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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
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(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
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) 877-0477
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class: on Which Registered:
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Common Shares of Beneficial Interest
par value $.01 per share New York Stock Exchange, Inc.
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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 reports) and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 25, 1997, the aggregate market value of the 112,466,292 Common
Shares held by non-affiliates of the registrant was approximately $4.1 billion,
based upon the closing price of $36 7/16 on the New York Stock Exchange.
Number of Common Shares outstanding as of March 25, 1997: 118,722,305
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 1997 Annual Meeting of Shareholders to be held in
June 1998 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . . . . . 25
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Historical Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . 39
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
PART III.
Item 10. Trust Managers and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 71
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 72
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 72
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This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company (as defined below) believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in real estate conditions (including rental rates
and competing properties) or in industries in which the Company's principal
tenants compete; changes in general economic conditions; consummation of the
proposed merger with Station Casinos, Inc. on terms other than those described
herein or the failure to consummate the merger; the ability to identify
acquisitions and investment opportunities meeting the Company's investment
strategy; timely leasing of unoccupied square footage; timely releasing of
occupied square footage upon expiration; the Company's ability to generate
revenues sufficient to meet debt service payments and other operating expenses;
the Company's inability to control the management and operation of its
residential development properties, its tenants and the businesses associated
with its investment in refrigerated warehouses; financing risks, such as the
availability of funds sufficient to service existing debt, changes in interest
rates associated with its variable rate debt, the availability of equity and
debt financing terms acceptable to the Company, the possibility that the
Company's outstanding debt (which requires so-called "balloon" payments of
principal) may be refinanced at higher interest rates or otherwise on terms less
favorable to the Company and the fact that interest rates under the Credit
Facility (as defined below) and certain of the Company's other financing
arrangements may increase; the existence of complex regulations relating to the
Company's status as a real estate investment trust and the adverse consequences
of the failure to qualify as such; and other risks detailed from time to time in
the Company's filings with the Securities and Exchange Commission. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
PART I
ITEM 1. BUSINESS
THE COMPANY
Crescent Real Estate Equities Company ("Crescent Equities") is a fully
integrated real estate company operating as a real estate investment trust for
federal income tax purposes (a "REIT"). The Company provides management,
leasing, and development services with respect to certain of its properties.
Crescent Equities is a Texas real estate investment trust which became the
successor to Crescent Real Estate Equities, Inc., a Maryland corporation (the
"Predecessor Corporation"), on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a Delaware corporation,
into Crescent Equities. The direct and indirect subsidiaries of Crescent
Equities include Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership"); Crescent Real Estate Equities, Ltd. (the "General
Partner"), which is the sole general partner of the Operating Partnership; and
seven single purpose limited partnerships (formed for the purpose of obtaining
securitized debt) in which the Operating Partnership owns substantially all of
the economic interests directly or indirectly, with the remaining interests
owned indirectly by Crescent Equities through seven separate corporations, each
of which is a wholly owned subsidiary of the General Partner and a general
partner of one of the seven limited partnerships. The term "Company" includes,
unless the context otherwise requires, Crescent Equities, the Predecessor
Corporation, the Operating Partnership, the General Partner and the other direct
and indirect subsidiaries of Crescent Equities.
As of December 31, 1997, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties") located primarily in 21
metropolitan submarkets in Texas and Colorado. The Properties include 80
office properties (the "Office Properties") with an aggregate of approximately
28.6 million net rentable square feet, 90 behavioral healthcare facilities (the
"Behavioral Healthcare Facilities"), six full-service hotels with a total of
1,962 rooms and two destination health and fitness resorts (the "Hotel
Properties"), real estate mortgages and non-voting common stock representing
interests ranging from 40% to 95% in five unconsolidated residential development
corporations (the "Residential Development Corporations"), which in turn,
through joint venture or partnership arrangements, own interests in 12
residential development properties (the "Residential Development Properties"),
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and seven retail properties (the "Retail Properties") with an aggregate of
approximately .8 million net rentable square feet. In addition, the Company
owns an indirect 38% interest in each of two corporations (the "Refrigerated
Warehouse Companies") that currently own and operate approximately 80
refrigerated warehouses with an aggregate of approximately 394 million cubic
feet (the "Refrigerated Warehouse Investment"). The Company also has a 42.5%
partnership interest in a partnership whose primary holdings consist of a
364-room executive conference center and general partner interests ranging from
one to 50%, in additional office, retail, multi-family and industrial
properties.
From January 1, 1998 through March 25, 1998, the Company acquired six
additional Office Properties with an aggregate of approximately 2.2 million net
rentable square feet and one additional Hotel Property with a total of 314
rooms. In addition, the Company has entered into an agreement to acquire a
corporation (the "Pending Investment") that owns four full-service casino/hotels
and two riverboat casinos. See "Recent Developments," below.
Crescent Equities conducts all of its business directly through the
Operating Partnership and its other subsidiaries. The structure of the Company
was developed to facilitate and maintain its qualification as a REIT and to
permit persons contributing properties (or interests therein) to the Company to
defer some or all of the tax liability that they otherwise might have incurred
in connection with the formation of the Company.
See Note 1 of Item 8. "Financial Statements and Supplementary Data"
for the table which lists the principal subsidiaries of Crescent Equities and
the Properties owned by such subsidiary.
The Company's executive offices are located at 777 Main Street, Suite
2100, Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company's business objective is to maximize the total return to
its shareholders through increases in distributions and share price. From the
Company's initial public offering of common shares on May 5, 1994, through
March 25, 1998, the total return to shareholders was approximately 225.3%, with
distributions having increased by approximately 64.3% and the market price per
Common Share having increased by approximately 191.5%. From January 1, 1997
through March 25, 1998, the total return to shareholders was approximately
43.3%, with distributions having increased by approximately 24.6% and the
market price per common share having increased by approximately 38.2%.
INVESTMENT STRATEGIES
Management believes that it will be able to identify substantial
opportunities for future real estate investments from a variety of sources,
including life insurance companies and pension funds seeking to reduce their
direct real estate investments, public and private real estate companies,
corporations divesting of nonstrategic real estate assets, public and private
sellers requiring complex disposition structures and other domestic and
international sources. The Company intends to continue utilizing its extensive
network of relationships, its ability to identify underperforming assets, its
market reputation and its ready access to equity and debt capital to achieve
favorable returns on invested capital and growth in cash flow by:
o acquiring high-quality office properties at prices
below their estimated replacement cost in selected
core markets and submarkets that management expects
to experience above-average population and employment
growth; and
o employing the corporate, transactional and financial
skills of the Company's management team to structure
innovative investments in other types of real estate
assets (such as its recent Refrigerated Warehouse
Investment, its acquisition of the Behavioral
Healthcare Facilities and its Pending Investment in
casino/hotel properties).
The Company believes that its proven ability to structure innovative
transactions provides it with a unique competitive advantage in making real
estate investments and enhances its ability to execute its investment strategy.
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OPERATING AND FINANCING STRATEGIES
The Company seeks to enhance its operating performance and financial
position by:
o applying well-defined leasing strategies in order to
capture the potential rental growth in the Company's
existing portfolio of Office Properties as occupancy
and rental rates increase with the recovery of the
markets and submarkets in which the Company has
invested;
o achieving a high tenant retention rate at the
Company's Office Properties through quality service,
individualized attention to its tenants and active
preventive maintenance programs;
o empowering management and employing compensation
formulas linked directly with enhanced operating
performance of the Company and its Properties; and
o optimizing the use of debt and other sources of
financing to create a flexible and conservative
capital structure that will allow the Company to
continue its opportunistic investment strategy.
EMPLOYEES
The Company, as a fully integrated real estate company, provides
management, leasing and development services with respect to certain of its
Properties. The Company has more than 475 employees. None of the employees is
covered by collective bargaining agreements.
RECENT DEVELOPMENTS
From January 1, 1997 through March 25, 1998, the Company completed
approximately $3.05 billion in property acquisitions and other investments. The
property acquisitions include 28 Office Properties and one Retail Property
acquired on or before December 31, 1997, and six Office Properties acquired
subsequent to December 31, 1997, with an aggregate purchase price of
approximately $1.52 billion, 90 Behavioral Healthcare Facilities (and two
additional behavioral healthcare facilities which subsequently were sold) with
an aggregate purchase price of approximately $387.2 million, two Hotel
Properties acquired on or before December 31, 1997, and one Hotel Property
acquired subsequent to December 31, 1997 with an aggregate purchase price of
approximately $125.0 million, an approximately 40.375% and 88.35% interest in
two Residential Development Corporations that own two Residential Development
Properties, respectively, with an aggregate purchase price of approximately
$370.2 million, the Refrigerated Warehouse Investment with an aggregate purchase
price of approximately $417.6 million and a 42.5% partnership interest in The
Woodlands Commercial Properties Company, L.P. with an aggregate purchase price
of approximately $83.9 million.
1997 AND 1998 COMPLETED ACQUISITIONS
Greenway II. On January 17, 1997, the Company acquired Greenway II, a
7-story Class A office building containing approximately 154,000 net rentable
square feet located in the Richardson/Plano submarket of Dallas, Texas.
Constructed in 1985, the Property, including an attached three-level, 560-space
above ground parking structure, was purchased for approximately $18.2 million.
Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center ("TCC"), a
50-story Class A office building. The Company acquired its interest in TCC
through the purchase of fee simple title to the Property (subject to a ground
lease and the lessee's leasehold estate regarding the building) and two
mortgage notes encumbering the leasehold interests in the land and building,
for approximately $162 million. TCC is located in the cultural and financial
district of the Central Business District ("CBD") submarket of Dallas, Texas.
Constructed in 1984, TCC contains approximately 1.1 million net rentable square
feet with a six-level underground parking structure that accommodates
1,154 cars.
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Denver Properties. On February 28, 1997, the Company acquired, in a
single transaction, for an aggregate purchase price of $42.7 million, the
following three office buildings in Denver, Colorado: 44 Cook, 55 Madison and
the AT&T Building. 44 Cook, a 10-story Class A office building constructed in
1984 and containing approximately 124,000 net rentable square feet, and 55
Madison, an eight-story Class A office building constructed in 1982 and
containing approximately 137,000 net rentable square feet, are both located in
the Cherry Creek submarket. 44 Cook and 55 Madison each have underground
parking containing 236 and 171 spaces, respectively, and the buildings also
share a four-level, 396-space above ground parking structure. Constructed in
1982, the AT&T Building, a 15-story office building, contains approximately
185,000 net rentable square feet and is located in the Denver CBD submarket. The
AT&T Building has a four-level, 207-space above ground parking structure.
Carter-Crowley Portfolio. On February 10, 1997, the Company entered into a
contract to acquire for approximately $383.3 million, substantially all of the
assets (the "Carter-Crowley Portfolio") of Carter-Crowley Properties, Inc.
("Carter-Crowley"), an unaffiliated company controlled by the family of Donald
J. Carter. At the time the contract was executed, the Carter-Crowley Portfolio
included 14 office buildings (the "Carter-Crowley Office Portfolio"), with an
aggregate of approximately 3.0 million net rentable square feet, approximately
1,216 acres of commercially zoned, undeveloped land located in the Dallas/Fort
Worth metropolitan area, two multifamily residential properties located in the
Dallas/Fort Worth metropolitan area, marketable securities, an approximately 12%
limited partner interest in the limited partnership that owns the Dallas
Mavericks NBA basketball franchise, secured and unsecured promissory notes,
certain direct non-operating working interests in various oil and gas wells, an
approximately 35% limited partner interest in two oil and gas limited
partnerships, and certain other assets (including operating businesses).
Pursuant to an agreement between Carter-Crowley and the Company, Carter-Crowley
liquidated approximately $51 million of such assets originally included in the
Carter-Crowley Portfolio, consisting primarily of the marketable securities and
the oil and gas investments, resulting in a reduction in the total purchase
price by a corresponding amount to approximately $332.3 million. On May 9, 1997,
the Company and Crescent Operating, Inc. ("COI") acquired the Carter-Crowley
Portfolio.
The Company acquired certain assets from the Carter-Crowley Portfolio, with
an aggregate purchase price of approximately $306.3 million consisting primarily
of the Carter-Crowley Office Portfolio, the two multi-family residential
properties, the approximately 1,216 acres of undeveloped land and the secured
and unsecured promissory notes relating primarily to the Dallas Mavericks. In
addition to the promissory notes relating to the Dallas Mavericks, the Company
obtained rights from the current holders of the majority interest in the Dallas
Mavericks to a contingent $10 million payment after a new arena is constructed
within a 75-mile radius of Dallas, as well as rights to participate in the
ownership and development of the new arena, certain land located adjacent to the
arena and proposed commercial properties to be developed on the adjacent land.
On December 10, 1997, the City of Dallas and the "Arena Group" (which consists
of four corporations, one of which is to be owned almost entirely by the
Company) entered into the Arena Master Agreement for the construction and
operation of a new arena located adjacent to the Dallas CBD submarket. The
taxpayers of Dallas subsequently approved a bond package that includes the
funding of the City's portion of the new arena costs. Construction of the new
arena is expected to commence prior to the end of 1998. On March 25, 1998, the
Company offered COI the opportunity to participate in the corporation in which
the Company will own the principal economic interest and in the entity that will
participate in ownership and development of the new arena, adjacent land and
commercial properties to be developed on the adjacent land. COI has accepted the
opportunity, subject to negotiation of satisfactory terms.
COI purchased the remainder of the Carter-Crowley Portfolio utilizing cash
contributions and loan proceeds provided to COI by the Company. These assets,
which have an allocated cost of approximately $26 million consisted primarily of
the approximately 12% limited partner interest in the limited partnership that
owns the Dallas Mavericks, an approximately 1% interest in a private venture
capital fund, and a 100% interest in a construction equipment sale, leasing and
services company.
On June 11, 1997, DBL Holdings, Inc. ("DBL"), a wholly owned subsidiary of
the Operating Partnership was formed. In connection with the formation of DBL,
the Operating Partnership acquired all the voting and non-voting common stock of
DBL, for an aggregate purchase price of approximately $2.5 million and loaned to
DBL approximately $10.1 million. The voting common stock which represented a 5%
effective interest in DBL, was subsequently sold to Gerald W. Haddock, the
President and Chief Executive Officer of the Company and COI, and John C. Goff,
the Vice Chairman of the Company and COI, for its aggregate original cost of
$126,000. On June 11, 1997, DBL acquired from COI, for approximately $12.6
million, the limited partner interest in the partnership that owns the Dallas
Mavericks.
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Behavioral Healthcare Facilities. On June 17, 1997, the Company
acquired substantially all of the real estate assets of the domestic hospital
provider business of Magellan Health Services, Inc. ("Magellan"), as previously
owned and operated by a wholly owned subsidiary of Magellan. The transaction
involved various components, the principal component of which was the
acquisition of the 90 Behavioral Healthcare Facilities (and two additional
behavioral healthcare facilities which subsequently were sold) for approximately
$387.2 million. The Behavioral Healthcare Facilities, which are located in 27
states, are leased to Charter Behavioral Health Systems, LLC ("CBHS"), and its
subsidiaries under a triple-net lease. See Item 2. Properties for a more
detailed discussion.
Woodlands Transaction. On July 31, 1997, the Company and certain
Morgan Stanley funds (the "Morgan Stanley Group") acquired The Woodlands
Corporation, a subsidiary of Mitchell Energy & Development Corp., for
approximately $543 million. In connection with the acquisition, the Company
and the Morgan Stanley Group made equity investments of approximately $80
million and $109 million, respectively. The remaining approximately $354
million and associated acquisition and financing costs of approximately $15
million were financed by the two limited partnerships, described below, through
which the investment was made. The Woodlands Corporation was the principal
owner, developer and operator of The Woodlands, an approximately 27,000-acre,
master-planned residential and commercial community located 27 miles north of
downtown Houston, Texas. The Woodlands which is approximately 50% developed,
includes a shopping mall, retail centers, office buildings, a hospital, club
facilities, a community college, a performance pavilion, and numerous other
amenities.
The acquisition was made through The Woodlands Commercial Properties
Company, L.P. ("Woodlands-CPC"), a limited partnership in which the Morgan
Stanley Group holds a 57.5% interest and the Company holds a 42.5% interest,
and the Woodlands Land Development Company, L.P. ("Woodlands-LDC"), a limited
partnership in which the Morgan Stanley Group holds a 57.5% interest and a
newly formed Residential Development Corporation, The Woodlands Land Company,
Inc. ("WLC"), holds a 42.5% interest. The Company owns all of the non-voting
common stock, representing a 95% economic interest in WLC and, effective
September 29, 1997, COI acquired all of the voting common stock, representing a
5% economic interest, in WLC. The Company is the managing general partner of
Woodlands-CPC and WLC is the managing general partner of Woodlands-LDC.
In connection with the acquisition, Woodlands-CPC acquired The
Woodlands Corporation's 25% general partner interest in the partnerships that
own approximately 1.2 million square feet of The Woodlands Office and Retail
Properties. The Company previously held a 75% limited partner interest in each
of these partnerships and, as a result of the acquisition, the Company's
indirect economic ownership interest in these Properties increased to
approximately 85%. The other assets acquired by Woodlands-CPC include a
364-room executive conference center, a private golf and tennis club, and
approximately 400 acres of land that will support commercial development of
more than 3.5 million square feet of office, multi-family, industrial, retail
and lodging properties. In addition, Woodlands-CPC acquired The Woodlands
Corporation's general partner interests, ranging from one to 50%, in additional
office and retail properties and in multi-family and light industrial
properties. Woodlands-LDC acquired approximately 6,400 acres of land that will
support development of more than 20,000 lots for single-family homes and
approximately 2,500 acres of land that will support more than 21.5 million net
rentable square feet of commercial development. The executive conference
center, including the golf and tennis club and golf courses, is operated and
leased by a wholly owned subsidiary of a partnership owned 42.5% by a
subsidiary of COI and 57.5% by the Morgan Stanley Group.
Desert Mountain. On August 29, 1997, the Company acquired, through a
newly formed Residential Development Corporation, Desert Mountain Development
Corporation ("DMDC"), the majority economic interest in Desert Mountain
Properties Limited Partnership ("DMPLP"), the partnership that owns Desert
Mountain, a master-planned, luxury residential and recreational community in
northern Scottsdale, Arizona. Desert Mountain is an 8,300-acre property that is
zoned for the development of approximately 4,500 residential lots, approximately
1,539 of which have been sold. Desert Mountain also includes The Desert
Mountain Club, a private golf, tennis and fitness club serving over 1,600
members. The partnership interest was acquired from a subsidiary of Mobil Land
Development Corporation for approximately $214 million. The sole limited partner
of DMPLP is Sonora Partners Limited Partnership ("Sonora") whose principal owner
is the original developer of Desert Mountain. A portion of Sonora's interest in
DMPLP is exchangeable for common shares of the Company. Sonora currently owns a
7% economic interest in DMPLP, and DMDC, which is the sole general partner of
DMPLP, owns the remaining 93% economic
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interest. The Company owns all of the non-voting common stock, representing a
95% economic interest, and, effective September 29, 1997, COI acquired all of
the voting common stock, representing a 5% economic interest, in DMDC. The
Company also holds a residential development property mortgage on Desert
Mountain.
Houston Center. On September 22, 1997, the Company acquired Houston
Center, an approximately 3.0 million square foot, mixed-use property located in
the CBD submarket of Houston, Texas. Houston Center consists of three high-
rise Class A office buildings aggregating approximately 2.8 million net
rentable square feet, the 399-room Four Seasons- Houston Hotel Property, 114
luxury apartments, approximately 191,000 net rentable square feet of retail
space and approximately 20 acres of undeveloped commercial land. Houston
Center is located on the east side of downtown Houston within walking distance
of the Houston Convention Center and is also near the site of the proposed
downtown major league baseball stadium. Built between 1974 and 1983, the three
Class A office buildings are situated on approximately 5.7 acres. The Four
Seasons-Houston, which was built in 1982, is one of the highest rated luxury
hotels in Houston, with a five-diamond rating from American Automobile
Association. The upscale, luxury Four Seasons Place apartments, which are
located atop the hotel, offer both long-term residential and short-term
corporate units at monthly rental rates ranging from approximately $2.00 to
$4.00 per leased square foot. The 20-acre tract is one of the largest
contiguous underdeveloped parcels in downtown Houston. The Houston Center was
purchased for approximately $327.6 million.
Miami Center. On September 30, 1997, the Company acquired Miami
Center, a 34-story Class A office building containing approximately 783,000 net
rentable square feet located in the CBD submarket of Miami, Florida.
Constructed in 1983, the Property, including an attached nine-level
above-ground parking structure that accommodates 893 cars, was purchased for
approximately $131.5 million.
U.S. Home Building. On October 15, 1997, the Company acquired the
U.S. Home Building, a 21-story Class A office building located in the West
Loop/Galleria suburban office submarket of Houston, Texas, for approximately
$45 million. The U.S. Home Building is located approximately five miles west
of downtown Houston and approximately 2.5 miles west of the Company's Greenway
Plaza properties. Built in 1982, the building is located on approximately 1.9
acres and contains approximately 400,000 net rentable square feet with an
attached twelve-level above-ground parking structure that accommodates 964
cars.
Bank One Center. On October 22, 1997, the Company, together with
affiliates of TrizecHahn Corporation ("Trizec"), acquired Bank One Center, a
60-story Class A office building located in the CBD submarket of Dallas, Texas,
from two unaffiliated entities. The acquisition was made through a newly
formed limited partnership in which the Company and Trizec each own a 50%
interest, for an aggregate purchase price of approximately $238 million. Of
the approximately $238 million purchase price, approximately $83 million was
funded through capital contributions of $41.5 million from each of the Company
and Trizec, and the remaining approximately $155 million was funded through two
loans to the newly formed limited partnership provided by The Travelers
Insurance Company. Construction of the office property was completed in 1987.
Bank One Center contains approximately 1.5 million net rentable square feet
with a three-level underground parking structure that accommodates
667 cars and an eight-level off site parking garage that accommodates 885 cars.
Americold Corporation and URS Logistics, Inc. On October 31, 1997,
the Company, through two newly formed subsidiaries (the "Crescent
Subsidiaries"), initially acquired a 40% interest in each of two partnerships,
one of which owns Americold Corporation ("Americold") and one of which owns URS
Logistics, Inc. ("URS"). Vornado Realty Trust ("Vornado") acquired the remaining
60% interest in the partnerships. Americold and URS are the two largest
suppliers of refrigerated warehouse space in the United States.
One of the partnerships acquired all of the common stock of Americold
through the merger of a subsidiary of Vornado into Americold, and the other
partnership acquired all of the common stock of URS through the merger of a
separate subsidiary of Vornado into URS. As a result of the acquisition, the
Americold partnership and the URS partnership became the owners and operators
of approximately 80 refrigerated warehouses, with an aggregate of approximately
394 million cubic feet, that are operated pursuant to arrangements with
national food suppliers.
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The aggregate purchase price for the acquisition of Americold and URS
was approximately $1.04 billion (including transaction costs associated with
the acquisition). Of this amount, the purchase price for the acquisition of
Americold was approximately $645 million (consisting of approximately $112
million in cash for the purchase of the equity, approximately $151 million in
cash for the repayment of certain outstanding bonds issued by Americold,
approximately $372 million in retention of debt and approximately $10 million
in transaction costs), and the purchase price for the acquisition of URS was
approximately $399 million (consisting of approximately $173 million in cash
for the purchase of the equity, approximately $211 million in retention of debt
and approximately $15 million in transaction costs.)
On December 30, 1997 and effective October 31, 1997, in order to
permit the Company to continue to satisfy certain REIT qualification
requirements, the Company sold all of the voting common stock, representing a
5% economic interest, in each of the Crescent Subsidiaries to COI. As a
result, the Company currently owns a 38% interest in each of the Americold
partnership and URS partnership, through its ownership of all of the nonvoting
common stock, representing a 95% economic interest, in each of the Crescent
Subsidiaries. See Item 2. Properties for a more detailed discussion.
Fountain Place. On November 7, 1997, the Company acquired Fountain
Place, a 60-story Class A office building located in the CBD submarket of
Dallas, Texas, approximately three blocks west of the Company's Trammell Crow
Center Office Property, for approximately $114 million. Built in 1986, the
building contains approximately 1.2 million net rentable square feet with a
three level underground parking structure that accommodates approximately 899
cars as well as surface parking that accommodates 343 cars.
Ventana Country Inn. On December 19, 1997, the Company acquired for
approximately $30 million the Ventana Country Inn, a 62-room resort Hotel
Property located in Big Sur, California. The Ventana Country Inn is situated
on a 243-acre wooded site in the foothills of the Santa Lucia Mountains
overlooking the Pacific Ocean. The purchase also included an adjacent 72-acre
parcel of undeveloped land offering the potential for single-family residential
development. A subsidiary of COI will market and operate the Ventana Country
Inn jointly with the Company's Sonoma Mission Inn & Spa Hotel Property pursuant
to a lease with the Company.
Energy Centre. On December 22, 1997, the Company acquired Energy
Centre, a 39-story Class A office building located in the CBD submarket of New
Orleans, Louisiana. Built in 1984, the building contains approximately 762,000
net rentable square feet with a six-level attached, above-ground parking
structure that accommodates approximately 520 cars. Energy Centre was acquired
for approximately $75 million.
Austin Centre. On January 23, 1998, the Company acquired Austin
Centre, a mixed-use property developed in 1986, including a Class A office
building containing approximately 344,000 net rentable square feet, the
314-room Omni Austin Hotel Property and 61 apartments. The Property is located
in the CBD submarket of Austin, Texas, four blocks from the state capitol
building and was acquired for approximately $96.4 million. A subsidiary of COI
will oversee the marketing and operations of the Omni Austin Hotel Property
pursuant to a participating triple-net lease with the Company.
Post Oak Central. On February 13, 1998, the Company acquired Post Oak
Central, a three-building Class A office complex located in the West
Loop/Galleria suburban office submarket of Houston, Texas. Built between 1974
and 1981, the three Office Properties contain approximately 1.3 million net
rentable square feet with three multi-level detached, but connected via covered
walkway or tunnel, above-ground parking structures that in total accommodate
approximately 4,400 cars. Post Oak Central was acquired for approximately
$155.3 million.
Washington Harbour. On February 25, 1998, the Company acquired
Washington Harbour, a Class A office complex, consisting of a five-story office
building and an eight-story office building (the top three stories of which
comprise 35 luxury condominiums, which were not included in the purchase),
located in the Georgetown submarket of Washington, D.C. Built in 1986, the two
Office Properties contain approximately 536,000 net rentable square feet with a
two-level attached, below ground parking structure that accommodates
613 cars. Washington Harbour was purchased for approximately $161 million.
7
10
PENDING INVESTMENT
Station Casinos, Inc. On January 16, 1998, the Company entered into an
agreement and plan of merger (the "Merger Agreement") pursuant to which Station
Casinos, Inc. ("Station") will merge (the "Merger") with and into the Company.
Station is an established multi-jurisdictional casino/hotel company that owns
and operates, through wholly owned subsidiaries, six distinctly themed
casino/hotel properties, four of which are located in Las Vegas, Nevada, one of
which is located in Kansas City, Missouri and one of which is located in St.
Charles, Missouri. As a result of the Merger, the Company will acquire the
real estate and other assets of Station, except to the extent operating assets
are transferred immediately prior to the Merger, as described below.
As part of the transactions associated with the Merger, it is
currently anticipated that certain operating assets and the employees of
Station will be transferred to a limited liability company (the "Station
Lessee") immediately prior to the Merger. The Station Lessee will be owned 50%
by COI or entity designated by the Company, 24.9% by an entity owned by three
of the existing directors of Station (including its Chairman, President and
Chief Executive Officer) and 25.1% by a separate entity owned by other members
of Station management. The Station Lessee will operate the six casino/hotel
properties currently operated by Station pursuant to a lease with the Company.
The lease will have a 10-year term, with one five-year renewal option. The
lease will provide for base and percentage rent but the amount of the rent has
not yet been determined. The Station Lessee will be required to maintain the
properties in good condition at its own expense. The Company will establish
and maintain a reserve account to be used under certain circumstances for the
purchase of furniture, fixtures and equipment with respect to the properties.
The Company will also enter into a Right of First Refusal and Noncompetition
Agreement with the Station Lessee, pursuant to which each party will grant
certain rights to the other party to participate in future investment in and
operation of casino/hotel properties and will agree not to invest in or operate
any such properties without the participation or consent of the other party.
In order to effect the Merger, the Company will issue 0.466 common
shares for each share of common stock of Station (including each restricted
share) that is issued and outstanding immediately prior to the Merger. In
addition, the Company will create a new class of preferred shares which will be
exchanged, upon consummation of the Merger, for the shares of $3.50 Convertible
Preferred Stock of Station outstanding immediately prior to the Merger. The new
class of preferred shares will have equal priority with the Company's Series A
preferred shares as to rights to receive distributions and to participate in
distributions or payments upon any liquidation, dissolution or winding up of the
Company.
The total value of the Merger transaction, including the Company's
issuance of common shares and preferred shares in connection with consummation
of the Merger and the Company's assumption and/or refinancing of approximately
$919 million in existing indebtedness of Station and its subsidiaries, is
approximately $1.75 billion.
In connection with the Merger, the Company also has agreed to purchase
up to $115 million of a new class of convertible preferred stock of Station
prior to consummation of the Merger. The purchase will be made in increments,
or in a single transaction, upon call by Station subject to certain conditions,
whether or not the Merger is consummated.
Consummation of the Merger is subject to various conditions, including
Station's receipt of the approval of two-thirds of the holders of both its
common stock and its preferred stock, expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, and the
receipt by the Company and certain of its officers, trust managers and
affiliates of the approvals required under applicable gaming laws. The Company
anticipates that the Merger and the associated transactions will be consummated
in the fourth quarter of 1998, although there can be no assurances that the
Merger will be consummated on the terms described above.
8
11
FINANCING ACTIVITIES
On December 19, 1997, the Company's line of credit (the "Credit
Facility") from a consortium of banks led by BankBoston, N.A. ("BankBoston")
was increased to $550 million. The Credit Facility is unsecured and expires in
June 2000.
On February 13, 1998, the Company increased the maximum borrowings
available under its bridge loan with BankBoston to $250 million. The increase
in the maximum borrowings available and the additional borrowings thereunder
were made in connection with the funding of the purchase price of Post Oak
Central. The bridge loan is unsecured and expires in March 1998. The Company
has a commitment with BankBoston to extend the term to May 31, 1998, with the
same interest rate.
TAX STATUS
The Company elected under Section 856(c) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be taxed as a REIT under the Code
beginning with its taxable year ended December 31, 1994. As a REIT for federal
income tax purposes, the Company generally is not subject to federal income tax
on income that it distributes to its shareholders. Under the Code, REITs are
subject to numerous organizational and operational requirements, including a
requirement that they distribute at least 95% of their taxable income
currently. If the Company fails to qualify for taxation as a REIT in any
taxable year, it will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates and will not be permitted to qualify for treatment as a REIT for federal
income tax purposes for four years following the year during which
qualification is lost. Even if the Company qualifies as a REIT for federal
income tax purposes, it may be subject to certain federal, state and local
taxes on its income and property and to federal income and excise tax on its
undistributed income. In addition, certain of its subsidiaries are subject to
federal, state and local income taxes.
ENVIRONMENTAL MATTERS
The Company and its properties are subject to a variety of federal and
state environmental laws, ordinances and regulations, including The
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Clean Water Act, the Federal Clean Air Act and the Toxic Substances
Control Act. The application of these laws to a specific property owned by the
Company will be dependent on a variety of property-specific circumstances,
including the former uses to which the property was put and the building
materials used at each property. The Company believes that any environmental
liability that may be associated with its Properties does not present a material
risk to its financial condition or results of operations.
Under the environmental laws set forth above, a current or previous
owner or operator of real estate may be required to investigate and clean up
certain hazardous or toxic substances, asbestos-containing materials, or
petroleum product releases at the property, and may be held liable to a
governmental entity or the third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with the
contamination whether or not the owner or operator knew of, or was responsible
for, the contamination. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it
incurs in connection with the contamination. The presence of contamination or
the failure to remediate contaminations may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. The owner or operator of a site may be liable under common law to
third parties for damages and injuries resulting from environmental
contamination emanating from the site. Such costs or liabilities could exceed
the value of the affected real estate. The Company has not been notified by
any governmental authority of any non-compliance, liability or other claim in
connection with any of its properties, and the Company is not aware of any
other environmental condition with respect to any of the properties that
management believes would have a material adverse effect on the Company's
business, assets or results of operation. Prior to the Company's acquisition
of its Properties, independent environmental consultants conducted or updated
Phase I environmental assessments (which generally do not involve invasive
techniques such as soil or ground water sampling) on the Properties. None of
these Phase I assessments or updates revealed any materially adverse
environmental condition not known to the
9
12
Company or the independent consultants preparing the assessments. There can be
no assurances, however, that environmental liabilities have not developed since
such environmental assessments were prepared, or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability.
COMPETITION
The Company believes that it does not have a direct competitor with its
Office Properties considered as a group. The Company's Office Properties,
primarily Class A properties located within the Southwest, individually compete
against a wide range of property owners and developers, including property
management companies and other REITs, that offer space in similar types of
office properties (for example, Class A and Class B properties). A number of
these owners and developers may own more than one property. The number and type
of competing properties in a particular market or submarket could have a
material effect on the Company's ability to lease space or maintain or increase
occupancy at its Office Properties or at any newly acquired properties.
Management believes, however, that the quality service and individualized
attention that the Company offers its tenants, together with its active
preventive maintenance program and physical building location, within markets,
enhance the Company's ability to attract and retain tenants for its Office
Properties. In addition, the Company owns 17% and 12% of the Class A and Class B
office space, respectively, in 29 and five submarkets in which the Company owns
Class A and Class B Office Properties, respectively. Management believes that
ownership of a significant percentage of office space in a particular market
offers the Company the opportunity to reduce property operating expenses payable
by the Company and its tenants, enhancing the Company's ability to attract and
retain tenants and potentially resulting in increases in Company net revenues.
For example, during 1997, the Company successfully negotiated bulk contracts for
services such as cleaning and elevator maintenance in its core markets of
Dallas, Houston and Denver, resulting in discounts of approximately 5% to 10%
from contracts previously in place.
Each of the Behavioral Healthcare Facilities competes with other
hospitals, some of which are larger and have greater financial resources. The
Behavioral Healthcare Facilities frequently draw patients from areas outside
their immediate area and therefore may, in certain markets, compete with both
local and distant hospitals. The Behavioral Healthcare Facilities compete not
only with other psychiatric hospitals, but also with psychiatric units in
general hospitals, and outpatient services provided by the Behavioral Healthcare
Facilities may compete with private practicing mental health professionals. The
Company believes that its primary competitors are other operators that operate a
large number of psychiatric beds in multiple states, such as Behavioral
Healthcare Corp., Columbia/HCA Healthcare Corp., Universal Health Services,
Ramsey Health Care and Healthcare America.
The competitive position of a Behavioral Healthcare Facility is, to a
significant degree, dependent upon the number and quality of physicians who
practice at the hospital and who are members of its medical staff. In recent
years, an increasing percentage of the Behavioral Healthcare Facilities'
revenues have come from contracts with preferred provider organizations
("PPOs"), health maintenance organizations ("HMOs") and other managed care
programs. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. As a result of
the increasing importance of PPOs, HMOs and other managed care programs, the
competitive position of the Behavioral Healthcare Facilities is increasingly
affected by their ability to win contracts from these organizations. The
importance of obtaining contracts with PPOs, HMOs and other managed care
companies varies from market to market, depending on the individual market
strength of the managed care companies.
Certificate of need laws in certain states regulate the Behavioral
Healthcare Facilities, and their competitors' ability to build new hospitals and
to expand existing hospital facilities and services. These laws provide some
protection from competition, as their intent is to prevent duplication of
services. In most cases, these state laws do not restrict the ability of the
Behavioral Healthcare Facilities or their competitors to offer new outpatient
services.
The Company's Hotel Properties in Denver and Albuquerque are convention
center hotels that compete against other convention center hotels, which are
owned by a variety of owners, including national hotel chains and local owners.
The Company believes, however, that its destination health and fitness resorts
are unique properties that do not have direct competitors. In addition, the
Company believes that each of the remaining Hotel Properties experiences little
to no direct competition due to its high replacement cost and unique concept or
location. The Hotel Properties do compete, although to a limited extent,
against business class hotels or middle-market resorts in their geographic areas
as well as against luxury resorts nationwide and around the world.
10
13
At the time that the Company made the Refrigerated Warehouse
Investment, the Refrigerated Warehouse Companies were the two largest owners and
operators of refrigerated warehouse space in the country in terms of cubic feet
of storage space owned. Industry sources indicate that, in 1997, the
Refrigerated Warehouse Companies owned and operated an aggregate of
approximately 25% of total refrigerated warehouse space. Among other owners and
operators of refrigerated warehouse space, no other owner and operator owned or
operated more than 8% of total refrigerated warehouse space. As a result, the
Company believes that the Refrigerated Warehouse Companies do not have any
competitors of comparable size. The Refrigerated Warehouse Companies operate in
an environment in which competition is national, regional and local in nature
and in which the breadth of service, warehouse locations, customer mix,
warehouse size, service performance and price are the principal competitive
factors. Since frozen food manufacturers and distributors incur transportation
costs which typically are significantly greater than warehousing costs, breadth
of total logistics services and warehouse location are major competitive
factors. In addition, in certain locations, customers depend upon pooling
shipments, which involves combining their products with the products of others
destined for the same markets. In these cases, the mix of customers in a
warehouse can significantly influence the cost of delivering products to
markets. The size of a warehouse is important because large customers prefer
to have all of the products needed to serve a given market in a single location
to have the flexibility to increase storage in that single location during
seasonal peaks. If there are several warehouse locations which satisfy a
customer mix and size requirements, the Company believes that customers
generally will select a warehouse facility based upon the types of services
available, service performance and price.
The Company's Residential Development Properties compete against a
variety of other housing alternatives in each of their respective areas. These
alternatives include other planned developments, pre-existing single-family
detached housing, condominiums, townhouses and non-owner occupied housing, such
as luxury apartments. Management believes that The Woodlands and Desert
Mountain, representing the Company's most significant investments in Residential
Development Properties, contain certain features that provide competitive
advantages to these developments. For example, The Woodlands, which is an
approximately 27,000-acre, master-planned residential and commercial community
north of Houston, Texas, is unique among developments in the Houston area
because it functions as a self-contained community. Amenities contained in the
development, which are not contained within other local developments, include a
shopping mall, retail centers, office buildings, a hospital, a community
college, places of worship, 60 parks, two man-made lakes and a performance
pavilion. Desert Mountain, a luxury residential and recreational community in
Scottsdale, Arizona, which also offers four 18-hole golf courses and tennis
courts, does not have any significant direct competitors due in part to the
types of amenities that it offers. Substantially all of the remaining
residential lots for the four developments which traditionally have competed
with Desert Mountain were sold during 1997. As a result, these developments
have become resale communities that no longer compete with Desert Mountain in
any significant respect.
The Retail Properties compete against other commercial properties in
each of their respective areas, including shopping malls, free-standing retail
operations and convenience stores.
ITEM 2. PROPERTIES
OFFICE PROPERTIES
The Company's Office Properties are located primarily in Dallas/Fort
Worth and Houston, Texas. As of March 25, 1998, the Company's Office Properties
in Dallas/Fort Worth and Houston represent an aggregate of approximately 72% of
its office portfolio based on total net rentable square feet (40% and 32% for
Dallas/Fort Worth and Houston, respectively).
OFFICE PROPERTIES TABLES
The following table sets forth, as of December 31, 1997, certain
information about the Company's Office Properties after giving effect to the
acquisitions of Properties completed after December 31, 1997. Based on
annualized base rental revenues from office leases in place as of December 31,
1997 and after giving effect to the acquisitions of Properties completed after
December 31, 1997, no single tenant would have accounted for more than 4% of the
Company's total annualized Office Property rental revenues for 1997.
11
14
WEIGHTED AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
ACQUISITION YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET YEAR COMPLETED (SQ. FT.) LEASED SQ. FT. (1)
- --------------------- --------- ---- --------- --------- ------ -----------
TEXAS
DALLAS
Bank One Center(3) CBD 10/97 1987 1,530,957 73% $18.41
The Crescent Office Towers Uptown/Turtle Creek (2) 1985 1,210,949 96 27.06
Fountain Place CBD 11/97 1986 1,200,266 95 14.99
Trammell Crow Center(4) CBD 2/97 1984 1,128,331 87 23.28
Stemmons Place Stemmons Freeway 5/97 1983 634,381 92 13.73
Spectrum Center(5) Far North Dallas 8/95 1983 598,250 94 17.12
Waterside Commons Las Colinas 10/94 1986 458,739 98 13.68
Caltex House Las Colinas 5/94 1982 445,993 94 23.75
Reverchon Plaza Uptown/Turtle Creek 5/97 1985 374,165 99 16.73
The Aberdeen Far North Dallas 3/95 1986 320,629 100 17.31
MacArthur Center I & II Las Colinas (2) 1982/1986 294,069 99 17.35
Stanford Corporate Centre Far North Dallas 1/95 1985 265,507 100 14.80
The Amberton Central Expressway 5/97 1982 255,052 79 10.78
Concourse Office Park LBJ Freeway 5/97 1972-1986 244,879 88 12.31
12404 Park Central LBJ Freeway 5/95 1987 239,103 96 18.38
Palisades Central II Richardson/Plano 5/97 1985 237,731 100 15.68
3333 Lee Parkway Uptown/Turtle Creek 1/96 1983 233,484 77(6) 18.77
Liberty Plaza I & II Far North Dallas 7/94 1981/1986 218,813 100 12.84
The Addison Far North Dallas 5/97 1981 215,016 100 15.09
The Meridian LBJ Freeway 5/97 1984 213,915 96 14.54
Palisades Central I Richardson/Plano 5/97 1980 180,503 100 13.64
Walnut Green Central Expressway 5/97 1986 158,669 96 13.21
Greenway II Richardson/Plano 1/97 1985 154,329 100 19.38
Addison Tower Far North Dallas 5/97 1987 145,886 99 13.27
5050 Quorum Far North Dallas 5/97 1981 133,594 97 14.23
Cedar Springs Plaza Uptown/Turtle Creek 5/97 1982 110,923 91 15.08
Greenway IA Richardson/Plano 12/96 1983 94,784 100 14.31
Valley Centre Las Colinas 5/97 1985 74,861 98 13.22
Greenway I Richardson/Plano 12/96 1983 51,920 100 14.31
One Preston Park Far North Dallas 5/97 1980 40,525 87 13.55
------ ---- -----
Subtotal/Weighted Average 11,466,223 92% $17.92
---------- --- ------
FORT WORTH
Continental Plaza CBD (2) 1982 954,895 53%(6) $16.34
------- -- ------
HOUSTON
Greenway Plaza Office Richmond-Buffalo 10/96 1969-1982 4,286,277 85% $14.64
Portfolio(7) Speedway
Houston Center(8) CBD 9/97 1974-1983 2,764,418 92 17.61
Post Oak Central(8)(9) West Loop/Galleria 2/98 1974-1981 1,277,598 94 13.54
The Woodlands Office The Woodlands 7/95(11) 1980-1996 812,227 99 14.37
Properties(10) 8/96 1983 414,251 100 13.46
Three Westlake Park(12) Katy Freeway
U.S. Home Building West Loop/Galleria 10/97 1982 399,777 81 16.37
------- -- ------
Subtotal/Weighted Average 9,954,548 90% $15.32
--------- -- ------
AUSTIN
Frost Bank Plaza CBD 12/96 1984 433,024 75% $17.82
301 Congress Avenue(13) CBD 4/96 1986 418,338 96 22.86
Bank One Tower CBD 12/96 1974 389,503 95 16.76
Austin Centre(9) CBD 1/98 1986 343,665 84(6) 17.99
The Avallon Northwest 11/94 1993/1997 232,301(14) 79(6) 17.10
Barton Oaks Plaza One Southwest 6/95 1986 99,792 95 19.56
------ -- ------
Subtotal/Weighted Average 1,916,623 87% $18.84
--------- -- ------
COLORADO
DENVER
MCI Tower CBD 6/95 1982 550,807 98% $17.74
Ptarmigan Place Cherry Creek 10/95 1984 418,565 82(6) 15.52
Regency Plaza One DTC 8/94 1985 309,862 87 20.24
AT&T Building CBD 2/97 1982 184,581 97 14.89
The Citadel Cherry Creek (2) 1987 130,652 98 18.80
55 Madison Cherry Creek 2/97 1982 137,176 77 16.43
44 Cook Cherry Creek 2/97 1984 124,174 93 17.45
------- -- ------
Subtotal/Weighted Average 1,855,817 91% $17.36
--------- -- ------
COLORADO SPRINGS
Briargate Office and Colorado Springs 11/95 1988 252,857 100% $15.55
Research Center --------- --- ------
12
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WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
ACQUISITION YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET DATE COMPLETED (SQ. FT.) LEASED SQ. FT. (1)
--------------------- --------- ---- --------- --------- ---------- ------------
LOUISIANA
NEW ORLEANS
Energy Centre CBD 12/97 1984 761,500 78% $14.54
1615 Poydras CBD 8/96 1984 508,741 75(6) 15.09
------- -- ------
Subtotal/Weighted Average 1,270,241 77% $14.76
--------- -- -------
FLORIDA
MIAMI
Miami Center CBD 9/97 1983 782,686 79% $22.31
------- -- ------
ARIZONA
PHOENIX
Two Renaissance Square Downtown/CBD 11/94 1990 476,373 89% $23.09
6225 North 24th Street Camelback Corridor 11/95 1981 86,451 67 21.00
------ -- ------
Subtotal/Weighted Average 562,824 85% $22.84
------- -- -------
WASHINGTON D.C.
WASHINGTON D.C.
Washington Harbour(9)(15) Georgetown 2/98 1986 536,206 95% $36.60
--------- -- ------
NEBRASKA
OMAHA
Central Park Plaza CBD 6/96 1982 409,850 100% $14.71
------- --- ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza CBD 12/95 1990 366,236 83%(6) $18.09
------- -- ------
CALIFORNIA
SAN FRANCISCO
160 Spear Street South of Market/CBD 12/96 1984 276,420 83%(6) $22.76
------- -- ------
SAN DIEGO
Chancellor Park(16) UTC 10/96 1988 195,733 85% $20.11
------- -- ------
TOTAL WEIGHTED AVERAGE 30,801,159 88%(6) $17.46
========== == ======
- ---------------------------
(1) Calculated based on base rent payable as of December 31, 1997,
without giving effect to free rent or scheduled rent increases
that would be taken into account under generally accepted
accounting principles and including adjustments for expenses
payable by or reimbursable from tenants.
(2) Property was contributed to the Operating Partnership on May
5, 1994.
(3) The Company has a 50% general partner interest in the
partnership that owns Bank One Center.
(4) The Company owns the principal 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 building.
(5) The Company owns the principal economic interest in Spectrum
Center through an interest in Spectrum Mortgage Associates
L.P., which owns both a mortgage note secured by Spectrum
Center and the ground lessor's interest in the land underlying
the office building.
(6) Leases have been executed at certain Office Properties but had
not commenced as of December 31, 1997. If such leases had
commenced as of December 31, 1997, the percent leased for
Office Properties would have been 92%. The total percent
leased for such Properties would have been as follows: 3333
Lee Parkway -- 98%; Continental Plaza -- 100%; Austin Centre
-- 98%; The Avallon -- 100%; Ptarmigan Place -- 99%; 1615
Poydras -- 80%; Albuquerque Plaza -- 96% and 160 Spear Street
-- 91%.
(7) Consists of ten Office Properties.
(8) Consists of three Office Properties.
(9) Acquired subsequent to December 31, 1997.
(10) The Company has a 75% limited partner interest and an indirect
approximately 10% general partner interest in the partnership
that owns the 12 Office Properties that comprise The Woodlands
Office Properties.
(11) Two of The Woodlands Office Properties were acquired July 31,
1996.
(12) The Company owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured
by Three Westlake Park.
(13) The Company has a 1% general partner and a 49% limited partner
interest in the partnership that owns 301 Congress Avenue.
(14) In August 1997, construction was completed on a 106,342 square
foot office property. The entire building is leased to BMC
Software, Inc., which is expected to occupy in stages over the
next 19 months.
(15) Consists of two Office Properties.
(16) The Company owns Chancellor Park through its ownership of a
mortgage note secured by the building and through its direct
and indirect interests in the partnership which owns the
building.
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The following table provides information, as of December 31, 1997, for
the Company's Office Properties by state, city, and submarket after giving
effect to the acquisitions of Properties completed after December 31, 1997 as if
they had been completed as of December 31, 1997.
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
PERCENT PERCENT OFFICE COMPANY QUOTED QUOTED SERVICE
OF LEASED AT SUBMARKET SHARE OF MARKET RENTAL RENTAL
TOTAL TOTAL COMPANY PERCENT OFFICE RENTAL RATE RATE PER RATE PER
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3) FOOT(4) FOOT(5)
- ---------------------- ---------- ------- ------ ---------- ----------- --------- ----------- --------- --------
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD 3 3,859,554 14% 84% 81% 21% $20.37 $23.18 $18.68
Uptown/Turtle Creek 4 1,929,521 6 94(6) 90 34 25.28 29.32 23.47
Far North Dallas 7 1,897,695 6 98 92 30 24.12 23.23 15.59
Las Colinas 4 1,273,662 4 97 94 18 25.95 23.28 17.94
Richardson/Plano 5 719,267 2 100 99 20 19.01 21.29 15.68
Stemmons Freeway 1 634,381 2 92 84 31 17.95 18.75 13.73
LBJ Freeway 2 453,018 1 96 95 5 22.89 22.17 16.50
--- ---------- --- ---- ---- --- -------- -------- --------
Subtotal/Weighted
Average 26 10,767,098 35% 92% 89% 20% $22.44 $23.87 $18.28
--- ---------- --- ---- ---- --- -------- -------- --------
FORT WORTH
CBD 1 954,895 3% 53%(6) 84% 23% $17.24 $17.00 $16.34
--- ---------- --- ---- ---- --- -------- -------- --------
HOUSTON
CBD 3 2,764,418 9% 92% 94% 11% $17.82 $18.76 $17.61
Richmond-Buffalo
Speedway 4 1,994,274 6 96 98 51 18.01 19.00 15.43
West Loop/Galleria(7) 4 1,677,375 5 91 94 13 19.44 19.88 14.14
The Woodlands 7 486,140 2 100 100 100 15.36 15.36 14.28
Katy Freeway 1 414,251 1 100 100 15 17.69 18.55 13.46
--- ---------- --- ---- ---- --- -------- -------- --------
Subtotal/Weighted
Average 19 7,336,458 23% 94% 95% 16% $18.07 $18.84 $15.74
--- ---------- --- ---- ---- --- -------- -------- --------
AUSTIN
CBD(7) 4 1,584,530 5% 88%(6) 93% 44% $23.02 $23.36 $19.03
Northwest 1 232,301 1 79 (6) 96 10 22.40 21.00 17.10
Southwest 1 99,792 0 95 94 6 24.87 22.00 19.56
--- ---------- --- ---- ---- --- -------- -------- --------
Subtotal/Weighted
Average 6 1,916,623 6% 87% 94% 25% $23.04 $23.01 $18.84
--- ---------- --- ---- ---- --- -------- -------- --------
COLORADO
DENVER
Cherry Creek 4 810,567 3% 86%(6) 91% 38% $19.42 $20.64 $16.59
CBD 2 735,388 2 98 94 7 18.63 18.50 17.00
DTC 1 309,862 1 87 90 7 23.21 25.00 20.24
--- ---------- --- ---- ---- --- -------- -------- --------
Subtotal/Weighted
Average 7 1,855,817 6% 91% 92% 11% $19.74 $20.52 $17.36
--- ---------- --- ---- ---- --- -------- -------- --------
COLORADO SPRINGS 1 252,857 1% 100% 96% 7% $17.69(8) $17.50 $15.55
--- ---------- --- ---- ---- --- -------- -------- --------
LOUISIANA
NEW ORLEANS
CBD 2 1,270,241 4% 77%(6) 87% 14% $15.82 $16.70 $14.76
--- ---------- --- ---- ---- --- -------- -------- --------
FLORIDA
MIAMI
CBD 1 782,686 3% 79% 89% 23% $27.39 $30.25 $22.31
--- ---------- --- ---- ---- --- -------- -------- --------
ARIZONA
PHOENIX
Downtown/CBD 1 476,373 2% 89% 90% 27% $21.60 $21.50 $23.09
Camelback Corridor 1 86,451 0 67 94 3 24.82 21.97 21.00
--- ---------- --- ---- ---- --- -------- -------- --------
Subtotal/Weighted
Average 2 562,824 2% 85% 93% 11% $22.09 $21.57 $22.84
--- ---------- --- ---- ---- --- -------- -------- --------
WASHINGTON D.C.
WASHINGTON D.C.
Georgetown(7) 2 536,206 2% 95% 95% 100% $40.00 $40.00 $36.60
--- ---------- --- ---- ---- --- -------- -------- --------
NEBRASKA
OMAHA
CBD 1 409,850 1% 100% 93% 32% $18.13 $18.50 $14.71
--- ---------- --- ---- ---- --- -------- -------- --------
NEW MEXICO
ALBUQUERQUE
CBD 1 366,236 1% 83%(6) 95% 63% $18.50 $18.00 $18.09
--- ---------- --- ---- ---- --- -------- -------- --------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD 1 276,420 1% 83%(6) 99% 3% $33.28 $34.00 $22.76
--- ---------- --- ---- ---- --- -------- -------- --------
14
17
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
PERCENT PERCENT OFFICE COMPANY QUOTED QUOTED SERVICE
OF LEASED AT SUBMARKET SHARE OF MARKET RENTAL RENTAL
TOTAL TOTAL COMPANY PERCENT OFFICE RENTAL RATE RATE PER RATE PER
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3) FOOT(4) FOOT(5)
- ---------------------- ---------- --- --- ---------- ----------- --- ---- ---- ----
SAN DIEGO
UTC 1 195,733 1% 85% 92% 7% $25.20 $24.36 $20.11
- ------- - -- -- - ------ ------ ------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE 71 27,483,944 89% 89% 92% 17% $21.09 $22.01 $17.89
== ========== == == == == ====== ====== ======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway 2 413,721 1% 86% 89% 11% $15.28 $17.73 $11.85
LBJ Freeway 1 244,879 1 88 93 2 16.94 17.50 12.31
Far North Dallas 1 40,525 0 87 90 1 17.60 17.00 13.55
- ------ - -- -- - ------ ----- -----
Subtotal/Weighted Average 4 699,125 2% 87% 91% 3% $16.00 $17.61 $12.12
- ------- - -- -- - ------ ------ ------
HOUSTON
Richmond-Buffalo Speedway 6 2,292,003 8% 76% 74% 54% $16.52 $17.00 $13.77
The Woodlands 5 326,087 1 97 97 100 14.46 14.46 14.50
- ------- - -- -- --- ------ ----- -----
Subtotal/Weighted Average 11 2,618,090 9% 78% 75% 58% $16.27 $16.69 $13.88
-- --------- - -- -- -- ------ ------ ------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE 15 3,317,215 11% 80% 88% 12% $16.21 $16.88 $13.48
== ========= == == == == ====== ====== ======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE 86 30,801,159 100% 88%(6) 91% 16% $20.57 $21.46 $17.46
== ========== === == == == ====== ====== ======
- --------------------
(1) NRA means net rentable area in square feet.
(2) Market information is for Class A office space under the
caption "Class A Office Properties" and market information is
for Class B office space under the caption "Class B Office
Properties." Sources are Jamison Research, Inc. (for the Dallas
CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central
Expressway, Fort Worth CBD and the New Orleans CBD submarkets),
Baca Landata, Inc. (for the Houston Richmond-Buffalo Speedway,
CBD and West Loop/Galleria submarkets), The Woodlands Operating
Company, L.P. (for the Houston The Woodlands submarket),
Cushman & Wakefield of Texas, Inc. (for the Houston Katy
Freeway submarket), CB Commercial (for the Austin CBD,
Northwest and Southwest submarkets), Cushman & Wakefield of
Colorado, Inc. (for the Denver Cherry Creek, CBD and DTC
submarkets), Turner Commercial Research (for the Colorado
Springs market), Grubb and Ellis Company (for the Phoenix
Downtown/CBD, Camelback Corridor and San Francisco South of
Market/CBD submarkets), Jones Lang Wootton (for the Washington
D.C. Georgetown submarket) Pacific Realty Group, Inc. (for the
Omaha CBD submarket), Building Interests, Inc. (for the
Albuquerque CBD submarket), Real Data Information Systems, Inc.
(for the Miami CBD submarket) and John Burnham & Co. (for the
San Diego UTC submarket).
(3) Represents full-service quoted market rental rates. These rates
do not necessarily represent the amounts at which available
space at the Office Properties will be leased. The weighted
average subtotals and total are based on total net rentable
square feet of Company Office Properties in the submarket.
(4) For Office Properties, represents weighted average rental rates
per square foot quoted by the Company as of December 31, 1997,
based on total net rentable square feet of Company Office
Properties in the submarket, adjusted, if necessary, based on
management estimates, to equivalent full-service quoted rental
rates to facilitate comparison to weighted average Class A or
Class B, as the case may be, quoted submarket rental rates per
square foot. For Office Properties acquired subsequent to
December 31, 1997, represents weighted average full-service
quoted market rental rates per square foot. These rates do not
necessarily represent the amounts at which available space at
the Company Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office
Properties and Properties acquired subsequent to December 31,
1997 in the submarket as of December 31, 1997, without giving
effect to free rent or scheduled rent increases that would be
taken into account under generally accepted accounting
principles and including adjustments for expenses payable by
tenants, divided by total net rentable square feet of Company
Office Properties in the submarket.
(6) Leases have been executed at certain Properties in these
submarkets but had not commenced as of December 31, 1997. If
such leases had commenced as of December 31, 1997, the percent
leased for all Office Properties in the Company's submarkets
would have been 92%. The total percent leased at the Company's
Office Properties would have been as follows: Dallas
Uptown/Turtle Creek -- 98%; Fort Worth CBD -- 100%; Austin CBD
-- 92%; Austin Northwest -- 100%; Denver Cherry Creek -- 94%;
New Orleans CBD -- 79%; Albuquerque CBD -- 96%; and San
Francisco South of Market/CBD -- 91%.
(7) Includes three properties acquired in the Houston West
Loop/Galleria submarket, one property acquired in the Austin
CBD submarket, and two properties acquired in the Washington
D.C. Georgetown submarket subsequent to December 31, 1997.
(8) Represents weighted average quoted market triple-net rental
rates per square foot, adjusted based on management estimates,
to equivalent full-service quoted market rental rates.
15
18
The following table sets forth, as of December 31, 1997, the principal
businesses conducted by the tenants at the Company's Office Properties, based on
information supplied to the Company from the tenants, after giving effect to the
acquisitions of Properties completed after December 31, 1997.
Percent of
Industry Sector Leased Sq. Ft.
--------------- --------------
Professional Services (1) 26%
Financial Services (2) 20%
Energy 15%
Telecommunications 7%
Technology 6%
Manufacturing 5%
Retail 3%
Medical 3%
Government 3%
Food Service 3%
Other (3) 9%
--------
Total Leased 100%
========
- ----------------------
(1) Includes legal, accounting, engineering, architectural, and
advertising services.
(2) Includes banking, title and insurance and investment services.
(3) Includes construction, real estate, transportation and other
industries.
MARKET INFORMATION
Management believes that its Office Properties reflect the Company's
strategy to invest in premier assets within markets that have significant
potential for rental growth. The Company has analyzed demographic and economic
data to focus on markets it expects to benefit from significant internal
employment growth as well as corporate relocations. After identifying and
analyzing attractive regional markets, the Company selects submarkets which the
Company believes will be the major beneficiaries of this projected growth.
Management believes that the most attractive submarkets for office investment
are those that integrate a premier office environment with quality of life
features including: affordable residential housing; an environment generally
well protected from crime; effective transportation systems; a significant
concentration of retailing alternatives; and cultural centers, entertainment
attractions and recreational facilities. Other factors considered by the
Company in selecting the submarkets include proximity to major airports and the
relative aggressiveness of local governments providing tax and other incentives
designed to favor business.
Within these submarkets, the Company has focused on premier properties
that management believes are able to attract and retain the highest quality
tenants and command premium rents. In addition, several of the
Properties benefit from significant "over-improvement" (improvements beyond
what currently could be justified by expected economic returns) made by prior
owners or developers. These over-improvements, which should not materially
increase the future operating cost of the Properties, include various
amenities, use of expensive materials, and extensive landscaping. Such premier
properties also tend to be more stable in downward property cycles. Consistent
with its investment strategies, the Company seeks situations where it can
acquire properties that have strong economic returns based on in-place tenancy
and have a dominant position within the submarket due to quality and/or
location. Accordingly, management's investment strategy not only demands
acceptable current cash flow return on invested capital, but also considers
long-term cash flow growth prospects.
16
19
The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the markets in which the Company has
invested are projected to continue to be at or above the national average, as
illustrated in the following table.
Projected Population Growth and Employment Growth for all Company Markets
Population Employment
Growth Growth
Metropolitan Statistical Area (MSA) 1997-2007 1997-2007
- --------------------------------------------------------------------------------
Dallas/Fort Worth, TX 17.8% 16.9%
Houston, TX 11.2 12.4
Austin, TX 29.7 26.7
Denver, CO 16.6 16.2
Colorado Springs, CO 17.7 19.3
New Orleans, LA 4.4 10.0
Miami, FL 12.2 13.8
Phoenix, AZ 23.2 23.4
Washington, D.C. 17.7 18.1
Omaha, NE 11.1 14.5
Albuquerque, NM 17.2 19.3
San Francisco, CA 14.6 14.6
San Diego, CA 18.5 18.4
United States 8.6 12.6
- --------------------------
Source: Cognetics, Inc.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for
leases in place as of December 31, 1997 at the Company's Office Properties,
including six Office Properties acquired subsequent to December 31, 1997, for
each of the ten years beginning with 1998, assuming that none of the tenants
exercises renewal options and excluding an aggregate 3,991,391 square feet of
unleased space.
PERCENTAGE ANNUAL
OF TOTAL FULL-SERVICE
NET RENTABLE PERCENTAGE OF ANNUAL ANNUAL RENT PER
NUMBER OF AREA LEASED NET FULL- FULL-SERVICE SQUARE
TENANTS REPRESENTED RENTABLE AREA SERVICE RENT FOOT OF NET
WITH BY EXPIRING REPRESENTED BY RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------------------------------------------------------------------------------------------------
1998 416 2,454,569 9.2% $39,165,179 7.8% $15.96
1999 418 3,470,357 12.9 59,169,483 11.8 17.05
2000 372 3,311,919 12.4 60,340,936 12.0 18.22
2001 288 3,680,753 13.7 63,445,501 12.7 17.24
2002 277 3,407,331 12.7 66,653,848 13.3 19.56
2003 74 1,423,950 5.3 24,016,848 4.8 16.87
2004 70 2,561,029 9.6 49,035,329 9.8 19.15
2005 47 1,988,191 7.5 40,734,393 8.1 20.49
2006 20 521,177 1.9 10,096,070 2.0 19.37
2007 23 1,138,952 4.2 19,837,446 4.0 17.42
2008 and thereafter 30 2,851,334 10.6 68,926,526 13.7 24.17
- --------------------------
(1) Calculated based on base rent payable as of the expiration
date of the lease for net rentable square feet expiring, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants based on
current levels.
17
20
BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE LEASES
On June 17, 1997, the Company acquired substantially all of the real
estate assets of the domestic hospital provider business of Magellan, as
previously owned and operated by a wholly owned subsidiary of Magellan. The
transaction involved various components, the principal component of which was
the acquisition of the 90 Behavioral Healthcare Facilities (and two additional
behavioral healthcare facilities which subsequently were sold) for approximately
$387.2 million. The Behavioral Healthcare Facilities, which are located in 27
states, are leased to CBHS, and its subsidiaries under a triple-net lease. CBHS
is a Delaware limited liability company, formed to operate the Behavioral
Healthcare Facilities, owned 50% by a subsidiary of Magellan and 50% by COI.
The lease requires the payment of annual minimum rent in the amount of
approximately $41.7 million for the period ending June 16, 1998, increasing in
each subsequent year during the 12- year term at a 5% compounded annual rate.
All maintenance and capital improvement costs are the responsibility of CBHS
during the term of the lease. In addition, the obligation of CBHS, pursuant to
a franchise agreement, to pay an approximately $78.2 million franchise fee to
Magellan and one of its subsidiaries, as franchisor, is subordinated to the
obligation of CBHS to pay annual minimum rent to the Company. The franchisor
does not have the right to terminate the franchise agreement due to any
nonpayment of the franchise fee as a result of the subordination of the
franchise fee to the annual minimum rent. The lease is designed to provide the
Company with a secure, above-average return on its investment as a result of the
priority of annual minimum rent to the franchise fee and the initial amount and
annual escalation in the lease payments.
On March 5, 1998, COI entered into a definitive agreement to acquire
Magellan's 50% interest in CBHS in exchange for $30 million in common stock of
COI. In a related transaction, CBHS executed a definitive agreement to purchase
from Magellan, for approximately $280 million, certain assets and intellectual
property rights used by Magellan to supply franchise services to CBHS. The
agreement provides for the elimination of the franchise fee that is payable by
CBHS to Magellan. The transactions are subject to a number of conditions,
including customary closing conditions, a condition that CBHS obtain funds
sufficient to finance the purchase and certain regulatory conditions. The
transactions, as structured will not affect the arrangements pursuant to which
CBHS leases the Behavioral Healthcare Facilities from the Company.
BEHAVIORAL HEALTHCARE FACILITIES TABLE
The following chart sets forth the locations of the 90 Behavioral
Healthcare Facilities by state:
Number of Number of
State Facilities State Facilities
----- ---------- ----- ----------
Alabama 2 Mississippi 2
Arkansas 2 North Carolina 4
Arizona 2 New Hampshire 2
California 9 New Jersey 1
Delaware 1 Nevada 1
Florida 10 Ohio 1
Georgia 12 Pennsylvania 2
Indiana 8 South Carolina 3
Kansas 2 Tennessee 1
Kentucky 4 Texas 9
Louisiana 2 Utah 1
Maryland 1 Virginia 4
Minnesota 1 Wisconsin 2
Missouri 1 --
Total 90
==
18
21
The Behavioral Healthcare Facilities are located in well-populated
urban and suburban locations. Most of the Behavioral Healthcare Facilities
offer a full continuum of behavioral care in their service area, including
inpatient hospitalization, partial hospitalization, intensive outpatient
services and, in some markets, residential treatment services. The Behavioral
Healthcare Facilities provide structured and intensive treatment programs for
mental health and alcohol and drug dependency disorders in children, adolescents
and adults. A significant portion of admissions are provided by referrals from
former patients, local marketplace advertising, managed care organizations and
physicians. The Behavioral Healthcare Facilities work closely with mental
health professionals, non-psychiatric physicians, emergency rooms and community
agencies that come in contact with individuals who may need treatment for mental
illness or substance abuse.
The Behavioral Healthcare Facilities in the past have been, and in the
future may be, adversely affected by factors influencing the entire psychiatric
hospital industry. The industry is subject to governmental regulation in
various respects. Factors which may affect the operations and successful
results of operations of the Behavioral Healthcare Facilities include (i) the
imposition of more stringent length of stay and admission criteria by payers;
(ii) the failure of reimbursement rates received from certain payers that
reimburse on a per diem or other discounted basis to offset increases in the
cost of providing services; (iii) an increase in the percentage of business that
the Behavioral Healthcare Facilities derive from payers that reimburse on a per
diem or other discounted basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; and (v) pricing pressure related to
increasing rate of claims denials by third party payers. In addition to these
regulations, the recently adopted National Mental Health Parity Act of 1997
potentially benefits the industry by imposing an obligation for health insurance
issuers and group health plans to place mental health benefits on equal footing
with all other medical benefits. Title I of this Act amends the Code to impose
on an issuer or group health plan a tax equal to 25% of a health plan's premiums
received during the calendar year if the plan imposes limitations or financial
requirements on the coverage of benefits relating to certain mental health
conditions unless similar limitations or requirements also are imposed on
coverage of benefits with respect to conditions other than mental health.
INDUSTRY INFORMATION
In an era of cost-containment and the reduction of dollars available
for care, behavioral health providers have focused attention on developing
treatment approaches that respond to payers' increasing demands for shorter
stays, lower costs, and expanded access to care. Changes in the mix of
services, the prices of services, and the intensity of service are all part of
this response. These changes have also been bolstered by a rapidly expanding
science base, improved medications management, and the growing availability of
non-hospital treatment settings in more and more communities that help to make
it possible to manage complex and severe illnesses in less intensive treatment
settings. One of the effects that the behavioral healthcare industry is
experiencing is an increasing percentage of non-inpatient care. According to
the National Association of Psychiatric Health Systems 1997 Annual Survey
Report, nearly one in four admissions in 1996 was to a service other than
inpatient hospitalization, compared to just one in ten admissions in 1992.
Although non-inpatient services are rapidly growing, total inpatient admissions
have increased also. In general, inpatient and non-inpatient admissions are
increasing, but average length of stay and care costs are decreasing.
Due to these changes in the behavioral healthcare industry, a
hospital's position relative to its competitors has been affected by its
ability to obtain contracts with HMOs, PPOs and other managed care plans for
the provision of health care services. Although such contracts generally
provide for discounted services, pre-admission certification and concurrent
length of stay reviews, they also provide a strong patient referral base. The
importance of entering into contracts with HMOs, PPOs and other managed care
companies varies from market to market and depends upon the market strength of
the particular managed care company.
For the Year Ended December 31,
----------------------------------------------
1996 1995 1994 1993
------- ------- ------- -------
Total Admissions . . . . . . . . 476,844 447,525 399,407 325,679
Average length of stay (days) . . 11.5 11.7 10.4 16.2
Source: National Association of Psychiatric Health Systems 1997 Annual Survey
Report
19
22
HOTEL PROPERTIES
HOTEL LEASES
Because of the Company's status as a REIT for federal income tax
purposes, it does not operate the Hotel Properties directly. The Company has
leased the Hotel Properties to subsidiaries of COI (collectively, the "Hotel
Lessees") pursuant to nine separate leases. Under the leases, each having a
term of 10 years, the Hotel Lessees have assumed the rights and obligations of
the property owner under the respective management agreement with the hotel
operators, as well as the obligation to pay all property taxes and other
charges against the property. As part of each of the lease agreements for
eight of the Hotel Properties, the Company has agreed to fund all capital
expenditures relating to furniture, fixtures and equipment reserves required
under the applicable management agreements. The only exception is Canyon
Ranch-Tucson, in which the hotel lessee owns all furniture, fixtures and
equipment associated with the property and will fund all related capital
expenditures. Each of the leases provides for the payment by the lessee of the
Hotel Property of (i) base rent, with periodic rent increases, (ii) percentage
rent based on a percentage of gross hotel receipts or gross room revenues, as
applicable, above a specified amount, and (iii) a percentage of gross food and
beverage revenues above a specified amount for certain Hotel Properties.
HOTEL PROPERTIES TABLES
The following table sets forth certain information for the years ended
December 31, 1997 and 1996, about the Company's Hotel Properties, including the
Hotel Property that the Company acquired after December 31, 1997. The
information for the Hotel Properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which are destination health and
fitness resorts that measure their performance based on available guest nights.
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
Year RATE RATE ROOM
Acq. Completed/ ---- ---- ----
Hotel Property (1) Location Date Renovated Rooms 1997 1996 1997 1996 1997 1996
- -------------- -------- ---- --------- ----- ---- ---- ---- ---- ---- ----
Full-Service/Luxury Hotels
Denver Marriott City
Center Denver, CO 6/95 1982/1994 613 80% 79% $117 $108 $ 94 $85
Four Seasons Hotel-
Houston Houston, TX 9/97 1982 399 67 65 161 142 108 93
Hyatt Regency Albuquerque, NM 12/95 1990 395 74 77 98 93 73 71
Albuquerque
Omni Austin Hotel(2) Austin, TX 1/98 1986 314 78 76 103 102 81 77
Hyatt Regency Avon, CO 1/95 1989 295 66 67 229 207 151 139
Beaver Creek
Sonoma Mission Inn
& Spa Sonoma, CA 11/96 1927/1987/1997 198(3) 87 92 210 181 183 166
Ventana Country Inn Big Sur, CA 12/97 1975/1982/1988 62 84 83 337 312 282 258
----- --- --- --- --- --- ---
TOTAL / WEIGHTED AVERAGE 2,276(3) 75% 75% $149 $136 $112 $102
===== === === ==== ==== ==== ====
Destination Health & Fitness Resorts
Canyon Ranch - Tucson Tucson, AZ 7/96 1980 250(4) 81%(5) 80%(5) $508(6) $479(6) $387(7) $366(7)
Canyon Ranch - Lenox Lenox, MA 12/96 1989 202(4) 80 (5) 81 (5) 445(6) 407(6) 347(7) 320(7)
-----