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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED June 30, 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 July 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: 99,394,943
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2004 and 2003 (unaudited).................................................... 4
Consolidated Statement of Shareholders' Equity for the six months ended
June 30, 2004 (unaudited)............................................................. 5
Consolidated Statements of Cash Flows for the six months ended June 30, 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......................................................................... 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 64
Item 4. Controls and Procedures............................................................... 64
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................. 65
Item 4. Submission of Matters to a Vote of Security Holders................................... 65
Item 6. Exhibits and Reports on Form 8-K...................................................... 65
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
ASSETS:
Investments in real estate:
Land $ 264,276 $ 236,956
Land improvements, net of accumulated depreciation of $21,253 and
$19,270 at June 30, 2004 and December 31, 2003, respectively 108,949 105,236
Building and improvements, net of accumulated depreciation of
$613,103 and $576,682 at June 30, 2004 and December 31, 2003,
respectively 2,293,002 2,103,718
Furniture, fixtures and equipment, net of accumulated depreciation
of $41,263 and $33,344 at June 30, 2004 and December 31, 2003,
respectively 50,977 43,227
Land held for investment or development 480,159 450,279
Properties held for disposition, net 138,333 219,786
------------- -------------
Net investment in real estate $ 3,335,696 $ 3,159,202
Cash and cash equivalents $ 57,026 $ 78,052
Restricted cash and cash equivalents 61,311 217,329
Defeasance investments 173,903 9,620
Accounts receivable, net 46,514 40,740
Deferred rent receivable 74,685 65,266
Investments in unconsolidated companies 346,637 440,594
Notes receivable, net 73,992 78,453
Income tax asset-current and deferred, net 27,929 17,506
Other assets, net 269,813 207,701
------------- -------------
Total assets $ 4,467,506 $ 4,314,463
============= =============
LIABILITIES:
Borrowings under Credit Facility $ 232,500 $ 239,000
Notes payable 2,478,149 2,319,699
Accounts payable, accrued expenses and other liabilities 428,319 370,136
Current income tax payable -- 7,995
------------- -------------
Total liabilities $ 3,138,968 $ 2,936,830
------------- -------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,864,311 and 8,873,347 units, at June 30,
2004 and December 31, 2003, respectively $ 91,844 $ 108,706
Consolidated real estate partnerships 43,882 47,123
------------- -------------
Total minority interests $ 135,726 $ 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 June 30, 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 June 30, 2004 and December 31, 2003 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,444,012 and 124,396,168 shares issued and outstanding
at June 30, 2004 and December 31, 2003, respectively 1,238 1,237
Additional paid-in capital 2,245,955 2,245,683
Deferred compensation on restricted shares (3,450) (4,102)
Accumulated deficit (987,744) (877,120)
Accumulated other comprehensive income (4,128) (13,829)
------------- -------------
$ 1,652,960 $ 1,681,952
Less - shares held in treasury, at cost, 25,121,861
common shares at June 30, 2004 and December 31, 2003 (460,148) (460,148)
------------- -------------
Total shareholders' equity $ 1,192,812 $ 1,221,804
------------- -------------
Total liabilities and shareholders' equity $ 4,467,506 $ 4,314,463
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE:
Office Property $ 131,752 $ 118,761 $ 254,370 $ 239,608
Resort/Hotel Property 40,253 39,291 90,255 90,554
Residential Development Property 55,591 61,973 103,279 105,694
------------ ------------ ------------ ------------
Total Property revenue $ 227,596 $ 220,025 $ 447,904 $ 435,856
------------ ------------ ------------ ------------
EXPENSE:
Office Property real estate taxes $ 16,719 $ 17,120 $ 33,779 $ 34,323
Office Property operating expenses 43,654 41,423 85,415 82,066
Resort/Hotel Property expense 35,833 33,361 75,903 73,308
Residential Development Property expense 51,761 55,572 92,323 97,002
------------ ------------ ------------ ------------
Total Property expense $ 147,967 $ 147,476 $ 287,420 $ 286,699
------------ ------------ ------------ ------------
Income from Property Operations $ 79,629 $ 72,549 $ 160,484 $ 149,157
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Income from investment land sales, net $ 949 $ 1,628 $ 949 $ 1,628
Gain on joint venture of properties, net -- -- -- 100
Interest and other income 2,942 1,155 5,685 2,586
Corporate general and administrative (6,794) (5,729) (13,711) (11,610)
Interest expense (45,429) (43,046) (90,437) (86,254)
Amortization of deferred financing costs (3,076) (2,545) (6,790) (4,969)
Extinguishment of debt (988) -- (2,927) --
Depreciation and amortization (42,390) (32,864) (81,643) (68,554)
Impairment charges related to real estate assets -- -- -- (1,200)
Other expenses (94) (785) (149) (912)
Equity in net income (loss) of unconsolidated companies:
Office Properties 748 1,864 1,690 3,322
Resort/Hotel Properties (18) 1,382 (247) 2,125
Residential Development Properties (393) 1,540 (307) 2,510
Temperature-Controlled Logistics Properties (2,707) (406) (3,608) 1,101
Other (515) 214 (581) (815)
------------ ------------ ------------ ------------
Total Other Income (Expense) $ (97,765) $ (77,592) $ (192,076) $ (160,942)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES $ (18,136) $ (5,043) $ (31,592) $ (11,785)
Minority interests 2,205 (1,117) 4,126 580
Income tax benefit 5,324 3,067 6,601 5,470
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (10,607) $ (3,093) $ (20,865) $ (5,735)
Income from discontinued operations, net of minority
interests 3,621 4,496 5,456 8,096
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (424) (840) (2,418) (14,265)
Loss on real estate from discontinued operations, net of
minority interests (2,073) (41) (2,120) (329)
Cumulative effect of a change in accounting principle, net
of minority interests -- -- (363) --
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (9,483) $ 522 $ (20,310) $ (12,233)
Series A Preferred Share distributions (5,991) (4,556) (11,742) (9,112)
Series B Preferred Share distributions (2,019) (2,019) (4,038) (4,038)
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (17,493) $ (6,053) $ (36,090) $ (25,383)
============ ============ ============ ============
BASIC EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued
operations and cumulative effect of a change in accounting
principle $ (0.19) $ (0.10) $ (0.38) $ (0.20)
Income from discontinued operations, net of minority
interests 0.03 0.05 0.06 0.08
Impairment charges related to real estate assets from
discontinued operations, net of minority interests -- (0.01) (0.02) (0.14)
Loss on real estate from discontinued operations, net of
minority interests (0.02) -- (0.02) --
Cumulative effect of a change in accounting principle, net
of minority interests -- -- -- --
------------ ------------ ------------ ------------
Net loss available to common shareholders - basic $ (0.18) $ (0.06) $ (0.36) $ (0.26)
============ ============ ============ ============
DILUTED EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued
operations and cumulative effect of a change in accounting
principle $ (0.19) $ (0.10) $ (0.38) $ (0.20)
Income from discontinued operations, net of minority
interests 0.03 0.05 0.06 0.08
Impairment charges related to real estate assets from
discontinued operations, net of minority interests -- (0.01) (0.02) (0.14)
Loss on real estate from discontinued operations, net of
minority interests (0.02) -- (0.02) --
Cumulative effect of a change in accounting principle, net
of minority interests -- -- -- --
------------ ------------ ------------ ------------
Net loss available to common shareholders - diluted $ (0.18) $ (0.06) $ (0.36) $ (0.26)
============ ============ ============ ============
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 25,121,861 $ (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 Gain on Cash
Flow Hedges -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, June 30, 2004 14,200,000 $ 319,166 3,400,000 $ 81,923 25,121,861 $ (460,148)
============ ============ ============ ============ ============ ============
Deferred
Compensation Accumulated
Common Shares Additional on Other
------------------------- Paid-in Restricted Accumulated Comprehensive
Shares Par Value Capital Shares (Deficit) Income Total
------------ ------------ ------------ ------------ ------------ ------------ -----------
SHAREHOLDERS' EQUITY,
December 31, 2003 124,396,168 $ 1,237 $ 2,245,683 $ (4,102) $ (877,120) $ (13,829) $ 1,221,804
Issuance of Common Shares 3,872 -- 64 -- -- -- 64
Exercise of Common Share Options 25,900 1 361 -- -- -- 362
Accretion of Discount on Employee
Stock Option Notes -- -- (126) -- -- -- (126)
Issuance of Shares in Exchange
for Operating Partnership
Units 18,072 -- -- -- -- -- --
Preferred Equity Issuance -- -- -- -- -- -- 71,006
Stock Option Grants -- -- (27) -- -- -- (27)
Amortization of Deferred
Compensation on
Restricted Shares -- -- -- 652 -- -- 652
Dividends Paid -- -- -- -- (74,534) -- (74,534)
Net Loss Available to Common
Shareholders -- -- -- -- (36,090) -- (36,090)
Unrealized Gain on Marketable
Securities -- -- -- -- -- 663 663
Unrealized Net Gain on Cash
Flow Hedges -- -- -- -- -- 9,038 9,038
------------ ------------ ------------ ------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, June 30, 2004 124,444,012 $ 1,238 $ 2,245,955 $ (3,450) $ (987,744) $ (4,128) $ 1,192,812
============ ============ ============ ============ ============ ============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
5
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,310) $ (12,233)
Adjustments to reconcile net loss to net cash provided
operating activities:
Depreciation and amortization 88,433 73,523
Residential Development cost of sales 40,904 50,158
Residential Development capital expenditures (62,352) (50,196)
Impairment charges related to real estate assets from
discontinued operations, net of minority interests 2,418 14,265
Loss on real estate from discontinued operations, net of
minority interests 2,120 329
Discontinued operations - depreciation and minority interests 3,200 8,072
Extinguishment of debt 2,927 --
Impairment charges related to real estate assets -- 1,200
Income from investment in land sales, net (949) (1,628)
Gain on joint venture of properties, net -- (100)
Minority interests (4,126) (580)
Cumulative effect of a change in accounting principle, net of
minority interests 363 --
Non-cash compensation 563 (30)
Equity in (earnings) loss from unconsolidated companies:
Office Properties (1,690) (3,322)
Resort/Hotel Properties 247 (2,125)
Residential Development Properties 307 (2,510)
Temperature-Controlled Logistics Properties 3,608 (1,101)
Other 581 815
Distributions received from unconsolidated companies:
Office Properties 3,083 6,334
Residential Development Properties -- 47
Temperature-Controlled Logistics Properties 1,822 --
Other 550 402
Change in assets and liabilities, net of consolidations and
acquisitions:
Restricted cash and cash equivalents 44,257 17,487
Accounts receivable (4,186) 4,464
Deferred rent receivable (9,414) (310)
Income tax asset - current and deferred, net (18,933) (7,049)
Other assets (29,687) 4,154
Accounts payable, accrued expenses and other liabilities (18,008) (61,576)
-------------- --------------
Net cash provided by operating activities $ 25,728 $ 38,490
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated
entities $ 334 $ 11,374
Proceeds from property sales 78,826 6,428
Acquisition of investment properties (164,391) (2,000)
Development of investment properties (1,881) (1,158)
Property improvements - Office Properties (6,116) (7,908)
Property improvements - Resort/Hotel Properties (15,960) (3,360)
Tenant improvement and leasing costs - Office Properties (46,674) (28,555)
Residential Development Properties Investments (17,308) (15,218)
Decrease (increase) in restricted cash and cash equivalents 113,275 (2,729)
Purchase of defeasance investments (169,778) --
Proceeds from defeasance investments maturities 5,495 --
Return of investment in unconsolidated companies:
Office Properties 731 2,344
Resort/Hotel Properties 612 --
Residential Development Properties 14 --
Temperature-Controlled Logistics Properties 90,776 3,201
Other 236 5,409
Investment in unconsolidated companies:
Office Properties (29) (83)
Residential Development Properties (871) (1,691)
Temperature-Controlled Logistics Properties (2,406) (834)
Other (13) (750)
Decrease in notes receivable 98 20,513
-------------- --------------
Net cash used in investing activities $ (135,030) $ (15,017)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (6,139) $ (1,932)
Borrowings under Credit Facility 319,000 187,000
Payments under Credit Facility (325,500) (99,000)
Notes payable proceeds 407,542 92,435
Notes payable payments (372,848) (92,416)
Residential Development Properties notes payable borrowings 47,193 41,316
Residential Development Properties notes payable payments (24,480) (47,808)
Amortization of debt premiums (1,138) --
Obligation related to property financing transaction 79,920 --
Capital distributions - joint venture partner (3,900) (7,966)
Capital contributions - joint venture partner 1,108 135
Proceeds from exercise of share options 362 --
Treasury shares purchase under compensation plan -- (854)
Issuance of preferred shares - Series A 71,006 --
Series A Preferred Share distributions (11,981) (9,112)
Series B Preferred Share distributions (4,038) (4,038)
Dividends and unitholder distributions (87,831) (87,744)
-------------- --------------
Net cash provided by (used in) financing activities $ 88,276 $ (29,984)
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS $ (21,026) $ (6,511)
CASH AND CASH EQUIVALENTS,
Beginning of period 78,052 78,444
-------------- --------------
CASH AND CASH EQUIVALENTS,
End of Period $ 57,026 $ 71,933
============== ==============
The accompanying notes are an integral part
of these consolidated financial statements.
6
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas real estate investment trust, and all of its direct
and indirect subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at June 30,
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 table shows the consolidated subsidiaries of the Company
that owned or had an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of June 30, 2004.
Operating Partnership Wholly-owned assets - The Avallon IV,
Datran Center (two office properties),
Houston Center (three office properties and
the Houston Center Shops), and Dupont
Centre. These properties are included in
the Company's Office Segment.
Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) and Fountain
Place (0.1%), included in the Company's
Office Segment. Sonoma Mission Inn (80.1%
interest), included in the Company's
Resort/Hotel Segment.
See Note 6, "Other Transactions," for a
description of the Fountain Place Office
Property transaction.
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), BriarLake
Plaza (30% interest) and Five Post Oak Park
(30% interest). These properties are
included in the Company's Office Segment.
Temperature-Controlled Logistics Properties
(40% interest in 87 properties), included
in the Company's Temperature-Controlled
Logistics Segment.
Hughes Center Entities(1) Wholly-owned assets - Hughes Center
Properties (seven office properties each
in a separate limited liability company).
These properties are included in the
Company's Office Segment.
Non wholly-owned asset, consolidated - 3770
Hughes Parkway (67% interest), included in
the Company's Office Segment.
Crescent Real Estate Funding Wholly-owned assets - The Aberdeen, The
I, L.P. ("Funding I") Avallon I, II & III, Carter Burgess Plaza,
The Citadel, The Crescent Atrium, The
Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway. These properties are included in
the Company's Office Segment.
Crescent Real Estate Funding Wholly-owned assets - Greenway Plaza Office
III, IV and V, L.P. Properties (ten Office Properties). These
("Funding III, IV and V")(2) properties are included in the Company's
Office Segment. Renaissance Houston Hotel
is included in the Company's Resort/Hotel
Segment.
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel
("Funding VI") Segment.
Crescent Real Estate Funding Wholly-owned assets - The Addison, Austin
VIII, L.P. ("Funding VIII") Centre, The Avallon V, Chancellor Park, 816
Congress, Greenway I & IA (two office
properties), Greenway II, Johns Manville
Plaza, Palisades Central I, Palisades
Central II, Stemmons Place, Trammell Crow
Center(3), 3333 Lee Parkway, 5050 Quorum,
44 Cook and 55 Madison. These properties
are included in the Company's Office
Segment. The Canyon Ranch - Tucson, Omni
Austin Hotel, and Ventana Inn & Spa, all of
which are included in the Company's
Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - Post Oak Central
X, L.P. ("Funding X") (three Office Properties). These properties
are included in the Company's Office
Segment.
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Funding Wholly-owned assets - 12404 Park Central,
XII, L.P. ("Funding XII") Albuquerque Plaza, Barton Oaks Plaza,
Briargate Office and Research Center,
MacArthur Center I & II, Stanford Corporate
Center, and Two Renaissance Square. These
properties are included in the Company's
Office Segment. The Hyatt Regency
Albuquerque and the Park Hyatt Beaver Creek
Resort & Spa. These properties are
included in the Company's Resort/Hotel
Segment.
Crescent 707 17th Street, Wholly-owned assets - 707 17th Street,
L.L.C included in the Company's Office Segment,
and The Denver Marriott City Center,
included in the Company's Resort/Hotel
Segment.
Crescent Spectrum Center, Non wholly-owned asset, consolidated -
L.P. Spectrum Center (approximately 100%
interest), included in the Company's Office
Segment.
Crescent Colonnade, L.L.C. Wholly-owned asset - The BAC-Colonnade
Building, included in the Company's Office
Segment.
Mira Vista Development Corp. Non wholly-owned asset, consolidated - Mira
("MVDC") Vista (98% interest), included in the
Company's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated -
Corp. ("HADC") Falcon Point (98% interest), Falcon Landing
(98% interest) and Spring Lakes (98%
interest). These properties are included in
the Company's Residential Development
Segment.
Desert Mountain Development Non wholly-owned assets, consolidated -
Corporation ("DMDC") Desert Mountain (93% interest), included
in the Company's Residential Development
Segment.
Crescent Resort Development Non wholly-owned assets, consolidated -
Inc. ("CRDI") Brownstones (64% interest), Creekside at
Riverfront (64% interest), Cresta (60%
interest), Delgany (64% interest), Eagle
Ranch (60% interest), Gray's Crossing (71%
interest), Horizon Pass Lodge (64%
interest), Horizon Pass Townhomes (64%
interest), Hummingbird (64% interest),
Main Street Station (30% interest),
Northstar (57% interest), Old Greenwood
(71% interest), Park Place at Riverfront
(64% interest), Park Tower at Riverfront
(64% interest), Riverbend (60% interest),
Riverfront Park (64% interest). These
properties are included in the Company's
Residential Development Segment.
Non wholly-owned assets, unconsolidated -
Blue River Land Company, L.L.C. - Three
Peaks (30% interest) and EW Deer Valley,
L.L.C. (42% interest), included in the
Company's Residential Development Segment.
Crescent TRS Holdings Corp. Non wholly-owned assets, unconsolidated -
two quarries (56% interest). These
properties are included in the Company's
Temperature-Controlled Logistics Segment.
- ----------
(1) In addition, the Company owns nine retail parcels located in Hughes
Center.
(2) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.
(3) The Company owns the 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.
See Note 8, "Investments in Unconsolidated Companies," for a table that
lists the Company's ownership in significant unconsolidated joint ventures and
investments as of June 30, 2004.
See Note 9, "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 June 30, 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 June 30, 2004:
o OFFICE SEGMENT consisted of 75 office properties (collectively
referred to as the "Office Properties"), located in 28
metropolitan submarkets in seven states, with an aggregate of
approximately 30.0 million net rentable square feet.
Sixty-five 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.
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 28 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
June 30, 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 June 30, 2004, VCQ owned two quarries and the related land.
The Company accounts for its interests in the
Temperature-Controlled Logistics Partnership and in VCQ 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 and six months
ended June 30, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at June 30, 2004 and December 31, 2003.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and six- month
periods ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004.
The condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
You should read these consolidated financial statements in conjunction
with the consolidated financial statements and footnotes thereto in the
Company's annual report on 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 STANDARD
EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by
the FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional evidence gathering in determining whether or not securities are
other-than-temporarily impaired and lists some of these impairment indicators.
The impairment accounting guidance is effective for periods beginning after June
15, 2004 and the disclosure requirements for annual reporting periods are
effective for periods ending after June 15, 2004. The Company adopted EITF 03-1
effective July 1, 2004 and expects no impact on the Company's financial
condition or its results of operations.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. 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." In December 2003, the FASB
issued FIN 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), which
amended FIN 46. Under FIN 46R, 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 46R 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 46R 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 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 46R, 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 $52.0 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at June 30, 2004.
In connection with the Hughes Center acquisition, the Company entered
into two separate exchange agreements with a third party intermediary. The first
exchange agreement includes two parcels of undeveloped land and the second
exchange agreement includes the 3930 Hughes Parkway Office Property. Both
agreements were for a maximum term of 180 days and allow the Company to pursue
favorable tax treatment on other properties sold by the Company within this
period. During the 180-day periods, which will end on August 28, 2004 and
November 6, 2004, respectively, 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 fully consolidates
these properties. The Company will take legal ownership of the properties no
later than on the expiration of the 180-day period.
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 was for a
maximum term of 180 days and allowed the Company to pursue favorable tax
treatment on other properties sold by the Company within this period. During the
180-day period, which ended on June 28, 2004, the third party intermediary was
the legal owner of the properties, although the Company controlled the
properties, retained all of the economic benefits and risks associated with
these properties and indemnified the third party intermediary and, therefore,
the Company fully consolidated these properties. On June 28, 2004, the Company
took legal ownership of the Office Properties and the nine retail parcels.
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 six months ended June 30, 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
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
(in thousands, except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------- ------------ ------------ ------------ ------------
Net loss available to common shareholders, as
reported $ (17,493) $ (6,053) $ (36,090) $ (25,383)
Add: Stock-based employee compensation expense
included in reported net income 351 3 701 4
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of minority interest (835) (585) (1,696) (1,197)
------------ ------------ ------------ ------------
Pro forma net loss $ (17,977) $ (6,635) $ (37,085) $ (26,576)
(Loss) earnings per share:
Basic/Diluted - as reported $ (0.18) $ (0.06) $ (0.36) $ (0.26)
Basic/Diluted - pro forma $ (0.18) $ (0.07) $ (0.37) $ (0.27)
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 specific identification. 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.
Investments in securities with no readily determinable market value are reported
at cost, as they are not considered marketable under SFAS No. 115, and total
$5.5 million at June 30, 2004 and December 31, 2003.
The following tables present the cost, fair value and unrealized gains
and losses as of June 30, 2004 and December 31, 2003 and the realized gains and
change in Accumulated Other Comprehensive Income ("OCI") for the six months
ended June 30, 2004 and 2003 for the Company's marketable securities.
AS OF JUNE 30, 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) $ 187,655 $ 185,481 $ (2,174) $ 9,620 $ 9,621 $ 1
Trading(2) 7,950 8,489 N/A 4,473 4,714 N/A
Available for sale(3) 6,338 6,260 (78) 2,278 2,278 --
------------ ------------ ------------ ------------ ------------ ------------
Total $ 201,943 $ 200,230 $ (2,252) $ 16,371 $ 16,613 $ 1
============ ============ ============ ============ ============ ============
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
------------------------------ -----------------------------
(in thousands)
REALIZED CHANGE REALIZED CHANGE
TYPE OF SECURITY GAIN/(LOSS) IN OCI GAIN/(LOSS) IN OCI
------------ ------------ ------------ ------------
Held to maturity(1) $ -- $ N/A $ -- $ N/A
Trading(2) 248 N/A -- N/A
Available for sale(3) 1 (78) (502) 514
------------ ------------ ------------ ------------
Total $ 249 $ (78) $ (502) $ 514
============ ============ ============ ============
- ----------
(1) Held to maturity securities are carried at amortized cost and consist
of $173.9 million of U.S. Treasury and government sponsored agency
securities purchased for the sole purpose of funding debt service
payments on the LaSalle Note II and $13.8 million of bonds included in
"Other assets, net" in the accompanying Consolidated Balance Sheets at
June 30, 2004. See Note 9, "Notes Payable and Borrowings Under Credit
Facility," for additional information on the defeasance of the LaSalle
Note II.
(2) Trading securities consist of primarily marketable securities purchased
in connection with the Company's dividend incentive unit program. These
securities are included in "Other assets, net" in the accompanying
Consolidated Balance Sheets and 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 included in "Other assets, net" in the accompanying
Consolidated Balance Sheets and are marked to market value on a monthly
basis with the corresponding unrealized gain or loss recorded in OCI.
In July 2004, Fresh Choice, Inc., in which the Company owns $5.5
million Series B Preferred shares reported at cost at June 30, 2004 and December
31, 2003, filed for protection under Chapter 11 of the U.S. Bankruptcy Court in
order to facilitate a reorganization and restructuring. At June 13, 2004, the
accrued liquidation preference on the Series B Preferred shares was $9.1
million. Based on the Company's evaluation of its preferred interest in Fresh
Choice, the Company estimates the value of its shares at a minimum to be equal
to the investment balance of $5.5 million.
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.
Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.
The following tables present reconciliations for the three and six
months ended June 30, 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, which for
the periods presented, are the same.
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
2004 2003
------------------------------------ --------------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per 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 $ (10,607) 99,022 $ (3,093) 99,170
Series A Preferred Share distributions (5,991) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
---------- -------- ------- ---------- ---------- ----------
Loss available to common shareholders
before discontinued operations and
cumulative effect of a change in
accounting principle $ (18,617) 99,022 $ (0.19) $ (9,668) 99,170 $ (0.10)
Income from discontinued operations, net of
minority interests 3,621 0.03 4,496 0.05
Impairment charges related to real estate
assets from discontinued operations, net of
minority interests (424) -- (840) (0.01)
Loss on real estate from discontinued
operations, net of minority interests (2,073) (0.02) (41) --
Cumulative effect of a change in accounting
principle -- -- -- --
---------- -------- ------- ---------- ---------- ----------
Net loss available to common shareholders $ (17,493) 99,022 $ (0.18) $ (6,053) 99,170 $ (0.06)
========== ======== ======= ========== ========== ==========
- ----------
(1) Anti-dilutive shares not included are 114 and 13 for the three months ended
June 30, 2004 and 2003, respectively.
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
2004 2003
-------------------------------------- ---------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per 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 $ (20,865) 99,007 $ (5,735) 99,194
Series A Preferred Share distributions (11,742) (9,112)
Series B Preferred Share distributions (4,038) (4,038)
--------- ---------- --------- --------- --------- --------
Loss available to common shareholders
before discontinued operations and cumulative
effect of a change in accounting principle $ (36,645) 99,007 $(0.38) $(18,885) 99,194 $ (0.20)
Income from discontinued operations, net of
minority interests 5,456 0.06 8,096 0.08
Impairment charges related to real estate assets
from discontinued operations, net of minority
interests (2,418) (0.02) (14,265) (0.14)
Loss on real estate from discontinued operations,
net of minority interests (2,120) (0.02) (329) --
Cumulative effect of a change in accounting
principle (363) -- -- --
--------- ---------- --------- ---------- --------- --------
Net loss available to common shareholders $ (36,090) 99,007 $(0.36) $ (25,383) 99,194 $ (0.26)
========== ========== ========= ========== ========= ========
- ----------
(1) Anti-dilutive shares not included are 218 and 7 for the six months ended
June 30, 2004 and 2003, respectively.
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2004 2003
------------- ------------
(in thousands)
Interest paid on debt $ 84,724 $ 76,240
Interest capitalized - Resort/Hotel 210 --
Interest capitalized - Residential Development 7,444 8,297
Additional interest paid in conjunction with cash flow hedges 6,765 10,114
------------ ----------
Total interest paid $ 99,143 $ 94,651
============ ===========
Cash paid for income taxes $ 12,337 $ 1,640
============ ===========
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 $ -- $ 8
Assumption of debt in conjunction with acquisitions of Office
Properties 94,807 --
Non-cash compensation 616 22
Financed purchase/(sale) of land parcel 7,500 (11,800)
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 available to common shareholders - 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.
13
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
available to common shareholders - diluted and FFO appropriate measures of
performance for an equity REIT and for its investment segments. However, FFO
available to common shareholders - 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 available to common shareholders -
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
and six months ended June 30, 2004 and 2003, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at June 30, 2004 and December 31, 2003, are presented
below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------------------------
TEMPERATURE-
(in thousands) RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Total Property revenue $ 131,752 $ 40,253 $ 55,591 $ -- $ -- $ 227,596
Total Property expense 60,373 35,833 51,761 -- -- 147,967
----------- ----------- ----------- ----------- ----------- -----------
Income from Property Operations $ 71,379 $ 4,420 $ 3,830 $ -- $ -- $ 79,629
Total other income (expense) (31,401) (5,286) (4,434) (2,707) (53,937)(3) (97,765)
Minority interests and income taxes (286) 2,948 3,601 -- 1,266 7,529
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (1,647) 2,901 8 -- (138) 1,124
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 38,045 $ 4,983 $ 3,005 $ (2,707) $ (52,809) $ (9,483)
----------- ----------- ----------- ----------- ----------- -----------
Depreciation and amortization of real
estate assets $ 31,840 $ 5,008 $ 1,534 $ -- $ -- $ 38,382
(Gain) loss on property sales, net 2,444 -- -- -- (7) 2,437
Impairment charges related to real
estate assets 500 -- -- -- -- 500
Adjustments for investment in
unconsolidated companies 2,497 -- 629 5,785 -- 8,911
Unitholder minority interest -- -- -- -- (1,700) (1,700)
Series A Preferred share distributions -- -- -- -- (5,991) (5,991)
Series B Preferred share distributions -- -- -- -- (2,019) (2,019)
----------- ----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
(loss) to funds from operations -
diluted $ 37,281 $ 5,008 $ 2,163 $ 5,785 $ (9,717) $ 40,520
----------- ----------- ----------- ----------- ----------- -----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 75,326 $ 9,991 $ 5,168 $ 3,078 $ (62,526) $ 31,037
Impairment charges related to real
estate assets (500) -- -- -- -- (500)
----------- ----------- ----------- ----------- ----------- -----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 74,826 $ 9,991 $ 5,168 $ 3,078 $ (62,526) $ 30,537
=========== =========== =========== =========== =========== ===========
See footnotes to the following table.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------
(in thousands) TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
------------- ----------- ------------- ------------- ----------- ----------
Total Property revenue $ 118,761 $ 39,291 $ 61,973 $ -- $ -- $ 220,025
Total Property expense 58,543 33,361 55,572 -- -- 147,476
------------- ---------- ------------- ------------- ---------- ----------
Income from Property Operations $ 60,218 $ 5,930 $ 6,401 $ -- $ -- $ 72,549
Total other income (expense) (22,826) (3,281) (992) (407) (50,086)(3) (77,592)
Minority interests and income taxes (117) 1,901 (469) -- 635 1,950
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets 3,733 1,645 (31) -- (1,732) 3,615
------------- ---------- ------------- ------------- ---------- ----------
Net income (loss) $ 41,008 $ 6,195 $ 4,909 $ (407) $ (51,183) $ 522
------------- ---------- ------------- ------------- ---------- ----------
Depreciation and amortization of real
estate assets $ 25,985 $ 5,806 $ 1,308 $ -- $ -- $ 33,099
(Gain) loss on property sales, net (34) -- -- -- 513 479
Impairment charges related to real
estate assets -- -- -- -- 990 990
Adjustments for investment in
unconsolidated companies 2,596 355 (512) 5,486 (104) 7,821
Unitholder minority interest -- -- -- -- 105 105
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 $ 28,547 $ 6,161 $ 796 $ 5,486 $ (5,071) $ 35,919
------------- ---------- ------------- ------------- ---------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 69,555 $ 12,356 $ 5,705 $ 5,079 $ (56,254) $ 36,441
Impairment charges related to real
estate assets -- -- -- -- (990) (990)
------------- ---------- ------------- ------------- ---------- ----------
Funds from operations available to
common shareholders after
impairment charges related to real
estate assets - diluted $ 69,555 $ 12,356 $ 5,705 $ 5,079 $ (57,244) $ 35,451
============= ========== ============== ============= ========== ==========
See footnotes to the following table.
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------------------------
(in thousands) TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
------------ ------------- ------------ ------------- ----------- ----------
Total Property revenue $ 254,370 $ 90,255 $ 103,279 $ -- $ -- $ 447,904
Total Property expense 119,194 75,903 92,323 -- -- 287,420
------------ ------------- ------------ ------------- ----------- ----------
Income from Property Operations 135,176 $ 14,352 $ 10,956 $ -- $ -- $ 160,484
Total other income (expense) (60,459) (10,745) (7,485) (3,608) (109,779)(3) (192,076)
Minority interests and income taxes (719) 4,078 4,838 -- 2,530 10,727
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (2,733) 3,968 47 -- (364) 918
Cumulative effect of a change in
accounting principle -- -- -- -- (363) (363)
------------ ------------- ------------ ------------- ----------- ----------
Net income (loss) $ 71,265 $ 11,653 $ 8,356 $ (3,608) $ (107,976) $ (20,310)
------------ ------------- ------------ ------------- ----------- ----------
Depreciation and amortization of real
estate assets $ 62,121 $ 11,368 $ 2,934 -- -- 76,423
(Gain) loss on property sales, net 2,156 -- -- -- 337 2,493
Impairment charges related to real
estate assets 2,851 -- -- -- -- 2,851
Adjustments for investment in
unconsolidated companies 4,905 -- 52 11,580 -- 16,537
Unitholder minority interest -- -- -- -- (3,638) (3,638)
Series A Preferred share distributions -- -- -- -- (11,742) (11,742)
Series B Preferred share distributions -- -- -- -- (4,038) (4,038)
------------ ------------- ------------ ------------- ----------- ----------
Adjustments to reconcile net income
(loss) to funds from operations
available to common shareholders -
diluted $ 72,033 $ 11,368 $ 2,986 $ 11,580 $ (19,081) $ 78,886
------------ ------------- ------------ ------------- ----------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 143,298 $ 23,021 $ 11,342 $ 7,972 $ (127,057) $ 58,576
Impairment charges related to real
estate assets (2,851) -- -- -- -- (2,851)
------------ ------------- ------------ ------------- ----------- ----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 140,447 $ 23,021 $ 11,342 $ 7,972 $ (127,057) $ 55,725
============ ============= ============ ============= =========== ==========
See footnotes to the following table.
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------
(in thousands) TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
------------- ---------- ------------- ------------- ---------- ----------
Total Property revenue $ 239,608 $ 90,554 $ 105,694 $ -- $ -- $ 435,856
Total Property expense 116,389 73,308 97,002 -- -- 286,699
------------- ---------- ------------- ------------- ---------- ----------
Income from Property Operations $ 123,219 $ 17,246 $ 8,692 $ -- $ -- $ 149,157
Total other income (expense) (48,679) (7,187) (2,665) 1,100 (103,511)(3) (160,942)
Minority interests and income taxes (274) 2,538 2,324 -- 1,462 6,050
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (8,697) 3,059 (11) -- (849) (6,498)
------------- ---------- ------------- ------------- ---------- ----------
Net income (loss) $ 65,569 $ 15,656 $ 8,340 $ 1,100 $ (102,898) $ (12,233)
------------- ---------- ------------- ------------- ---------- ----------
Depreciation and amortization of real
estate assets 55,392 11,582 2,426 -- -- 69,400
(Gain) loss on property sales, net (98) -- -- -- 803 705
Impairment charges related to real
estate assets 15,000 -- -- -- 3,018 18,018
Adjustments for investment in
unconsolidated companies 5,418 749 227 10,996 (82) 17,308
Unitholder minority interest -- -- -- -- (2,190) (2,190)
Series A Preferred share distributions -- -- -- -- (9,112) (9,112)
Series B Preferred share distributions -- -- -- -- (4,038) (4,038)
------------- ---------- ------------- ------------- ---------- ----------
Adjustments to reconcile net income
(loss) to funds from operations -
diluted $ 75,712 $ 12,331 $ 2,653 $ 10,996 $ (11,601) $ 90,091
------------- ---------- ------------- ------------- ---------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 141,281 $ 27,987 $ 10,993 $ 12,096 $ (114,499) $ 77,858
Impairment charges related to real
estate assets (15,000) -- -- -- (3,018) (18,018)
------------- ---------- ------------- ------------- ---------- ----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 126,281 $ 27,987 $ 10,993 $ 12,096 $ (117,517) $ 59,840
------------- ---------- ------------- ------------- ---------- ----------
See footnotes to the following table.
RESIDENTIAL TEMPERATURE-
RESORT/ DEVELOPMENT CONTROLLED CORPORATE
OFFICE HOTEL SEGMENT(2) LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT (4) SEGMENT OTHER TOTAL
----------- ------------ ------------- -------------- ----------- ----------
TOTAL ASSETS BY SEGMENT: (5) (6)
Balance at June 30, 2004 2,619 495 798 207 349 (7) 4,468
Balance at December 31, 2003 2,503 468 707 300 336 4,314
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at June 30, 2004 (1,374) (135) (111) -- (1,091)(8) (2,711)
Balance at December 31, 2003 (1,459) (138) (88) -- (874)(8) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at June 30, 2004 (172) (45) (162) -- (49) (428)
Balance at December 31, 2003 (120) (27) (109) -- (122) (378)
MINORITY INTERESTS:
Balance at June 30, 2004 (9) (6) (29) -- (92) (136)
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 $5.9 million
and $0.9 million for the three months ended June 30, 2004 and 2003,
respectively and $7.2 million and $2.9 million for the six months ended
June 30, 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 Development Segment
includes total assets, consolidated property level financing,
consolidated other liabilities and minority interest totaling $496
million at June 30, 2004. The primary components of net book value are
$332 million for CRDI, consisting of Tahoe Mountain Resort properties
of $192 million, Denver development properties of $61 million and
Colorado Mountain development properties of $79 million, $132 million
for Desert Mountain and $32 million for other land development
properties.
(5) Total assets by segment are inclusive of investments in unconsolidated
companies.
(6) Non-income producing land held for investment or development of $82.5
million by segment is as follows: Corporate $79.0 million and
Resort/Hotel $3.5 million.
(7) Includes U.S. Treasury and government sponsored agency securities of
$173.9 million.
(8) Inclusive of Corporate bonds, credit facility, the $75 million Fleet
Term Loan and Funding II defeased debt.
16
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 and
subsequently placed a $35.5 million non-recourse first mortgage loan on the
property. This Office Property is wholly-owned and included in the Company's
Office Segment.
On May 10, 2004, the Company completed the purchase of the remaining
Hughes Center Office Property in Las Vegas, Nevada for approximately $18.3
million. The purchase was 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 and six months ended June
30, 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 June 30, 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 proceeds, net of
selling costs, 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 interests,
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 proceeds, net of selling costs, of
approximately $2.0 million and a net loss of approximately $0.3 million, net of
minority interests. This property was wholly-owned.
On April 13, 2004, the Company completed the sale of the Liberty Plaza
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $10.8 million and a net loss of approximately $0.2
million, net of minority interests. The Company previously recorded an
impairment charge of approximately $3.6 million, net of minority interests,
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.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 17, 2004, the Company completed the sale of the Ptarmigan Place
Office Property in Denver, Colorado. The sale generated proceeds, net of selling
costs, of approximately $25.3 million and a net loss of approximately $2.0
million, net of minority interests. The Company previously recorded an
impairment charge of approximately $0.5 million, net of minority interests,
during the quarter ended March 31, 2004. In addition, the Company completed the
sale of approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place.
The sale generated proceeds, net of selling costs, of approximately $2.9 million
and a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Company's Bank of America Fund XII Term Loan.
The property and adjacent land were wholly-owned.
On June 29, 2004, the Company completed the sale of the Addison Tower
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $8.8 million and a net gain of approximately $0.2
million, net of minority interests. The proceeds from the sale were used
primarily to pay down the Company's credit facility. This property was
wholly-owned.
ASSETS HELD FOR SALE
The following Properties are classified as held for sale as of June 30,
2004.
PROPERTY LOCATION
------------------------------------- --------------------------
12404 Park Central(1) Dallas, Texas
5050 Quorum(1) Dallas, Texas
Albuquerque Plaza(2) Albuquerque, New Mexico
Hyatt Regency Albuquerque(2) Albuquerque, New Mexico
Denver Marriot City Center Denver, Colorado
- ----------
(1) This property was sold in July 2004.
(2) The Company has entered into a contract to sell this property. The sale
is expected to close in the third quarter of 2004.
OFFICE SEGMENT
As of June 30, 2004, the Company determined that 3333 Lee Parkway, in
the Uptown/Turtle Creek submarket in Dallas, Texas was no longer held for sale
due to the Property no longer being actively marketed for sale due to changes in
market conditions. The Property has been reclassified from "Properties held for
disposition, net" to "Land," "Building and improvements, net of accumulated
depreciation," and "Other assets, net" in the accompanying Consolidated Balance
Sheets with a net book value of $14.3 million at June 30, 2004. In addition,
approximately $0.1 million has been reclassified from "Income from discontinued
operations, net of minority interests," to "Office Property revenue," "Office
Property real estate taxes," "Office Property operating expenses" and
"Depreciation and amortization" in the accompanying Consolidated Statements of
Operations for the six months ended June 30, 2004.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major asset classes of the properties
held for sale.
(in thousands) JUNE 30, 2004(1) DECEMBER 31, 2003(2)
- ---------------------------------- ------------------- ----------------------
Land $ 3,328 $ 13,924
Buildings and improvements 156,099 241,363
Furniture, fixtures and equipment 19,519 18,822
Accumulated depreciation (43,150) (60,321)
Other assets, net 2,537 5,998
--------------- ------------------
Net investment in real estate $ 138,333 $ 219,786
=============== ==================
- ----------
(1) Includes three Office Properties, two Resort/Hotel Properties and other
assets.
(2) Includes seven Office Properties, two Resort/Hotel Properties, one
behavioral healthcare property and other assets.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 six months ended June 30, 2004 and 2003, for properties included in
discontinued operations.
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
(in thousands) 2004 2003
--------------- ---------------
Total revenues $ 32,526 $ 43,991
Operating and other expenses (23,884) (27,965)
Depreciation and amortization (2,209) (6,481)
Unitholder minority interests (977) (1,449)
--------------- ---------------
Income from discontinued operations, net of
minority interests $ 5,456 $ 8,096