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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED September 30, 2004
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
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(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(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 October 31,2004.
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: 97,532,788
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003
(unaudited).......................................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 and 2003 (unaudited).............................................................. 4
Consolidated Statement of Shareholders' Equity for the nine months ended
September 30, 2004 (unaudited)....................................................................... 5
Consolidated Statements of Cash Flows for the nine months ended September 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........................................................................................ 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 70
Item 4. Controls and Procedures.............................................................................. 70
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................................ 70
Item 6. Exhibits and Reports on Form 8-K..................................................................... 70
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS:
Investments in real estate:
Land $ 274,260 $ 237,058
Land improvements, net of accumulated depreciation of $22,937 and $19,270 at
September 30, 2004 and December 31, 2003, respectively 113,217 105,236
Building and improvements, net of accumulated depreciation of $650,194 and
$584,861 at September 30, 2004 and December 31, 2003, respectively 2,377,177 2,135,338
Furniture, fixtures and equipment, net of accumulated depreciation of $38,374
and $33,344 at September 30, 2004 and December 31, 2003, respectively 41,313 43,227
Land held for investment or development 505,543 450,279
Properties held for disposition, net 78,067 186,135
------------- ------------
Net investment in real estate $ 3,389,577 $ 3,157,273
Cash and cash equivalents $ 64,517 $ 78,052
Restricted cash and cash equivalents 75,800 217,329
Defeasance investments 170,589 9,620
Accounts receivable, net 48,796 40,740
Deferred rent receivable 79,573 66,567
Investments in unconsolidated companies 356,950 440,594
Notes receivable, net 74,157 78,453
Income tax asset-current and deferred, net 31,138 17,506
Other assets, net 295,872 208,329
------------- ------------
Total assets $ 4,586,969 $ 4,314,463
============= ============
LIABILITIES:
Borrowings under Credit Facility $ 307,500 $ 239,000
Notes payable 2,548,391 2,319,699
Accounts payable, accrued expenses and other liabilities 466,514 370,136
Current income tax payable - 7,995
------------- ------------
Total liabilities $ 3,322,405 $ 2,936,830
------------- ------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,863,889 and 8,873,347 units, at September 30, 2004
and December 31, 2003, respectively $ 83,304 $ 108,706
Consolidated real estate partnerships 44,137 47,123
------------- ------------
Total minority interests $ 127,441 $ 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 September 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 September 30, 2004 and December 31, 2003 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,446,656 and 124,396,168 shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively 1,238 1,237
Additional paid-in capital 2,245,927 2,245,683
Deferred compensation on restricted shares (3,124) (4,102)
Accumulated deficit (1,043,673) (877,120)
Accumulated other comprehensive income (4,186) (13,829)
------------- ------------
$ 1,597,271 $ 1,681,952
Less - shares held in treasury, at cost, 25,121,861
common shares at September 30, 2004 and December 31, 2003 (460,148) (460,148)
------------- ------------
Total shareholders' equity $ 1,137,123 $ 1,221,804
------------- ------------
Total liabilities and shareholders' equity $ 4,586,969 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2004 2003 2004 2003
--------- ---------- ----------- ---------
REVENUE:
Office Property $ 128,331 $ 123,155 $ 384,564 $ 364,137
Resort/Hotel Property 46,986 42,319 137,241 132,873
Residential Development Property 60,595 34,936 163,875 140,631
--------- ---------- ----------- ----------
Total Property revenue $ 235,912 $ 200,410 $ 685,680 $ 637,641
--------- ---------- ----------- ----------
EXPENSE:
Office Property real estate taxes $ 15,719 $ 15,323 $ 49,719 $ 49,794
Office Property operating expenses 46,699 42,976 132,906 125,956
Resort/Hotel Property expense 39,479 35,397 115,382 108,706
Residential Development Property expense 54,480 34,975 146,803 131,977
--------- ---------- ----------- ----------
Total Property expense $ 156,377 $ 128,671 $ 444,810 $ 416,433
--------- ---------- ----------- ----------
Income from Property Operations $ 79,535 $ 71,739 $ 240,870 $ 221,208
--------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Income from investment land sales, net $ 7,583 $ 11,334 $ 8,532 $ 12,961
Gain on joint venture of properties, net - - - 100
Interest and other income 2,576 1,319 8,295 3,954
Corporate general and administrative (9,023) (7,356) (22,734) (18,968)
Interest expense (46,571) (43,044) (137,008) (129,298)
Amortization of deferred financing costs (3,453) (2,783) (10,243) (7,751)
Extinguishment of debt (155) - (3,082) -
Depreciation and amortization (45,715) (35,550) (127,702) (104,761)
Impairment charges related to real estate assets (4,094) - (4,094) (1,200)
Other expenses (88) (130) (236) (1,042)
Equity in net income (loss) of unconsolidated companies:
Office Properties 1,268 5,871 3,871 9,981
Resort/Hotel Properties 22 (89) (227) 2,036
Residential Development Properties (803) 1,725 (1,110) 4,235
Temperature-Controlled Logistics Properties (906) (949) (4,514) 152
Other 190 (864) (391) (1,679)
--------- ---------- ----------- ----------
Total Other Income (Expense) $ (99,169) $ (70,516) $ (290,643) $ (231,280)
--------- ---------- ----------- ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES $ (19,634) $ 1,223 $ (49,773) $ (10,072)
Minority interests 710 (1,174) 4,615 (667)
Income tax benefit 6,613 4,865 13,214 10,336
--------- ---------- ----------- ----------
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (12,311) $ 4,914 $ (31,944) $ (403)
Income from discontinued operations, net of minority interests 1,967 373 6,192 8,052
Impairment charges related to real estate assets from discontinued
operations, net of minority interests (297) (1,998) (2,715) (16,263)
Loss on real estate from discontinued operations, net of minority
interests (32) (19) (2,152) (349)
Cumulative effect of a change in accounting principle, net of minority
interests - - (363) -
--------- ---------- ----------- ----------
NET (LOSS) INCOME $ (10,673) $ 3,270 $ (30,982) $ (8,963)
Series A Preferred Share distributions (5,991) (4,556) (17,733) (13,668)
Series B Preferred Share distributions (2,019) (2,019) (6,057) (6,057)
--------- ---------- ----------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (18,683) $ (3,305) $ (54,772) $ (28,688)
========= ========== =========== ==========
BASIC EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations
and cumulative effect of a change in accounting principle $ (0.21) $ (0.01) $ (0.56) $ (0.20)
Income from discontinued operations, net of minority interests 0.02 - 0.06 0.08
Impairment charges related to real estate assets from discontinued
operations, net of minority interests - (0.02) (0.03) (0.17)
Loss on real estate from discontinued operations, net of minority
interests - - (0.02) -
Cumulative effect of a change in accounting principle, net of minority
interests - - - -
--------- ---------- ----------- ----------
Net loss available to common shareholders - basic $ (0.19) $ (0.03) $ (0.55) $ (0.29)
========= ========== =========== ==========
DILUTED EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations
and cumulative effect of a change in accounting principle $ (0.21) $ (0.01) $ (0.56) $ (0.20)
Income from discontinued operations, net of minority interests 0.02 - 0.06 0.08
Impairment charges related to real estate assets from discontinued
operations, net of minority interests - (0.02) (0.03) (0.17)
Loss on real estate from discontinued operations, net of minority
interests - - (0.02) -
Cumulative effect of a change in accounting principle, net of minority
interests - - - -
--------- ---------- ----------- ----------
Net loss available to common shareholders - diluted $ (0.19) $ (0.03) $ (0.55) $ (0.29)
========= ========== =========== ==========
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, September 30, 2004 14,200,000 $ 319,166 3,400,000 $ 81,923 25,121,861 $ (460,148)
========== ========= ========= ========= ========== ==========
Deferred
Common Shares Additional Compensation
----------------------- Paid-in on Restricted Accumulated
Shares Par Value Capital Shares (Deficit)
------------ --------- ---------- ------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2003 124,396,168 $ 1,237 $ 2,245,683 $ (4,102) $ (877,120)
Issuance of Common Shares 5,672 - 94 - -
Exercise of Common Share Options 25,900 1 361 - -
Accretion of Discount on Employee
Stock Option Notes - - (189) - -
Issuance of Shares in Exchange for Operating
Partnership Units 18,916 - - - -
Preferred Equity Issuance - - - - -
Stock Option Grants - - (22) - -
Amortization of Deferred Compensation
on Restricted Shares - - - 978 -
Dividends Paid - - - - (111,781)
Net Loss Available to Common Shareholders - - - - (54,772)
Unrealized Gain on Marketable Securities - - - - -
Unrealized Net Gain on Cash Flow Hedges - - - - -
------------ --------- ---------- ------------- -----------
SHAREHOLDERS' EQUITY, September 30, 2004 124,446,656 $ 1,238 $ 2,245,927 $ (3,124) $(1,043,673)
============ ========= == ======== ============= ===========
Accumulated
Other
Comprehensive
Income Total
------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2003 $ (13,829) $ 1,221,804
Issuance of Common Shares - 94
Exercise of Common Share Options - 362
Accretion of Discount on Employee
Stock Option Notes - (189)
Issuance of Shares in Exchange for Operating
Partnership Units - -
Preferred Equity Issuance - 71,006
Stock Option Grants - (22)
Amortization of Deferred Compensation
on Restricted Shares - 978
Dividends Paid - (111,781)
Net Loss Available to Common Shareholders - (54,772)
Unrealized Gain on Marketable Securities 1,445 1,445
Unrealized Net Gain on Cash Flow Hedges 8,198 8,198
------------- -----------
SHAREHOLDERS' EQUITY, September 30, 2004 $ (4,186) $1,137,123
============= ===========
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 NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (30,982) $ (8,963)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 137,945 112,512
Residential Development cost of sales 67,519 66,658
Residential Development capital expenditures (126,622) (98,506)
Impairment charges related to real estate assets from discontinued 2,715 16,263
operations, net of minority interests
Loss on real estate from discontinued operations, net of minority interests 2,152 349
Discontinued operations - depreciation and minority interests 2,939 14,360
Extinguishment of debt 3,082 -
Impairment charges related to real estate assets 4,094 1,200
Income from investment in land sales, net (8,532) (12,961)
Gain on joint venture of properties, net - (100)
Minority interests (4,615) 667
Cumulative effect of a change in accounting principle, net of minority 363 -
interests
Non-cash compensation 861 (43)
Equity in (earnings) loss from unconsolidated companies:
Office Properties (3,871) (9,981)
Resort/Hotel Properties 227 (2,036)
Residential Development Properties 1,110 (4,235)
Temperature-Controlled Logistics Properties 4,514 (152)
Other 391 1,679
Distributions received from unconsolidated companies:
Office Properties 4,465 10,220
Residential Development Properties - 46
Temperature-Controlled Logistics Properties 1,822 -
Other 938 852
Change in assets and liabilities, net of consolidations, acquisitions
and dispositions:
Restricted cash and cash equivalents 52,695 602
Accounts receivable (6,903) 4,824
Deferred rent receivable (12,998) (1,501)
Income tax asset - current and deferred, net (22,223) (11,223)
Other assets (11,045) 7,465
Accounts payable, accrued expenses and other liabilities 15,295 (29,395)
------------- ---------------
Net cash provided by operating activities $ 75,336 $ 58,601
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated companies $ 334 $ 11,374
Proceeds from property sales 113,871 16,030
Acquisition of investment properties (193,275) (14,802)
Development of investment properties (3,804) (3,612)
Property improvements - Office Properties (9,040) (11,342)
Property improvements - Resort/Hotel Properties (22,228) (7,097)
Tenant improvement and leasing costs - Office Properties (68,145) (51,114)
Residential Development Properties Investments (28,319) (28,696)
Decrease (increase) in restricted cash and cash equivalents 92,347 (835)
Purchases of defeasance investments and other securities (195,781) (2,963)
Proceeds from defeasance investment maturities 8,809 -
Return of investment in unconsolidated companies:
Office Properties 2,288 7,721
Resort/Hotel Properties 1,299 -
Residential Development Properties 14 227
Temperature-Controlled Logistics Properties 90,776 3,201
Other 204 5,428
Investment in unconsolidated companies:
Office Properties (10,086) (85)
Residential Development Properties (991) (4,738)
Temperature-Controlled Logistics Properties (2,404) (897)
Other (2,646) (1,419)
Decrease in notes receivable 4,810 19,098
------------- ---------------
Net cash used in investing activities $ (221,967) $ (64,521)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (8,218) $ (2,603)
Borrowings under Credit Facility 440,000 284,500
Payments under Credit Facility (371,500) (134,000)
Notes payable proceeds 454,623 100,435
Notes payable payments (386,590) (97,164)
Residential Development Properties notes payable borrowings 77,706 57,516
Residential Development Properties notes payable payments (62,462) (56,042)
Amortization of debt premiums (1,766) -
Obligation related to property financing transaction 79,920 -
Capital distributions - joint venture partner (6,331) (9,462)
Capital contributions - joint venture partner 2,101 -
Proceeds from exercise of share options 362 -
Treasury shares purchase under compensation plan - (880)
Issuance of preferred shares - Series A 71,006 -
Series A Preferred Share distributions (17,972) (13,668)
Series B Preferred Share distributions (6,057) (6,057)
Dividends and unitholder distributions (131,726) (131,616)
------------- ---------------
Net cash provided by (used in) financing activities $ 133,096 $ (9,041)
------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS $ (13,535) $ (14,961)
CASH AND CASH EQUIVALENTS,
Beginning of period 78,052 78,444
------------- ---------------
CASH AND CASH EQUIVALENTS,
End of period $ 64,517 $ 63,483
============= ===============
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 September 30,
2004 included:
- CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."
- CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.
- 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 September 30, 2004.
Operating Partnership 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% interest), 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 I, Wholly-owned assets - The Aberdeen, The
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. ("Funding Properties (ten Office Properties). These
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 Funding Wholly-owned asset - Canyon Ranch - Lenox,
VI, L.P. ("Funding VI") included in the Company's 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, 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 X, Wholly-owned assets - Post Oak Central (three
L.P. ("Funding X") 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 XII, Wholly-owned assets - Albuquerque Plaza,
L.P. ("Funding XII") 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, L.L.C Wholly-owned assets - 707 17th Street,
included in the Company's Office Segment, and
The Denver Marriott City Center, included in
the Company's Resort/Hotel Segment.
Crescent Alhambra, L.L.C. Wholly-owned asset - Alhambra Plaza (two
Office Properties), included in the Company's
Office Segment.
Crescent Spectrum Center, L.P. Non wholly-owned asset, consolidated -
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 Corp. Non wholly-owned assets, consolidated -
("HADC") Falcon Point (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 Inc. Non wholly-owned assets, consolidated -
("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 (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 September 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.
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Company were divided into four investment
segments at September 30, 2004, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Company owned in whole or in part the following
real estate assets (the "Properties") as of September 30, 2004:
- OFFICE SEGMENT consisted of 75 office properties (collectively
referred to as the "Office Properties"), located in 27 metropolitan
submarkets in seven states, with an aggregate of approximately 29.9
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.
- 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.
- 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").
- 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
September 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 September 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 nine months
ended September 30, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at September 30, 2004 and December 31, 2003.
See Note 17, "Subsequent Events," for a discussion of (i) the Company's
joint venture transaction related to three of its Office Properties, (ii) the
sale of one of its business-class hotel properties and (iii) the restructuring
of the Company's investment in the Temperature-Controlled Logistics Segment.
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 nine-
month periods ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
The 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.
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED 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 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 it had 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 $57.7 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at September 30, 2004.
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2004, the Company entered into three separate exchange agreements
with a third party intermediary. The first exchange agreement included two
parcels of undeveloped land, the second exchange agreement included the 3930
Hughes Parkway Office Property, and the third exchange agreement included The
Alhambra Office Property. The 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 ended or will
end on August 28, 2004, November 6, 2004, and February 2, 2005, 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
took or will take legal ownership of the properties no later than on the
expiration of the respective 180-day period.
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 nine months
ended September 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 been determined based on the fair value at the grant dates for
awards under the Plans consistent with SFAS No. 123, the Company's net loss and
loss per share would have been reduced to the following pro forma amounts:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
(in thousands, except per share amounts) 2004 2003 2004 2003
- ------------------------------------------ ------------ ---------- ------------ ------------
Net loss available to common shareholders, as reported $ (18,683) $ (3,305) $ (54,772) $ (28,688)
Add: Stock-based employee compensation expense included in
reported net income 355 15 1,056 21
Deduct: total stock-based employee compensation expense
determined under fair value based method for all
awards, net of minority interest (838) (594) (2,534) (1,794)
------------ ---------- ------------ ------------
Pro forma net loss $ (19,166) $ (3,884) $ (56,250) $ (30,461)
Loss per share:
Basic/Diluted - as reported $ (0.19) $ (0.03) $ (0.55) $ (0.29)
Basic/Diluted - pro forma $ (0.19) $ (0.04) $ (0.57) $ (0.31)
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2004 and December 31, 2003.
The following tables present the cost, fair value and unrealized gains and
losses as of September 30, 2004 and December 31, 2003 and the realized gains and
change in Accumulated Other Comprehensive Income ("OCI") for the nine months
ended September 30, 2004 and 2003 for the Company's marketable securities.
AS OF SEPTEMBER 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) $ 170,589 $ 169,042 $ (1,547) $ 9,620 $ 9,621 $ 1
Trading(2) 7,963 8,270 N/A 4,473 4,714 N/A
Available for sale(3) 24,204 24,908 705 2,278 2,278 -
---------- ----------- ----------- ---------- ----------- -----------
Total $ 202,756 $ 202,220 $ (842) $ 16,371 $ 16,613 $ 1
========== =========== =========== ========== =========== ===========
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 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) 367 N/A - N/A
Available for sale(3) 6 705 (502) 514
---------- ------------ ------------- ----------
Total $ 373 $ 705 $ (502) $ 514
========== ============ ============= ==========
(1) Held to maturity securities are carried at amortized cost and consist of
U.S. Treasury and government sponsored agency securities purchased for the
sole purpose of funding debt service payments on the LaSalle Note II. See
Note 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
consist of $18.3 million of bonds and $6.6 million of preferred stock
which 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 September 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 September 5, 2004,
the accrued liquidation preference on the Series B Preferred shares was $9.3
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.
12
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 nine months
ended September 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 SEPTEMBER 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 $ (12,311) 99,024 $ 4,914 99,172
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 $ (20,321) 99,024 $ (0.21) $(1,661) 99,172 $ (0.01)
Income from discontinued operations, net of minority interests 1,967 0.02 373 -
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (297) - (1,998) (0.02)
Loss on real estate from discontinued operations, net of
minority interests (32) - (19) -
Cumulative effect of a change in accounting principle - - - -
--------- ---------- --------- ------- --------- ---------
Net loss available to common shareholders $ (18,683) 99,024 $ (0.19) $(3,305) 99,172 $ (0.03)
========= ========== ========= ======= ========= =========
- --------------
(1) Anti-dilutive shares not included are 112 and 10 for the three months
ended September 30, 2004 and 2003, respectively.
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $ (31,944) 99,013 $ (403) 99,186
Series A Preferred Share distributions (17,733) (13,668)
Series B Preferred Share distributions (6,057) (6,057)
--------- ---------- --------- -------- --------- ---------
Loss available to common shareholders
before discontinued operations and cumulative
effect of a change in accounting principle $ (55,734) 99,013 $ (0.56) $(20,128) 99,186 $ (0.20)
Income from discontinued operations, net of minority interests 6,192 0.06 8,052 0.08
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (2,715) (0.03) (16,263) (0.17)
Loss on real estate from discontinued operations, net of
minority interests (2,152) (0.02) (349) -
Cumulative effect of a change in accounting principle (363) - - -
--------- ---------- --------- -------- --------- ---------
Net loss available to common shareholders $ (54,772) 99,013 $ (0.55) $(28,688) 99,186 $ (0.29)
========= ========== ========= ======== ========= =========
- ---------
(1) Anti-dilutive shares not included are 170 and 6 for the nine months ended
September 30, 2004 and 2003, respectively.
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: SEPTEMBER 30,
(in thousands) 2004 2003
- --------------------------------------------------- ---------- -------------
Interest paid on debt $ 121,622 $ 110,670
Interest capitalized - Resort/Hotel 278 -
Interest capitalized - Residential Development 11,090 13,896
Additional interest paid in conjunction with cash flow hedges 8,935 15,472
---------- -------------
Total interest paid $ 141,925 $ 140,038
========== =============
Cash paid for income taxes $ 8,406 $ 1,954
========== =============
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 139,807 38,000
Non-cash compensation 962 147
Financed sale of land parcel 4,878 11,800
Financed purchase of land parcel 7,500 -
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:
- Net Income (Loss) - determined in accordance with GAAP;
- excluding gains (losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint
ventures.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
nine months ended September 30, 2004 and 2003, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at September 30, 2004 and December 31, 2003, are
presented below:
SELECTED FINANCIAL INFORMATION:
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $ 128,331 $ 46,986 $ 60,595 $ - $ - $ 235,912
Total Property expense 62,418 39,479 54,480 - - 156,377
------------- ---------- ----------- --------- --------- ----------
Income from Property Operations $ 65,913 $ 7,507 $ 6,115 $ - $ - $ 79,535
Total other income (expense) (34,238) (5,993) (8,310) (906) (49,722)(3) (99,169)
Minority interests and income taxes (512) 2,454 3,469 - 1,912 7,323
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (341) 2,642 103 - (766) 1,638
------------- ---------- ----------- --------- --------- ----------
Net income (loss) $ 30,822 $ 6,610 $ 1,377 $ (906) $ (48,576) $ (10,673)
------------- ---------- ----------- --------- --------- ----------
Depreciation and amortization of real
estate assets $ 35,141 $ 5,662 $ 2,181 $ - $ - $ 42,984
(Gain) loss on property sales, net 164 - (126) - 155 193
Impairment charges related to real
estate assets - - 2,497 - 350 2,847
Adjustments for investment in
unconsolidated companies 2,283 - (2,150) 5,768 - 5,901
Unitholder minority interest - - - - (1,912) (1,912)
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 $ 37,588 $ 5,662 $ 2,402 $ 5,768 $ (9,417) $ 42,003
------------- ---------- ----------- --------- --------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 68,410 $ 12,272 $ 3,779 $ 4,862 $ (57,993) $ 31,330
Impairment charges related to real
estate assets - - (2,497) - (350) (2,847)
------------- ---------- ----------- --------- --------- ----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 68,410 $ 12,272 $ 1,282 $ 4,862 $ (58,343) $ 28,483
============= ========== =========== ========= ========= ==========
See footnotes to the following table.
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION:
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $ 123,155 $ 42,319 $ 34,936 $ - $ - $ 200,410
Total Property expense 58,299 35,397 34,975 - - 128,671
------------- ---------- ----------- ------------ ---------- ----------
Income from Property Operations $ 64,856 $ 6,922 $ (39) $ - $ - $ 71,739
Total other income (expense) (21,254) (4,988) (670) (949) (42,655)(3) (70,516)
Minority interests and income taxes 7 1,481 2,347 - (144) 3,691
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (1,177) 1,600 10 - (2,077) (1,644)
------------- ---------- ----------- ------------ ---------- ----------
Net income (loss) $ 42,432 $ 5,015 $ 1,648 $ (949) $ (44,876) $ 3,270
------------- ---------- ----------- ------------ ---------- ----------
Depreciation and amortization of real
estate assets $ 32,438 $ 6,062 $ 1,117 $ - $ - $ 39,617
(Gain) loss on property sales, net 28 - - - (14) 14
Impairment charges related to real
estate assets - - - - 2,356 2,356
Adjustments for investment in
unconsolidated companies (1,613) 394 8 5,147 260 4,196
Unitholder minority interest - - - - 585 585
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 $ 30,853 $ 6,456 $ 1,125 $ 5,147 $ (3,388) $ 40,193
------------- ---------- ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 73,285 $ 11,471 $ 2,773 $ 4,198 $ (48,264) $ 43,463
Impairment charges related to real
estate assets - - - - (2,356) (2,356)
------------- ---------- ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders after
impairment charges related to real
estate assets - diluted $ 73,285 $ 11,471 $ 2,773 $ 4,198 $ (50,620) $ 41,107
============= ========== =========== ============ ========== ==========
See footnotes to the following table.
SELECTED FINANCIAL INFORMATION:
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 384,564 $ 137,241 $ 163,875 $ - $ - $ 685,680
Total Property expense 182,625 115,382 146,803 - - 444,810
------------- ------------ ----------- ------------ ---------- ----------
Income from Property Operations $ 201,939 $ 21,859 $ 17,072 $ - $ - $ 240,870
Total other income (expense) (94,131) (16,738) (15,794) (4,514) (159,466)(3) (290,643)
Minority interests and income taxes (1,230) 6,531 8,308 - 4,220 17,829
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (4,434) 6,611 149 - (1,001) 1,325
Cumulative effect of a change in
accounting principle - - - - (363) (363)
------------- ------------ ----------- ------------ ---------- ----------
Net income (loss) $ 102,144 $ 18,263 $ 9,735 $ (4,514) $ (156,610) $ (30,982)
------------- ------------ ----------- ------------ ---------- ----------
Depreciation and amortization of real
estate assets $ 97,205 $ 17,030 $ 5,115 $ - $ 56 $ 119,406
(Gain) loss on property sales, net 2,319 - (127) - 491 2,683
Impairment charges related to real
estate assets 2,852 - 2,497 - 350 5,699
Adjustments for investment in
unconsolidated companies 7,188 - (2,099) 17,348 - 22,437
Unitholder minority interest - - - - (5,548) (5,548)
Series A Preferred share distributions - - - - (17,733) (17,733)
Series B Preferred share distributions - - - - (6,057) (6,057)
------------- ------------ ----------- ------------ ---------- ----------
Adjustments to reconcile net income
(loss) to funds from operations
available to common shareholders -
diluted $ 109,564 $ 17,030 $ 5,386 $ 17,348 $ (28,441) $ 120,887
------------- ------------ ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 211,708 $ 35,293 $ 15,121 $ 12,834 $ (185,051) $ 89,905
Impairment charges related to real
estate assets (2,852) - (2,497) - (350) (5,699)
------------- ------------ ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 208,856 $ 35,293 $ 12,624 $ 12,834 $ (185,401) $ 84,206
============= ============ =========== ============ ========== ==========
See footnotes to the following table.
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION:
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 364,137 $ 132,873 $ 140,631 $ - $ - $ 637,641
Total Property expense 175,750 108,706 131,977 - - 416,433
------------- ------------ ----------- ------------ ---------- ----------
Income from Property Operations $ 188,387 $ 24,167 $ 8,654 $ - $ - $ 221,208
Total other income (expense) (71,493) (12,187) (3,336) 151 (144,415)(3) (231,280)
Minority interests and income taxes (267) 4,031 4,671 - 1,234 9,669
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (10,340) 4,659 (1) - (2,878) (8,560)
------------- ------------ ----------- ------------ ---------- ----------
Net income (loss) $ 106,287 $ 20,670 $ 9,988 $ 151 $ (146,059) $ (8,963)
------------- ------------ ----------- ------------ ---------- ----------
Depreciation and amortization of real
estate assets $ 87,829 $ 17,645 $ 3,543 $ - $ - $ 109,017
(Gain) loss on property sales, net 447 - - - 272 719
Impairment charges related to real
estate assets 16,200 - - - 4,174 20,374
Adjustments for investment in
unconsolidated companies 3,805 1,143 235 16,143 178 21,504
Unitholder minority interest - - - - (1,605) (1,605)
Series A Preferred share distributions - - - - (13,668) (13,668)
Series B Preferred share distributions - - - - (6,057) (6,057)
------------- ------------ ----------- ------------ ---------- ----------
Adjustments to reconcile net income
(loss) to funds from operations -
diluted $ 108,281 $ 18,788 $ 3,778 $ 16,143 $ (16,706) $ 130,284
------------- ------------ ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders before
impairment charges related to real
estate assets - diluted $ 214,568 $ 39,458 $ 13,766 $ 16,294 $ (162,765) $ 121,321
Impairment charges related to real
estate assets (16,200) - - - (4,174) (20,374)
------------- ------------ ----------- ------------ ---------- ----------
Funds from operations available to
common shareholders after impairment
charges related to real estate
assets - diluted $ 198,368 $ 39,458 $ 13,766 $ 16,294 $ (166,939) $ 100,947
============= ============ =========== ============ ========== ==========
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 September 30, 2004 $ 2,692 $ 500 $ 834 $ 206 $ 355(7) $ 4,587
Balance at December 31, 2003 2,503 468 707 300 336 4,314
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at September 30, 2004 (1,437) (143) (103) - (1,173)(8) (2,856)
Balance at December 31, 2003 (1,459) (138) (88) - (874)(8) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at September 30, 2004 (188) (43) (178) - (57) (466)
Balance at December 31, 2003 (120) (27) (109) - (122) (378)
MINORITY INTERESTS:
Balance at September 30, 2004 (9) (6) (29) - (83) (127)
Balance at December 31, 2003 (9) (7) (31) - (109) (156)
- --------------------
(1) The property revenue includes lease termination fees (net of the write-off
of deferred rent receivables) of approximately $1.3 million and $5.0
million for the three months ended September 30, 2004 and 2003,
respectively and $8.5 million and $7.9 million for the nine months ended
September 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:
income from investment land sales, net, 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 $524 million at September
30, 2004. The primary components of net book value are $361 million for
CRDI, consisting of Tahoe Mountain Resort properties of $215 million,
Denver development properties of $62 million and Colorado Mountain
development properties of $84 million, $135 million for Desert Mountain
and $28 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 $82.2
million by segment is as follows: Corporate $75.3 million and Resort/Hotel
$6.9 million.
(7) Includes U.S. Treasury and government sponsored agency securities of
$170.6 million.
(8) Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
Loan, The Rouse Company Note, and Funding II defeased debt.
17
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 included $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.
On August 6, 2004, the Company acquired The Alhambra, two Class A Office
Properties, located in the Coral Gables submarket of Miami, Florida. The Company
acquired the Office Properties for approximately $72.3 million, funded by the
Company's assumption of a $45.0 million loan from Wachovia Securities and a draw
on the Company's credit facility. The Office Properties are wholly-owned and are
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 nine months ended September 30, 2004
and 2003. Minority interests for wholly-owned properties represents unitholders'
share of related income, gains, losses and impairments. The carrying value of
the assets held for sale has been reflected as "Properties held for disposition,
net" in the accompanying Consolidated Balance Sheets as of September 30, 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. The Company previously recorded an impairment charge of
approximately $13.9 million 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. This
property was wholly-owned.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company previously recorded an impairment charge of approximately
$3.6 million 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 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. The Company previously recorded an impairment charge of approximately
$0.5 million 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. The proceeds from the sale were used primarily to pay down the
Company's credit facility. This property was wholly-owned.
On July 2, 2004, the Company completed the sale of the 5050 Quorum Office
Property in Dallas, Texas. The sale generated proceeds, net of selling costs, of
approximately $8.9 million and a loss of approximately $0.1 million. The Company
previously recorded an impairment charge of approximately $0.8 million during
the quarter ended March 31, 2004. The proceeds from the sale were used primarily
to pay down the Company's credit facility. This property was wholly-owned. The
Company continues to provide management and leasing services for this property.
On July 29, 2004, the Company completed the sale of the 12404 Park Central
Office Property in Dallas, Texas. The sale generated proceeds, net of selling
costs, of approximately $9.3 million. The Company previously recorded impairment
charges totaling approximately $4.0 million, $2.9 million during the year ended
December 31, 2003, $0.7 million during the quarter ended March 31, 2004 and $0.4
million during the quarter ended June 30, 2004. The proceeds from the sale were
used primarily to pay down the Bank of America Fund XII Term Loan. This property
was wholly-owned.
On September 14, 2004, the Company completed the sale of Breckenridge
Commercial Retail Center in Breckenridge, Colorado. The sale generated proceeds
to the Company, net of selling costs and repayment of debt, of approximately
$1.5 million, and a net gain of approximately $0.1 million, net of minority
interests and income tax. The Company previously recorded an impairment charge
of approximately $0.7 million, net of minority interests and income tax, during
the year ended December 31, 2003. The proceeds from the sale were used primarily
to pay down the Company's credit facility.
ASSETS HELD FOR SALE
The following Properties are classified as held for sale as of September
30, 2004.
PROPERTY LOCATION
- ---------------------------- -----------------------
Hyatt Regency Albuquerque(1) Albuquerque, New Mexico
Denver Marriott City Center Denver, Colorado
- ---------------
(1) This property was sold in October 2004.
OFFICE SEGMENT
As of September 30, 2004, the Company determined that Albuquerque Plaza,
in the CBD submarket in Albuquerque, New Mexico was no longer held for sale due
to the Office Property no longer being actively marketed for sale as a result of
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 $32.9 million at September
30, 2004. In addition, approximately $2.5 million has
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
been reclassified from "Income from discontinued operations, net of minority
interests," to "Office Property revenue," "Interest and other income," "Office
Property real estate taxes," "Office Property operating expenses" and
"Depreciation and amortization" line items in the accompanying Consolidated
Statements of Operations for the nine months ended September 30, 2004.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major asset classes of the properties
held for sale.
(in thousands) SEPTEMBER 30, 2004(1) DECEMBER 31, 2003(2)
- --------------------------------- --------------------- --------------------
Land $ 375 $ 13,823
Buildings and improvements 85,900 201,784
Furniture, fixtures and equipment 20,892 18,822
Accumulated depreciation (29,131) (52,142)
Other assets, net 31 3,848
----------- ----------
Net investment in real estate $ 78,067 $ 186,135
=========== ==========
- ------------------
(1) Includes two Resort/Hotel Properties and other assets.
(2) Includes six Office Properties, two Resort/Hotel Properties, one
behavioral healthcare property and other assets.
The following tables present total revenues, operating and other expenses,
depreciation and amortization, unitholder minority interests, impairments of
real estate assets and realized loss on sale of properties for the nine months
ended September 30, 2004 an