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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. 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 (I.R.S. Employer Identification
of incorporation or organization) Number)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
-----------------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 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 Partners' Capital 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............................ 71
Item 4. Controls and Procedures............................................................... 71
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 76
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit 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 $ 61,076 $ 74,885
Restricted cash and cash equivalents 75,800 217,329
Defeasance investments 170,589 9,620
Accounts receivable, net 48,761 40,715
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 287,602 203,770
----------- -----------
Total assets $ 4,575,223 $ 4,306,712
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 307,500 $ 239,000
Notes payable 2,548,391 2,319,699
Accounts payable, accrued expenses and other liabilities 454,088 361,614
Current income tax payable - 7,995
----------- -----------
Total liabilities $ 3,309,979 $ 2,928,308
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 44,137 $ 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 September 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 September 30, 2004 and December 31, 2003 81,923 81,923
Units of Partnership Interest, 58,526,287 and 58,510,501 issued
and outstanding at September 30, 2004 and December 31, 2003,
respectively:
General partner - outstanding 585,263 and 585,105 8,516 10,424
Limited partners - outstanding 57,941,024 and 57,925,396 815,688 1,004,603
Accumulated other comprehensive income (4,186) (13,829)
----------- -----------
Total partners' capital $ 1,221,107 $ 1,331,281
----------- -----------
Total liabilities and partners' capital $ 4,575,223 $ 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 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 2,575 1,319 8,295 3,953
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) $ (99,170) $ (70,516) $(290,643) $(231,281)
--------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES $ (19,635) $ 1,223 $ (49,773) $ (10,073)
Minority interests (1,495) (294) (1,106) (739)
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 $ (14,517) $ 5,794 $ (37,665) $ (476)
Income from discontinued operations 2,319 440 7,301 9,493
Impairment charges related to real estate assets from
discontinued operations (350) (2,356) (3,201) (19,174)
Loss on real estate from discontinued operations (38) (23) (2,537) (411)
Cumulative effect of a change in accounting principle - - (428) -
--------- --------- --------- ---------
NET (LOSS) INCOME $ (12,586) $ 3,855 $ (36,530) $ (10,568)
Series A Preferred Unit distributions (5,991) (4,556) (17,733) (13,668)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (6,057)
--------- --------- --------- ---------
NET LOSS AVAILABLE TO PARTNERS $ (20,596) $ (2,720) $ (60,320) $ (30,293)
========= ========= ========= =========
BASIC EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.39) $ (0.01) $ (1.05) $ (0.34)
Income from discontinued operations 0.04 - 0.12 0.16
Impairment charges related to real estate assets from
discontinued operations - (0.04) (0.05) (0.33)
Loss on real estate from discontinued operations - - (0.04) (0.01)
Cumulative effect of a change in accounting principle - - (0.01) -
--------- --------- --------- ---------
Net loss available to partners - basic $ (0.35) $ (0.05) $ (1.03) $ (0.52)
========= ========= ========= =========
DILUTED EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.39) $ (0.01) $ (1.05) $ (0.34)
Income from discontinued operations 0.04 - 0.12 0.16
Impairment charges related to real estate assets from
discontinued operations - (0.04) (0.05) (0.33)
Loss on real estate from discontinued operations - - (0.04) (0.01)
Cumulative effect of a change in accounting principle - - (0.01) -
--------- --------- --------- ---------
Net loss available to partners - diluted $ (0.35) $ (0.05) $ (1.03) $ (0.52)
========= ========= ========= =========
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 - 5 527 - 532
Distributions - (1,320) (130,693) - (132,013)
Amortization of Deferred Compensation on Restricted Shares - 10 968 - 978
Net Loss - (603) (59,717) - (60,320)
Unrealized Gain on Marketable Securities - - - 1,445 1,445
Unrealized Gain on Cash Flow Hedges - - - 8,198 8,198
---------- -------- ----------- --------- -----------
PARTNERS' CAPITAL, September 30, 2004 $ 401,089 $ 8,516 $ 815,688 $ (4,186) $ 1,221,107
========== ======== =========== ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (36,530) $ (10,568)
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 operations 3,201 19,174
Loss on real estate from discontinued operations 2,537 411
Discontinued operations - depreciation and minority interests 1,830 12,919
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 1,106 739
Cumulative effect of a change in accounting principle 428 -
Non-cash compensation 861 -
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 effects of consolidations,
acquisitions and dispositions:
Restricted cash and cash equivalents 52,695 602
Accounts receivable (6,893) 4,866
Deferred rent receivable (12,998) (1,501)
Income tax asset - current and deferred, net (22,223) (11,223)
Other assets (7,328) 7,536
Accounts payable, accrued expenses and other liabilities 11,391 (31,735)
--------- ---------
Net cash provided by operating activities $ 75,159 $ 56,416
--------- ---------
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) (9,461)
Capital contributions - joint venture partner 2,101 -
Capital contributions to the Operating Partnership 362 146
Issuance of preferred units - Series A 71,006 -
Series A Preferred Unit distributions (17,972) (13,668)
Series B Preferred Unit distributions (6,057) (6,057)
Distribution from the Operating Partnership (131,823) (131,292)
--------- ---------
Net cash provided by (used in) financing activities $ 132,999 $ (7,690)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS $ (13,809) $ (15,795)
CASH AND CASH EQUIVALENTS,
Beginning of period 74,885 75,418
--------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 61,076 $ 59,623
========= =========
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
September 30, 2004, the Company's approximately 84% limited partner interest has
been treated as equivalent, for purposes of this report, to 49,077,135 units and
the remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,863,889 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,263 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 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 September
30, 2004.
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston Center
(three office properties and the Houston Center
Shops), and Dupont Centre. These properties
are included in the Operating Partnership's
Office Segment.
Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) and Fountain Place
(0.1% interest), 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 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 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 Avallon
I, L.P. ("Funding I") 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 Funding Wholly-owned asset - Canyon Ranch - Lenox,
VI, L.P. ("Funding VI") included in the Operating Partnership's
Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - The Addison, Austin Centre,
VIII, L.P. ("Funding VIII") 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
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 (three
X, L.P. ("Funding X") Office Properties). These properties are
included in the Operating Partnership's Office
Segment.
Crescent Real Estate Funding Wholly-owned assets - Albuquerque Plaza, Barton
XII, L.P. ("Funding XII") 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, included
L.L.C. in the Operating Partnership's Office Segment,
and The Denver Marriott City Center, included in
the Operating Partnership's Resort/Hotel Segment.
Crescent Alhambra, L.L.C. Wholly-owned asset - Alhambra Plaza (two Office
Properties), included in the Operating
Partnership's Office 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 Vista
("MVDC") (98% interest), included in the Operating
Partnership's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated - Falcon
Corp. ("HADC") Point (98% interest) 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 - Desert
Corporation ("DMDC") 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 (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 September 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 September 30, 2004, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Operating Partnership owned in whole or in part
the following real estate assets (the "Properties") as of September 30, 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 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").
- 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
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 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 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 Operating
Partnership'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 Operating Partnership'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-
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 it had 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
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During 2004, the Operating Partnership 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 Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
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 Operating
Partnership controls the properties, retains all of the economic benefits and
risks associated with these properties and indemnifies the third party
intermediary and, therefore, the Operating Partnership fully consolidates these
properties. The Operating Partnership 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 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 nine months ended September 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
(in thousands, except per unit amounts) 2004 2003 2004 2003
---- ---- ---- ----
Net loss available to partners, as reported $ (20,596) $ (2,720) $ (60,320) $ (30,293)
Add: Stock-based and unit-based employee
compensation expense included in reported
net income 355 15 1,056 21
Deduct: total stock-based and unit-based
employee compensation expense determined
under fair value based method for all
awards (924) (698) (2,798) (2,111)
--------- -------- --------- ---------
Pro forma net loss $ (21,165) $ (3,403) $ (62,062) $ (32,383)
Loss per unit:
Basic/Diluted - as reported $ (0.35) $ (0.05) $ (1.03) $ (0.52)
Basic/Diluted - pro forma $ (0.36) $ (0.06) $ (1.06) $ (0.55)
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 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 Operating Partnership'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
Available for sale (2) 24,204 24,908 705 2,278 2,278 -
--------- --------- ---------- -------- -------- ----------
Total $ 194,793 $ 193,950 $ (842) $ 11,898 $ 11,899 $ 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
Available for sale (2) 6 705 (502) 514
--------- --------- ---------- --------
Total $ 6 $ 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) Available for sale securities consist of marketable securities which the
Operating Partnership 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 Operating Partnership 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 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 nine months
ended September 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 SEPTEMBER 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 $(14,517) 58,376 $ 5,794 58,460
Series A Preferred Unit distributions (5,991) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
-------- -------- ------- --------
Loss available to partners
before discontinued operations and cumulative
effect of a change in accounting principle $(22,527) 58,376 $ (0.39) $ (781) 58,460 $ (0.01)
Income from discontinued operations 2,319 0.04 440 -
Impairment charges related to real estate assets
from discontinued operations (350) - (2,356) (0.04)
Loss on real estate from discontinued operations (38) - (23) -
Cumulative effect of a change in accounting principle - - - -
-------- -------- -------- ------- -------- --------
Net loss available to partners $(20,596) 58,376 $ (0.35) $(2,720) 58,460 $ (0.05)
======== ======== ======== ======= ======== ========
- ---------------------------------------------
(1) Anti-dilutive units not included are 56 and 4 for the three months ended
September 30, 2004 and 2003, respectively.
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $(37,665) 58,371 $ (476) 58,468
Series A Preferred Unit distributions (17,733) (13,668)
Series B Preferred Unit distributions (6,057) (6,057)
-------- -------- ------- --------
Loss available to partners
before discontinued operations and cumulative
effect of a change in accounting principle $(61,455) 58,371 $ (1.05) $(20,201) 58,468 $ (0.34)
Income from discontinued operations 7,301 0.12 9,493 0.16
Impairment charges related to real estate assets
from discontinued operations, (3,201) (0.05) (19,174) (0.33)
Loss on real estate from discontinued operations (2,537) (0.04) (411) (0.01)
Cumulative effect of a change in accounting principle (428) (0.01) - -
-------- -------- -------- -------- -------- --------
Net loss available to partners $(60,320) 58,371 $ (1.03) $(30,293) 58,468 $ (0.52)
======== ======== ======== ======== ======== ========
- -------------------------------------------
(1) Anti-dilutive units not included are 85 and 2 for the nine months ended
September 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 NINE MONTHS ENDED
SEPTEMBER 30,
------------
(in thousands) 2004 2003
- -------------- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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:
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 Operating
Partnership currently has four major investment segments based on property type:
the Office Segment; the Resort/Hotel Segment; the Residential Development
Segment; and the Temperature-Controlled Logistics Segment. Management utilizes
this segment structure for making operating decisions and assessing performance.
The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, as used in this document, is based on
the definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and means:
- Net Income (Loss) - determined in 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 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 operating
partnership 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 equity REIT and for its investment
segments. However, FFO available to partners - diluted and FFO should not be
considered as alternatives to net income determined in accordance with GAAP as
an indication of the Operating Partnership's operating performance.
The Operating Partnership's measures of FFO available to partners -
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
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) (49,723)(3) (99,170)
Minority interests and income taxes (512) 2,454 3,469 - (293) 5,118
Discontinued operations - income, loss on real estate
and impairment charges related to real
estate assets (341) 2,642 103 - (473) 1,931
--------- --------- --------- --------- ----------- ---------
Net income (loss) $ 30,822 $ 6,610 $ 1,377 $ (906) $ (50,489) $ (12,586)
--------- --------- --------- --------- ----------- ---------
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
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 $ 37,588 $ 5,662 $ 2,402 $ 5,768 $ (7,505) $ 43,915
--------- --------- --------- --------- ----------- ---------
Funds from operations available to partners before
impairment charges related to real estate
assets - diluted $ 68,410 $ 12,272 $ 3,779 $ 4,862 $ (57,994) $ 31,329
Impairment charges related to real estate assets - - (2,497) - (350) (2,847)
--------- --------- --------- --------- ----------- ---------
Funds from operations available to partners after
impairment charges related to real estate
assets - diluted $ 68,410 $ 12,272 $ 1,282 $ 4,862 $ (58,344) $ 28,482
========= ========= ========= ========= =========== =========
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 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 - 736 4,571
Discontinued operations - income, loss on real
estate and impairment charges related to real
estate assets (1,177) 1,600 10 - (2,372) (1,939)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 42,432 $ 5,015 $ 1,648 $ (949) $ (44,291) $ 3,855
--------- --------- --------- --------- ---------- ---------
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
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 $ 30,853 $ 6,456 $ 1,125 $ 5,147 $ (3,973) $ 39,608
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners 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 partners 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 - (1,501) 12,108
Discontinued operations - income, loss on real
estate and impairment charges related to real
estate assets (4,434) 6,611 149 - (763) 1,563
Cumulative effect of a change in accounting principle - - - - (428) (428)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 102,144 $ 18,263 $ 9,735 $ (4,514) $ (162,158) $ (36,530)
--------- --------- --------- --------- ---------- ---------
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
Series A Preferred unit distributions - - - - (17,733) (17,733)
Series B Preferred unit distributions - - - - (6,057) (6,057)
--------- --------- --------- --------- ---------- ---------
Adjustments to reconcile net income (loss) to funds
from operations available to partners - diluted $ 109,564 $ 17,030 $ 5,386 $ 17,348 $ (22,893) $ 126,435
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners 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 partners 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 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
SELECTED FINANCIAL INFORMATION: 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 (144,416)(3) (231,281)
Minority interests and income taxes (267) 4,031 4,671 - 1,162 9,597
Discontinued operations-income, loss on real
estate and impairment charges related to real
estate assets (10,340) 4,659 (1) - (4,410) (10,092)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 106,287 $ 20,670 $ 9,988 $ 151 $ (147,664) $ (10,568)
--------- --------- --------- --------- ---------- ---------
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
Series A Preferred unit distributions - - - - (13,668) (13,668)
Series B Preferred unit distributions - - - - (6,057) (6,057)
--------- --------- --------- --------- ---------- ---------
Adjustments to reconcile net income (loss) to funds
from operations - diluted $ 108,281 $ 18,788 $ 3,778 $ 16,143 $ (15,101) $ 131,889
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners 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 partners 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-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(IN MILLIONS) SEGMENT(1) SEGMENT SEGMENT(2)(4) SEGMENT AND OTHER TOTAL
---------- ------- ---------- ------- --------- -----
TOTAL ASSETS BY SEGMENT: (5) (6)
Balance at September 30, 2004 $ 2,692 $ 500 $ 834 $ 206 $ 343(7) $ 4,575
Balance at December 31, 2003 2,503 468 707 300 329 4,307
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) - (45) (454)
Balance at December 31, 2003 (120) (27) (109) - (114) (370)
MINORITY INTERESTS:
Balance at September 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 $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 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: 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 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 $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 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 included $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.
On August 6, 2004, the Operating Partnership acquired The Alhambra, two
Class A Office Properties, located in the Coral Gables submarket of Miami,
Florida. The Operating Partnership acquired the Office Properties for
approximately $72.3 million, funded by the Operating Partnership's assumption of
a $45.0 million loan from Wachovia Securities and a draw on the Operating
Partnership's credit facility. The Office Properties are wholly-owned and are
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 nine months ended September 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
September 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.
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
On July 2, 2004, the Operating Partnership 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 $0.2
million. The Operating Partnership previously recorded an impairment charge of
approximately $1.0 million during the quarter ended March 31, 2004. The proceeds
from the sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned. The Operating Partnership continues to
provide management and leasing services for this property.
On July 29, 2004, the Operating Partnership 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 Operating
Partnership previously recorded impairment charges totaling approximately $4.6
million, $3.4 million during the year ended December 31, 2003, $0.7 million
during the quarter ended March 31, 2004 and $0.5 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 Operating Partnership completed the sale of
Breckenridge Commercial Retail Center in Breckenridge, Colorado. The sale
generated proceeds to the Operating Partnership, 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
Operating Partnership 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 Operating Partnership'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.
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFFICE SEGMENT
As of September 30, 2004, the Operating Partnership 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 been
reclassified from "Income from discontinued operations" 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, impairments of real estate assets and realized
loss on sale of properties for the nine months ended September 30, 2004 and
2003, for properties included in discontinued operations.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Total revenues $ 41,853 $ 62,139
Operating and other expenses (32,691) (40,059)
Depreciation and amortization (1,861) (12,587)
----------- -----------
Income from discontinued operations $ 7,301 $ 9,493
=========== ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Impairment charges related to real estate assets $ (3,201) $ (19,174)
========= ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Realized loss on sale of properties $ (2,537) $ (411)
========== ========
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER TRANSACTIONS
FOUNTAIN PLACE TRANSACTION
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 Operating Partnership pays 99.9% of the distributable funds
from the Office Property to Lehman, which is recorded in the "Interest Expense"
line item in the Operating Partnership's Consolidated Statement of Operations.
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 September 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.
UNDEVELOPED LAND
On August 16, 2004, the Operating Partnership sold approximately 2.5 acres
of undeveloped land located in Houston, Texas. The sale generated proceeds, net
of selling costs, of approximately $6.4 million and a note receivable in the
amount of $5.6 million. The note provides for payments of principal of $0.5
million due in December 2004, annual installments of $1.0 million each due
beginning August 2005 through August 2008, and $1.1 million due at maturity in
August 2009 and does not bear interest. The Operating Partnership recognized a
net gain of approximately $7.6 million included in the "Income from investment
land sales, net" line item in the accompanying Consolidated Statements of
Operations. The proceeds were used to pay down the Operating Partnership's
credit facility.
RESIDENTIAL DEVELOPMENT
During the quarter ended September 30, 2004, the Sonoma Club was
demolished in order to begin construction on a new clubhouse. Accordingly, the
Operating Partnership recorded an impairment charge of approximately $2.5
million, net of income tax, included in the "Impairment charges related to real
estate assets" line item in the accompanying Consolidated Statements of
Operations.
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, AmeriCold Logistics, LLC was 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, AmeriCold
Logistics leased the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. The Operating Partnership has an indirect 40% ownership
interest in the Temperature-Controlled Logistics Corporation.. 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 $40.0
million of the total $120.4 million of rent payable for the nine months ended
September 30, 2004. The Operating Partnership's share of the deferred rent was
$16.0 million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $16.0 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the nine months ended September
30, 2004. As of September 30, 2004, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from Amer