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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. 333-42293
333-89194-01
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY*
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2531304
DELAWARE 42-1536518
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
-------------- ----------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES X NO
-------------- ----------------
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
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 Partners' Capital 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......................................................................... 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 67
Item 4. Controls and Procedures............................................................... 67
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 68
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit 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 $ 52,956 $ 74,885
Restricted cash and cash equivalents 61,311 217,329
Defeasance investments 173,903 9,620
Accounts receivable, net 46,456 40,715
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 27,929 17,506
Other assets, net 261,640 203,142
----------- ------------
Total assets $ 4,455,205 $ 4,306,712
=========== ============
LIABILITIES:
Borrowings under Credit Facility $ 232,500 $ 239,000
Notes payable 2,478,149 2,319,699
Accounts payable, accrued expenses and other liabilities 415,260 361,614
Current income tax payable -- 7,995
----------- ------------
Total liabilities $ 3,125,909 $ 2,928,308
----------- ------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 43,882 $ 47,123
----------- ------------
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference of $25.00 per unit,
14,200,000 and 10,800,000 units issued and outstanding
at June 30, 2004 and December 31, 2003, respectively $ 319,166 $ 248,160
Series B Cumulative Preferred Units,
liquidation preference of $25.00 per unit,
3,400,000 units issued and outstanding
at June 30, 2004 and December 31, 2003 81,923 81,923
Units of Partnership Interest, 58,525,387 and 58,510,501 issued
and outstanding at June 30, 2004 and December 31, 2003, respectively:
General partner - outstanding 585,254 and 585,105 9,159 10,424
Limited partners - outstanding 57,940,133 and 57,925,396 879,294 1,004,603
Accumulated other comprehensive income (4,128) (13,829)
----------- ------------
Total partners' capital $ 1,285,414 $ 1,331,281
----------- ------------
Total liabilities and partners' capital $ 4,455,205 $ 4,306,712
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
REVENUE: 2004 2003 2004 2003
---- ---- ---- ----
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 2,941 1,155 5,684 2,585
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) $ (97,766) $ (77,592) $ (192,077) $ (160,943)
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES $ (18,137) $ (5,043) $ (31,593) $ (11,786)
Minority interests 305 (1,657) 389 (447)
Income tax benefit 5,324 3,067 6,601 5,470
---------- ---------- ---------- ----------
LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (12,508) $ (3,633) $ (24,603) $ (6,763)
Income from discontinued operations 4,269 5,300 6,434 9,547
Impairment charges related to real estate assets from
discontinued operations (500) (990) (2,851) (16,818)
Loss on real estate from discontinued operations (2,444) (49) (2,500) (388)
Cumulative effect of a change in accounting principle -- -- (428) --
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (11,183) $ 628 $ (23,948) $ (14,422)
Series A Preferred Unit distributions (5,991) (4,556) (11,742) (9,112)
Series B Preferred Unit distributions (2,019) (2,019) (4,038) (4,038)
---------- ---------- ---------- ----------
NET LOSS AVAILABLE TO PARTNERS $ (19,193) $ (5,947) $ (39,728) $ (27,572)
========== ========== ========== ==========
BASIC EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.35) $ (0.17) $ (0.69) $ (0.33)
Income from discontinued operations 0.07 0.09 0.11 0.16
Impairment charges related to real estate assets from
discontinued operations (0.01) (0.02) (0.05) (0.29)
Loss on real estate from discontinued operations (0.04) -- (0.04) (0.01)
Cumulative effect of a change in accounting principle -- -- (0.01) --
---------- ---------- ---------- ----------
Net loss available to partners - basic $ (0.33) $ (0.10) $ (0.68) $ (0.47)
========== ========== ========== ==========
DILUTED EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.35) $ (0.17) $ (0.69) $ (0.33)
Income from discontinued operations 0.07 0.09 0.11 0.16
Impairment charges related to real estate assets from
discontinued operations (0.01) (0.02) (0.05) (0.29)
Loss on real estate from discontinued operations (0.04) -- (0.04) (0.01)
Cumulative effect of a change in accounting principle -- -- (0.01) --
---------- ---------- ---------- ----------
Net loss available to partners - diluted $ (0.33) $ (0.10) $ (0.68) $ (0.47)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)
PREFERRED GENERAL LIMITED ACCUMULATED
PARTNERS' PARTNERS' PARTNERS' COMPREHENSIVE PARTNERS'
CAPITAL CAPITAL CAPITAL INCOME CAPITAL
--------- --------- --------- ------------- ----------
PARTNERS' CAPITAL, December 31, 2003 $ 330,083 $ 10,424 $1,004,603 $ (13,829) $1,331,281
Issuance of Preferred Units A 71,006 -- -- -- 71,006
Contributions, net -- 5 469 -- 474
Distributions -- (880) (87,092) -- (87,972)
Amortization of Deferred Compensation on
Restricted Shares -- 7 645 -- 652
Net Loss -- (397) (39,331) -- (39,728)
Unrealized Gain on Marketable Securities -- -- -- 663 663
Unrealized Gain on Cash Flow Hedges -- -- -- 9,038 9,038
--------- --------- --------- ------------- ----------
PARTNERS' CAPITAL, June 30, 2004 $ 401,089 $ 9,159 $ 879,294 $ (4,128) $1,285,414
========= ========= ========= ============= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
2004 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,948) $ (14,422)
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 2,851 16,818
Loss on real estate from discontinued operations 2,500 388
Discontinued operations - depreciation and minority interests 2,223 6,623
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 (389) 447
Cumulative effect of a change in accounting principle 428 --
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 (4,153) 4,510
Deferred rent receivable (9,414) (310)
Income tax asset - current and deferred, net (18,933) (7,049)
Other assets (26,071) 4,073
Accounts payable, accrued expenses and other liabilities (22,545) (65,766)
--------------- ---------------
Net cash provided by operating activities $ 24,840 $ 34,266
--------------- ---------------
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
Capital contributions to the Operating Partnership 362 --
Issuance of preferred unit - Series A 71,006 --
Series A Preferred Unit distributions (11,981) (9,112)
Series B Preferred Unit distributions (4,038) (4,038)
Distributions from the Operating Partnership (87,846) (87,073)
--------------- ---------------
Net cash provided by (used in) financing activities $ 88,261 $ (28,459)
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS $ (21,929) $ (9,210)
CASH AND CASH EQUIVALENTS,
Beginning of period 74,885 75,418
--------------- ---------------
CASH AND CASH EQUIVALENTS,
End of Period $ 52,956 $ 66,208
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company" or "Crescent Equities"), through the Company's
ownership of all of the outstanding stock of Crescent Real Estate Equities,
Ltd., a Delaware corporation ("the General Partner"), which owns a 1% general
partner interest in the Operating Partnership. In addition, the Company owns an
approximately 84% limited partner interest in the Operating Partnership, with
the remaining approximately 15% limited partner interest held by other limited
partners.
All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of June 30,
2004, the Company's approximately 84% limited partner interest has been treated
as equivalent, for purposes of this report, to 49,075,822 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,864,311 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,254 units.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.
The following table shows, by consolidated entity, the consolidated
subsidiaries of the Operating Partnership 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 Wholly-owned assets - The Avallon IV,
Partnership Datran Center (two office properties),
Houston Center (three office properties and
the Houston Center Shops), and Dupont
Centre. These properties are included in
the Operating Partnership's Office Segment.
Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) and Fountain
Place (0.1%), included in the Operating
Partnership's Office Segment. Sonoma
Mission Inn (80.1% interest), included in
the Operating Partnership'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 Operating Partnership's
Office Segment. Temperature-Controlled
Logistics Properties (40% interest in 87
properties), included in the Operating
Partnership's Temperature-Controlled
Logistics Segment.
Hughes Wholly-owned assets - Hughes Center
Center Entities(1) Properties (seven office properties each in
a separate limited liability company).
These properties are included in the
Operating Partnership's Office Segment.
Non wholly-owned asset, consolidated - 3770
Hughes Parkway (67% interest), included in
the Operating Partnership'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 Operating Partnership'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 Operating
Partnership's Office Segment. Renaissance
Houston Hotel is included in the Operating
Partnership's Resort/Hotel Segment.
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Operating Partnership's
("Funding VI") Resort/Hotel 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 Operating Partnership's
Office Segment. The Canyon Ranch - Tucson,
Omni Austin Hotel, and Ventana Inn & Spa,
all of which are included in the Operating
Partnership's Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - Post Oak Central
X, L.P. ("Funding X") (three Office Properties). These properties
are included in the Operating Partnership's
Office Segment.
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 Operating
Partnership's Office Segment. The Hyatt
Regency Albuquerque and the Park Hyatt
Beaver Creek Resort & Spa. These properties
are included in the Operating Partnership's
Resort/Hotel Segment.
Crescent 707 17th Street, Wholly-owned assets - 707 17th Street,
L.L.C included in the Operating Partnership's
Office Segment, and The Denver Marriott
City Center, included in the Operating
Partnership's Resort/Hotel Segment.
Crescent Spectrum Center, L.P. Non wholly-owned asset, consolidated -
Spectrum Center (approximately 100%
interest), included in the Operating
Partnership's Office Segment.
Crescent Colonnade, L.L.C. Wholly-owned asset - The BAC-Colonnade
Building, included in the Operating
Partnership's Office Segment.
Mira Vista Development Corp. Non wholly-owned asset, consolidated - Mira
("MVDC") Vista (98% interest), included in the
Operating Partnership'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 Operating Partnership's Residential
Development Segment.
Desert Mountain Development Non wholly-owned assets, consolidated -
Corporation ("DMDC") Desert Mountain (93% interest), included in
the Operating Partnership'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 Operating
Partnership'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
Operating Partnership's Residential
Development Segment.
Crescent TRS Holdings Corp. Non wholly-owned assets, unconsolidated -
two quarries (56% interest). These
properties are included in the Operating
Partnership's Temperature-Controlled
Logistics Segment.
- ----------
(1) In addition, the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership and the Company,
all of which are consolidated in the Operating Partnership's or the Company's
financial statements and were formed primarily for the purpose of obtaining
secured debt or joint venture financing.
8
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Operating Partnership 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 Operating Partnership 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.
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 Operating
Partnership'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 Operating
Partnership'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 Operating
Partnership 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
Operating Partnership'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.
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Operating Partnership's significant accounting
policies contained in the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 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 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
Operating Partnership adopted EITF 03-1 effective July 1, 2004 and expects no
impact on the Operating Partnership'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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership'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 Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership'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 Operating
Partnership 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
Operating Partnership to pursue favorable tax treatment on other properties sold
by the Operating Partnership 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 Operating
Partnership controls the properties, retains all of the economic benefits and
risks associated with these properties and indemnifies the third party
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
intermediary and, therefore, the Operating Partnership fully consolidates these
properties. The Operating Partnership 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
Operating Partnership 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 Operating
Partnership to pursue favorable tax treatment on other properties sold by the
Operating Partnership 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 Operating Partnership controlled the properties,
retained all of the economic benefits and risks associated with these properties
and indemnified the third party intermediary and, therefore, the Operating
Partnership fully consolidated these properties. On June 28, 2004, the Operating
Partnership took legal ownership of the Office Properties and the nine retail
parcels.
STOCK-BASED COMPENSATION. Effective January 1, 2003, the Operating
Partnership 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 and the Operating
Partnership granted stock and unit options and the Operating Partnership
recognized compensation expense that was not significant to its results of
operations. With respect to the Company's stock options and the Operating
Partnership's unit options which were granted prior to 2003, the Operating
Partnership accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25"). 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 Operating Partnership's
net loss and loss per unit 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 unit amounts) 2004 2003 2004 2003
- ------------------------------------------------- ------------- ------------- ------------- -------------
Net loss available to partners, as reported $ (19,193) $ (5,947) $ (39,728) $ (27,572)
Add: Stock-based and unit-based employee
compensation expense included in reported
net income 351 3 701 4
Deduct: total stock-based and unit-based employee
compensation expense determined under fair
value based method for all awards (922) (689) (1,874) (1,411)
------------- ------------- ------------- -------------
Pro forma net loss $ (19,764) $ (6,633) $ (40,901) $ (28,979)
(Loss) earnings per unit:
Basic/Diluted - as reported $ (0.33) $ (0.10) $ (0.68) $ (0.47)
Basic/Diluted - pro forma $ (0.34) $ (0.11) $ (0.70) $ (0.50)
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARKETABLE SECURITIES. The Operating Partnership 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 Operating Partnership'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 25 316 N/A -- -- N/A
Available for sale(2) 6,338 6,260 (78) 2,278 2,278 --
----------- ----------- ----------- ----------- ----------- -----------
Total $ 194,018 $ 192,057 $ (2,252) $ 11,898 $ 11,899 $ 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
Available for sale(2) 1 (78) (502) 514
----------- ----------- ----------- -----------
Total $ 1 $ (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) Available for sale securities consist of marketable securities which
the Operating Partnership 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 Operating Partnership
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 Operating Partnership's evaluation of its
preferred interest in Fresh Choice, the Operating Partnership estimates the
value of its shares at a minimum to be equal to the investment balance of $5.5
million.
12
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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 partners by
the weighted average number of units outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue units were exercised or converted into units, where such
exercise or conversion would result in a lower EPS amount. The Operating
Partnership presents both basic and diluted earnings per unit.
The following tables present reconciliations for the three and six
months ended June 30, 2004 and 2003 of basic and diluted earnings per unit from
"Loss before discontinued operations and cumulative effect of a change in
accounting principle" to "Net loss available to partners." The table also
includes weighted average units 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 Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units(1) Amount (Loss) Units(1) Amount
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
BASIC/DILUTED EPS -
Loss before discontinued operations and cumulative
effect of a change in accounting principle $ (12,508) 58,375 $ (3.633) 58,460
Series A Preferred Unit distributions (5,991) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
---------- ---------- ---------- ---------- ---------- ----------
Loss available to common unitholders $ (20,518) 58,375 $ (0.35) $ (10,208) 58,460 $ (0.17)
before discontinued operations and cumulative
effect of a change in accounting principle
Income from discontinued operations, 4,269 0.07 5,300 0.09
Impairment charges related to real estate assets from
discontinued operations (500) (0.01) (990) (0.02)
Loss on real estate from discontinued operations (2,444) (0.04) (49) --
Cumulative effect of a change in accounting principle -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net loss available to partners $ (19,193) 58,375 $ (0.33) $ (5,947) 58,460 $ (0.10)
========== ========== ========== ========== ========== ==========
- ----------
(1) Anti-dilutive units not included are 57 and 6 for the three months ended
June 30, 2004 and 2003, respectively.
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units(1) Amount (Loss) Units(1) Amount
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
BASIC/DILUTED EPS -
Loss before discontinued operations and cumulative
effect of a change in accounting principle $ (24,603) 58,369 $ (6,763) 58,472
Series A Preferred Unit distributions (11,742) (9,112)
Series B Preferred Unit distributions (4,038) (4,038)
---------- ---------- ---------- ---------- ---------- ----------
Loss available to partners $ (40,383) 58,369 $ (0.69) $ (19,913) 58,472 $ (0.33)
before discontinued operations and cumulative
effect of a change in accounting principle
Income from discontinued operations 6,434 0.11 9,547 0.16
Impairment charges related to real estate assets from
discontinued operations, (2,851) (0.05) (16,818) (0.29)
Loss on real estate from discontinued operations (2,500) (0.04) (388) (0.01)
Cumulative effect of a change in accounting principle (428) (0.01) -- --
---------- ---------- ---------- ---------- ---------- ----------
Net loss available to partners $ (39,728) 58,369 $ (0.68) $ (27,572) 58,472 $ (0.47)
========== ========== ========== ========== ========== ==========
- ----------
(1) Anti-dilutive units not included are 109 and 4 for the six months ended
June 30, 2004 and 2003, respectively.
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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:
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
Operating Partnership currently has four major investment segments based on
property type: the Office Segment; the Resort/Hotel Segment; the Residential
Development Segment; and the Temperature-Controlled Logistics Segment.
Management utilizes this segment structure for making operating decisions and
assessing performance.
The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, as used in this document, is based on
the definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and means:
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 Operating Partnership calculates FFO available to partners -
diluted in the same manner, except that Net Income (Loss) is replaced by Net
Income (Loss) Available to Partners.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners - diluted and FFO appropriate measures of
performance for an operating partnership of an equity REIT and for its
investment segments. However, FFO available to partners - diluted and FFO should
not be
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
considered as alternatives to net income determined in accordance with GAAP as
an indication of the Operating Partnership's operating performance.
The Operating Partnership's measures of FFO available to partners -
diluted and FFO may not be comparable to similarly titled measures of operating
partnerships of REITs (other than the Company) if those REITs apply the
definition of FFO in a different manner than the Operating Partnership.
Selected financial information related to each segment for the three
and 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-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) 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) (53,938)(3) (97,766)
Minority interests and income taxes (286) 2,948 3,601 -- (634) 5,629
Discontinued operations -income, loss on
real estate and impairment charges related
to real estate assets (1,647) 2,901 8 -- (63) 1,325
---------- ------------ ----------- ------------ --------- --------
Net income (loss) $ 38,045 $ 4,983 $ 3,005 $ (2,707) $ (54,509) $(11,183)
---------- ------------ ----------- ------------ --------- --------
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
Series A Preferred unit distributions -- -- -- -- (5,991) (5,991)
Series B Preferred unit distributions -- -- -- -- (2,019) (2,019)
---------- ------------ ----------- ------------ --------- --------
Adjustments to reconcile net income (loss) to
funds from operations - diluted $ 37,281 $ 5,008 $ 2,163 $ 5,785 $ (8,017) $ 42,220
---------- ------------ ----------- ------------ --------- --------
Funds from operations available to partners
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 partners
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.
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) 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) -- 95 1,410
Discontinued operations -income, loss on
real estate and impairment charges related
to real estate assets 3,733 1,645 (31) -- (1,086) 4,261
---------- ------------ ----------- ------------ --------- --------
Net income (loss) $ 41,008 $ 6,195 $ 4,909 $ (407) $ (51,077) $ 628
---------- ------------ ----------- ------------ --------- --------
Depreciation and amortization of real
estate assets $ 25,985 $ 5,806 $ 1,308 $ -- $ -- $ 33,099
(Gain) loss on property sales, net (34) -- -- -- 512 478
Impairment charges related to real estate
assets -- -- -- -- 990 990
Adjustments for investment in unconsolidated
companies 2,596 355 (512) 5,486 (104) 7,821
Series A Preferred unit distributions -- -- -- -- (4,556) (4,556)
Series B Preferred unit distributions -- -- -- -- (2,019) (2,019)
---------- ------------ ----------- ------------ --------- --------
Adjustments to reconcile net income (loss) to
funds from operations - diluted $ 28,547 $ 6,161 $ 796 $ 5,486 $ (5,177) $ 35.813
---------- ------------ ----------- ------------ --------- --------
Funds from operations available to partners
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 partners
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
-------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) 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) (109,780)(3) (192,077)
Minority interests and income taxes (719) 4,078 4,838 -- (1,207) 6,990
Discontinued operations -income, loss on
real estate and impairment charges related
to real estate assets (2,733) 3,968 47 -- (199) 1,083
Cumulative effect of a change in accounting
principle -- -- -- -- (428) (428)
---------- ------------ ----------- ------------ --------- ---------
Net income (loss) $ 71,265 $ 11,653 $ 8,356 $ (3,608) $(111,614) $ (23,948)
---------- ------------ ----------- ------------ --------- ---------
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
Series A Preferred unit distributions -- -- -- -- (11,742) (11,742)
Series B Preferred unit distributions -- -- -- -- (4,038) (4,038)
---------- ------------ ----------- ------------ --------- ---------
Adjustments to reconcile net income (loss)
to funds from operations available to
partners - diluted $ 72,033 $ 11,368 $ 2,986 $ 11,580 $ (15,443) $ 85,524
---------- ------------ ----------- ------------ --------- ---------
Funds from operations available to partners
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 partners
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.
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) 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 (103,512)(3) (160,943)
Minority interests and income taxes (274) 2,538 2,324 -- 435 5,023
Discontinued operations -income, loss on real
estate and impairment charges related to
real estate assets (8,697) 3,059 (11) -- (2,010) (7,659)
---------- ------------ ----------- ------------ --------- --------
Net income (loss) $ 65,569 $ 15,656 $ 8,340 $ 1,100 $(105,087) $(14,422)
---------- ------------ ----------- ------------ --------- --------
Depreciation and amortization of real estate
assets $ 55,392 $ 11,582 $ 2,426 $ -- $ -- $ 69,400
(Gain) loss on property sales, net (98) -- -- -- 802 704
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
Series A Preferred unit distributions -- -- -- -- (9,112) (9,112)
Series B Preferred unit distributions -- -- -- -- (4,038) (4,038)
---------- ------------ ----------- ------------ --------- --------
Adjustments to reconcile net income (loss) to
funds from operations - diluted $ 75,712 $ 12,331 $ 2,653 $ 10,996 $ (9,412) $ 92,280
---------- ------------ ----------- ------------ --------- --------
Funds from operations available to partners
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 partners
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.
TEMPERATURE-
RESORT/ RESIDENTIAL CONTROLLED CORPORATE
OFFICE HOTEL DEVELOPMENT LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT SEGMENT(2)(4) SEGMENT OTHER TOTAL
- -------------------------------------- ---------- ------------ ------------- ------------ --------- --------
Total Assets by Segment: (5) (6)
Balance at June 30, 2004 $ 2,619 $ 495 $ 798 $ 207 $ 336(7) $ 4,455
Balance at December 31, 2003 2,503 468 707 300 329 4,307
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) -- (36) (415)
Balance at December 31, 2003 (120) (27) (109) -- (114) (370)
Minority Interests:
Balance at June 30, 2004 (9) (6) (29) -- -- (44)
Balance at December 31, 2003 (9) (7) (31) -- -- (47)
- ----------
(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 Operating Partnership 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 Operating Partnership'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.
17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
During January and February 2004, in accordance with the original
purchase contract, the Operating Partnership 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 Operating Partnership acquired a 67%
interest. The remaining four Office Properties are wholly-owned by the Operating
Partnership. The Operating Partnership acquired these five Office Properties and
seven retail parcels for approximately $175.3 million, funded by the Operating
Partnership's assumption of approximately $85.4 million in mortgage loans and by
a portion of the proceeds from the sale of the Operating Partnership's interests
in The Woodlands on December 31, 2003. The Operating Partnership 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
Operating Partnership's Office Segment.
On March 31, 2004, the Operating Partnership acquired Dupont Centre, a
250,000 square foot Class A office property, located in the John Wayne Airport
submarket of Irvine, California. The Operating Partnership acquired the Office
Property for approximately $54.3 million, funded by a draw on the Operating
Partnership'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 Operating Partnership's Office Segment.
On May 10, 2004, the Operating Partnership 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 Operating
Partnership's credit facility. This Office Property is wholly-owned and included
in the Operating Partnership's Office Segment.
UNDEVELOPED LAND
On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Operating Partnership 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 Operating Partnership'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," gain
or loss on the assets sold or held for sale have been presented as "Loss on real
estate from discontinued operations" and impairments on the assets sold or held
for sale have been presented as "Impairment charges related to real estate
assets from discontinued operations" 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 Operating Partnership 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. The Operating Partnership previously recorded an
impairment charge of approximately $16.4 million during the year ended December
31, 2003. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.
On March 31, 2004, the Operating Partnership 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 $0.4
million. This property was wholly-owned.
On April 13, 2004, the Operating Partnership 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. The Operating Partnership previously recorded an impairment charge
of approximately $4.3 million during the year
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ended December 31, 2003. The proceeds from the sale were used primarily to pay
down the Operating Partnership's credit facility. This property was
wholly-owned.
On June 17, 2004, the Operating Partnership 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 $2.4 million. The Operating Partnership previously recorded an
impairment charge of approximately $0.6 million during the quarter ended March
31, 2004. In addition, the Operating Partnership 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 Operating Partnership's Bank of America Fund
XII Term Loan. The property and adjacent land were wholly-owned.
On June 29, 2004, the Operating Partnership 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. The proceeds from the sale were used primarily to pay down the
Operating Partnership'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 Operating Partnership 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 Operating Partnership 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" 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.
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present total revenues, operating and other
expenses, depreciation and amortization, 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 (23,883) (27,963)
Depreciation and amortization (2,209) (6,481)
------------ ------------
Income from discontinued operations $ 6,434 $ 9,547
============ ============
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
(in thousands) 2004 2003
------------------------------------------------- ------------ ------------
Impairment charges related to real estate assets $ (2,851) $ (16,818)
============ ============
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
(in thousands) 2004 2003
------------------------------------------------- ------------ ------------
Realized loss on sale of properties $ (2,500) $ (388)
============ ============
6. OTHER TRANSACTIONS
On June 28, 2004, the Operating Partnership completed a transaction
related to the Fountain Place Office Property with Crescent FP Investors, L.P.,
("FP Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Operating Partnership. In the transaction, the
Fountain Place Office Property was, for tax purposes, sold to FP Investors for
$168.2 million, including the assumption by FP Investors of a new $90.0 million
loan from Lehman Capital. The Operating Partnership received net proceeds of
approximately $78.2 million. This transaction resulted in the completion of a
reverse Section 1031 like-kind exchange associated with the Operating
Partnership's prior purchase of a portion of the Hughes Center office portfolio.
Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Operating Partnership to purchase
Lehman's interest in FP Investors for an agreed upon fair value of $79.9 million
at any time until November 30, 2004. For GAAP purposes, under SFAS No. 66,
"Accounting for Sales of Real Estate," this unconditional right, or contingency,
results in the transaction requiring accounting associated with a financing
transaction. As a result, no gain has been recorded on the transaction and the
Operating Partnership's accompanying financial statements continue to include
the Office Property, related debt and operations until expiration of the
contingency. The fair value of the contingency, $79.9 million, is included in
the "Accounts payable, accrued expenses and other liabilities" line item in the
Operating Partnership's Consolidated Balance Sheet at June 30, 2004.
Also on June 28, 2004, the Operating Partnership paid off the $220.0
million Deutsche Bank - CMBS loan with proceeds from the Fountain Place Office
Property transaction and a draw on the Operating Partnership's revolving credit
facility. See Note 9, "Notes Payable and Borrowings Under Credit Facility," for
further information relating to the $90.0 million loan with Lehman Capital,
secured by the Fountain Place Office Property.
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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. The
Operating Partnership has no interest in COPI or AmeriCold Logistics. 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 $26.9
million of the total $78.9 million of rent payable for the six months ended June
30, 2004. The Operating Partnership's share of the deferred rent was $10.8
million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $10.8 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the six months ended June