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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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) 321-2100
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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
6 3/4% Series A Convertible Cumulative Preferred Shares of
Beneficial Interest par value $.01 per share New York Stock Exchange
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 [ ]
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 24, 2000, the aggregate market value of the 113,005,779 common
shares and 8,000,000 preferred shares held by non-affiliates of the registrant
was approximately $2.1 billion, based upon the closing price of $17 15/16 for
common shares and $14 for preferred shares on the New York Stock Exchange.
Number of Common Shares outstanding as of March 24, 2000: 121,645,289
Number of Preferred Shares outstanding as of March 24, 2000: 8,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2000 Annual Meeting of Shareholders to be held in
June 2000 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
PART I.
Item 1. Business.............................................................................. 2
Item 2. Properties............................................................................ 17
Item 3. Legal Proceedings..................................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders................................... 29
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 30
Item 6. Selected Financial Data............................................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 60
Item 8. Financial Statements and Supplementary Data........................................... 62
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 101
PART III.
Item 10. Trust Managers and Executive Officers of the Registrant............................... 101
Item 11. Executive Compensation................................................................ 102
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 102
Item 13. Certain Relationships and Related Transactions........................................ 102
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 102
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PART I
ITEM 1. BUSINESS
THE COMPANY
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust (a "REIT") for federal income tax purposes, and,
together with its subsidiaries, is a fully integrated real estate company. The
Company, as defined below, provides management, leasing and development services
with respect to some of its properties.
The term "Company" includes, unless the context otherwise requires,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.
The direct and indirect subsidiaries of Crescent Equities include:
o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP;
The Operating Partnership
o CRESCENT REAL ESTATE EQUITIES, LTD.;
The General Partner of the Operating Partnership
o SEVEN SINGLE-PURPOSE LIMITED PARTNERSHIPS;
Formed for the purpose of obtaining securitized debt,
substantially all the economic interests owned
directly or indirectly by the Operating Partnership
and the remaining interests owned indirectly by
Crescent Equities through seven separate corporations
described below.
o SEVEN SEPARATE CORPORATIONS.
Wholly owned subsidiaries of the General Partner,
each of which is a general partner of one of the
seven limited partnerships described above.
Crescent Equities conducts all of its business directly through the
Operating Partnership and its other subsidiaries. The Company is structured to
facilitate and maintain its qualification as a REIT. This structure permits
persons contributing properties (or interests in properties) to the Company to
defer some or all of the tax liability that they otherwise might have incurred
in connection with the sale of assets to the Company.
See Note 1. Organization and Basis of Presentation of Item 8. Financial
Statements and Supplementary Data for a table that lists the principal
subsidiaries of Crescent Equities and the Properties owned by such subsidiaries.
As of December 31, 1999, the Company's assets and operations were
composed of five major investment segments:
o Office and Retail Segment;
o Hospitality Segment;
o Residential Development Segment;
o Temperature-Controlled Logistics Segment; and
o Behavioral Healthcare Segment.
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Within these segments, the Company owned directly or indirectly the
following real estate assets (the "Properties") as of December 31, 1999:
o OFFICE AND RETAIL SEGMENT consisted of 89 office properties
(collectively referred to as the "Office Properties") located
in 31 metropolitan submarkets in nine states, with an
aggregate of approximately 31.8 million net rentable square
feet, and seven retail properties (collectively referred to as
the "Retail Properties") with an aggregate of approximately
0.8 million net rentable square feet. See "Industry Segments -
Office and Retail Segment - Recent Developments - Property
Dispositions" for a description of the disposition of six of
the Office Properties and four of the Retail Properties
subsequent to December 31, 1999.
o HOSPITALITY SEGMENT consisted of five upscale business class
hotels with a total of 2,168 rooms, three luxury resorts and
spas with a total of 516 rooms and two Canyon Ranch
destination fitness resorts and spas that can accommodate up
to 462 guests daily (collectively referred to as the "Hotel
Properties"). All Hotel Properties, except the Omni Austin
Hotel, are leased to subsidiaries of Crescent Operating, Inc.
("COI"). The Omni Austin Hotel is leased to HCD Austin
Corporation.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and non-voting common stock
representing interests ranging from 40% to 95% in five
unconsolidated residential development corporations
(collectively referred to as the "Residential Development
Corporations"), which in turn, through joint venture or
partnership arrangements, currently own 14 residential
development properties (collectively referred to as the
"Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT (FORMERLY THE
REFRIGERATED STORAGE SEGMENT) consisted of the Company's
indirect 39.6% interest in three partnerships (collectively
referred to as the "Temperature-Controlled Logistics
Partnerships"), each of which owns one or more corporations or
limited liability companies (collectively referred to as the
"Temperature-Controlled Logistics Corporations") which, as of
December 31, 1999, directly or indirectly owned 89
temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 428.3 million
cubic feet (17.0 million square feet). This segment was
restructured in 1999, and the new ownership structure was
effective as of March 12, 1999.
o BEHAVIORAL HEALTHCARE SEGMENT consisted of 88 properties in 24
states (collectively referred to as the "Behavioral Healthcare
Properties") that were leased to Charter Behavioral Health
Systems, LLC ("CBHS") and its subsidiaries. CBHS was formed to
operate the behavioral healthcare business located at the
Behavioral Healthcare Properties and is owned 10% by a
subsidiary of Magellan Health Services, Inc. ("Magellan") and
90% by COI and an affiliate of COI. On February 16, 2000, CBHS
and all of its subsidiaries that are subject to the master
lease with the Company filed voluntary Chapter 11 bankruptcy
petitions in the United States Bankruptcy Court for the
District of Delaware. Of the 88 Behavioral Healthcare
Properties, 37 are designated as the "Core Properties" for the
conduct of CBHS's business and remain subject to the master
lease. Since December 31, 1999, CBHS has ceased or is planning
to cease operations at the remaining 51 Behavioral Healthcare
Properties which are designated as the "Non-Core Properties"
and the Company is actively marketing these Properties for
sale. From January 1 through March 24, 2000, the Company sold
11 of these Behavioral Healthcare Properties and entered into
contracts or letters of intent to sell an additional six of
these Behavioral Healthcare Properties. The Company intends to
sell the remaining 37 Core Behavioral Healthcare Properties or
lease them to new tenants. See "Industry Segments - Behavioral
Healthcare Segment" for a description of the current status of
CBHS and the Company's investment in the Behavioral Healthcare
Properties.
See Note 4. Segment Reporting of Item 8. Financial Statements and
Supplementary Data for a table showing revenues and funds from operations for
the years ended December 31, 1999, 1998 and 1997 and identifiable assets for
each of these investment segments at December 31, 1999 and 1998.
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BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company's business objective is to provide its shareholders with
attractive but predictable growth in cash flow and underlying asset value. In
addition, the Company seeks to create value by distinguishing itself as the
leader in each of its investment segments through customer service and asset
quality.
STRATEGIC PLAN
In August 1999, the Company announced a strategic plan for the years
2000 - 2002. Under the plan, the Company is intently focused, during this
period, on increasing:
o net asset value per share;
o funds from operations and cash available for distribution per
share; and
o corresponding growth rates in net asset value per share, funds
from operations and cash available for distribution per share.
The strategic plan also includes short-term goals designed to meet
these objectives. These short-term goals are to:
o resolve the issues surrounding the Behavioral Healthcare
Segment;
o refinance 2000 and 2001 debt maturities and reduce exposure to
variable-rate debt;
o dispose of non-strategic or non-core assets within the
investment segments;
o market certain of the Office Properties for joint
ventures; and
o engage in a share repurchase program.
OPERATING AND FINANCING STRATEGIES
Based on management's assessment of current conditions in the real
estate and financial markets, the Company will focus in 2000 on growth in
revenues from its existing Property portfolio. The Company seeks to enhance its
operating performance and financial position by:
o continuing to operate the Office Properties as long-term
investments, providing exceptional tenant services,
improving occupancies, increasing in-place rents to market
rates and seeking to increase revenues by providing tenants
with a broad spectrum of additional services;
o achieving a high tenant retention rate at the Office
Properties through quality service, individualized attention
to its tenants and active preventive maintenance programs;
o seeking to sell the non-core, non-strategic Office
Properties;
o seeking to sell the Non-Core Behavioral Healthcare Properties
and, in cooperation with CBHS, sell or lease the Core
Behavioral Healthcare Properties;
o seeking, over the next two years, to reduce the Company's
investment in its upscale business class Hotel Properties;
o optimizing the use of various sources of capital, including
the refinancing of existing debt to extend debt maturities and
to reducing exposure to variable-rate debt;
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o entering into venture arrangements with private equity
partners under arrangements where the Company would
hold a minority interest in the Properties and would continue
to lease and manage the Properties;
o repurchasing and retiring up to $500 million of common shares
over the next two years;
o entering into arrangements with other businesses, such as
venture capital and technology firms, to exchange office
space, which is difficult to lease due to location, size, or
configuration, for an equity interest in those businesses, and
o empowering management and employing compensation plans which
are designed to continue to attract and retain the best talent
available and are aligned with the interests of the Company's
shareholders.
INVESTMENT STRATEGIES
In 2000, the Company intends to focus primarily on assessing investment
opportunities within each of its existing investment segments that are
consistent with its long-term investment strategy of acquiring value investments
at a significant discount to replacement cost in an environment where the
Company believes values will appreciate to or above replacement cost and
acquiring investments offering growth in cash flow after applying management
skills, renovation and expansion capital, and strategic vision.
The Company's investment strategies include:
o capitalizing on the luxury resorts and spas business through
(a) the formation of an investment partnership headed by one
of the Company's former executives, which will acquire new
resorts that can be converted into luxury spa destinations and
operated under the "Sonoma Spa Resorts" brand and (b)
investments in a management company which will operate and
manage the property or assets of some of the Company's Hotel
Properties as well as any new resort properties acquired by
the investment partnership;
o expansion of the Canyon Ranch franchise and capitalizing on
the "Canyon Ranch" brand through the Company's indirect
approximately 20% equity ownership (the Company has the
opportunity to acquire an additional indirect 10% equity
ownership through July 2000) in a management company that has
all rights to develop and manage any new Canyon Ranch resorts
or spa concepts, both in the United States and
internationally;
o seeking, within the Office Property segment, to provide
tenants a broad spectrum of services, such as
telecommunications services, by providing the vendors of those
services with access to the tenants of the Company's Office
Property portfolio in exchange for potential royalty income
and an equity investment;
o seeking private equity partners for joint ventures, in which
the Company would invest for selected office property
development; and
o continuing to monetize current development through the
Company's five Residential Development Corporations, and
reinvesting in other land developments as capital is returned.
EMPLOYEES
As of March 24, 2000, the Company had 634 employees. None of these
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be good.
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 REIT
taxable
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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 REIT taxable income each
year. The Company will be subject to federal income tax on its REIT taxable
income (including any applicable alternative minimum tax) at regular corporate
rates if it fails to qualify as a REIT for tax purposes in any taxable year. The
Company will also 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 REIT taxable income and property and to federal income and excise tax on
its undistributed REIT taxable income. In addition, certain of its subsidiaries
are subject to federal, state and local income taxes.
On December 17, 1999, President Clinton signed into law the REIT
Modernization Act which will become effective after December 31, 2000, and
contains a provision that would permit the Company to own and operate certain
types of investments that are currently owned by COI. The REIT Modernization Act
is expected to reduce the number of business opportunities that the Company
would otherwise offer to COI pursuant to the Intercompany Agreement between
the Company and COI, which provides each party with rights to participate in
certain transactions. The Company has expressed an interest to COI in certain of
the businesses currently owned or operated by COI that the REIT Modernization
Act would allow the Company to own or operate. The Company is exploring
alternatives with COI regarding a potential future transaction with respect to
certain of COI's assets.
ENVIRONMENTAL MATTERS
The Company and its Properties are subject to a variety of federal,
state and local environmental, health and safety laws, including:
o Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA");
o Resource Conservation & Recovery Act;
o Federal Clean Water Act;
o Federal Clean Air Act;
o Toxic Substances Control Act; and
o Occupational Safety & Health Act.
The application of these laws to a specific property that the Company
owns will be dependent on a variety of property-specific circumstances,
including the former uses of the property and the building materials used at
each property. Under certain environmental laws, principally CERCLA, 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. They may also be held liable to a
governmental entity or third parties for property damage and for investigation
and clean up costs such parties incur 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 owner or operator of a site also 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 presence of
contamination or the failure to remediate contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral.
Compliance by the Company with existing environmental, health and
safety laws has not had a material adverse effect on the Company's financial
condition and results of operations, and management does not believe it will
have such an impact in the future. In addition, the Company has not incurred,
and does not expect to incur any material costs or liabilities due to
environmental contamination at Properties it currently owns or has owned in the
past. However, the Company cannot predict the impact of new or changed laws or
regulations on its current Properties or on properties that it may acquire in
the future. Except as set forth below, the Company has no current plans for
substantial capital expenditures with respect to compliance with environmental,
health and safety laws.
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INDUSTRY SEGMENTS
OFFICE AND RETAIL SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 1999, the Company owned 89 Office Properties located
in 31 metropolitan submarkets in nine states, with an aggregate of approximately
31.8 million net rentable square feet and seven Retail Properties with an
aggregate of approximately 0.8 million net rentable square feet. The Company, as
lessor, has retained substantially all of the risks and benefits of ownership of
the Office and Retail Properties and accounts for its leases as operating
leases. Additionally, the Company provides management and leasing services for
substantially all of its Office and Retail Properties. From January 1 through
March 24, 2000, the Company sold six of the Office Properties and four of the
Retail Properties. See "Recent Developments - Property Dispositions" below.
See Item 2. Properties for more information about the Company's Office
and Retail Properties, and Note 1. Organization and Basis of Presentation of
Item 8. Financial Statements and Supplementary Data for a table that lists the
principal subsidiaries of the Company and the Properties owned by such
subsidiaries.
MARKET INFORMATION
The Office and Retail Properties reflect the Company's strategy of
investing in premier assets within markets that have significant potential for
rental growth. In selecting the Office and Retail Properties, the Company
analyzed demographic and economic data to focus on markets expected to benefit
from significant employment growth as well as corporate relocations. After
identifying and analyzing attractive regional markets, the Company selected
submarkets that it believed would be the major beneficiaries of this projected
growth and that would integrate a premier office environment with quality of
life features such as: 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 the Company considered in
selecting the submarkets in which its Office and Retail Properties are located
included proximity to major airports and the relative aggressiveness of local
governments in providing tax and other incentives designed to favor business.
Currently, the Company's Office and Retail Properties are located primarily in
the Dallas/Fort Worth and Houston, Texas metropolitan areas. The southwestern
markets are expected to continue experiencing some of the strongest growth in
the country being "demand-driven" markets because of high levels of in-migration
by corporations and labor. Companies continue to migrate to the southwest with
its friendly state and local governments, lower cost of living, outstanding
transportation systems, strong educational base, and central United States
location.
Within its selected submarkets, the Company has focused on premier
locations that management believes are able to attract and retain the highest
quality tenants and command premium rents. In addition, several of the Office
and Retail Properties benefit from improvements made by prior owners or
developers beyond what currently could be justified by expected economic
returns. Examples of these improvements, which should not materially increase
the future operating cost of the Properties, are the inclusion of various
amenities, the use of expensive materials and the addition of extensive
landscaping. Such premier locations also tend to be more stable in downward
property cycles. Consistent with its long-term investment strategies, the
Company has sought transactions where it was able to 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 long-term investment strategy not only demands acceptable current
cash flow return on invested capital, but also considers long-term cash flow
growth prospects.
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The Company does not depend on a single or a few major customers within
the Office and Retail segment, the loss of which would have a material adverse
effect on the Company's financial condition or results of operations. Based on
rental revenues from office and retail leases in effect as of December 31, 1999,
no single tenant accounted for more than 4% of the Company's total Office and
Retail segment rental revenues for 1999.
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 approximate or exceed the national
averages (with the exception of: New Orleans, Louisiana; Omaha, Nebraska; and
San Francisco, California), as illustrated in the following table. Subsequent to
December 31, 1999, the Company disposed of its Office Property located in Omaha,
Nebraska and one of its two Office Properties located in New Orleans, Louisiana
and is actively marketing the remaining property in New Orleans, Louisiana for
sale. See "Recent Developments - Property Dispositions" below.
PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL COMPANY MARKETS
Population Employment
Growth Growth
Metropolitan Statistical Area (MSA) 1999-2009 1999-2009
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Albuquerque, NM 13.9% 24.4%
Austin, TX 22.7 26.3
Colorado Springs, CO 12.7 21.9
Dallas, TX 15.5 20.7
Denver, CO 12.7 26.0
Fort Worth, TX 19.2 22.8
Houston, TX 15.5 21.9
Miami, FL 9.3 16.8
New Orleans, LA 1.4 10.1
Omaha, NE 6.8 10.7
Phoenix, AZ 26.8 36.4
San Diego, CA 17.4 19.7
San Francisco, CA 6.4 12.9
Washington, D.C 10.1 21.5
UNITED STATES 8.4 13.6
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Source: Compiled from information published by RFA/Dismal Sciences, Inc.
The Company applies a well-defined leasing strategy in order to capture
the potential rental growth in the Company's portfolio of Office Properties as
occupancy and rental rates increase with the continued recovery of the markets
and the submarkets in which the Company has invested. The Company's strategy has
been and continues to be based in part on identifying and making its investments
in submarkets in which weighted average full-service rental rates (representing
base rent after giving effect to free rent and scheduled rent increases that
would be taken into account under generally accepted accounting principles
("GAAP") and including adjustments for expenses payable by or reimbursed from
tenants) are significantly less than weighted average full-service replacement
cost rental rates (the rate management estimates to be necessary to provide a
return to a developer of a comparable, multi-tenant building sufficient to
justify construction of new buildings) in that submarket. In calculating
replacement cost rental rates, management relies on available third-party data
and its own estimates of construction costs (including materials and labor in a
particular market) and assumes replacement cost rental rates are achieved at a
95% occupancy level. The Company believes that the difference between the two
rates is a useful measure of the additional revenue that the Company may be able
to obtain from a property, because the difference should represent the amount by
which rental rates would be required to increase in order to justify
construction of new properties. For the Company's Office Properties, the
weighted average full-service rental rate as of December 31, 1999 was $20.38 per
square foot, compared to an estimated weighted average full-service replacement
cost rental rate of $28.49 per square foot.
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COMPETITION
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 and maintain or increase occupancy or rents in its existing Office
Properties. Management believes, however, that the quality services and
individualized attention that the Company offers its tenants, together with its
active preventive maintenance program and superior building locations within
markets, enhance the Company's ability to attract and retain tenants for its
Office Properties. In addition, as of December 31, 1999, on a weighted average
basis, the Company owned 16% of the Class A office space in the 30 submarkets in
which the Company owned Class A office properties, and 9% of the Class B office
space in the five submarkets in which the Company owned Class B office
properties. 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 that the Company and its tenants pay, enhancing the
Company's ability to attract and retain tenants and potentially resulting in
increases in Company net revenues.
RECENT DEVELOPMENTS
Property Dispositions
For the year ended December 31, 1999, the Company recognized an
impairment loss of approximately $16.8 million on one Office Property held for
disposition, which was sold during the first quarter of 2000. The impairment
loss represented the difference between the carrying value of the Office
Property and the sales price less costs of the sale. As of March 24, 2000, the
Company completed the sale of six wholly-owned Office Properties, which were
included in a group of ten Office Properties held for disposition at December
31, 1999, and were actively being marketed for sale. The sales generated
approximately $146.6 million of net proceeds. Excluding the impairment loss on
one of the six Office Properties held for disposition at December 31, 1999, the
Company recognized a net gain of approximately $13.3 million in the first
quarter of 2000, related to the sales of the other five Office Properties that
were classified as held for disposition at December 31, 1999. In addition, the
Company entered into contracts relating to the sale of two additional Office
Properties. The sales of the additional Office Properties are expected to close
by the end of the second quarter of 2000. Management expects to complete any
economically justified sales of the remaining two Office Properties held for
disposition at December 31, 1999 by the end of the second quarter of 2000.
Management is currently in the process of evaluating the bids for the remaining
Office Properties to determine their economic viability as well as the
credit-worthiness of the potential purchasers and their ability to close the
transactions. The disposition of these Office Properties remains subject to the
negotiation of acceptable terms and other customary conditions.
The Woodlands Commercial Properties Company, L.P., owned by the Company
and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for
sale certain property assets (multi-family, retail and office/venture tech
portfolios), located in The Woodlands, which includes the Company's four Retail
Properties and 12 Office Properties located in The Woodlands. The sale of the
four Retail Properties located in The Woodlands, closed on January 5, 2000,
generating net proceeds of approximately $49.8 million, of which the Company's
portion was approximately $37.3 million and a net gain of approximately $9.0
million, of which the Company's portion was approximately $7.7 million. The sale
of The Woodlands Office Properties, is expected to close in the second quarter
of 2000.
Investment in Broadband Office, Inc.
In October 1999, the Company, along with seven other real estate
companies, joined with an unrelated third party venture capitalist as a founding
shareholder in Broadband Office, Inc. ("Broadband"), a national
telecommunications company. Broadband is dedicated to providing state of the art
broadband telecommunications services to commercial office properties across the
country. In addition to significantly improving the Company's office tenant
amenity package to take advantage of evolving technologies, the Company received
an equity interest
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and representation on the board of directors of Broadband in exchange for
granting Broadband marketing access to the tenants within the Company's Office
Property portfolio.
HOSPITALITY SEGMENT
OWNERSHIP STRUCTURE
Because of the Company's status as a REIT for federal income tax
purposes, it does not operate the Hotel Properties. The Company has leased all
of the Hotel Properties, except the Omni Austin Hotel, to subsidiaries of COI
pursuant to nine separate leases. The Omni Austin Hotel has been leased, under a
separate lease, to HCD Austin Corporation. Under the leases, each having a term
of 10 years, the Hotel Property lessees have assumed the rights and obligations
of the property owner under the respective management agreements with the hotel
operators, as well as the obligation to pay all property taxes and other costs
related to the Properties. The Company has agreed to fund all capital
expenditures relating to furniture, fixtures and equipment reserves required
under the applicable management agreements as part of each of the lease
agreements for nine of the Hotel Properties. The only exception is Canyon
Ranch-Tucson, in which the Hotel Property lessee owns all furniture, fixtures
and equipment associated with the property and will fund all related capital
expenditures.
The leases provide for the payment by the Hotel Property lessees of all
or a combination of the following:
o base rent, with periodic rent increases if applicable (for
1999, base rent represented approximately 70% of total hotel
rental revenues received from the hotel lessees);
o percentage rent based on a percentage of gross hotel receipts
or gross room revenues, as applicable, above a specified
amount; and
o a percentage of gross food and beverage revenues above a
specified amount.
CRL INVESTMENTS, INC.
The Company has a 95% economic interest, representing all of the
non-voting stock in CRL Investments, Inc. ("CRL"), which has a 20% economic
interest in CR License, LLC, the entity which owns the right to the future use
of the "Canyon Ranch" name. CRL has the opportunity through July 2000 to pay
$3.0 million to obtain an additional 10% interest in CR License, LLC. CRL also
has an effective 60% economic interest in the Canyon Ranch Spa Club in the
Venetian Hotel in Las Vegas, Nevada. The Canyon Ranch Spa Club opened in June
1999 and is the first project to expand the franchise value of the "Canyon
Ranch" name.
See Item 2. Properties for more information about the Company's Hotel
Properties.
MARKET INFORMATION
Average hotel room rental rates in the United States grew 4.0%, 4.4%,
6.2% and 6.3%, in 1999, 1998, 1997, and 1996, respectively. Within the luxury
and upscale segments of the industry, average room rental rates increased
approximately 3.3% from 1998 to 1999. Industry information was compiled from
information published by Smith Travel Research.
Business and convention travel accounts for approximately two-thirds of
room demand and has risen along with the improving economy and increased
corporate profits. Domestic leisure travel has also increased, especially among
the "baby boomers", who are not only at the prime age for leisure travel but
also have a greater tendency to travel than previous generations. A healthier,
more active senior population is also contributing to the increase in travel.
With the aging of the "baby boomer" generation and the growing interest in
quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.
COMPETITION
Most of the Company's upscale business class Hotel Properties in
Denver, Albuquerque, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels. The
Company believes, however, that its luxury resorts and spas and destination
fitness resorts and spas are unique properties that have insignificant direct
competitors due either to their high replacement cost or unique concept and
location. The Hotel Properties do compete, 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.
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RECENT DEVELOPMENTS
In February 2000, the Company entered into an agreement with Sanjay
Varma, a former senior executive officer of the Company, to form an investment
partnership which will seek luxury spa resorts and hotels to acquire and manage
under the "Sonoma Spa Resorts" brand and concept. The Company and Mr. Varma
acquired a 93% and 7% interest, respectively, in this new partnership. Mr. Varma
has also established a new management company, which has contracted with COI to
manage either the property or assets of the Company's existing portfolio of
Hotel Properties (excluding the Canyon Ranch resorts and the Hyatt Regency
Beaver Creek), in addition to new properties the investment partnership
acquires. The Company currently holds a 30% non-voting interest in this
management company.
As part of its strategic plan, the Company will seek to reduce its
investment in the upscale business class Hotel Properties over the next two
years. However, these Hotel Properties are not currently being actively marketed
for sale.
RESIDENTIAL DEVELOPMENT SEGMENT
OWNERSHIP STRUCTURE
The Company owns economic interests in five Residential Development
Corporations through the Residential Development Property mortgages and the
non-voting common stock of these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, currently own interests in 14 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties.
See Item 2. Properties for more information about the Company's
Residential Development Properties.
COMPETITION
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, single-family homes,
condominiums, townhouses and non-owner occupied housing, such as luxury
apartments. Management believes that The Woodlands Land Company, Inc., Crescent
Development Management Corp. ("CDMC") and Desert Mountain Development Corp.
("Desert Mountain"), representing the Company's most significant investments in
Residential Development Properties, contain certain features that provide
competitive advantages to these developments. 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, a conference center, 60 parks, 81 holes of golf, two
man-made lakes and a performing arts pavilion. The Woodlands could be adversely
affected by downturns in the Houston economy. CDMC was formed for investing in
resort residential real estate and resort operating opportunities primarily in
Colorado. Management believes CDMC does not have any direct competitors because
the locations of the projects are unique, the land is limited and CDMC owns most
of the land in each location. Desert Mountain, a luxury residential and
recreational community in Scottsdale, Arizona, which also offers five 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 that 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.
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RECENT DEVELOPMENTS
On April 29, 1999, a partnership in which CDMC has a 64% economic
interest finalized the purchase of Riverfront Park (previously known as "The
Commons"), a master planned residential development on 23 acres in the Central
Platte Valley near downtown Denver, Colorado for approximately $25 million. The
development of Riverfront Park is expected to begin in the spring of 2000. The
first phase will consist of one condominium project and two loft projects with
prices ranging from $0.2 million to $2.5 million. One of the first residential
projects, consisting of 71 lofts, commenced pre-selling in January 2000. As of
March 24, 2000, contracts had been signed on 83% of the 71 lofts. In the first
quarter of 2000, the partnership has entered into contracts relating to the sale
of 9.7 acres of Riverfront Park, which is expected to close in the second
quarter of 2000. The acreage is in close proximity to several major
entertainment and recreational facilities including Coors Field (home to the
Major League Baseball's Colorado Rockies), Elitch Gardens (an amusement park),
the new Pepsi Center (home to the National Hockey League's Colorado Avalanche
and the National Basketball Association's Denver Nuggets) and the new downtown
Commons Park. An adjacent 28 acres is expected to be commercially developed by
another company, thus providing a major mixed-use community adjacent to the
lower downtown area of Denver.
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
ORIGINAL OWNERSHIP STRUCTURE
Prior to the restructuring of its investment in the
Temperature-Controlled Logistics Properties in March 1999, the Company, through
two subsidiaries (the "Crescent Subsidiaries"), owned an indirect 38% interest
in each of the three Temperature-Controlled Logistics Partnerships. One of the
Temperature-Controlled Logistics Partnerships owned AmeriCold Corporation
("AmeriCold"), the second Temperature-Controlled Logistics Partnership owned URS
Logistics, Inc. ("URS") and the third Temperature-Controlled Logistics
Partnership owned the assets and business operations acquired from Freezer
Services, Inc. ("Freezer Services") and Carmar Group, Inc. ("Carmar Group").
Vornado Realty Trust ("Vornado") owned a 60% interest in the
Temperature-Controlled Logistics Partnerships and COI owned a 2% indirect
interest in the Temperature-Controlled Logistics Partnerships.
In order to permit the Company to satisfy certain REIT qualification
requirements, the Company owned its indirect 38% interest in the
Temperature-Controlled Logistics Partnerships through its ownership of all of
the nonvoting common stock, representing a 95% economic interest, in each of the
Crescent Subsidiaries, and COI owned its 2% indirect interest in the
Temperature-Controlled Logistics Partnerships through its ownership of all of
the voting common stock, representing a 5% economic interest, in each of the
Crescent Subsidiaries.
NEW OWNERSHIP STRUCTURE
Effective March 12, 1999, the Company, Vornado, the
Temperature-Controlled Logistics Partnerships, the Temperature-Controlled
Logistics Corporations (including all affiliated entities that owned any portion
of the business operations of the Temperature-Controlled Logistics Properties at
that time) and COI restructured their investment in the Temperature-Controlled
Logistics Properties (the "Restructuring"). In the Restructuring, the
Temperature-Controlled Logistics Corporations (including all affiliated entities
that owned any portion of the business operations of the Temperature-Controlled
Logistics Properties) sold their ownership of the business operations to a newly
formed partnership ("AmeriCold Logistics") owned 60% by Vornado Operating L.P.
and 40% by a newly formed subsidiary of COI, in consideration of the payment of
$48.7 million by AmeriCold Logistics. AmeriCold Logistics, as lessee, entered
into triple-net master leases of the Temperature-Controlled Logistics Properties
with certain of the Temperature-Controlled Logistics Corporations. Each of the
Temperature-Controlled Logistics Properties is subject to one or more of the
leases, each of which has an initial term of 15 years, subject to two, five-year
renewal options. Under the leases, AmeriCold Logistics is required to pay for
all costs arising from the operation, maintenance, and repair of properties as
well as property capital expenditures in excess of $5.0 million annually.
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For the period of March 12, 1999 to December 31, 1999, base rent and percentage
rent was approximately $135.8 million of which base rent represented
approximately 80%. AmeriCold Logistics has the right to defer a portion of the
rent for up to three years beginning on March 12, 1999 to the extent that
available cash, as defined in the leases, is insufficient to pay such rent, and
pursuant thereto, rent was deferred as of December 31, 1999, of which the
Company's share was approximately $2.1 million.
In addition, in connection with the Restructuring and also effective in
March 1999, the Company purchased from COI an additional 4% nonvoting economic
interest in each of the Crescent Subsidiaries for an aggregate purchase price of
$13.2 million. As a result, the Company holds an indirect 39.6% interest in the
Temperature-Controlled Logistics Partnerships and COI holds an indirect 0.4%
interest in the Temperature-Controlled Logistics Partnerships. The Company also
granted COI an option to require the Company to purchase COI's remaining 1%
economic interest, representing all of the voting stock, in each of the Crescent
Subsidiaries at any time within the next two years, provided that such purchase
would not, in the opinion of counsel to the Company, adversely affect the status
of Crescent Equities as a REIT for an aggregate price, payable by the Company,
of approximately $3.4 million.
The Temperature-Controlled Logistics Corporations, directly or
indirectly owned, as of December 31, 1999, approximately 89
Temperature-Controlled Logistics Properties, with an aggregate of approximately
428.3 million cubic feet (17.0 million square feet), with the operations
conducted pursuant to arrangements with national food suppliers.
See Item 2. Properties for more information about the Company's
Temperature-Controlled Logistics Properties.
INDUSTRY INFORMATION
AmeriCold Logistics provides frozen food manufacturers with
refrigerated warehousing and transportation management services. The
Temperature-Controlled Logistics Properties consist of production and
distribution facilities. Production facilities differ from distribution
facilities in that they typically serve one or a small number of customers
located nearby. These customers store large quantities of processed or partially
processed products in the facility until they are further processed or shipped
to the next stage of production or distribution. Distribution facilities
primarily serve customers who store a wide variety of finished products to
support shipment to end-users, such as food retailers and food service
companies, in a specific geographic market.
Transportation management services offered include freight routing,
dispatching, freight rate negotiation, backhaul coordination, freight bill
auditing, network flow management, order consolidation and distribution channel
assessment. AmeriCold Logistics' temperature-controlled logistics expertise and
access to both the frozen food warehouses and distribution channels enable the
customers of AmeriCold Logistics to respond quickly and efficiently to
time-sensitive orders from distributors and retailers.
Customers consist primarily of national, regional and local frozen food
manufacturers, distributors, retailers and food service organizations, including
ConAgra, Inc., H.J. Heinz Company, Kraft Foods, Inc., McCain Foods and Tyson
Foods, Inc.
COMPETITION
AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in the country. AmeriCold Logistics operated an aggregate of
approximately 30% of total public refrigerated warehouse space as of December
31, 1999. No other person or entity operated more than 8% of total public
refrigerated warehouse space as of December 31, 1999. As a result, AmeriCold
Logistics does not have any competitors of comparable size. AmeriCold Logistics
operates in an environment in which competition is national, regional and local
in nature and in which the range of service, temperature-controlled logistics
facilities, customer mix, service performance and price are the principal
competitive factors.
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BEHAVIORAL HEALTHCARE SEGMENT
OWNERSHIP STRUCTURE AND RECAPITALIZATION
As of December 31, 1999, the Behavioral Healthcare Segment consisted
of 88 Behavioral Healthcare Properties, all of which were leased to CBHS and its
subsidiaries under a triple-net master lease. CBHS is a Delaware limited
liability company which was formed to operate the behavioral healthcare
businesses located at the Behavioral Healthcare Properties and is owned 10% by a
subsidiary of Magellan and 90% by COI and an affiliate of COI. CBHS operates the
Behavioral Healthcare Properties through wholly owned subsidiaries.
CBHS's business has been negatively affected by many factors, including
adverse industry conditions. During 1999, CBHS failed to perform in accordance
with its operating budget. In the fourth quarter of 1999, the Company, COI,
Magellan and CBHS completed a recapitalization of CBHS. Pursuant to the
recapitalization, Magellan transferred its remaining hospital-based assets to
CBHS, canceled its accrued franchise fees and terminated the franchise
agreements, pursuant to which Magellan had provided certain services to CBHS in
exchange for certain franchise fees. The Company also deferred the monthly
rental payments due from CBHS for November and December 1999 and amended its
master lease with CBHS to provide a mechanism to terminate the master lease as
to certain Non-Core Behavioral Healthcare Properties, and agreed that, upon each
sale by the Company of Non-Core Behavioral Healthcare Properties, the monthly
minimum rent due from CBHS under the master lease would be reduced by a
specified percentage of the net proceeds of such sale. The Non-Core Behavioral
Healthcare Properties consist of 51 Properties at which CBHS has ceased
operations or is planning to cease operations.
PROPERTY ACQUISITIONS AND DISPOSITIONS
During the fourth quarter of 1999, the Company purchased two
Behavioral Healthcare Properties from Magellan for an aggregate purchase price
of approximately $7.1 million in satisfaction of its obligations under an
agreement with Magellan entered into in November 1998. In addition, during the
fourth quarter of 1999, the Company disposed of one Behavioral Healthcare
Property for approximately $1.4 million in net proceeds.
BANKRUPTCY PROCEEDINGS
On February 16, 2000, CBHS and all of its subsidiaries that are subject
to the master lease with the Company filed voluntary Chapter 11 bankruptcy
petitions in the United States Bankruptcy Court for the District of Delaware.
CBHS has stated in its bankruptcy petitions that it intends to sell all of the
ongoing businesses of CBHS and its subsidiaries by mid-May of 2000 or develop an
appropriate liquidation procedure if the sales have not taken place by that
time.
Effective February 29, 2000, pursuant to the referenced amendments to
the master lease, the Non-Core Properties ceased to be subject to the master
lease, although the aggregate rent due under the master lease was not reduced as
a result, except as described above with respect to sales of Non-Core
Properties. The Company is actively marketing these Properties for sale. From
January 1 through March 24, 2000, the Company sold 11 Non-Core Properties for
approximately $34.9 million in net proceeds. As a result of these sales and the
sale of the one Behavioral Healthcare Property during the fourth quarter of
1999, the amount of rent due under the master lease was reduced in accordance
with the amendments to the master lease. The Company has also entered into
contracts or letters of intent to sell an additional six Non-Core Properties.
The Company continues to actively market the remaining 34 Non-Core Properties
for sale.
As of December 31, 1999, the 37 Behavioral Healthcare Properties that
were not designated as Non-Core Properties are designated as Core Properties.
The Core Properties remain subject to the master lease. Payment and treatment of
rent for the Behavioral Healthcare Properties is subject to a rent stipulation
agreed to by certain of the parties involved in the CBHS bankruptcy proceeding.
In conjunction with the bankruptcy proceedings, a new subsidiary of
COI entered into an agreement for the purchase of CBHS's core operating assets,
subject to certain conditions, and the Company agreed to lease the Core
Properties to the new subsidiary if it is successful in acquiring the core
operating assets of CBHS, subject to agreement on various terms of the lease and
certain additional conditions. COI has since announced that it does not expect
that the conditions will be satisfied and, therefore, does not expect to
conclude the purchase. The agreements expire on April 16, 2000 if the conditions
are not satisfied.
On April 24, 2000, an auction will be held for the core operating
assets of CBHS as part of the bankruptcy proceedings. The Company has agreed to
provide an acceptable sales price for each of the remaining 37 Behavioral
Healthcare Properties and, to the extent possible, acceptable lease terms for
continued operation of the Behavioral Healthcare Properties. Bidders will have
the opportunity to bid for any or all of the core operating assets of CBHS and,
in connection with a bid, either to bid to purchase the related Behavioral
Healthcare Property or Properties or to seek approval from the Company to lease
the Property or Properties. Proceeds from the sale of core operating assets of
CBHS will be available to pay creditors of CBHS. Proceeds from any sales of the
Behavioral Healthcare Properties will belong to the Company.
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INDUSTRY INFORMATION
In an era of cost-containment and the reduction of dollars available
for care, behavioral healthcare providers such as CBHS have focused attention on
developing treatment approaches that respond to payors' 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 outpatient care. According to the
National Association of Psychiatric Health Systems 1998 Annual Survey Report,
the most recent available report, nearly one in four admissions in 1997 was to a
service other than inpatient hospitalization, compared to just one in ten
admissions in 1992. Although outpatient admissions are increasing and inpatient
admissions also are increasing, average length of stay is decreasing.
Due to these changes in the behavioral healthcare industry, the
position of a hospital or other behavioral care facility, such as the facilities
operated at the Behavioral Healthcare Properties, 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 on
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.
The behavioral healthcare industry in general, and the facilities
operated at the Behavioral Healthcare Properties in particular, are influenced
by the cyclical nature of the business, with a reduced demand for services
during the summer months and around major holidays.
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COMPETITION
In general, the operation of behavioral healthcare programs is
characterized by intense competition. The Company anticipates that competition
will become more intense as pressure to contain the rising costs of health care
increases, particularly as programs such as those that are or may be operated at
the Behavioral Healthcare Properties are perceived to help contain mental health
care costs. Each of the facilities operated at the Behavioral Healthcare
Properties competes with other hospitals and behavioral healthcare facilities.
Some competing facilities are owned and operated by governmental agencies,
others by nonprofit organizations supported by endowments and charitable
contributions. The facilities operated at the Behavioral Healthcare Properties
frequently draw patients from areas outside their immediate locale and,
therefore, these facilities may, in certain markets, compete with both local and
distant hospitals and other facilities. In addition, the facilities operated at
the Behavioral Healthcare Properties compete not only with other psychiatric
hospitals, but also with psychiatric units in general hospitals. With respect to
outpatient services, the facilities operated at the Behavioral Healthcare
Properties compete with private practicing mental health professionals, publicly
funded mental health centers, and partial hospitalization and other intensive
outpatient services programs and facilities. The competitive position of a
particular facility is, to a significant degree, dependent upon the number and
quality of physicians who practice at the facility and who are members of its
medical staff. There can be no assurance that any operator of the behavioral
healthcare facilities will be able to compete effectively with its present or
future competitors, and any such inability could have a material adverse effect
on the operator's business, financial condition and results of operations and,
accordingly, on its ability to make rental payments to the Company.
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ITEM 2. PROPERTIES
The Company considers all of its Properties to be in good condition,
well-maintained and suitable and adequate to carry on the Company's business.
OFFICE PROPERTIES
As of December 31, 1999, the Company owned 89 Office Properties located
in 31 metropolitan submarkets in nine states with an aggregate of approximately
31.8 million net rentable square feet. The Company's Office Properties are
located primarily in the Dallas/Fort Worth and Houston, Texas metropolitan
areas. As of December 31, 1999, the Company's Office Properties in Dallas/Fort
Worth and Houston represented an aggregate of approximately 72% of its office
portfolio based on total net rentable square feet (39% for Dallas/Fort Worth and
33% for Houston).
In pursuit of management's objective to dispose of non-strategic and
non-core assets, the Company was actively marketing for sale its wholly owned
interests in 10 Office Properties at December 31, 1999. The Office Properties
targeted for disposition represented an aggregate of approximately 2.9 million
net rentable square feet in Dallas, Texas; Denver, Colorado; New Orleans,
Louisiana; and Omaha, Nebraska. As of March 24, 2000, the Company completed the
sale of six of the 10 Office Properties. The Office Properties sold were: The
Amberton, Concourse Office Park, The Meridian, and Walnut Green Office
Properties located in Dallas, Texas; the Energy Centre Office Property located
in New Orleans, Louisiana; and the Central Park Plaza Office Property located in
Omaha, Nebraska.
In addition, the Company has entered into contracts relating to the
sale of two additional Office Properties: the AT&T Building located in Denver,
Colorado; and One Preston Park located in Dallas, Texas. The sales of these
Properties are expected to close by the end of the second quarter of 2000.
Management expects to complete any economically justified sales of the remaining
two Office Properties (Valley Centre located in Dallas, Texas; and 1615 Poydras
located in New Orleans, Louisiana) by the end of the second quarter of 2000.
Management is currently in the process of evaluating the bids for the remaining
Properties to determine their economic viability as well as the
credit-worthiness of the potential purchasers and their ability to close the
transactions. The disposition of these Office Properties remains subject to the
negotiation of acceptable terms and other customary conditions.
The Woodlands Commercial Properties Company, L.P., owned by the Company
and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for
sale certain office/venture tech properties located in The Woodlands, which
includes the Company's 12 Office Properties located in The Woodlands with an
aggregate of approximately 0.8 million net rentable square feet. The sale of The
Woodlands Office Properties is expected to close in the second quarter of 2000.
OFFICE PROPERTIES TABLES
The following table shows, as of December 31, 1999, certain information
about the Company's Office Properties. Based on rental revenues from office and
retail leases in effect as of December 31, 1999, no single tenant accounted for
more than 4% of the Company's total Office and Retail segment rental revenues
for 1999.
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WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- ---------- --------- --------- ----------- ------- ------------
TEXAS
DALLAS
Bank One Center (2) 1 CBD 1987 1,530,957 76% $21.94
The Crescent Office Towers 1 Uptown/Turtle Creek 1985 1,204,670 98 30.67
Fountain Place 1 CBD 1986 1,200,266 94 19.42
Trammell Crow Center (3) 1 CBD 1984 1,128,331 78(5) 23.87
Stemmons Place 1 Stemmons Freeway 1983 634,381 86 15.48
Spectrum Center (4) 1 Far North Dallas 1983 598,250 91 22.99
Waterside Commons 1 Las Colinas 1986 458,739 100 19.79
Caltex House 1 Las Colinas 1982 445,993 95 28.78
Reverchon Plaza 1 Uptown/Turtle Creek 1985 374,165 96 19.77
The Aberdeen 1 Far North Dallas 1986 320,629 100 18.44
MacArthur Center I & II 1 Las Colinas 1982/1986 294,069 99 21.04
Stanford Corporate Centre 1 Far North Dallas 1985 265,507 86(5) 18.69
The Amberton 1 Central Expressway 1982 255,052 79 13.94
Concourse Office Park 1 LBJ Freeway 1972-1986 244,879 89 15.54
12404 Park Central 1 LBJ Freeway 1987 239,103 100 21.24
Palisades Central II 1 Richardson/Plano 1985 237,731 62(5) 17.52
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,769 92 21.13
Liberty Plaza I & II 1 Far North Dallas 1981/1986 218,813 100 15.71
The Addison 1 Far North Dallas 1981 215,016 100 18.54
The Meridian 1 LBJ Freeway 1984 213,915 94 17.32
Palisades Central I 1 Richardson/Plano 1980 180,503 84(5) 17.63
Walnut Green 1 Central Expressway 1986 158,669 72 16.21
Greenway II 1 Richardson/Plano 1985 154,329 100 22.59
Addison Tower 1 Far North Dallas 1987 145,886 91 16.82
Greenway I & IA 2 Richardson/Plano 1983 146,704 100 23.00
5050 Quorum 1 Far North Dallas 1981 133,594 89 17.19
Cedar Springs Plaza 1 Uptown/Turtle Creek 1982 110,923 96 18.20
Valley Centre 1 Las Colinas 1985 74,861 87(5) 17.70
One Preston Park 1 Far North Dallas 1980 40,525 71 18.08
-- ---------- --- ------
Subtotal/Weighted Average 30 11,460,229 89% $21.47
-- ---------- --- ------
FORT WORTH
UPR Plaza 1 CBD 1982 954,895 95% $15.29
-- ---------- --- ------
HOUSTON
Greenway Plaza Office Portfolio 10 Richmond-Buffalo 1969-1982 4,286,277 91%(5) $17.34
Speedway
Houston Center 3 CBD 1974-1983 2,764,418 96 17.21
Post Oak Central 3 West Loop/Galleria 1974-1981 1,277,516 93 17.80
The Woodlands Office Properties (6) 12 The Woodlands 1980-1996 811,067 92 16.33
Four Westlake Park 1 Katy Freeway 1992 561,065 100 18.53
Three Westlake Park (7)(8) 1 Katy Freeway 1983 414,251 62 19.81
1800 West Loop South 1 West Loop/Galleria 1982 399,777 60(5) 17.31
-- ---------- --- ------
Subtotal/Weighted Average 31 10,514,371 91% $17.42
-- ---------- --- ------
AUSTIN
Frost Bank Plaza 1 CBD 1984 433,024 96% $22.54
301 Congress Avenue (9) 1 CBD 1986 418,338 97 23.84
Bank One Tower 1 CBD 1974 389,503 94 19.41
Austin Centre 1 CBD 1986 343,665 91 21.61
The Avallon 1 Northwest 1993/1997 232,301 100 22.40
Barton Oaks Plaza One 1 Southwest 1986 99,895 100 21.93
-- ---------- --- ------
Subtotal/Weighted Average 6 1,916,726 96% $22.00
-- ---------- --- ------
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WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- ---------- --------- --------- ----------- ------- ------------
COLORADO
DENVER
MCI Tower 1 CBD 1982 550,807 99% $18.08
Ptarmigan Place 1 Cherry Creek 1984 418,630 97(5) 18.49
Regency Plaza One 1 DTC 1985 309,862 97 22.88
AT&T Building 1 CBD 1982 184,581 82(5) 15.33
The Citadel 1 Cherry Creek 1987 130,652 92 21.97
55 Madison 1 Cherry Creek 1982 137,176 86(5) 18.90
44 Cook 1 Cherry Creek 1984 124,174 99 19.27
-- ---------- --- ------
Subtotal/Weighted Average 7 1,855,882 95% $19.18
-- ---------- --- ------
COLORADO SPRINGS
Briargate Office and
and Research Center 1 Colorado Springs 1988 252,857 100% $18.98
-- ---------- --- ------
LOUISIANA
NEW ORLEANS
Energy Centre 1 CBD 1984 761,500 82%(5) $15.53
1615 Poydras 1 CBD 1984 508,741 83 16.33
-- ---------- --- ------
Subtotal/Weighted Average 2 1,270,241 83% $15.85
-- ---------- --- ------
FLORIDA
MIAMI
Miami Center 1 CBD 1983 782,686 79%(5) $23.46
Datran Center 2 South Dade/Kendall 1986/1988 472,236 91(5) 21.68
-- ---------- --- ------
Subtotal/Weighted Average 3 1,254,922 83% $22.72
-- ---------- --- ------
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 96% $23.90
6225 North 24th Street 1 Camelback Corridor 1981 86,451 100 21.86
-- ---------- --- ------
Subtotal/Weighted Average 2 562,824 97% $23.57
-- ---------- --- ------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour 2 Georgetown 1986 536,206 94%(5) $37.04
-- ---------- --- ------
NEBRASKA
OMAHA
Central Park Plaza 1 CBD 1982 409,850 94% $15.88
-- ---------- --- ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza 1 CBD 1990 366,236 92% $18.97
-- ---------- --- ------
CALIFORNIA
SAN FRANCISCO
160 Spear Street 1 South of Market/CBD 1984 276,420 99% $25.82
-- ---------- --- ------
SAN DIEGO
Chancellor Park (10) 1 UTC 1988 195,733 91%(5) $22.40
-- ---------- --- ------
TOTAL/WEIGHTED AVERAGE 89 31,827,392 91%(5) $19.90(11)
== ========== === ======
19
21
- ----------------
(1) Calculated based on base rent payable as of December 31, 1999, without
giving effect to free rent or scheduled rent increases that would be
taken into account under GAAP and including adjustments for expenses
payable by or reimbursable from tenants.
(2) The Company has a 49.5% limited partner interest and a 0.5% general
partner interest in the partnership that owns Bank One Center.
(3) 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.
(4) 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.
(5) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 1999. If such leases had commenced as of
December 31, 1999, the percent leased for all Office Properties would
have been 93%. The total percent leased for these Properties would have
been as follows: Trammell Crow Center - 89%; Stanford Corporate Center
- 92%; Palisades Central II - 69%; Palisades Central I - 95%; Valley
Centre - 90%; Greenway Plaza Office Portfolio- 96%; 1800 West Loop
South - 65%; Ptarmigan Place - 100%; AT&T Building - 89%; 55 Madison -
93%; Energy Centre - 86%; Miami Center - 87%; Datran Center - 95%;
Washington Harbour - 100%; and Chancellor Park - 94%.
(6) The Company has a 75% limited partner interest and an approximate 10%
indirect general partner interest in the partnership that owns the 12
Office Properties that comprise The Woodlands Office Properties.
(7) The Property was primarily occupied by a major tenant until June 1999,
at which time the tenant made a payment of $4.7 million in connection
with its termination of the lease. Simultaneously with the lease
termination, the Company leased approximately 41% of the vacated space
to a new tenant pursuant to a lease which commenced September 1, 1999.
An additional 21% of the vacated space was leased and commenced prior
to December 31, 1999.
(8) As of December 31, 1999, the Company owned the principal economic
interest in Three Westlake Park through its ownership of a mortgage
note secured by Three Westlake Park. Effective January 7, 2000, the
Property was conveyed to the Company by a deed in lieu of foreclosure,
and as a result, the Company now owns Three Westlake Park in fee
simple.
(9) The Company has a 1% general partner interest and a 49% limited partner
interest in the partnership that owns 301 Congress Avenue.
(10) 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.
(11) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Company Office Properties as
of December 31, 1999, giving effect to free rent and scheduled rent
increases that would be taken into consideration under GAAP and
including adjustments for expenses payable by or reimbursed from
tenants is $20.38.
20
22
The following table provides information, as of December 31, 1999, for the
Company's Office Properties by state, city, and submarket.
PERCENT OFFICE COMPANY
PERCENT OF LEASED AT SUBMARKET SHARE OF
TOTAL TOTAL COMPANY PERCENT OFFICE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2)
- -------------------------- ---------- ------- ---------- ---------- ----------- ---------
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD 3 3,859,554 12% 82%(6) 86% 21%
Uptown/Turtle Creek 4 1,923,527 6 97 90 32
Far North Dallas 7 1,897,695 6 94 76 18
Las Colinas 4 1,273,662 4 97 83 12
Richardson/Plano 5 719,267 2 84(6) 82 14
Stemmons Freeway 1 634,381 2 86 76 26
LBJ Freeway 2 453,018 1 97 84 5
-- ---------- --- --- -- ---
Subtotal/Weighted Average 26 10,761,104 33% 90% 83% 17%
-- ---------- --- --- -- ---
FORT WORTH
CBD 1 954,895 3% 95% 87% 24%
-- ---------- --- --- -- ---
HOUSTON
CBD 3 2,764,418 8% 96% 97% 11%
Richmond-Buffalo Speedway 6 2,735,030 8 91(6) 95 56
West Loop/Galleria 4 1,677,293 5 85 94 13
Katy Freeway 2 975,316 3 84 80 13
The Woodlands 7 487,320 2 90 88 100
-- ---------- --- --- -- ---
Subtotal/Weighted Average 22 8,639,377 26% 90% 93% 17%
-- ---------- --- --- -- ---
AUSTIN
CBD 4 1,584,530 5% 95% 98% 44%
Northwest 1 232,301 1 100 87 10
Southwest 1 99,895 0 100 99 4
-- ---------- --- --- -- ---
Subtotal/Weighted Average 6 1,916,726 6% 96% 95% 23%
-- ---------- --- --- -- ---
COLORADO
DENVER
Cherry Creek 4 810,632 3% 95% 87% 45%
CBD 2 735,388 2 95 97 7
DTC 1 309,862 1 97 89 6
-- ---------- --- --- -- ---
Subtotal/Weighted Average 7 1,855,882 6% 95% 93% 11%
-- ---------- --- --- -- ---
COLORADO SPRINGS
Colorado Springs 1 252,857 1% 100% 93% 6%
-- ---------- --- --- -- ---
LOUISIANA
NEW ORLEANS
CBD 2 1,270,241 4% 83% 87% 14%
-- ---------- --- --- -- ---
FLORIDA
MIAMI
CBD 1 782,686 3% 79%(6) 93% 23%
South Dade/Kendall 2 472,236 2 91(6) 93 100
-- ---------- --- --- -- ---
Subtotal/Weighted Average 3 1,254,922 5% 83% 93% 33%
-- ---------- --- --- -- ---
ARIZONA
PHOENIX
Downtown/CBD 1 476,373 2% 97% 97% 27%
Camelback Corridor 1 86,451 0 100 95 2
-- ---------- --- --- -- ---
Subtotal/Weighted Average 2 562,824 2% 97% 96% 10%
-- ---------- --- --- -- ---
WASHINGTON D.C.
WASHINGTON D.C.
Georgetown 2 536,206 2% 94%(6) 98% 100%
-- ---------- --- --- -- ---
NEBRASKA
OMAHA
CBD 1 409,850 1% 94% 96% 32%
-- ---------- --- --- -- ---
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
QUOTED QUOTED SERVICE
MARKET RENTAL RENTAL
RENTAL RATE RATE PER RATE PER
PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) FOOT(5)
- -------------------------- ----------- -------- --------
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD $22.63 $25.99 $21.57
Uptown/Turtle Creek 26.55 30.06 26.79
Far North Dallas 24.53 24.26 19.33
Las Colinas 25.09 25.39 23.05
Richardson/Plano 23.47 23.25 20.17
Stemmons Freeway 23.10 19.75 15.48
LBJ Freeway 24.00 21.61 19.46
------ ------ ------
Subtotal/Weighted Average $24.10 $25.61 $21.83
------ ------ ------
FORT WORTH
CBD $19.38 $19.54 $15.29
------ ------ ------
HOUSTON
CBD $23.00 $23.82 $17.21
Richmond-Buffalo Speedway 20.60 21.38 18.43
West Loop/Galleria 22.07 23.04 17.71
Katy Freeway 22.26 24.44 18.94
The Woodlands 16.54 16.54 16.81
------ ------ ------
Subtotal/Weighted Average $21.61 $22.56 $17.85
------ ------ ------
AUSTIN
CBD $30.04 $31.08 $21.94
Northwest 27.81 27.00 22.40
Southwest 27.57 24.50 21.93
------ ------ ------
Subtotal/Weighted Average $29.64 $30.24 $22.00
------ ------ ------
COLORADO
DENVER
Cherry Creek $23.59 $22.30 $19.23
CBD 24.71 22.75 17.46
DTC 25.41 26.00 22.88
------ ------ ------
Subtotal/Weighted Average $24.34 $23.09 $19.18
------ ------ ------
COLORADO SPRINGS
Colorado Springs $19.99 $21.29 $18.98
------ ------ ------
LOUISIANA
NEW ORLEANS
CBD $16.43 $16.10 $15.85
------ ------ ------
FLORIDA
MIAMI
CBD $28.96 $30.50 $23.46
South Dade/Kendall 23.46 23.46 21.68
------ ------ ------
Subtotal/Weighted Average $26.89 $27.85 $22.72
------ ------ ------
ARIZONA
PHOENIX
Downtown/CBD $23.02 $22.00 $23.90
Camelback Corridor 27.36 21.00 21.86
------ ------ ------
Subtotal/Weighted Average $23.69 $21.85 $23.57
------ ------ ------
WASHINGTON D.C.
WASHINGTON D.C.
Georgetown $36.68 $36.68 $37.04
------ ------ ------
NEBRASKA
OMAHA
CBD $18.61 $18.50 $15.88
------ ------ ------
21
23
PERCENT OFFICE COMPANY
PERCENT OF LEASED AT SUBMARKET SHARE OF
TOTAL TOTAL COMPANY PERCENT OFFICE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2)
- -------------------------- ---------- ------- ---------- ---------- ----------- ---------
NEW MEXICO
ALBUQUERQUE
CBD 1 366,236 1% 92% 95% 64%
-- ---------- --- --- -- ---
CALIFORNIA
SAN FRANCISCO
South of Market/CBD 1 276,420 1% 99% 98% 2%
-- ---------- --- --- -- ---
SAN DIEGO
UTC 1 195,733 1% 91%(6) 93% 7%
-- ---------- --- --- -- ---
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE 76 29,253,273 92% 91% 90% 16%
== ========== === === == ===
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway 2 413,721 1% 76% 84% 11%
LBJ Freeway 1 244,879 1 89 81 2
Far North Dallas 1 40,525 0 71 83 0
-- ---------- --- --- -- ---
Subtotal/Weighted Average 4 699,125 2% 80% 82% 3%
-- ---------- --- --- -- ---
HOUSTON
Richmond-Buffalo Speedway 4 1,551,247 5% 90% 94% 47%
The Woodlands 5 323,747 1 96 96 100
-- ---------- --- --- -- ---
Subtotal/Weighted Average 9 1,874,994 6% 91% 94% 51%
-- ---------- --- --- -- ---
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE 13 2,574,119 8% 88% 84% 9%
== ========== === === == ===
CLASS A AND CLASS B
OFFICE PROPERTIES
TOTAL/WEIGHTED AVERAGE 89 31,827,392 100% 91%(6) 89% 15%
== ========== === === == ===
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
QUOTED QUOTED SERVICE
MARKET RENTAL RENTAL
RENTAL RATE RATE PER RATE PER
PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) FOOT(5)
- -------------------------- ----------- -------- --------
NEW MEXICO
ALBUQUERQUE
CBD $19.10 $19.50 $18.97
------ ------ ------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD $49.30 $42.00 $25.82
------ ------ ------
SAN DIEGO
UTC $29.88 $30.30 $22.40
------ ------ ------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE $23.70 $24.44 $20.28
------ ------ ------
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway $18.44 $18.78 $14.78
LBJ Freeway 19.03 18.40 15.54
Far North Dallas 19.88 19.50 18.08
------ ------ ------
Subtotal/Weighted Average $18.73 $18.69 $15.25
------ ------ ------
HOUSTON
Richmond-Buffalo Speedway $18.85 $20.24 $15.37
The Woodlands 15.07 15.07 15.65
------ ------ ------
Subtotal/Weighted Average $18.20 $19.35 $15.42
------ ------ ------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE $18.34 $19.17 $15.38
====== ====== ======
CLASS A AND CLASS B
OFFICE PROPERTIES
TOTAL/WEIGHTED AVERAGE $23.27 $24.01 $19.90(7)
====== ====== ======
- -----------------------
(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 CoStar/Jamison, (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), The Baca Group (for the
Houston Richmond-Buffalo Speedway, CBD and West Loop/Galleria and Katy
Freeway submarkets), The Woodlands Operating Company, L.P. (for The
Woodlands submarket), CB Richard Ellis (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), Grubb and Ellis Company and the Company (for the Washington
D.C. Georgetown submarket), Grubb and Ellis/Pacific Realty Group, Inc. (for
the Omaha CBD submarket), Building Interests, Inc. (for the Albuquerque CBD
submarket), RealData Information Systems, Inc. (for the Miami CBD and South
Dade/Kendall submarkets) and CoStar/John Burnham & Company (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, 1999, 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. These rates do not necessarily represent the amounts
at which available space at the Company's Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office Properties in the
submarket as of December 31, 1999, without giving effect to free rent or
scheduled rent increases that would be taken into account under GAAP and
including adjustments for expenses payable by or reimbursed from 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, 1999. If such leases had commenced as of
December 31, 1999, the percent leased for all Office Properties in the
Company's submarkets would have been 93%. The total percent leased for these
Class A Company submarkets would have been as follows: Dallas CBD - 86%;
Dallas Richardson/Plano - 88%; Houston Richmond - Buffalo Speedway - 96%;
Miami CBD - 87%; Miami South Dade/Kendall - 95%; Washington D.C. Georgetown
- 100%; and San Diego UTC - 94%.
(7) The weighted average full-service rental rate per square foot calculated
based on base rent payable for Company Office Properties as of December 31,
1999, giving effect to free rent and scheduled rent increases that would be
taken into consideration under GAAP and including adjustments for expenses
payable by or reimbursed from tenants is $20.38.
22
24
The following table shows, as of December 31, 1999, the principal
businesses conducted by the tenants at the Company's Office Properties, based on
information supplied to the Company from the tenants.
Percent of
Industry Sector Leased Sq. Ft.
- ------------------------------ -----------------
Professional Services (1) 27%
Financial Services (2) 20
Energy (3) 19
Telecommunications 7
Technology 6
Retail 4
Medical 3
Food Service 3
Manufacturing 3
Government 2
Other (4) 6
---
TOTAL LEASED 100%
===
- ----------
(1) Includes legal, accounting, engineering, architectural, and advertising
services.
(2) Includes banking, title and insurance, and investment services.
(3) Of the 19% of energy tenants at the Company's Office Properties, 63% are
located in Houston, 24% are located in Dallas, 7% are located in Denver and
6% are located in New Orleans. Of the 63% of energy tenants located in
Houston (approximately 3.7 million square feet), 66% (approximately 2.4
million square feet) are obligated under long-term leases (expiring in 2004
or later).
(4) Includes construction, real estate, transportation and other industries.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following tables show schedules of lease expirations for leases in
place as of December 31, 1999 for the Company's total Office Properties and for
Dallas and Houston, Texas, individually, for each of the 10 years beginning
with 2000, assuming that none of the tenants exercises or has exercised renewal
options.
TOTAL OFFICE PROPERTIES
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES (1) LEASES EXPIRING (1)
- -------------------- ------------ ------------------ --------------- ------------------ ------------- --------------
2000 588 3,733,754(2) 13.1% 72,033,578 11.9% $19.29
2001 413 3,757,711 13.2 72,588,010 12.0 19.32
2002 407 4,054,356 14.2 85,179,300 14.0 21.01
2003 294 2,892,182 10.1 56,714,636 9.3 19.61
2004 297 4,436,077 15.6 95,012,506 15.7 21.42
2005 91 2,475,989 8.7 55,123,113 9.0 22.26
2006 44 1,173,796 4.1 26,581,991 4.4 22.65
2007 40 1,406,752 4.9 32,078,424 5.3 22.80
2008 32 1,111,917 3.9 27,829,120 4.6 25.03
2009 19 624,431 2.2 16,345,094 2.7 26.18
2010 and thereafter 25 2,851,241 10.0 67,484,874 11.1 23.67
----- ---------- ----- ------------ ----- ------
2,250 28,518,206(3) 100.0% $606,970,646 100.0% $21.28
===== ========== ===== ============ ===== ======
- ----------
(1) Calculated based on base rent payable under 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 GAAP and
including adjustments for expenses payable by or reimbursable from
tenants based on current levels.
(2) As of December 31, 1999, leases have been signed for approximately
1,655,276 net rentable square feet (including renewed leases and leases
of previously unleased space) commencing in 2000.
(3) Reconciliation to the Company's total Office Property net rentable
area is as follows:
23
25
SQUARE PERCENTAGE
FEET OF TOTAL
------ ----------
Square footage leased to tenants 28,518,206 89.6 %
Square footage reflecting
management offices, building use,
and remeasurement adjustments 284,295 0.9
Square footage vacant 3,024,891 9.5
---------- -----
Total net rentable square footage 31,827,392 100.0%
========== =====
DALLAS OFFICE PROPERTIES
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES (1) LEASES EXPIRING (1)
- -------------------- ------------ --------------- --------------- ---------------- -------------- --------------
2000 212 1,873,892(2) 18.5 % $ 39,003,440 17.1% $20.81
2001 143 1,171,410 11.6 24,947,776 10.9 21.30
2002 123 1,068,631 10.5 25,562,095 11.2 23.92
2003 88 1,185,742 11.7 23,486,432 10.3 19.81
2004 95 1,088,124 10.7 26,986,381 11.8 24.80
2005 20 1,199,492 11.8 25,654,231 11.3 21.39
2006 14 240,536 2.4 6,341,975 2.8 26.37
2007 15 606,309 6.0 14,603,527 6.4 24.09
2008 12 586,526 5.8 14,519,218 6.4 24.75
2009 8 380,025 3.7 9,516,050 4.2 25.04
2010 and thereafter 4 738,666 7.3 17,399,764 7.6 23.56
--- ---------- ----- ------------ ----- ------
734 10,139,353 100.0% $228,020,889 100.0% $22.49
=== ========== ===== ============ ===== ======
- ----------
(1)Calculated based on base rent payable under 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 GAAP and including
adjustments for expenses payable by or reimbursable from tenants based on
current levels.
(2)As of December 31, 1999, leases have been signed for approximately 738,506
net rentable square feet (including renewed leases and leases of previously
unleased space) commencing in 2000.
HOUSTON OFFICE PROPERTIES
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES (1) LEASES EXPIRING (1)
- -------------------- ------------ ------------- ------------- ------------ ------------ -------------
2000 194 959,986(2) 10.1% $ 15,058,758 8.2% $15.69
2001 131 1,640,539 17.3 28,202,207 15.4 17.19
2002 150 1,288,025 13.6 23,726,974 12.9 18.42
2003 96 849,835 9.0 15,321,601 8.3 18.03
2004 98 1,817,969 19.2 34,374,426 18.7 18.91
2005 19 201,470 2.1 3,900,181 2.1 19.36
2006 12 604,927 6.4 12,553,291 6.8 20.75
2007 8 502,817 5.3 9,986,515 5.4 19.86
2008 7 183,719 1.9 3,242,296 1.8 17.65
2009 2 48,538 0.5 1,150,095 0.6 23.69
2010 and thereafter 10 1,394,957 14.6 36,004,607 19.8 25.81
--- --------- ----- ------------ ----- ------
727 9,492,782 100.0% $183,520,951 100.0% $19.33
=== ========= ===== ============ ===== ======
24
26
- ----------
(1) Calculated based on base rent payable under 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 GAAP and including
adjustments for expenses payable by or reimbursable from tenants based on
current levels.
(2) As of December 31, 1999, leases have been signed for approximately 469,939
net rentable square feet (including renewed leases and leases of previously
unleased space) commencing in 2000.
RETAIL PROPERTIES
As of December 31, 1999, the Company owned seven Retail Properties,
which in the aggregate contain approximately 779,000 net rentable square feet.
Four of the Retail Properties, The Woodlands Retail Properties, with an
aggregate of approximately 358,000 net rentable square feet, were located in The
Woodlands, a master-planned development located 27 miles north of downtown
Houston, Texas. On January 5, 2000, the sale of The Woodlands Retail Properties
was completed. Two of the Retail Properties, Las Colinas Plaza, with
approximately 135,000 net rentable square feet, and The Crescent Atrium with
approximately 95,000 net rentable square feet, are located in submarkets of
Dallas, Texas. The remaining Retail Property, The Park Shops at Houston Center,
with an aggregate of approximately 191,000 net rentable square feet, is located
in the CBD submarket of Houston, Texas. As of December 31, 1999, the Retail
Properties were 95% leased.
25
27
HOTEL PROPERTIES
HOTEL PROPERTIES TABLES
The following table shows certain information for the year ended
December 31, 1999 and 1998, about the Company's Hotel Properties. The
information for the Hotel Properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which are destination resorts and
spas that measure their performance based on available guest nights.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
AVERAGE AVERAGE
OCCUPANCY DAILY
YEAR RATE RATE
COMPLETED/ --------------- ---------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1999 1998 1999 1998
- ----------------- -------- --------- ----- ---- ---- ---- ----
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613 80% 80% $124 $124
Four Seasons Hotel-Houston(2) Houston, TX 1982 399 66 65 197 181
Hyatt Regency Albuquerque Albuquerque,NM 1990 395 66 69 106 103
Omni Austin Hotel Austin, TX 1986 372(4) 76 77 125 114
Renaissance Houston Hotel(3) Houston, TX 1975 389 63 67 94 93
----- -- -- ---- ----
TOTAL/WEIGHTED AVERAGE 2,168 71% 72% $129 $123
===== == == ==== ====
LUXURY RESORTS AND SPAS:
Hyatt Regency Beaver Creek Avon, CO 1989 276(5) 72% 69% $244 $233
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 178(6) 79 82 225 235
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62 78 63(7) 388 387
----- -- -- ---- ----
TOTAL/WEIGHTED AVERAGE 516 75% 73% $255 $249
===== == == ==== ====
GUEST
NIGHTS
------
DESTINATION FITNESS RESORTS AND SPAS:
Canyon Ranch-Tucson Tucson, AZ 1980 250(8)
Canyon Ranch-Lenox Lenox, MA 1989 212(8)
----- -- -- ---- ----
TOTAL/WEIGHTED AVERAGE 462 87%(9) 86%(9) $543(10) $508(10)
===== == == ==== ====
GRAND TOTAL/WEIGHTED AVERAGE FOR ALL HOTEL PROPERTIES 3,146 74% 75% $218 $207
===== == == ==== ====
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
REVENUE
PER
AVAILABLE
ROOM
--------------
HOTEL PROPERTY(1) 1999 1998
- ----------------- ---- ----
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center $ 99 $100
Four Seasons Hotel-Houston(2) 129 118
Hyatt Regency Albuquerque 70 71
Omni Austin Hotel 94 88
Renaissance Houston Hotel(3) 59 62
---- ----
TOTAL/WEIGHTED AVERAGE $ 91 $ 89
==== ====
LUXURY RESORTS AND SPAS:
Hyatt Regency Beaver Creek $175 $162
Sonoma Mission Inn & Spa 179 194
Ventana Inn & Spa 302 245(7)
---- ----
TOTAL/WEIGHTED AVERAGE $191 $183
==== ====
DESTINATION FITNESS RESORTS AND SPAS:
Canyon Ranch-Tucson
Canyon Ranch-Lenox
---- ----
TOTAL/WEIGHTED AVERAGE $451(11) $422(11)
==== ====
GRAND TOTAL/WEIGHTED AVERAGE FOR ALL HOTEL PROPERTIES $161 $154
==== ====
- ----------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased all of the Hotel
Properties, except the Omni Austin Hotel, to COI pursuant to long term
leases. As of January 1, 1999, the Omni Austin Hotel is leased, pursuant to
a separate long term lease, to HCD Austin Corporation.
(2) The hotel is undergoing a $5 million renovation of all guest rooms and
common areas scheduled to be completed during the third quarter of 2000.
(3) The hotel is undergoing a $15 million renovation project scheduled to be
completed in October 2000. The renovation includes improvements to all guest
rooms, the lobby, corridor, and exterior and interior systems.
(4) As of December 31, 1999, 58 condominiums have been converted to hotel
suites.
(5) In 1998, the number of rooms was reduced to 276 due to 19 rooms being
converted into a 20,000 square foot spa.
(6) In February 1999, 20 rooms were taken out of commission for construction of
the spa, which is part of an approximately $20 million expansion scheduled
to be completed in April 2000. The expansion will also include the
construction of 30 additional guest rooms. Rates were discounted during the
construction period, which resulted in a lower average daily rate and
revenue per available room in 1999, as compared to 1998.
(7) Temporarily closed from February 1, 1998 through May 1, 1998 due to flooding
in the region, affecting the roadway passage to the hotel.
(8) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(9) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(10) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(11) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
26
28
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES TABLE
The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of December 31, 1999:
TOTAL CUBIC TOTAL TOTAL CUBIC TOTAL
NUMBER OF FOOTAGE SQUARE FEET NUMBER OF FOOTAGE SQUARE FEET
STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS) STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS)
----- ------------- ------------- ------------- ----- ------------- ------------- -------------
Alabama 4 9.4 0.3 Mississippi 1 4.7 0.2
Arizona 1 2.9 0.1 Missouri(2) 2 37.9 2.2
Arkansas 6 33.1 1.0 Nebraska 2 4.4 0.2
California 9 28.6 1.1 New York 1 11.8 0.4
Colorado 2 3.4 0.1 North Carolina 3 8.5 0.3
Florida 5 7.5 0.3 Oklahoma 2 2.1 0.1
Georgia 7 44.5 1.6 Oregon 6 40.4 1.7
Idaho 2 18.7 0.8 Pennsylvania 2 27.4 0.9
Illinois 2 11.6 0.4 South Carolina 1 1.6 0.1
Indiana 1 9.1 0.3 South Dakota 1 2.9 0.1
Iowa 2 12.5 0.5 Tennessee 3 10.6 0.4
Kansas 2 5.0 0.2 Texas 2 6.6 0.2
Kentucky 1 2.7 0.1 Utah 1 8.6 0.4
Maine 1 1.8 0.2 Virginia 2 8.7 0.3
Massachusetts 6 15.2 0.7 Washington 6 28.7 1.1
Wisconsin 3 17.4 0.7
-- ----- ----
TOTAL 89(3) 428.3(3) 17.0(3)
== ===== ====
- ----------
(1) As of December 31, 1999, the Company held an indirect 39.6% interest in the
Temperature-Controlled Logistics Partnerships, which own the
Temperature-Controlled Logistics Corporations, which directly or indirectly
owned the Temperature-Controlled Logistics Properties. The business
operations associated with the Temperature-Controlled Logistics Properties
are owned by AmeriCold Logistics, in which the Company has no interest. The
Temperature-Controlled Logistics Corporations are entitled to receive lease
payments (base rent and percentage rent) from AmeriCold Logistics.
(2) Includes an underground storage facility, with approximately 33.1 million
cubic feet.
(3) As of December 31, 1999, AmeriCold Logistics operated 104
temperature-controlled logistics properties with an aggregate of
approximately 519.2 million cubic feet (19.9 million square feet).
27
29
RESIDENTIAL DEVELOPMENT PROPERTIES
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table shows certain information as of December 31, 1999,
relating to the Residential Development Properties.
TOTAL TOTAL AVERAGE
RESIDENTIAL RESIDENTIAL TOTAL LOTS/UNITS LOTS/UNITS CLOSED
RESIDENTIAL DEVELOPMENT DEVELOPMENT LOTS/ DEVELOPED CLOSED SALE PRICE
DEVELOPMENT PROPERTIES TYPE OF CORPORATION'S UNITS SINCE SINCE PER LOT/
CORPORATION (1) (RDP) RDP(2) LOCATION OWNERSHIP % PLANNED INCEPTION INCEPTION UNIT ($)(3)
- ---------------- ----------- ------- -------- ------------- ------- ---------- ---------- -----------
Desert Mountain Desert Mountain SF Scottsdale, AZ
Development 93.0% 2,665 2,265 1,980 480,000
Corp. ------ ------ ------
The Woodlands The Woodlands SF The Woodlands, TX
Land Company, 42.5% 36,385 22,240 20,721 48,131
Inc. ------ ------ ------
Crescent Deer Trail SFH Avon, CO 60.0% 16(6) 11 11 2,930,000
Development Buckhorn
Management Townhomes TH Avon, CO 60.0% 24(6) 22 22 1,300,000
Corp. Bear Paw Lodge CO Avon, CO 60.0% 53(6) 11 11 1,675,000
QuarterMoon TH Avon, CO 64.0% 13(6) -- -- N/A
Eagle Ranch SF Eagle, CO 60.0% 1,100(6) 90 88 111,500
Main Street
Junction CO Breckenridge, CO 60.0% 36(6) 18 13 475,000
Riverbend SF Charlotte, NC 60.0% 650 -- -- N/A
Three Peaks
(Eagle's Nest)SF Silverthorne, CO 30.0% 391(6) 75 71 220,000
------ ------ ------
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORP. 2,283 227 216
------ ------ ------
Mira Vista Mira Vista SF Fort Worth, TX 100.0% 757 740 628 100,000
Development The Highlands SF Breckenridge, CO 12.3% 750 323 311 148,000
Corp. ------ ------ ------
TOTAL MIRA VISTA DEVELOPMENT CORP. 1,507 1,063 939
------ ------ ------
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 556 543 31,000
Development Spring Lakes SF Houston, TX 100.0% 536 161 110 28,000
Corp. ------ ------ ------
TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,741 717 653
------ ------ ------
TOTAL 44,581 26,512 24,509
====== ====== ======
RESIDENTIAL RANGE OF
RESIDENTIAL DEVELOPMENT PROPOSED
DEVELOPMENT PROPERTIES TYPE OF SALE PRICES
CORPORATION (1) (RDP) RDP(2) LOCATION PER LOT/UNIT ($)(4)
- ---------------- ----------- ------- -------- -------------------
Desert Mountain Desert Mountain SF Scottsdale, AZ 375,000 - 3,000,000(5)
Development
Corp.
The Woodlands The Woodlands SF The Woodlands, TX 13,600 - 500,000
Land Company,
Inc.
Crescent Deer Trail SFH Avon, CO 2,695,000 - 4,075,000
Development Buckhorn
Management Townhomes TH Avon, CO 1,420,000 - 1,870,000
Corp. Bear Paw Lodge CO Avon, CO 665,000 - 2,025,000
QuarterMoon TH Avon, CO 1,850,000 - 2,795,000
Eagle Ranch SF Eagle, CO 80,000 - 150,000
Main Street
Junction CO Breckenridge, CO 300,000 - 580,000
Riverbend SF Charlotte, NC 23,000 - 30,000
Three Peaks
(Eagle's Nest)SF Silverthorne, CO 135,000 - 425,000
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORP.
Mira Vista Mira Vista SF Fort Worth, TX 50,000 - 265,000
Development The Highlands SF Breckenridge, CO 55,000 - 450,000
Corp.
TOTAL MIRA VISTA DEVELOPMENT CORP.
Houston Area Falcon Point SF Houston, TX 22,000 - 60,000
Development Spring Lakes SF Houston, TX 22,000 - 33,000
Corp.
TOTAL HOUSTON AREA DEVELOPMENT CORP.
TOTAL
(1) The Company has an approximately 95%, 95%, 90%, 94% and 94%, ownership
interest in Desert Mountain Development Corp., The Woodlands Land Company,
Inc., Crescent Development Management Corp., Mira Vista Development Corp.,
and Houston Area Development Corp., respectively, through ownership of
non-voting common stock in each of these Residential Development
Corporations.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); TS (Timeshare);
and SFH (Single Family Homes).
(3) Based on lots/units closed during the Company's ownership period.
(4) Based on existing inventory of developed lots and lots to be developed.
(5) Includes golf membership, which for 1999, is approximately $175,000.
(6) As of December 31, 1999, two units were under contract at Deer Trail
representing $5.9 million in sales, two units were under contract at
Buckhorn Townhomes representing $3.3 million in sales, 32 units were under
contract at Bear Paw Lodge representing $43.6 million in sales, 11 units
were under contract at QuarterMoon representing $24.7 million in sales, 73
lots were under contract at Eagle Ranch representing $10.5 million in
sales, six units were under contract at Main Street Junction representing
$2.5 million in sales, and 27 lots were under contract at Three Peaks
representing $6.4 million in sales.
28
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BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE PROPERTIES
As of December 31, 1999, the Behavioral Healthcare Segment consisted of
88 Behavioral Healthcare Properties, all of which were leased to CBHS and its
subsidiaries under a triple-net master lease. CBHS is a Delaware limited
liability company which was formed to operate the behavioral healthcare
businesses located at the Behavioral Healthcare Properties and is owned 10% by a
subsidiary of Magellan and 90% by COI and an affiliate of COI. CBHS operates the
Behavioral Healthcare Properties through wholly owned subsidiaries.
During the fourth quarter of 1999, the Company purchased two Behavioral
Healthcare Properties from Magellan for an aggregate purchase price of
approximately $7.1 million in satisfaction of its obligations under an agreement
with Magellan entered into in November 1998. In addition, during the fourth
quarter of 1999, the Company disposed of one Behavioral Healthcare Property for
approximately $1.4 million in net proceeds.
On February 16, 2000, CBHS and all of its subsidiaries that are subject
to the master lease with the Company filed voluntary Chapter 11 bankruptcy
petitions in the United States Bankruptcy Court for the District of Delaware.
CBHS has stated in its bankruptcy petitions that it intends to sell all of the
ongoing businesses of CBHS and its subsidiaries by mid-May of 2000 or develop an
appropriate liquidation procedure if the sales have not taken place by that
time.
Effective February 29, 2000, the Non-Core Properties ceased to be
subject to the master lease, although the aggregate rent due under the master
lease was not reduced as a result except with respect to sales of Non-Core
Properties. The Company is actively marketing these Properties for sale. From
January 1 through March 24, 2000, the Company sold 11 Non-Core Properties for
approximately $34.9 million in net proceeds. As a result of these sales and the
sale of the one Behavioral Healthcare Property during the fourth quarter of
1999, the amount of rent due under the master lease was reduced in accordance
with the amendments to the master lease. The Company has also entered into
contracts or letters of intent to sell an additional six Non-Core Properties.
The Company continues to actively market the remaining 34 Non-Core Properties
for sale.
The Core Properties remain subject to the master lease. The Company
intends to sell the Core Properties or lease them to new tenants in connection
with CBHS's bankruptcy proceedings.
For more information on CBHS, the voluntary filing of the Chapter 11
bankruptcy petitions, the Company's investment in the Behavioral Healthcare
Properties and the master lease, see Item 1. Business - Industry Segments -
Behavioral Healthcare Segment and Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Behavioral Healthcare
Segment.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1999.
29
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares have been traded on the New York Stock
Exchange under the symbol "CEI" since the completion of its initial public
offering at a price of $12.50 per share in May 1994. For each calendar quarter
indicated, the following table reflects the high and low sales prices during the
quarter for the common shares and the distributions declared by the Company with
respect to each quarter.
PRICE
--------------------------------
HIGH LOW DISTRIBUTIONS
------------- -------------- -----------------
1998
First Quarter $ 40.38 $ 33.06 $ 0.38
Second Quarter $ 37.44 $ 30.75 $ 0.38
Third Quarter $ 34.69 $ 21.13 $ 0.55
Fourth Quarter $ 26.38 $ 21.06 $ 0.55
1999
First Quarter $ 23.94 $ 20.50 $ 0.55
Second Quarter $ 24.94 $ 20.00 $ 0.55
Third Quarter $ 24.13 $ 17.38 $ 0.55
Fourth Quarter $ 18.44 $ 15.13 $ 0.55
As of March 24, 2000, there were approximately 1,274 holders of record
of the common shares.
DISTRIBUTION POLICY
The actual results of operations of the Company and the amounts
actually available for distribution will be affected by a number of factors,
including:
o the operating and interest expenses of the Company;
o the ability of tenants to meet their rent obligations;
o general leasing activity in the markets in which the Office
Properties and Retail Properties are located;
o consumer preferences relating to the Hotel Properties;
o cash flows from unconsolidated entities;
o the general condition of the United States economy;
o federal, state and local taxes payable by the Company;
o capital expenditure requirements; and
o the adequacy of cash reserves.
Future distributions by the Company will be at the discretion of the
Board of Trust Managers. The Board of Trust Managers has indicated that it will
review the adequacy of the Company's distribution rate on a quarterly basis.
Under the Code, real estate investment trusts are subject to numerous
organizational and operational requirements, including the requirement to
distribute at least 95% of REIT taxable income. Pursuant to this requirement,
the Company was required to distribute $140.6 million and $136.8 million for
1999 and 1998, respectively. Actual distributions by the Company were $298.1
million and $220.6 million for 1999 and 1998, respectively.
Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes generally will
be taxable to a shareholder as ordinary dividend income. Distributions in excess
of current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder's basis in such shareholder's shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its shares will have the effect of
deferring taxation until the sale of the
30
32
shareholder's shares. No assurances can be given regarding what portion, if any,
of distributions in 2000 or subsequent years will constitute a return of capital
for federal income tax purposes.
Following is the income tax status of distributions paid during the
years ended December 31, 1999 and 1998 to common shareholders:
1999 1998
---- ----
Ordinary income 50.1% 58.8%
Capital gain 2.0% 5.6%
Return of capital 47.9% 35.6%
Distributions on the 8,000,000 6 3/4% Series A Convertible Cumulative
Preferred Shares issued by the Company in February 1998 are payable at the rate
of $1.69 per annum per Series A Convertible Cumulative Preferred Share, prior to
distributions on the common shares.
Following is the income tax status of distributions paid during the
years ended December 31, 1999 and 1998 to preferred shareholders:
1999 1998
---- ----
Ordinary income 96.4% 94.4%
Capital gain 3.6% 5.6%
31
33
ITEM 6. SELECTED FINANCIAL DATA
The following table includes certain financial information for the
Company on a consolidated historical basis. All information relating to common
shares has been adjusted to reflect the two-for-one stock split effected in the
form of a 100% share dividend paid on March 26, 1997 to shareholders of record
on March 20, 1997. You should read this section in conjunction with Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Total revenue ....................... $ 746,279 $ 698,343 $ 447,373 $ 208,861 $ 129,960
Operating income (loss) ............. (54,954) 143,893 111,281 44,101 30,858
Income before minority
interests and extraordinary
item .......................... 13,343 183,210 135,024 47,951 36,358
Basic earnings per common share:
Income (loss) before extraordinary
item .......................... $ (0.06) $ 1.26 $ 1.25 $ 0.72 $ 0.66
Net income (loss) ................ $ (0.06) 1.26 1.25 0.70 0.66
Diluted earnings per common share:
Income (loss) before extraordinary
item .......................... $ (0.06) $ 1.21 $ 1.20 $ 0.70 $ 0.65
Net income (loss) ................ $ (0.06) 1.21 1.20 0.68 0.65
BALANCE SHEET DATA
(AT PERIOD END):
Total assets ........................ $ 4,950,561 $ 5,043,447 $ 4,179,980 $ 1,730,922 $ 964,171
Total debt .......................... 2,598,929 2,318,156 1,710,124 667,808 444,528
Total shareholders' equity .......... 2,056,774 2,422,545 2,197,317 865,160 406,531
OTHER DATA:
Funds from Operations(1) ............ $ 355,777 $ 360,148 $ 214,396 $ 87,616 $ 64,475
Cash distribution declared per
common share ..................... $ 2.20 $ 1.86 $ 1.37 $ 1.16 $ 1.05
Weighted average
common shares and units
outstanding - basic .............. 135,954,043 132,429,405 106,835,579 64,684,842 54,182,186
Weighted average
common shares and units
outstanding - diluted ............ 137,891,561 140,388,063 110,973,459 65,865,517 54,499,690
Cash flow provided by
(used in):
Operating activities ............. $ 296,377 $ 277,075 $ 211,714 $ 77,384 $ 65,011
Investing activities ............. (166,128) (798,085) (2,294,428) (513,038) (421,406)
Financing activities ............. (167,615) 564,680 2,123,744 444,315 343,079
- ------------------------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net income (loss)
(determined in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
excluding adjustments not of a normal recurring nature, plus depreciation
and amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. For a more detailed
definition and description of FFO, see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
32
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this section in conjunction with the selected financial
data and the consolidated financial statements and the accompanying notes in
Item 6. Selected Financial Data and Item 8. Financial Statements and
Supplementary Data, respectively, of this report. Historical results and
percentage relationships set forth in these Items and this section should not be
taken as indicative of future operations of the Company. Capitalized terms used
but not otherwise defined in this section, have the meanings given to them in
Items 1 - 6 of this Form 10-K.
This 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. These statements are generally
characterized by terms such as "believe", "expect" and "may".
Although the Company 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 given in the forward-looking
statements.
The following factors might cause such a difference:
o The Company's ability to timely lease unoccupied square
footage and timely re-lease occupied square footage upon
expiration;
o Changes in real estate conditions (including rental rates and
competition from other properties and new development of
competing properties);
o The concentration of a significant percentage of the Company's
assets in Texas;
o Financing risks, such as the ability to generate revenue
sufficient to service existing debt, increases in debt service
associated with variable-rate debt, the ability to meet
existing financial covenants and the Company's ability to
consummate planned financings and refinancings on the terms
and within the time frames anticipated;
o The Company's ability to close anticipated sales of assets or
joint venture transactions or other pending transactions;
o The failure of CBHS as debtor in possession to negotiate or
consummate an acceptable sale of its core operating assets in
the on-going bankruptcy proceedings;
o The failure of CBHS, any successful purchaser or purchasers of
such core operating assets out of bankruptcy, and the Company
to negotiate and consummate leases for the core facilities or
the inability of the Company to secure on a timely basis the
release of hospital facilities from the debtor in possession;
o The failure of the purchaser or purchasers of the core
operating assets of CBHS, following any purchase and
bankruptcy restructuring, to fulfill all new lease obligations
to the Company over the long term;
o The Company's ability to close sales of the Behavioral
Healthcare Properties;
o The Company's ability to find acquisition and development
opportunities which meet the Company's investment strategy;
o The existence of complex regulations relating to the Company's
status as a REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse
consequences of the failure to qualify as a REIT;
o Adverse changes in the financial condition of existing
tenants; and
o Other risks detailed from time to time in the Company's
filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company is not obligated to update these
forward-looking statements to reflect any future events or circumstances.
33
35
STRATEGIC PLAN UPDATE
John C. Goff, Vice-Chairman of the Board of Trust Managers of the
Company, was appointed to the positions of President and Chief Executive Officer
of the Company on June 11, 1999. As announced in August, 1999, Mr. Goff and the
management team outlined the following immediate objectives:
o resolve the issues surrounding the Behavioral Healthcare
Segment;
o refinance 2000 and 2001 debt maturities and reduce exposure to
variable-rate debt;
o dispose of non-strategic or non-core assets within the
investment segments;
o market certain of the Office Properties for joint ventures;
and
o engage in a share repurchase program.
CBHS
CBHS's business has been negatively affected by many factors, including
adverse industry conditions. During 1999, CBHS failed to perform in accordance
with its operating budget. In the fourth quarter of 1999, the Company, COI,
Magellan and CBHS completed a recapitalization of CBHS. Pursuant to the
recapitalization, Magellan transferred its remaining hospital-based assets to
CBHS, canceled its accrued franchise fees and terminated the franchise
agreements, pursuant to which Magellan had provided certain services to CBHS in
exchange for certain franchise fees. The Company also has deferred the monthly
rental payments due from CBHS for November and December 1999 and amended its
master lease with CBHS to provide a mechanism to terminate the master lease as
to certain non-core Behavioral Healthcare Properties, and agreed that, upon each
sale by the Company of non-core Behavioral Healthcare Properties, the monthly
minimum rent due from CBHS under the master lease would be reduced by a
specified percentage of the net proceeds of such sale. The non-core Behavioral
Healthcare Properties consists of 51 properties at which CBHS has ceased
operations or is planning to cease operations (the "Non-Core Properties").
As of December 31, 1999, the Behavioral Healthcare Segment consisted of
88 Behavioral Healthcare Properties in 24 states, all of which were leased to
CBHS and its subsidiaries under a triple-net master lease. On February 16, 2000,
CBHS and all of its subsidiaries that are subject to the master lease with the
Company filed voluntary Chapter 11 bankruptcy petitions in the United States
Bankruptcy Court for the District of Delaware. CBHS has stated in its bankruptcy
petitions that it intends to sell all of the ongoing businesses of CBHS and its
subsidiaries by mid-May of 2000 or develop an appropriate liquidation procedure
if the sales have not taken place by that time.
Effective February 29, 2000, pursuant to the referenced amendments to
the master lease, the Non-Core Properties ceased to be subject to the master
lease, although the aggregate rent due under the master lease was not reduced as
a result except as described above with respect to Non-Core Properties. The
Company is actively marketing these Properties for sale. From January 1 through
March 24, 2000, the Company sold 11 Non-Core Properties for approximately $34.9
million in net proceeds. As a result of these sales and the sale of the one
Behavioral Healthcare Property during the fourth quarter of 1999, the amount of
rent due under the master lease was reduced in accordance with the amendments to
the master lease. The Company has also entered into contracts or letters of
intent to sell an additional six Non-Core Properties. The Company continues to
actively market the remaining 34 Non-Core Properties for sale.
As of December 31, 1999, the 37 Behavioral Healthcare Properties that
were not designated as Non-Core Properties are designated as "Core Properties."
The Core Properties remain subject to the master lease. Payment and treatment of
rent for the Behavioral Healthcare Properties is subject to a rent stipulation
agreed to by certain of the parties involved in the CBHS bankruptcy proceeding.
The Company intends to sell the Core Properties or lease them to new
tenants.
On April 24, 2000, an auction will be held for the core operating
assets of CBHS as part of the bankruptcy proceedings. The Company has agreed to
provide an acceptable sales price for each of the remaining 37 Behavioral
Healthcare Properties and, to the extent possible, acceptable lease terms for
continued operation of the Behavioral Healthcare Properties. Bidders will have
the opportunity to bid for any or all of the core operating assets of CBHS and,
in connection with a bid, either to bid to purchase the related Behavioral
Healthcare Property or Properties or to seek approval from the Company to lease
the Property or Properties. Proceeds from the sale of core operating assets of
CBHS will be available to pay creditors of CBHS. Proceeds from any sales of the
Behavioral Healthcare Properties will belong to the Company.
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36
Exposure to Variable-rate Debt
Since the announcement of the Company's Strategic Plan in August 1999,
the Company fixed or hedged approximately $400 million of its variable-rate debt
in 1999. During the first quarter of 2000, the Company repaid and retired its
unsecured, variable-rate credit facility (the "Credit Facility") from a group of
banks led by BankBoston, N.A ("BankBoston") and its term note with BankBoston
primarily with the proceeds of a new secured, variable-rate facility (the "New
Facility") from UBS AG ("UBS"). Effective February 4, 2000, the Company entered
into a three-year cash flow hedge agreement with Fleet Boston Financial,
relating to a portion of the New Facility, for a notional amount of $200.0
million. As a result, 200.0 million of the amount due under the note, which was
originally issued at a floating rate of LIBOR plus 250 basis points, was
effectively converted to a fixed weighted average interest rate of 9.61% through
maturity. The refinancings and cash flow hedges reduced the Company's
variable-rate debt exposure to less than 30% of total debt. See "Liquidity and
Capital Resources - New Facility" and "Liquidity and Capital Resources -
Interest Rate Hedging Transactions" for additional information.
Assets Held for Disposition
During 1999, the Company identified the following assets for
disposition. These assets are either non-strategic or non-core assets within the
Company's investment segments. The proceeds generated from the remaining assets
held for disposition are expected to be used to further reduce the Company's
remaining variable-rate debt, make investments, fund a share repurchase program,
or any combination of these options.
o Dallas Mavericks Interest - On October 27, 1999, the Company completed
the sale of its non-core equity and debt interests in the Dallas
Mavericks, interest in the new Dallas sports arena development and
surrounding mixed-use development projects and certain promissory notes
related to the Dallas Mavericks for approximately $89 million in cash.
In connection with the sale, the Company recognized a net loss of
approximately $0.7 million. The proceeds were primarily used to pay
down variable-rate debt.
o The Woodlands Commercial Properties - The Woodlands Commercial
Properties Company, L.P., owned by the Company and Morgan Stanley Real
Estate Fund II, L.P., has been actively marketing for sale certain
property assets (multi-family, retail and office/venture tech
portfolios) located in The Woodlands. As of December 31, 1999, the
multi-family portfolio had been sold, generating net proceeds of
approximately $28.8 million, of which the Company's portion was
approximately $12.2 million. The sale generated a net gain of
approximately $11.6 million, of which the Company's portion was
approximately $4.9 million. The sale of the retail portfolio, including
the Company's four Retail Properties located in The Woodlands, closed
on January 5, 2000, and generated approximately $49.8 million of net
proceeds, of which the Company's portion was approximately $37.3
million. The Woodlands Retail Properties were sold at a net gain of
approximately $9.0 million, of which the Company's portion was
approximately $7.7 million. The proceeds from these sales were used
primarily to pay down variable-rate debt. In addition, the sale of the
office/venture tech portfolio, consisting of the Company's 12 Office
Properties located in The Woodlands, is expected to close in the second
quarter of 2000.
o Office Properties - For the year ended December 31, 1999, the Company
recognized an impairment loss of approximately $16.8 million on one of
the Office Properties held for disposition at December 31, 1999, which
was sold during the first quarter of 2000. The impairment loss
represented the difference between the carrying value of the Office
Property and the sales price less costs of the sale. As of March 24,
2000, the Company completed
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37
the sale of six wholly-owned Office Properties which were included in
the group of ten Office Properties held for disposition at December 31,
1999 and were being actively marketed for sale. The sales generated
approximately $146.6 million of net proceeds. The proceeds were
primarily used to pay down variable-rate debt. Excluding the impairment
loss on one of the six Office Properties held for disposition at
December 31, 1999, the Company recognized a net gain of approximately
$13.3 million in the first quarter of 2000 related to the sales of the
other five Office Properties that were classified as held for
disposition at December 31, 1999. The Company has entered into
contracts relating to the sale of two additional Office Properties. The
sale of these Properties are expected to close by the end of the second
quarter of 2000. Management expects to complete any economically
justified sales of the remaining two Office Properties held for
disposition as of December 31, 1999, by the end of the second quarter
of 2000.
o Behavioral Healthcare Properties - The Behavioral Healthcare Segment
consisted of 88 Properties in 24 states as of December 31, 1999. From
January 1 through March 24, 2000, 11 Non-Core Properties were sold for
approximately $34.9 million in net proceeds. The proceeds were
primarily used to pay down variable-rate debt. The Company has also
entered into contracts or letters of intent to sell an additional six
Non-Core Properties. The Company continues to actively market the
remaining 34 Non-Core Properties for sale. The Company intends to sell
the 37 Core Properties or lease them to new tenants.
Management is currently in the process of evaluating the bids for the
remaining Properties held for disposition to determine their economic viability
as well as the credit-worthiness of the potential purchasers and their ability
to close the transactions. The disposition of these Properties remains subject
to the negotiation of acceptable terms and other customary conditions.
Joint Ventures
The Company is currently seeking to enter into venture arrangements
with private equity partners for arrangements where the Company would hold a
minority interest in the Properties and would continue to lease and manage the
Properties.
Share Repurchase Program
On November 5, 1999, the Company's Board of Trust Managers authorized
the repurchase of a portion of its outstanding common shares from time to time
in the open market or through privately negotiated transactions, in an amount
not to exceed $500.0 million. The proposed repurchases will be subject to
prevailing market conditions and other considerations. The Company expects the
share repurchase program to be funded through a combination of asset sales and
financing arrangements, which, in some cases, may be secured by the repurchased
shares. The amount of shares that the Company actually will purchase will be
determined from time to time, in its reasonable judgement, based on market
conditions and the availability of funds, among other factors. There can be no
assurance that any number of shares actually will be purchased within any
particular time period.
On November 19, 1999, the Company entered into an agreement with UBS
which was amended on January 4, 2000 and which, as amended, obligates the
Company to repurchase approximately 5.8 million common shares from UBS, or
settle in common shares, on specified terms, before January 4, 2001. See
"Liquidity and Capital Resources - Share Repurchase Agreement" for a description
of this transaction.
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OFFICE AND RETAIL SEGMENT
The following tables show the same-store net operating income growth
for the 27.1 million square feet of Office Property space owned as of January 1,
1998.
FOR THE YEAR PERCENTAGE/
ENDED DECEMBER 31, POINT
--------------------------
1999 1998 INCREASE
------- ------- -----------
Same-store Revenues $ 518.0 $ 488.8 6.0%
Same-store Expenses (225.4) (213.8) 5.4%
------- -------
Net Operating Income $ 292.6 $ 275.0 6.4%
======= =======
Weighted Average Occupancy 91.1% 90.1% 1.0 pt
The following table shows selected leasing and rental rate information
for the 31.8 million square feet of Office Property owned as of December 31,
1999.
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
SIGNED EXPIRING PERCENTAGE
LEASES LEASES INCREASE
----------------------- ------------------------ -----------------
Renewed or re-leased (1) 2,646,000 sq. ft. N/A N/A
Weighted average full-
service rental rate (2) $21.72 per sq. ft. $18.30 per sq. ft. 19%
FFO annual net effective
rental rate (3) $13.63 per sq. ft. $10.26 per sq. ft. 33%
(1) All of which have commenced or will commence during the next twelve months.
(2) Including free rent, scheduled rent increases taken into account under GAAP
and expense recoveries.
(3) Calculated as weighted average full-service rental rate minus operating
expenses.
o For the year ended December 31, 1999, leases executed for renewal or
re-leased Office Property space required tenant improvements of $1.15
per square foot per year and leasing costs of $0.72 per square foot per
year. "Renewal" refers to leases executed by existing tenants for
exactly the same net rentable area currently occupied by those tenants.
"Re-lease" refers to leases executed by new or existing tenants for net
rentable area which has been vacant for six months or less.
o The overall office portfolio was approximately 92.7% leased, based on
executed leases, or approximately 90.5% leased based on commenced
leases, at December 31, 1999. Average occupancy for 1999 based on
commenced leases was approximately 90.9%.
Investment in Broadband Office, Inc.:
In October 1999, the Company, along with seven other real estate
companies, joined with an unrelated third party venture capitalist as a founding
shareholder in Broadband, a national telecommunications company. Broadband is
dedicated to providing state of the art broadband telecommunications services to
commercial office properties across the country. In addition to significantly
improving the Company's office tenant amenity package to take advantage of
evolving technologies, the Company received an equity interest and
representation on the board of directors of Broadband in exchange for granting
Broadband marketing access to the tenants within the Company's Office Property
portfolio.
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HOSPITALITY SEGMENT
The following table shows the percentage increases in occupancy,
average daily rate and revenue per available room for the Hotel Properties for
the years ended December 31, 1999 and 1998.
FOR THE YEAR PERCENTAGE/
ENDED DECEMBER 31, POINT
-------------------------------- INCREASE
1999 1998 (DECREASE)
------------- ------------- -------------
Weighted average occupancy 74% 75% (1)pt
Average daily rate $ 218 $ 207 5%
Revenue per available room $ 161 $ 154 5%
o For the year ended December 31, 1999, hotel property rental income
growth, including weighted average base rent(1) and percentage rent,
was approximately 12.3%(2) compared with the same period of 1998, for
the eight Hotel Properties owned as of January 1, 1998.
- -----------------------
(1) Including scheduled rent increases that would be taken into account under
GAAP.
(2) This growth was impacted by returns generated on approximately $38 million
of capital invested during 1998 and 1999 in connection with the
construction of The Allegria Spa at the Hyatt Regency Beaver Creek hotel,
the construction of The Allegria Spa at Ventana Inn & Spa, the Sonoma
Mission Inn & Spa expansion and the renovation of guest rooms at the Four
Seasons - Houston hotel.
Investment Partnership:
In February 2000, the Company entered into an agreement with Sanjay
Varma, a former senior executive officer of the Company, to form an investment
partnership, which will seek luxury spa resorts and hotels to acquire and manage
under the "Sonoma Spa Resorts" brand and concept. The Company and Mr. Varma
acquired a 93% and 7% interest, respectively, in this new partnership. Mr. Varma
has also established a new management company, which has contracted with COI to
manage either the property or assets of the Company's existing portfolio of
Hotel Properties (excluding the Canyon Ranch resorts and the Hyatt Regency
Beaver Creek), in addition to new properties the investment partnership
acquires. The Company currently holds a 30% non-voting interest in this
management company.
CRL Investments, Inc.:
The Company has a 95% economic interest, representing all of the
non-voting stock in CRL Investments, Inc. ("CRL"), which has a 20% economic
interest in CR License, LLC, the entity which owns the right to the future use
of the "Canyon Ranch" name. CRL has the opportunity through July 2000 to pay
$3.0 million to obtain an additional 10% interest in CR License, LLC. CRL also
has an effective 60% economic interest in the Canyon Ranch Spa Club in the
Venetian Hotel in Las Vegas, Nevada. The Canyon Ranch Spa Club opened in June
1999 and is the first project to expand the franchise value of the "Canyon
Ranch" name.
RESIDENTIAL DEVELOPMENT SEGMENT
The Company owns economic interests in five Residential Development
Corporations through the residential development property mortgages and the
non-voting common stock of these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, currently own interests in 14 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. Management plans to maintain the Residential Development
segment at its current investment level and reinvest returned capital into
residential development projects that it expects to achieve comparable rates of
return.
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The Woodlands Land Development, L.P. and The Woodlands Commercial Properties
Company, L.P. (collectively "The Woodlands"), The Woodlands, Texas:
FOR THE YEAR
ENDED DECEMBER 31,
----------------------------------------------
1999 1998
------------------- -------------------
Residential lot sales 1,991 1,462
Average sales price per lot(1) $ 45,843 $ 52,581
Commercial land sales 76 acres 205 acres
Average sales price per acre $ 344,995 $ 227,383
- ----------
(1) Decrease in average sales price per lot between years is due to a change in
product mix.
o Residential lot sales increased by 529 or 36%, in 1999 compared with
1998.
o Future buildout of The Woodlands is estimated at approximately 15,600
residential lots and approximately 1,972 acres of commercial land, of
which 1,519 residential lots and 991 acres are currently in inventory.
o The Woodlands estimates that sales of approximately 2,000 to 2,100
residential lots and 75 to 85 acres of commercial land will close
during 2000.
Desert Mountain Properties Limited Partnership ("Desert Mountain"), Scottsdale,
Arizona:
FOR THE YEAR
ENDED DECEMBER 31,
----------------------------
1999 1998
--------- ---------
Residential lot sales 258 258
Average sales price per lot(1) $ 533,000 $ 430,000
- ----------
(1) Including equity golf memberships.
o The average price per lot for the year ended 1999 increased 24%
compared to the year ended 1998, as a result of a higher price product
mix sold in 1999 versus 1998.
o During 1999, Desert Mountain opened five new villages in Saguaro Forest
consisting of 160 additional lots. Desert Mountain has sold 95 of these
lots with an average sales price of $619,000 per lot.
o Future buildout of Desert Mountain is estimated at approximately 685
residential lots, of which 285 are currently in inventory.
o Desert Mountain is anticipating the release in the year 2000 of three
new villages within Saguaro Forest consisting of approximately 106 lots
with prices from $500,000 to $2.6 million per lot.
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Crescent Development Management Corporation ("CDMC"), Beaver Creek, Colorado:
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1999 1998
--------------- -------------
Active projects 11 5
Residential lot sales 410 48
Townhome sales 32 27
Single-family home sales 11 --
Equivalent timeshare unit sales 6 32
Condominium sales 24 --
o On April 29, 1999, a partnership in which CDMC has a 64% economic interest
finalized the purchase of Riverfront Park (previously known as "The
Commons"), a master planned residential development on 23 acres in the
Central Platte Valley near downtown Denver, Colorado for approximately $25
million. The development of Riverfront Park is expected to begin in the
spring of 2000. The first phase will consist of one condominium project and
two loft projects with prices ranging from $0.2 million to $2.5 million.
One of the first residential projects, consisting of 71 lofts, commenced
pre-selling in January 2000. As of March 24, 2000, contracts had been
signed on 83% of the 71 lofts. In the first quarter of 2000, the
partnership has entered into contracts relating to the sale of 9.7 acres of
Riverfront Park, which is expected to close in the second quarter of 2000.
The acreage is in close proximity to several major entertainment and
recreational facilities including Coors Field (home to the Major League
Baseball's Colorado Rockies), Elitch Gardens (an amusement park), the new
Pepsi Center (home to the National Hockey League's Colorado Avalanche and
the National Basketball Association's Denver Nuggets) and the new downtown
Commons Park. An adjacent 28 acres is expected to be commercially developed
by another company, thus providing a major mixed-use community adjacent to
the lower downtown area of Denver.
o CDMC estimates the following sales for the year 2000 from its 10 active
projects: 383 residential lots, 17 townhomes, 5 single-family homes, and 44
condominiums.
o 99% of the sales anticipated during the first quarter and 71% of the sales
anticipated for the full year of 2000 have been pre-sold as of December 31,
1999.
Mira Vista Development Corp. ("Mira Vista"), Fort Worth, Texas:
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1999 1998
------------- --------------
Residential lot sales 69 79
Average sales price per lot $121,000 $111,000
Houston Area Development Corp. ("Houston Area Development"), Houston, Texas:
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1999 1998
------------- --------------
Residential lot sales 243 181
Average sales price per lot $ 28,000 $ 25,000
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TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of December 31, 1999, the Company held an indirect 39.6% interest in
the Temperature-Controlled Logistics Partnerships, which owns the
Temperature-Controlled Logistics Corporations, which directly or indirectly
owned the Temperature-Controlled Logistics Properties. The business operations
associated with the Temperature-Controlled Logistics Properties are owned by
AmeriCold Logistics, in which the Company has no interest. The
Temperature-Controlled Logistics Corporations are entitled to receive lease
payments (base rent and percentage rent) from AmeriCold Logistics.
Management believes that earnings before interest, taxes, depreciation
and amortization ("EBITDA") is a useful financial performance measure for
assessing the relative stability of the financial condition of the AmeriCold
Logistics, which is the sole lessee of the Temperature-Controlled Logistics
Properties.
This table shows AmeriCold Logistics, pro forma EBITDA for the year
ended December 31, 1999 and 1998, assuming that the acquisitions by one of the
Temperature-Controlled Logistics Corporations of 14 Temperature-Controlled
Logistics Properties had occurred on January 1, 1998.
FOR THE YEAR
ENDED DECEMBER 31,
(IN MILLIONS)
-------------------------------------
1999 1998
---------------- ----------------
Pro forma EBITDA(1) $ 164.8 $ 152.4
Pro forma lease payment $ 164.0 $ 149.1
- ----------
(1) EBITDA does not represent net income or cash flows from operating,
financing or investing activities as defined by GAAP.
o During 1999, the Temperature-Controlled Logistics Corporations completed
and opened $46 million of expansion and new product, representing
approximately 15.1 million cubic feet (0.5 million square feet).
o The Temperature-Controlled Logistics Corporations currently have
approximately $30.6 million of expansion and new temperature-controlled
logistics facilities under construction, which management of AmeriCold
Logistics expects will be completed in the second quarter of 2000, and
which are expected to contain approximately 16.6 million cubic feet (0.8
million square feet).
o The Temperature-Controlled Logistics Corporations have approximately $50 to
$75 million of expansion and new product temperature-controlled logistics
facilities under review for development or acquisition during 2000.
BEHAVIORAL HEALTHCARE SEGMENT
During the year ended December 31, 1999, the Company received cash
rental payments of approximately $35.3 million from CBHS. CBHS's business has
been negatively affected by many factors, including adverse industry conditions.
During 1999, CBHS failed to perform in accordance with its operating budget. See
"Strategic Plan Update - CBHS" above for a complete description of the current
status of CBHS, the voluntary filing of Chapter 11 bankruptcy petitions by CBHS
and its subsidiaries and the Company's investment in the Behavioral Healthcare
Properties.
The following financial statement charges were made with respect to the
Company's investment in the Behavioral Healthcare Properties for the year ended
December 31, 1999:
o CBHS rent is reflected on a cash basis beginning in the third
quarter of 1999 and CBHS rent will continue to be reflected on
a cash basis going forward;
o The Company wrote-off the rent that was deferred according to
the CBHS lease agreement from the commencement of the lease in
June of 1997 through June 30, 1999. The balance written-off
totaled $25.6 million;
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43
o The Company wrote-down its behavioral healthcare real estate
assets by approximately $103.8 million to a book value of
$245.0 million;
o The Company recorded approximately $15.0 million of additional
expense to be used by CBHS as working capital; and
o The Company has not recorded depreciation expense on the
Non-Core Properties since November 1999 when such Properties
were classified as held for disposition.
At December 31, 1999, the Company's investment in the Behavioral
Healthcare Properties represented approximately 5% of its total assets (after
the impairment and other charges related to the behavioral healthcare assets)
and approximately 5% of consolidated rental revenues for the year ended December
31, 1999 (after the write-off of the rent that was deferred for 1999).
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC staff released Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition", which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
SAB No. 101 prohibits contingent revenue from being accrued until the thresholds
upon which it is based have been met. In 1999, percentage rental income was
recognized on an accrual basis. However, SAB No. 101 had no material impact on
the Company's financial statements for the year ended December 31, 1999 because
all of the thresholds upon which percentage rental income is based had been met
by December 31, 1999. In accordance with SAB No. 101, percentage rental income
will not be recognized in the year 2000 until the thresholds upon which it is
based are met. Management does not believe this change will have a material
impact on its interim or annual financial statements.
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RESULTS OF OPERATIONS
The following table shows the Company's financial data as a percentage
of total revenues for the three years ended December 31, 1999, 1998, and 1997
and the variance in dollars between the years ended December 31, 1999 and 1998
and the years ended December 31, 1998 and 1997. See Note 4. Segment Reporting
included in Item 8. Financial Statements and Supplementary Data for financial
information about investment segments.
FINANCIAL DATA AS A PERCENTAGE OF TOTAL TOTAL VARIANCE IN DOLLARS BETWEEN
REVENUES FOR THE YEAR ENDED DECEMBER 31, THE YEARS ENDED DECEMBER 31,
---------------------------------------- ---------------------------------
1999 1998 1997 1999 AND 1998 1998 AND 1997
------ ------ ------ ------------- -------------
REVENUES
Office and retail properties 82.3% 80.6% 81.2% $ 51.5 $ 199.7
Hotel properties 8.8 7.7 8.3 11.9 16.0
Behavioral healthcare properties 5.5 7.9 6.7 (14.2) 25.5
Interest and other income 3.4 3.8 3.8 (1.2) 9.7
------ ------ ------ ------------- -------------
TOTAL REVENUES 100.0 100.0 100.0 48.0 250.9
------ ------ ------ ------------- -------------
EXPENSES
Operating expenses 34.4 34.8 35.5 14.1 84.1
Corporate general and administrative 2.2 2.3 2.9 -- 3.4
Interest expense 25.7 21.8 19.3 39.8 65.8
Amortization of deferred financing costs 1.4 0.9 0.8 3.8 3.0
Depreciation and amortization 17.6 16.9 16.6 13.6 43.7
Settlement of merger dispute 2.0 -- -- 15.0 --
Carrying value in excess of market value of
asset held for sale 2.3 -- -- 16.8 --
Impairment and other charges related to
the behavioral healthcare assets 21.7 -- -- 162.0 --
Write-off of costs associated with
unsuccessful acquisitions -- 2.7 -- (18.4) 18.4
------ ------ ------ ------------- -------------
TOTAL EXPENSES 107.3 79.4 75.1 246.7 218.4
------ ------ ------ ------------- -------------
OPERATING INCOME (LOSS) (7.3) 20.6 24.9 (198.7) 32.5
OTHER INCOME
Equity in net income of unconsolidated companies:
Office and retail properties 0.7 0.6 0.1 1.1 3.6
Temperature-controlled logistics properties 2.0 0.1 0.3 14.5 (0.7)
Residential development properties 5.7 4.8 4.2 9.4 14.7
Other 0.7 0.1 0.7 4.0 (2.0)
------ ------ ------ ------------- -------------
TOTAL OTHER INCOME 9.1 5.6 5.3 29.0 15.6
------ ------ ------ ------------- -------------
INCOME BEFORE MINORITY INTERESTS 1.8 26.2 30.2 (169.7) 48.1
Minority interests (0.3) (2.5) (4.0) 15.2 0.1
------ ------ ------ ------------- -------------
NET INCOME 1.5 23.7 26.2 (154.5) 48.2
Preferred share dividends (1.8) (1.7) -- (1.8) (11.7)
Return on share repurchase agreement (0.1) -- -- (0.6) --
Forward share purchase
agreement return (0.6) (0.4) -- (1.0) (3.3)
------ ------ ------ ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS (1.0)% 21.6% 26.2% $ (157.9) $ 33.2
====== ====== ====== ============= =============
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COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
REVENUES
Total revenues increased $48.0 million, or 6.9%, to $746.3 million for
the year ended December 31, 1999, as compared to $698.3 million for the year
ended December 31, 1998.
The increase in Office and Retail Property revenues of $51.5 million,
or 9.1%, compared to the year ended December 31, 1998, is attributable to:
o the acquisition of nine Office Properties in 1998, which
contributed revenues for a full year in 1999, as compared with
a partial year in 1998, resulting in $17.1 million in
incremental revenues;
o increased revenues of $27.8 million from the 80 Office and
Retail Properties acquired prior to January 1, 1998, primarily
as a result of rental rate increases at these Properties; and
o increased revenues of $6.6 million as a result of the receipt
of lease termination fees during 1999.
The increase in Hotel Property revenues of $11.9 million, or 22.3%,
compared to the year ended December 31, 1998, is attributable to:
o the acquisition of one golf course affiliated with one of the
Hotel Properties during 1998, which contributed to revenues
for a full year in 1999, as compared with a partial year in
1998, resulting in $1.7 million of incremental revenues;
o the reclassification of the Renaissance Houston Hotel from the
Office Property segment to the Hotel Property segment as a
result of the restructuring of its lease on July 1, 1999,
which contributed $2.8 million of incremental revenues under
the new lease;
o increased revenues of $1.3 million from the re-leasing of the
Omni Austin Hotel to HCD Austin Corporation as of January 1,
1999; and
o increased revenues of $6.1 million from the eight Hotel
Properties acquired prior to January 1, 1998, as a result of
an increase in base rents of $4.8 million because of lease
amendments entered into in connection with contributions made
by the Company for capital improvements at some of the Hotel
Properties, and an increase in percentage rent of $1.3
million.
The decrease in Behavioral Healthcare Property revenue of $14.2
million, or 25.7%, is attributable to the reflection of rent from CBHS on a cash
basis beginning in the third quarter of 1999, and also is attributable to the
deferral of the November and December 1999 rent payments from CBHS.
EXPENSES
Total expenses increased $246.7 million, or 44.5%, to $801.2 million
for the year ended December 31, 1999, as compared to $554.5 million for the year
ended December 31, 1998.
The increase in rental property operating expenses of $14.1 million, or
5.8%, compared to the year ended December 31, 1998, is attributable to:
o the acquisition of nine Office Properties during 1998, which
incurred expenses during the full year of 1999, as compared to
only a portion of the year of 1998, resulting in $7.1 million
of incremental expenses; and
o increased expenses of $7.0 million from the 80 Office and
Retail Properties acquired prior to January 1, 1998, primarily
as a result of an increase in real estate taxes.
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46
The increase in interest expense of $39.8 million, or 26.1%, compared
to the year ended December 31, 1998, is primarily attributable to:
o $0.9 million of incremental interest payable under the
Metropolitan Life Notes III and IV, which were assumed in
connection with the acquisition of the Datran Center Office
Property in May 1998;
o $5.9 million of incremental interest payable due to the
promissory note secured by the Houston Center Office Property
complex, contributing approximately 8 months of interest in
1999 compared with only three months of interest in 1998. This
promissory note was issued in conjunction with the termination
of the equity swap agreement with Merrill Lynch International
on September 30, 1998;
o $4.9 million of incremental interest payable due to the
refinancing of the Houston Center Office Property complex in
September 1999;
o $20.4 million of incremental interest payable due to draws
under the Credit Facility and under the term loans with
BankBoston N.A. (average balance outstanding on the Credit
Facility and under the term loans for the year ended December
31, 1999 and 1998 was $1,043.3 million and $745.0 million,
respectively); and
o $5.7 million of incremental interest payable due to the
refinancing of the Greenway Plaza Office Property complex in
June 1999 with a $280 million secured, fixed-rate note which
generated $165.0 million in net proceeds which were primarily
used to settle the Forward Share Purchase Agreement with UBS.
All of these financing arrangements were used to fund investments,
obligations associated with investments, and to provide working capital.
The increase in amortization of deferred financing costs of $3.8
million, or 58.5%, compared to the year ended December 31, 1998, is primarily
attributable to the incremental amortization of financing costs associated with
new debt obtained in 1998 and 1999.
The increase in depreciation and amortization expense of $13.6 million,
or 11.5%, compared to the year ended December 31, 1998, is primarily
attributable to the acquisition during 1998 of nine Office Properties.
An additional increase in expenses of $175.4 million is attributable
to:
o $162.0 million due to the impairment and other charges related
to the Behavioral Healthcare Properties;
o $16.8 million due to the impairment charge on one of the
Office Property assets held for disposition which represents
the difference between the carrying value of this property and
the subsequent sales price less costs of sale;
o non-recurring costs of $15.0 million associated with the
settlement of litigation relating to the merger agreement
entered into in January 1998 between the Company and Station
Casinos, Inc.; and
o offset by a decrease of $18.4 million due to a non-recurring
write-off in 1998 of costs associated with unsuccessful
acquisitions.
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES
Equity in net income of unconsolidated companies increased $29.0
million, or 73.8%, to $68.3 million for the year ended December 31, 1999, as
compared to $39.3 million for the year ended December 31, 1998.
The increase is attributable to:
o An increase in equity in net income of the unconsolidated
office and retail properties of $1.1 million, or 26.2%
compared to the year ended December 31, 1998, attributable to
increased revenues at the Woodlands Commercial Properties
Company L.P., due to the sale of the multi-family portfolio in
the third quarter of 1999;
o an increase in equity in net income of the
Temperature-Controlled Logistics Corporations of $14.5
million, or 2900.0%, compared to the year ended December 31,
1998, primarily as a result of the change in ownership. Prior
to March 12, 1999 the Temperature-Controlled Logistics
Corporations reflected its equity in the operations of the
Temperature-Controlled Logistics Properties. Subsequent to
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47
March 12, 1999, the Temperature-Controlled Logistics
Corporations receives rent from AmeriCold Logistics, the
lessee and owner of business operations. In addition, the
Company's 1999 equity in net income includes 12 months of
income from nine and five Temperature-Controlled Logistics
Properties which were acquired in June 1998 and July 1998,
respectively.
o an increase in equity in net income of the Residential
Development Corporations of $9.4 million, or 28.1%, compared
to the year ended December 31, 1998, primarily as a result of
(i) the increased sales activity at CDMC, primarily due to
increased residential lot sales, which resulted in $5.1
million of incremental equity in net income to the Company;
(ii) the increased lot sales and average price per lot sold
and the sale of 16 acres at Houston Area Development, which
resulted in $3.0 million of incremental equity in net income
to the Company, (iii) an increase in sales activity at The
Woodlands, which resulted in $1.6 million of incremental
equity in net income to the Company; (iv) the increase in
average sales price per lot at Desert Mountain with constant
lot absorption between years, which resulted in $0.6 million
of incremental equity in net income to the Company; and (v) a
decrease in lot sales at Mira Vista, which resulted in a
decrease of $0.9 million in equity in net income to the
Company; and
o an increase in equity in net income of the other
unconsolidated companies of $4.0 million, or 363.6%, compared
to the year ended December 31, 1998, primarily attributable to
the 7.5% dividend income from the $85 million preferred member
interest in Metropolitan Partners, LLC, which the Company
purchased in May 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
REVENUES
Total revenues increased $250.9 million, or 56.1%, to $698.3 million
for the year ended December 31, 1998, as compared to $447.4 million for the year
ended December 31, 1997.
The increase in Office and Retail Property revenues of $199.7 million,
or 55.0%, compared to 1997 is primarily attributable to:
o the acquisition of nine Office Properties in 1998, which
resulted in $54.7 million of incremental revenues;
o the acquisition of 26 Office Properties and one Retail
Property in 1997, which contributed revenues for a full year
in 1998, as compared to a partial year in 1997, resulting in
$111.3 million of incremental revenues; and
o increased revenues of $33.7 million from the 59 Office and
Retail Properties acquired prior to January 1, 1997, primarily
as a result of rental rate and occupancy increases at these
Properties.
The increase in Hotel Property revenues of $16.0 million, or 42.9%,
compared to 1997 is primarily attributable to:
o the acquisition of one Hotel Property and a golf course in
1998, which resulted in $3.9 million of incremental revenues;
o the acquisition of two Hotel Properties in 1997, which
contributed revenues for a full year in 1998, as compared to a
partial year in 1997, resulting in $8.9 million of incremental
revenues; and
o increased revenues of $3.3 million from the six Hotel
Properties acquired prior to January 1, 1997, which resulted
primarily from an increase in percentage rent.
The increase in Behavioral Healthcare Property revenues of $25.5
million, or 85.6%, compared to 1997 is primarily attributable to the fact that
the Behavioral Healthcare Properties contributed revenues for a full year in
1998 as compared to approximately six months in 1997.
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The increase in interest and other income of $9.7 million, or 57.1%,
compared to 1997 is primarily attributable to:
o the sale of marketable securities in 1998; and
o the acquisition of certain notes included in the portfolio
acquired from Carter-Crowley in May of 1997 and the extension
of loans to COI, also in May of 1997, both of which earned
interest for a full year in 1998 as compared to a partial year
in 1997, resulting in incremental interest income on these
notes receivable.
EXPENSES
Total expenses increased $218.4 million, or 65.0%, to $554.5 million
for the year ended December 31, 1998, as compared to $336.1 million for the year
ended December 31, 1997.
The increase in rental property operating expenses of $84.1 million, or
52.9%, compared to 1997 is attributable to:
o the acquisition of nine Office Properties in 1998, which
resulted in $22.1 million of incremental expenses;
o the acquisition of 26 Office Properties and one Retail
Property in 1997, which incurred expenses for a full year in
1998, as compared to a partial year in 1997, resulting in
$52.4 million of incremental expenses; and
o increased expenses of $9.6 million from the 59 Office and
Retail Properties acquired prior to January 1, 1997, primarily
as a result of occupancy increases at these Properties.
The increase in depreciation and amortization expense of $43.7 million,
or 58.7%, compared to 1997, is primarily attributable to the acquisitions of
Office, Retail, Hotel and the Behavioral Healthcare Properties in 1997 and 1998.
The increase in interest expense of $65.8 million, or 76.2%, compared
to 1997 is primarily attributable to:
o $21.6 million of interest payable under the Notes due 2002 and
Notes due 2007, which were issued in a private offering in
September 1997;
o $6.1 million of interest payable under the Chase Manhattan
Note, which was assumed in connection with the acquisition of
the Fountain Place Office Property in November 1997;
o $1.2 million of interest payable on the BankBoston Term
Note I, which the Company entered into in August 1997;
o $3.0 million of interest payable under the Metropolitan Life
Note II, which was assumed in connection with the acquisition
of the Energy Centre Office Property in December 1997;
o $2.3 million of interest payable under the Metropolitan Life
Notes III and IV, which were assumed in connection with the
acquisition of the Datran Center Office Property in May 1998;
o $3.3 million of interest payable under the promissory note
payable to Merrill Lynch International issued in conjunction
with the termination of the equity swap agreement with Merrill
Lynch International on September 30, 1998; and
o $28.0 million of incremental interest payable due to draws
under the Credit Facility and short-term borrowings with
BankBoston (average balance outstanding for the year ended
December 31, 1998 and 1997 was $728.3 million and $329.8
million, respectively).
All of these financing arrangements were used to fund investments and
working capital.
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The increase in corporate general and administrative expense of $3.4
million, or 26.4%, compared to 1997 is primarily attributable to the incremental
costs associated with the operations of the Company as a result of property
acquisitions.
An additional increase in expenses of $18.4 million is attributable to
a non-recurring write-off of costs associated with unsuccessful acquisitions.
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES
Equity in net income of unconsolidated companies increased $15.6
million, or 65.8%, to $39.3 million for the year ended December 31, 1998, as
compared to $23.7 million for the year ended December 31, 1997.
The increase is primarily attributable to:
o an increase in equity in net income of the Residential
Development Corporations of $14.7 million, or 78.2%, compared
to 1997 which is primarily attributable to the investments in
The Woodlands Land Company, Inc. in July 1997, and Desert
Mountain Development Corporation in August 1997, which
resulted in $14.2 million of incremental net income;
o an increase in equity in net income of other unconsolidated
office and retail properties of $3.5 million, or 600.0%,
compared to 1997, which is primarily attributable to the
investment in The Woodlands Commercial Properties Company,
L.P. in July 1997, which resulted in $4.0 million of
incremental net income; partially offset by
o a decrease in equity in net income of the other unconsolidated
companies of $2.0 million, or 64.5%, compared to 1997, which
is primarily attributable to distributions of $3.1 million
received in 1997 from the Company's investment in HBCLP, Inc.
(the primary asset of which is the investment in Hudson Bay
Partners, L.P., an investment partnership in which the Company
holds an effective 95% economic interest).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $72.9 million and $110.3 million at
December 31, 1999 and 1998, respectively. This 33.9% decrease is attributable to
$166.1 million and $167.6 million used in investing and financing activities,
respectively, partially offset by $296.4 million of cash provided by operating
activities.
INVESTING ACTIVITIES
The Company's cash used in investing activities of $166.1 million is
primarily attributable to:
o $93.9 million for increased investments in unconsolidated
companies primarily as a result of a $75.0 million preferred
interest in Metropolitan Partners, LLC;
o $58.5 million for recurring and non-recurring tenant
improvement and leasing costs for the Office and Retail
Properties;
o $20.3 million for capital expenditures on rental properties,
primarily attributable to non-recoverable building
improvements for the Office and Retail Properties and
replacement of furniture, fixtures and equipment for the Hotel
Properties;
o $31.4 million attributable to increased restricted cash and
cash equivalents primarily due to the escrow requirements
related to the refinancings of the Greenway Plaza Office
Property complex and the Houston Center Office Property
complex. Escrow funds of $23.0 million will be released during
the renovation phase of the Renaissance Houston Hotel over the
next 12 to 18 months; and
o $27.8 million for the development of investment properties,
including expansions and renovations at the Hotel
Properties.
The cash used in investing activities is partially offset by:
o $52.4 million for decreased notes receivable, primarily due to
the sale of certain promissory notes related to the Dallas
Mavericks; and
o $13.7 million for return of investment in the Residential
Development Corporations.
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OPERATING ACTIVITIES
The Company's cash provided by operating activities of $296.4 million
is primarily attributable to:
o $268.4 million from property operations;
o $21.5 million from an increase in accounts payable, accrued
liabilities and other liabilities;
o $30.9 million from a decrease in other assets, primarily due
to the sale of marketable securities; and
o $2.4 million from minority interests.
The cash provided by operating activities is partially offset by:
o $17.2 million from equity in earnings in excess of
distributions received from unconsolidated companies; and
o $9.7 million from an increase in restricted cash and cash
equivalents primarily as a result of increased property tax
escrow amounts related to 1999 debt refinancings.
FINANCING ACTIVITIES
The Company's use of cash for financing activities of $167.6 million is
primarily attributable to:
o distributions paid to common shareholders and unitholders of
$298.3 million;
o settlement of the Forward Share Purchase Agreement with UBS
for $149.4 million;
o debt financing costs of $16.7 million primarily related to the
refinancing of the Greenway Plaza Office Property complex, the
Houston Center Office Property complex and the BankBoston
Term Note II;
o distributions paid to preferred shareholders of $13.5 million;
o net payments under the Credit Facility of $150.0 million; and
o capital distributions to a joint venture partner of $3.2
million.
The use of cash for financing activities is partially offset by:
o net proceeds under short-term and long-term facilities of
$430.8 million primarily due to net proceeds from the
refinancing of the Greenway Plaza Office Property complex of
$165.0 million; net proceeds from the refinancing of the
BankBoston Term Note I of $60.0 million; net proceeds from the
refinancing of the BankBoston Term Note II of $200.0
million; net proceeds of $15.0 million from the refinancing of
the Houston Center Office Property complex; and net payments
of $7.1 million from the refinancing of the Datran Center
Office Property; and
o proceeds from the exercise of common share options of $32.6
million.
CBHS
In 1999, the Company experienced a decrease in liquidity as a result of
its investment in the Behavioral Healthcare Properties. The Behavioral
Healthcare Properties were leased to CBHS and its subsidiaries under a
triple-net lease. CBHS is a Delaware limited liability company which was formed
to operate the behavioral healthcare business located at the Behavioral
Healthcare Properties and is owned 10% by a subsidiary of Magellan and 90% by
COI and an affiliate of COI. CBHS's business has been negatively affected by
many factors, including adverse industry conditions. During 1999, CBHS failed to
perform in accordance with its operating budget. On February 16, 2000, CBHS and
all of its subsidiaries that are subject to the master lease with the Company
filed voluntary Chapter 11 bankruptcy proceedings in the United States
Bankruptcy Court for the District of Delaware. See "Strategic Plan Update -
CBHS" above for a complete description of the current status of CBHS, the
voluntary filing of Chapter 11 bankruptcy petitions by CBHS and its
subsidiaries, and the Company's investment in the Behavioral Healthcare
Properties.
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SHELF REGISTRATION STATEMENT
On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Management believes the Shelf
Registration Statement will provide the Company with more efficient and
immediate access to capital markets when considered appropriate. As of December
31, 1999, approximately $782.7 million was available under the Shelf
Registration Statement for the issuance of securities.
FORWARD SHARE PURCHASE AGREEMENT
On June 30, 1999, the Company settled the Forward Share Purchase
Agreement with UBS. As settlement of the Forward Share Purchase Agreement, the
Company made a cash payment of approximately $149.0 million to UBS in exchange
for the return by UBS to the Company of 7,299,760 common shares. The payment was
made with proceeds generated from the refinancing of the Greenway Plaza Office
Property complex.
The number of common shares returned to the Company is equal to the
4,700,000 common shares originally issued to UBS plus 2,599,760 common shares
subsequently issued by the Company, because of a decline in its stock price. The
additional shares were issued as collateral for the Company's obligation to
purchase 4,700,000 common shares from UBS by August 12, 1999. The settlement
price was calculated based on the gross proceeds the Company received from the
original issuance of 4,700,000 common shares to UBS, plus a forward accretion
component equal to 90-day LIBOR plus 75 basis points, minus an adjustment for
the Company's distributions paid to UBS. The forward accretion component
represented a guaranteed rate of return to UBS.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized
the repurchase of a portion of its outstanding common shares from time to time
in the open market or through privately negotiated transactions, in an amount
not to exceed $500.0 million. The proposed repurchases will be subject to
prevailing market conditions and other considerations. The Company expects the
share repurchase program to be funded through a combination of asset sales and
financing arrangements, which, in some cases, may be secured by the repurchased
shares. The amount of shares that the Company actually will purchase will be
determined from time to time, in its reasonable judgement, based on market
conditions and the availability of funds, among other factors. There can be no
assurance that any number of shares actually will be purchased within any
particular time period.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to
repurchase a portion of its common shares from UBS. As of December 31, 1999, the
Company was obligated to repurchase 4,789,580 common shares, or approximately
$84.1 million of the Company's common shares. The agreement was amended on
January 4, 2000, increasing the number of common shares the Company was
obligated to repurchase from UBS by January 4, 2001 to approximately 5,800,000
common shares, or approximately $102.0 million of the Company's common shares,
(as amended, the "Share Repurchase Agreement"). The price the Company will pay
for the common shares (the "Settlement Price") will be calculated based on the
average cost of the common shares purchased by UBS in connection with the Share
Repurchase Agreement plus a return to UBS of 30-day LIBOR plus 250 basis points,
minus an adjustment for the Company's distributions during the term of the Share
Repurchase Agreement. The guaranteed rate of return to UBS under the agreement
is equal to 30-day LIBOR plus 250 basis points.
The Company may settle the Share Repurchase Agreement in cash or common
shares. The Company currently intends to settle the Share Repurchase Agreement
to UBS in cash, by purchasing and retiring the shares with proceeds from Office
Property joint ventures and financing arrangements. This will decrease the
Company's liquidity and result in an increase in the Company's net income per
common share and net book value per common share. The Company, however, will
continue to evaluate its sources of capital and the potential uses of its
capital until the time that settlement is required under the Share Repurchase
Agreement or until such earlier time as it determines to settle the Share
Repurchase Agreement.
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In the event that the Company elects to fulfill the Share Repurchase
Agreement in common shares, UBS will sell the common shares on behalf of the
Company on the open market. If, as a result of a decrease in the market price of
the common shares, the number of common shares required to be sold to achieve
the Settlement Price exceeds the number of common shares purchased by UBS in
connection with the agreement, the Company will deliver additional cash or
common shares to UBS. If the Company elects to fulfill the Share Repurchase
Agreement in common shares, and the market price of the common shares is greater
than the Settlement Price, UBS will return a portion of the common shares that
it purchased in the open market to the Company.
If the common share price on the NYSE falls below the Settlement Price
calculated approximately every two weeks, the Company is required to remit cash
collateral to UBS equal to the product of the number of common shares purchased
by UBS and 115% of the difference between the Settlement Price and the closing
price of the common shares as reported on the NYSE. If the Company elects to
settle the Share Repurchase Agreement in cash, any cash collateral held by UBS
will be used to "pay-down" the Settlement Price. If the Company elects to settle
the Share Repurchase Agreement in common shares, UBS will release all claims to
any cash collateral they hold at that time. As of December 31, 1999, no cash
collateral was due to UBS. On February 18, 2000, the Company posted cash
collateral of $8.7 million to UBS, as a result of a decline in the common share
price.
According to the terms of the Share Repurchase Agreement, had the
agreement been settled, and the average cost of common shares to UBS on December
31, 1999 of approximately $17.55 been used, the Company would have had to
repurchase the 4,789,580 common shares from UBS for approximately $84.1 million.
In that event, the Company's liquidity would have decreased and the Company's
net income - diluted per common share would have been approximately $(0.06) for
the year ended December 31, 1999 and the net book value per common share
outstanding at December 31, 1999 would have been approximately $15.93.
STATION CASINOS, INC. ("STATION")
On April 14, 1999, the Company and Station entered into a settlement
agreement for the mutual settlement and release of all claims between the
Company and Station arising out of the agreement and plan of merger between the
Company and Station, which the Company terminated in August 1998. As part of the
settlement agreement, the Company paid $15.0 million to Station on April 22,
1999.
METROPOLITAN
On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates
Realty Corporation ("Reckson"), and Metropolitan Partners, LLC ("Metropolitan")
entered into a revised agreement and plan of merger that superseded the merger
agreement to which the Company was a party. Under the revised agreement,
Metropolitan agreed to acquire Tower for a combination of cash and Reckson
exchangeable Class B common shares. The Company, Reckson and Metropolitan agreed
that the Company's investment in Metropolitan would be an $85.0 million
preferred member interest in Metropolitan. In connection with the revised
agreement, the Company contributed $10.0 million of the $85.0 million required
capital contribution to Metropolitan in December 1998 and contributed the
remaining $75.0 million to Metropolitan upon satisfaction of all of the
conditions to the funding on May 19, 1999. The Company's $85.0 million preferred
member interest in Metropolitan at December 31, 1999 would equate to an
approximate 20% equity interest.
The investment has a cash flow preference of 7.5% for a two-year period
and may be redeemed by Metropolitan within the two-year period for
$85.0 million, plus an amount sufficient to provide a 9.5% internal rate of
return to the Company. If Metropolitan does not redeem the preferred interest
upon expiration of the two-year period, the Company may convert the interest
either into (i) a common equity interest in Metropolitan or (ii) shares of
common stock of Reckson at a conversion price of $24.61.
CREDIT FACILITY
At December 31, 1999, the Company's borrowing capacity under the Credit
Facility was limited to $560.0 million, of which $510.0 million was outstanding.
The interest rate on advances under the Credit Facility was the Eurodollar rate
plus 137 basis points. As of December 31, 1999, the weighted average interest
rate was 7.65%. The Credit Facility was unsecured and was scheduled to expire in
June 2000. The Credit Facility required the Company to maintain compliance with
a number of customary financial and other covenants on an ongoing basis,
including leverage ratios based on book value and debt service coverage ratios,
limitations on additional secured and total indebtedness and distributions,
limitations on additional investments and the incurrence of additional liens,
restrictions on real estate development activity and a minimum net worth
requirement. The Company was in compliance with the financial covenants related
to the Credit Facility for the December 31, 1999 reporting period. During the
first quarter of 2000, the Credit Facility was repaid and retired primarily with
the proceeds of the New Facility described below.
NEW FACILITY
On February 4, 2000, the Company repaid and retired the Credit Facility
and the BankBoston Term Note I primarily with the proceeds of the New Facility,
a new $850.0 million secured, variable-rate facility fully underwritten and
funded by UBS. The New Facility is comprised of three tranches: a three-year
$300.0 million revolving line of credit (the "UBS Line of Credit"), a $275.0
million three-year term loan ("UBS Term Loan I") and a $275.0 million four-year
term loan ("UBS Term Loan II"). Borrowings under the UBS Line of Credit, the UBS
Term Loan I and the UBS Term Loan II at March 24, 2000 were approximately $258.5
million, $257.2 million and $257.2 million, respectively. The UBS Line of Credit
and the UBS Term Loan I bear interest at LIBOR plus 250 basis points. The UBS
Term Loan II bears interest at LIBOR plus 275 basis points. The Company also
entered into a cash flow hedge agreement related to a portion of the New
Facility in a separate transaction subsequent to December 31, 1999, which is
intended to mitigate its exposure to variable rate debt as more fully described
in "Interest Rate Hedging Transactions" below. The New Facility is secured by 41
Office Properties and four Hotel Properties.
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INTEREST RATE HEDGING TRANSACTIONS
The Company does not use derivative financial instruments for trading
purposes, but utilizes them to manage exposure to variable rate debt. The
Company accounts for its derivative instruments under SFAS 133, which was
adopted in the third quarter of 1999. On September 1, 1999, the Company entered
into a four-year cash flow hedge agreement with Salomon Brothers Holding
Company, Inc.("Salomon"), relating to the BankBoston Term Note II, for a
notional amount of $200.0 million. The underlying note, which was originally
issued at a floating interest rate of 30-day LIBOR plus 325 basis points was
effectively converted to a fixed weighted average interest rate of 9.43% through
maturity. Effective February 1, 2000, the Company renegotiated certain terms and
covenants under the BankBoston Term Note II. At such time, the interest rate on
the facility increased to 30-day LIBOR plus 400 basis points, and consequently
increased the effective fixed weighted average interest rate to 10.18% through
maturity. As of December 31, 1999, the cash flow hedge agreement with Salomon
resulted in approximately $0.3 million of additional interest expense.
Effective February 4, 2000, the Company entered into a three-year cash
flow hedge agreement with Fleet Boston Financial, relating to a portion of the
New Facility, for a notional amount of $200.0 million. As a result, $200.0
million of the amount due under the note which was originally issued at a
floating interest rate of LIBOR plus 250 basis points, was effectively converted
to a fixed weighted average interest rate of 9.61% through maturity.
ASSET JOINT VENTURES
The Company has entered into agreements with Chadwick Saylor & Co.,
Inc. and Warburg Dillon Read to provide investment advisory services to the
Company in the successful execution of the Company's joint-venture strategy. The
Company intends to hold a minority interest in these assets and will continue to
lease and manage these Properties.
LIQUIDITY REQUIREMENTS
As of December 31, 1999, the Company's short-term liquidity
requirements consisted of secured and unsecured debt maturities, its
obligations under the Share Repurchase Agreement with UBS and amounts payable
in connection with the expansion or renovation of two Hotel Properties. The
Company had approximately $515.9 million of secured and unsecured debt that was
scheduled to expire during 2000, consisting primarily of $510.0 million due
under the Credit Facility with BankBoston, which was scheduled to expire in
June 2000. In addition, the Company, at that time, had approximately $445.0
million of secured debt that was scheduled to expire in 2001, consisting
primarily of $320.0 million due under the BankBoston Term Note I. Effective
January 31, 2000, the Company entered into the New Facility. The Company used
the proceeds of the New Facility to retire the Credit Facility and BankBoston
Term Note I, which made up 86% of the Company's maturing debt in 2000 and 2001.
The Company's Share Repurchase Agreement with UBS, as described in
"Share Repurchase Agreement" above, expires on January 4, 2001, at which time
the Company is required to settle in cash or common shares. The Company
currently intends to fulfill the Share Repurchase Agreement to UBS in cash, by
purchasing and retiring the shares with proceeds from Office Property joint
ventures and financing arrangements. This will decrease the Company's liquidity
and result in an increase in the Company's net income per common share and net
book value per common share. The Company, however, will continue to evaluate its
sources of capital and the potential uses of its capital until the time that
settlement is required under the Share Repurchase Agreement or until such
earlier time as it determines to settle the Share Repurchase Agreement.
The Sonoma Mission Inn & Spa, located north of San Francisco,
California, is scheduled to complete its estimated $20 million expansion
consisting of 30 additional guest rooms and a 30,000 square foot full-service
spa in April of 2000. The 389 guest room Renaissance Houston Hotel, located in
the center of Greenway Plaza, will undergo substantial renovation including
improvements to all guest rooms, the lobby, corridors and exterior and interior
systems. The estimated $15.0 million renovation project is scheduled to be
completed in October of 2000. Both of these projects will be funded from cash
flows provided by operating activities, additional debt financing or combination
thereof.
The Company expects to meet its other short-term liquidity requirements
primarily through cash flow provided by operating activities. The Company
believes that cash flow provided by operating activities will be adequate to
fund normal recurring operating expenses, regular debt service requirements
(including debt service relating to additional and replacement debt), recurring
capital expenditures and distributions to shareholders and unitholders, as well
as non-recurring capital expenditures, such as tenant improvement and leasing
costs related to previously unoccupied space. To
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the extent that the Company's cash flow from operating activities is not
sufficient to finance non-recurring capital expenditures, the Company expects to
finance such activities with available cash or additional debt financing.
The Company expects to meet its long-term liquidity requirements
through long-term secured and unsecured borrowings and other debt and equity
financing alternatives. As of December 31, 1999, the Company's long-term
liquidity requirements consisted primarily of maturities under the Company's
fixed and variable-rate debt.
Debt and equity financing alternatives currently available to the
Company to satisfy its liquidity requirements and commitments for material
capital expenditures include:
o Additional proceeds from the refinancing of existing secured and
unsecured debt;
o Additional debt secured by existing unencumbered properties, investment
properties, or by investment property acquisitions or developments;
o Issuances of Operating Partnership units; and
o Joint venture arrangements.
REIT QUALIFICATION
The Company intends to maintain its qualification as a REIT under
Section 856(c) of the Code. As a REIT, the Company generally will not be subject
to corporate federal income taxes as long as it satisfies certain technical
requirements of the Code, including the requirement to distribute 95% of its
REIT taxable income to its shareholders.
On December 17, 1999, President Clinton signed into law the REIT
Modernization Act which will become effective after December 31, 2000, and
contains a provision that would permit the Company to own and operate certain
types of investments that are currently owned by COI. The REIT Modernization Act
is expected to reduce the number of business opportunities that the Company
would otherwise offer to COI pursuant to the Intercompany Agreement between the
Company and COI, which provides each party with rights to participate in certain
transactions. The Company has expressed an interest to COI in certain of the
businesses currently owned or operated by COI that the REIT Modernization Act
would allow the Company to own or operate. The Company is exploring alternatives
with COI regarding a potential future transaction with respect to certain of
COI's assets.
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DEBT FINANCING ARRANGEMENTS
The significant terms of the Company's primary debt financing
arrangements existing as of December 31, 1999 are shown below (dollars in
thousands):
INTEREST BALANCE
RATE AT OUTSTANDING AT
MAXIMUM DECEMBER 31, EXPIRATION DECEMBER 31,
DESCRIPTION BORROWINGS 1999 DATE 1999
- ---------------------------------------- --------------- --------------- -------------------- ---------------
Secured Fixed Rate Debt:
AEGON Note (1) $ 278,392 7.53% July 2009 $ 278,392
LaSalle Note I (2) 239,000 7.83 August 2027 239,000
JP Morgan Mortgage Note (3) 200,000 8.31 October 2016 200,000
LaSalle Note II (4) 161,000 7.79 March 2028 161,000
CIGNA Note (5) 63,500 7.47 December 2002 63,500
Metropolitan Life Note I (6)(7) 11,388 8.88 September 2001 11,388
Metropolitan Life Note II (8) 43,623 6.93 December 2002 43,623
Metropolitan Life Note V (9) 39,700 8.49 December 2005 39,700
Northwestern Life Note (10) 26,000 7.65 January 2003 26,000
Nomura Funding VI Note (7)(11) 8,480 10.07 July 2020 8,480
Rigney Promissory Note (12) 723 8.50 November 2012 723
----------- ----- -----------
Subtotal/Weighted Average $ 1,071,806 7.83% $ 1,071,806
----------- ----- -----------
Secured Variable Rate Debt (13):
BankBoston Term Note I (14)(18) $ 320,000 9.38% October 2001 $ 320,000
BankBoston Term Note II (15) 200,000 9.38 August 2003 200,000
SFT Whole Loans, Inc. Note (16) 97,123 7.36 September 2001 97,123
----------- ----- -----------
Subtotal/Weighted Average $ 617,123 9.06% $ 617,123
----------- ----- -----------
Unsecured Fixed Rate Debt:
Notes due 2007 (17) $ 250,000 7.50% September 2007 $ 250,000
Notes due 2002 (17) 150,000 7.00 September 2002 150,000
----------- ----- -----------
Subtotal/Weighted Average $ 400,000 7.31% $ 400,000
----------- ----- -----------
Unsecured Variable Rate Debt:
Credit Facility (18) $ 560,000 7.65% June 2000 $ 510,000
----------- ----- -----------
Total/Weighted Average $ 2,648,929 8.01% $ 2,598,929
=========== ===== ===========
- ----------
(1) The outstanding principal balance at maturity of this note will be
approximately $223 million.
(2) The note has a seven-year period during which only interest is payable
(through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity. At the end of 12 years
(August 2007), the interest rate increases, and the Company is required to
remit, in addition to the monthly debt service payment, excess property
cash flow, to be applied first against principal until the note is paid in
full and thereafter, against accrued excess interest. It is the Company's
intention to repay the note in full at such time (August 2007) by making a
final payment of approximately $220 million. LaSalle Note I is secured by
Properties owned by Funding I (See Note 1. Organization and Basis of
Presentation of Item 8. Financial Statements and Supplementary Data). The
note agreement restricts Funding I from engaging in certain activities,
including incurring liens on the Properties securing the note, pledging the
Properties securing the note, incurring certain other indebtedness
canceling a material claim or debt owed to it, entering into certain
transactions distributing funds derived from operation of the Properties
securing the note (except as specifically permitted in the note agreement),
or creating easements with respect to the Properties securing the note.
(3) On September 14, 1999, the Company refinanced the $184,299 Salomon Brothers
Realty Corp. Note with this note. The additional proceeds of $15,701 were
used to pay indebtedness outstanding under the BankBoston Credit Facility.
The refinancing did not include the Four Seasons Hotel - Houston that had
served as partial collateral for the Salomon Brothers Realty Corp. Note. At
the end of seven years (October 2006), the loan reprices based on current
interest rates at this time. It is the Company's intention to repay the
note in full at such time (October 2006) by making a final payment of
approximately $179.0 million.
(4) The note has a seven-year period during which only interest is payable
(through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity. At the end of 10 years (March
2006), the interest rate increases, and the Company is required to remit,
in addition to the monthly debt service payment, excess property cash flow,
as defined, to be applied first against principal until the note is paid in
full and thereafter, against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (March 2006) by
making a final payment of approximately $154.0 million. LaSalle Note II is
secured by Properties owned by Funding II (See Note 1. Organization and
Basis of Presentation of Item 8. Financial Statements and Supplementary
Data). The note agreement restricts Funding II from engaging in certain
activities, including incurring liens on the Properties securing the note,
pledging the Properties securing the note, incurring certain other
indebtedness canceling a material claim or debt owed to it, entering into
certain affiliate transactions, distributing funds derived from operation
of the Properties securing the note (except as specifically permitted in
the note agreement), or creating easements with respect to the Properties
securing the note.
(5) The note requires payments of interest only during its term. The CIGNA Note
is secured by the MCI Tower and Denver Marriott City Center Hotel Property.
The note agreement has no negative covenants. The deed of trust requires
the Company to maintain the Properties that secure the note, and requires
approval to grant liens, transfer the Properties, or issue new leases.
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(6) The note requires monthly payments of principal and interest based on
20-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Metropolitan Note I
is secured by five of The Woodlands Office Properties which are under
contract for sale. The note agreement has no negative covenants.
(7) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties.
(8) The note requires monthly payments of principal and interest based on a
25-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Metropolitan Life
Note II is secured by the Energy Centre Office Property. The note agreement
requires the Company to maintain compliance with a number of customary
covenants, including maintaining the Property that secures the note and not
creating any lien with respect to or otherwise encumbering such Property.
This note was transferred to the new owner of Energy Centre upon its sale
on January 18, 2000.
(9) On December 1, 1999, the Company refinanced the Metropolitan Life Note III
with the Metropolitan Life Note V. The original note of $40 million had a
fixed interest rate of 7.74% and was scheduled to mature on December 1,
1999. The Metropolitan Life Note V requires monthly principal and interest
payments based on a 25-year amortization schedule through maturity, at
which time the outstanding principal balance is due and payable. The
Metropolitan Note is secured by the Datran Center Office Property.
(10) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by the 301 Congress Avenue Office
Property. The note agreement requires the Company to maintain compliance
with a number of customary covenants, including maintaining the Property
that secures the note and not creating any lien with respect to or
otherwise encumbering such Property.
(11) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. Beginning in July 1998, the Company obtained
the right to defease the note by purchasing Treasury obligations in an
amount sufficient to pay the note without penalty. The Nomura Funding VI
Note is secured by Canyon Ranch-Lenox, the Property owned by Funding VI
(see Note 1. Organization and Basis of Presentation of Item 8. Financial
Statements and Supplementary Data). In July of 2010, the interest rate due
under the note will change to a 10-year Treasury yield plus 500 basis
points or, if the Company so elects, it may repay the note without penalty.
The note agreement requires Funding VI to maintain compliance with a number
of customary covenants, including a debt service coverage ratio for the
Property that secures the note, a restriction on the ability to transfer or
encumber the Property that secures the note, and covenants related to
maintaining its single purpose nature, including restrictions on ownership
by Funding VI of assets other than the Property that secures the note,
restrictions on the ability to incur indebtedness and make loans, and
restrictions on operations.
(12) The note requires quarterly payments of principal and interest based on a
15-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Rigney Promissory
Note is secured by a parcel of land owned by the Company and located across
from an Office Property. The note agreement has no negative covenants.
(13) For the method of calculation of the interest rate for the Company's
variable-rate debt (other than the Credit Facility), see Note 7. Notes
Payable and Borrowings under Credit Facility of Item 8. Financial
Statements and Supplementary Data.
(14) This note requires payments of interest only during its term. The note
bears interest at the Company's election of Base Rate plus 100 basis points
or Eurodollar plus 325 basis points. On February 10, 1999, this loan was
increased to $320 million based on the inclusion of The Addison and
Reverchon Plaza Office Properties in the pool of Properties securing this
note. The note is secured by a first lien on the 3333 Lee Parkway, Frost
Bank Plaza, Four Westlake, Central Park Plaza, Bank One Tower, Washington
Harbour and Greenway I and IA Office Properties in addition to the two
Properties listed above. The term loan requires the Company to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios based on book value and debt
service coverage ratios, limitations on additional secured and total
indebtedness and distributions, limitations on additional investments and
the incurrence of additional liens, restrictions on real estate development
activity and a minimum net worth requirement.
(15) The Company entered into the BankBoston Term Note II on September 14, 1999.
The loan bears interest at LIBOR plus 325 basis points. This loan is
secured by partnership interests in two pools of underleveraged assets. The
term loan requires the Company to maintain compliance with a number of
customary financial and other covenants on an ongoing basis, including
leverage ratios based on book value and debt service coverage ratios,
limitations on additional secured and total indebtedness and distributions,
limitations on additional investments and the incurrence of additional
liens, restrictions on real estate development activity and a minimum net
worth requirement. The proceeds were used to repay the $150 million
BankBoston Bridge Loan, and to repay $50 million of outstanding
indebtedness under the BankBoston Credit Facility. On February 1, 2000, the
Company renegotiated certain terms and covenants under this note. As a
result, the interest rate on the facility increased to 30-day LIBOR plus
400 basis points. The Company entered into a four-year $200 million cash
flow hedge agreement with Salomon in a separate transaction related to the
BankBoston Term Note II. Pursuant to this agreement, the Company will pay
Salomon on a quarterly basis a 6.183% fixed interest rate, and Salomon will
pay the Company a floating 90-day LIBOR rate based on the same quarterly
reset dates.
(16) The note bears interest at the rate of LIBOR plus 175 basis points and
requires payment of interest only during its term. The SFT Note is secured
by Fountain Place. The note agreement requires that the Company maintain
compliance with customary covenants including maintaining the Property that
secures the note.
(17) The notes are unsecured and require payments of interest only during their
terms. The indenture requires the Company to maintain compliance with a
number of customary financial and other covenants on an ongoing basis,
including leverage ratios and debt service coverage ratios, limitations on
the incurrence of additional indebtedness and maintaining the Company's
Properties. The notes were issued in an offering registered with the SEC.
(18) At December 31, 1999, the Company's borrowing capacity under the Credit
Facility was limited to $560.0 million, of which $510.0 million was
outstanding. The interest rate on advances under the Credit Facility was
the Eurodollar rate plus 137 basis points. The Credit Facility required the
Company to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including leverage ratios based on
book value and debt service coverage ratios, limitations on additional
secured and total indebtedness and distributions, limitations on additional
investments and the incurrence of additional liens, restrictions on real
estate development activity and a minimum net worth requirement. The
Company was in compliance with the financial covenants related to the
Credit Facility for the December 31, 1999 reporting period. On February 4,
2000, the Credit Facility and the BankBoston Term Note I were repaid and
retired primarily with the proceeds from the New Facility, a new $850.0
million secured, variable-rate facility from UBS. See "Liquidity and
Capital Resources - New Facility" for a description of the New Facility.
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Below are the aggregate principal amounts due as of December 31, 1999
under the Credit Facility and other indebtedness of the Company by year.
Scheduled principal installments and amounts due at maturity are included.
SECURED UNSECURED TOTAL
----------- --------- -----------
(in thousands)
2000 $ 5,913 $ 510,000 $ 515,913
2001 444,975 - 444,975
2002 105,560 150,000 255,560
2003 315,515 - 315,515
2004 53,129 - 53,129
Thereafter 763,837 250,000 1,013,837
----------- --------- -----------
$ 1,688,929 $ 910,000 $ 2,598,929
=========== ========= ===========
See "Liquidity and Capital Resources - New Facility" above for a
description of the repayment and retiring of the Credit Facility subsequent to
December 31, 1999, primarily with the proceeds of the New Facility.
The Company's policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of:
o investment opportunities for which capital is required and the
cost of debt in relation to such investment opportunities;
o the type of debt available (secured or unsecured);
o the effect of additional debt on existing coverage ratios;
o the maturity of the proposed debt in relation to maturities of
existing debt; and
o exposure to variable-rate debt and alternatives such as
interest rate swaps and cash flow hedges to reduce this
exposure.
The Company's debt service coverage ratio for the years ended December
31, 1999 and 1998 was approximately 2.8 and 3.1, respectively. Debt service
coverage for a particular period is generally calculated as net income plus
depreciation and amortization, plus interest expense, plus extraordinary or
non-recurring losses, minus extraordinary or non-recurring gains, divided by
debt service (including principal and interest payable during the period of
calculation). The debt service coverage ratio the Company is required to
maintain as stipulated by the Company's debt arrangements and calculated as
described above is 1.5. The Company's New Facility requires a debt service
coverage ratio of 2.0.
SIGNIFICANT DEBT REFINANCINGS
On June 30, 1999, the Company refinanced the Greenway Plaza Office
Property complex with a $280 million, secured, fixed-rate mortgage loan, bearing
interest at a fixed rate of 7.53%. The proceeds were primarily used to repay
the $115 million existing note on the complex and to pay approximately $149
million in settlement of the Forward Share Purchase Agreement with UBS.
On September 14, 1999, the Company obtained a $200 million note from
BankBoston ("BankBoston Term Note II") secured by partnership interests in two
pools of assets which also secure the La Salle Notes I an II. This new loan has
a four-year term and a floating interest rate based on 30-day LIBOR plus 325
basis points. On February 1, 2000, the Company renegotiated certain terms and
covenants under this note. As a result, the interest rate on the facility
increased to 30-day LIBOR plus 400 basis points. The proceeds were used to repay
the $150 million short-term Bridge Loan with BankBoston in full and reduce the
amount outstanding under the BankBoston Credit Facility by $50 million. The
Company has entered into a four-year $200 million cash flow hedge agreement with
Salomon in a separate transaction related to this financing. Pursuant to this
agreement, the Company will pay Salomon a 6.183% fixed interest rate on a
quarterly basis, and Salomon will pay the Company a floating 90-day LIBOR rate
based on the same quarterly reset dates.
On September 15, 1999, the Company refinanced the $184 million Salomon
Brothers Note which secured the Houston Center mixed-use Office Property
complex, with a $200 million, secured, fixed-rate mortgage loan through J.P.
Morgan Investment Management, Inc. The replacement loan has a seven-year term
and bears interest at a fixed rate of 8.31%. The Houston Center mixed-use
Office Property secures the replacement loan but the Four Seasons Hotel -
Houston, which served as partial collateral for the original loan, does not
serve as collateral for the replacement loan. The proceeds of the replacement
loan were primarily used to repay the $184 million Salomon Brothers Note in
full and to reduce the amount outstanding under the BankBoston Credit Facility
by approximately $15 million.
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FUNDS FROM OPERATIONS
FFO, based on the definition adopted by the Board of Governors of the
NAREIT and as used in this document, means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from debt restructuring
and sales of property;
o excluding adjustments not of a normal or recurring
nature;
o plus depreciation and amortization of real estate
assets; and
o after adjustments for unconsolidated partnerships
and joint ventures.
NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. The Company considers
FFO an appropriate measure of performance of an equity REIT. However, FFO:
o does not represent cash generated from operating activities
determined in accordance with GAAP (which, unlike FFO,
generally reflects all cash effects of transactions and other
events that enter into the determination of net income);
o is not necessarily indicative of cash flow available to fund
cash needs; and
o should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the
Company's operating performance, or to cash flow from
operating activities determined in accordance with GAAP as a
measure of either liquidity or the Company's ability to make
distributions.
The Company has historically distributed an amount less than FFO,
primarily due to reserves required for capital expenditures, including leasing
costs. The aggregate cash distributions paid to shareholders and unitholders for
the year ended December 31, 1999 and 1998 were $298.1 and $220.6 million,
respectively.
An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because the Company's Board of
Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 95% of its REIT taxable income (as defined in the Code).
Therefore, a significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis.
Accordingly, the Company believes that to facilitate a clear
understanding of the consolidated historical operating results of the Company,
FFO should be considered in conjunction with the Company's net income (loss) and
cash flows reported in the consolidated financial statements and notes to the
financial statements. However, the Company's measure of FFO may not be
comparable to similarly titled measures of other REITs because these REITs may
apply the definition of FFO in a different manner than the Company.
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STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS AND SHARES/UNITS IN THOUSANDS)
FOR THE
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
--------- ---------
Net income $ 10,959 $ 165,600
Adjustments:
Depreciation and amortization of real estate assets 128,403 115,678
Settlement of merger dispute 15,000 --
Gain on behavioral healthcare facility disposition (439) --
Carrying value in excess of market value of
assets held for sale 16,800 --
Impairment and other charges related to the
behavioral healthcare assets 136,435 --
Write-off of costs associated with unsuccessful
acquisitions -- 18,435
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office and retail properties 6,110 2,530
Temperature-Controlled Logistics Segment 22,400 28,115
Residential development properties 31,725 25,379
Other 611 --
Unitholder minority interest 1,273 16,111
Preferred share dividends (13,500) (11,700)
--------- ---------
Funds from operations(1) $ 355,777 $ 360,148
========= =========
Investment Segments:
Office and Retail Segment $ 367,830 $ 325,442
Hospitality Segment 64,079 52,375
Behavioral Healthcare Segment 15,488 55,295
Temperature-Controlled Logistics Segment 37,439 28,626
Residential Development Segment 74,597 58,892
Corporate general & administrative (16,274) (16,264)
Interest expense (192,033) (152,214)
Preferred share dividends (13,500) (11,700)
Other(2) 18,151 19,696
--------- ---------
Funds from operations $ 355,777 $ 360,148
========= =========
Basic weighted average shares/units 135,954 132,429
========= =========
Diluted weighted average shares/units(3) 137,892 140,388
========= =========
- ------------------------
(1) To calculate basic funds from operations, deduct Unitholder minority
interest.
(2) Includes interest and other income, net of gain on behavioral healthcare
facility dispostion, less depreciation and amortization of non-real assets
and amortization of deferred financing costs.
(3) See calculations for the amounts presented in the reconciliation following
this table.
The following schedule reconciles the Company's basic weighted average
shares/units to the diluted weighted average shares/units presented above:
YEAR ENDED DECEMBER 31,
-----------------
(SHARES/UNITS IN THOUSANDS) 1999 1998
------- -------
Basic weighted average shares/units: 135,954 132,429
Add: Assumed conversion of preferred shares -- 3,478
Share and unit options 1,675 3,903
Forward Share Purchase Agreement 263 395
Equity Swap Agreement -- 183
------- -------
Diluted weighted average shares/units 137,892 140,388
======= =======
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RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
--------- ---------
Funds from operations $ 355,777 $ 360,148
Adjustments:
Depreciation and amortization of non-real estate assets 2,311 1,631
Settlement of merger dispute (15,000) --
Write-off costs associated with unsuccessful acquisitions -- (18,435)
Other charges related to the behavioral healthcare assets (32,662) --
Gain on behavioral healthcare property disposition 439 --
Amortization of deferred financing costs 10,283 6,486
Minority interest in joint ventures profit and depreciation
and amortization 2,054 2,272
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies (60,846) (56,024)
Change in deferred rent receivable (636) (34,047)
Change in current assets and liabilities 38,241 (6,138)
Equity in earnings in excess of distributions received from
unconsolidated companies (17,202) --
Distributions received in excess of equity in earnings from
unconsolidated companies -- 9,308
Preferred share dividends 13,500 11,700
Non-cash compensation 118 174
--------- ---------
Net cash provided by operating activities $ 296,377 $ 277,075
========= =========
HISTORICAL RECURRING OFFICE AND RETAIL PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring
capital expenditures (excluding those expenditures which are recoverable from
tenants) and tenant improvement and leasing costs for the years ended December
31, 1999, 1998 and 1997, attributable to signed leases, all of which have
commenced or will commence during the next twelve months (i.e. the renewal or
replacement tenant began or will begin to pay rent) for the Office and Retail
Properties consolidated in the Company's financial statements during each of the
periods presented. Tenant improvement and leasing costs for signed leases during
a particular period do not necessarily equal the cash paid for tenant
improvement and leasing costs during such period due to timing of payments.
1999 1998 1997
---------- ---------- ----------
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands) $ 6,048 $ 5,107 $ 3,310
Per square foot $ 0.19 $ 0.16 $ 0.15
TENANT IMPROVEMENT AND LEASING COSTS:(1)
Replacement Tenant Square Feet 1,259,660 850,325 584,116
Renewal Tenant Square Feet 1,385,911 923,854 1,001,653
Tenant Improvement Costs (in thousands) $ 14,339 $ 8,552 $ 10,958
Per square foot leased $ 5.42 $ 4.82 $ 6.91
Tenant Leasing Costs (in thousands) $ 7,804 $ 5,358 $ 6,601
Per square foot leased $ 2.95 $ 3.02 $ 4.16
Total (in thousands) $ 22,143 $ 13,910 $ 17,559
Total per square foot $ 8.37 $ 7.84 $ 11.07
Average lease term 4.5 years 5.4 years 6.4 years
Total per square foot per year $ 1.87 $ 1.44 $ 1.73
- -------------------------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).
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Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Office and Retail Property portfolio. The Company maintains an active preventive
maintenance program in order to minimize required capital improvements. In
addition, certain capital improvement costs are recoverable from tenants.
Tenant improvement and leasing costs also may fluctuate in any given
year depending upon factors such as the property, the term of the lease, the
type of lease (renewal or replacement tenant), the involvement of external
leasing agents and overall competitive market conditions. Management believes
that future recurring tenant improvements and leasing costs for the Company's
existing Office and Retail Properties will approximate on average for "renewal
tenants" $6.00 to $10.00 per square foot, or $1.20 to $2.00 per square foot per
year based on an average five-year lease term, and, on average for "replacement
tenants," $12.00 to $16.00 per square foot, or $2.40 to $3.20 per square foot
per year based on an average five-year lease term.
YEAR 2000 COMPLIANCE
Overview
The year 2000 issue related to whether computer systems will properly
recognize date-sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
year 2000 issue related to whether non-Information Technology ("IT") systems
that depend on embedded computer technology would recognize the year 2000.
Systems that did not properly recognize such information could generate
erroneous information or fail.
In early 1998, the Company assigned a group of individuals with the
task of creating a program to identify, understand and address the myriad issues
associated with the year 2000 problem. The group completed its assessment of the
Company's year 2000 readiness by way of a comprehensive review of IT and non-IT
systems at the Company's principal executive offices and at the Company's
Properties. The group completed its remediation and testing of any systems that
were identified as being date sensitive.
YEAR 2000 DISCLOSURE
The Company did not experience any significant disruptions as a result
of the year 2000 issues. The Company dismantled the year 2000 command center and
re-deployed the members of the year 2000 project team. However, the Company will
continue to monitor all areas of the Company for any year 2000 related issues
that may surface, but with the passing of time, the likelihood of an issue is
negligible.
The total costs to repair and replace IT and non-IT systems were
$0.75 million which was below the estimated costs of $1.2 million, and did not
have a material adverse effect on the Company's financial condition or results
of operations.
Although unlikely, given that the Company has not experienced any year
2000 problems to date, there can be no certainty that any future unforeseen year
2000 problem will not adversely affect the Company's results of operations,
liquidity or financial position or adversely affect the Company's relationships
with its customers, suppliers, vendors or others.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's use of financial instruments, such as debt instruments
and its Share Repurchase Agreement with UBS, subject the Company to market risk
which may affect the Company's future earnings and cash flows as well as the
fair value of its assets. Market risk generally refers to the risk of loss from
changes in interest rates and market prices. The Company manages its market risk
by attempting to match anticipated inflow of cash from its operating, investment
and financing activities with anticipated outflow of cash to fund debt payments,
distributions to shareholders, investments, capital expenditures and other cash
requirements. The Company does not enter into financial instruments for trading
purposes.
The following discussion of market risk is based solely on hypothetical
changes in interest rates related to the Company's variable-rate debt and the
Share Repurchase Agreement and in the market price of the Company's common
shares as such changes relate to the Share Repurchase Agreement. This discussion
does not purport to take into account all of the factors that may affect the
financial instruments discussed in this section.
INTEREST RATE RISK
The Company's interest rate risk is most sensitive to fluctuations in
interest rates on its short-term variable-rate debt. The Company had total
outstanding debt of approximately $2.6 billion at December 31, 1999, of which
approximately $0.9 billion, or 34.6%, was variable-rate unhedged debt. The
weighted average interest rate on such variable-rate debt was 8.22% as of
December 31, 1999. A 10% (82.2 basis point) increase in the weighted average
interest rate on such variable-rate debt would result in an annual decrease in
net income and cash flows of approximately $7.6 million based on the
variable-rate debt outstanding as of December 31, 1999, as a result of the
increased interest expense associated with the change in rate. Conversely, a 10%
(82.2 basis point) decrease in the weighted average interest rate on such
variable-rate debt would result in an annual increase in net income and cash
flows of approximately $7.6 million based on the variable rate debt outstanding
as of December 31, 1999, as a result of the decreased interest expense
associated with the change in rate.
In September 1999, the Company entered into a four-year cash flow hedge
agreement with Salomon Brothers Holding Company, Inc. ("Salomon") The cash flow
hedge agreement has a notional amount of $200.0 million relating to the
BankBoston Term Note II. Pursuant to this agreement, the Company will pay
Salomon on a quarterly basis at 6.183% fixed interest rate and Salomon will pay
the Company at a floating 90-day LIBOR rate based on the same quarterly reset
dates. The underlying note, which was originally issued at a floating interest
rate of 30-day LIBOR plus 325 basis points, was effectively converted to a fixed
weighted average interest rate of 9.43% through maturity. Effective February 1,
2000, the Company renegotiated certain terms and covenants under the BankBoston
Term Note II. At such time, the interest rate on the facility increased to
30-day LIBOR plus 400 basis points, and consequently increased the effective
fixed weighted average interest rate to 10.18% through maturity. As of December
31, 1999, the cash flow hedge agreement resulted in $0.3 million of additional
interest expense.
In addition, the Company's settlement obligations under the Share
Repurchase Agreement with UBS described in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Share Repurchase
Agreement, are subject to interest rate risk, specifically changes in the 30-day
LIBOR rate.
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MARKET PRICE RISK
The Share Repurchase Agreement is subject to market rate risk because
changes in the closing share price for the Company's common shares affect the
Company's settlement obligation. Assuming the Company elects to settle in common
shares on January 4, 2001 and the market price of the common shares decreases by
10% from the $18.38 per share closing price of the common shares on December 31,
1999, and assuming no change in the 30-day LIBOR rate from the rate at December
31, 1999, the Company will issue an additional 133,982 common shares. Assuming
the Company elects to settle in common shares on January 4, 2001, and the market
price of the common shares increases by 10% from the $18.38 per share closing
price of the common shares of December 31, 1999, and assuming no change in the
30-day LIBOR rate from December 31, 1999, UBS will return to the Company 133,982
common shares. The issuance of additional common shares under the terms of the
Share Repurchase Agreement would result in the reduction of the Company's net
income per common share and net book value per common share. A change in the
market price will not affect the amount required to be paid to settle the Share
Repurchase Agreement in cash.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants......................................................... 63
Consolidated Balance Sheets at December 31, 1999 and 1998........................................ 64
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997....... 65
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998
and 1997 ........................................................................................ 66
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997....... 67
Notes to Consolidated Financial Statements....................................................... 68
Schedule III Consolidated Real Estate Investments and Accumulated Depreciation .................. 98
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trust Managers of Crescent Real Estate Equities Company:
We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crescent Real Estate Equities
Company and Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 24, 2000
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
ASSETS:
Investments in real estate:
Land $ 398,754 $ 400,690
Land held for development or sale 95,760 95,282
Buildings and improvements 3,529,344 3,569,774
Furniture, fixtures and equipment 71,716 63,626
Less - accumulated depreciation (507,520) (387,457)
----------- -----------
Net investments in real estate 3,588,054 3,741,915
Cash and cash equivalents 72,926 110,292
Restricted cash and cash equivalents 87,939 46,841
Accounts receivable, net 37,204 32,730
Deferred rent receivable 74,271 73,635
Investments in real estate mortgages and equity
of unconsolidated companies 812,494 743,516
Notes receivable, net 131,542 183,974
Other assets, net 146,131 110,544
----------- -----------
Total assets $ 4,950,561 $ 5,043,447
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 510,000 $ 660,000
Notes payable 2,088,929 1,658,156
Accounts payable, accrued expenses and other liabilities 170,984 149,444
----------- -----------
Total liabilities 2,769,913 2,467,600
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS:
Operating partnership, 6,975,952 and 6,545,528 units,
respectively 99,226 126,575
Investment joint ventures 24,648 26,727
----------- -----------
Total minority interests 123,874 153,302
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value, authorized 100,000,000 shares:
6 3/4% Series A Convertible Cumulative Preferred Shares,
8,000,000 shares issued and outstanding at December 31, 1999
and 1998 200,000 200,000
Common shares, $.01 par value, authorized 250,000,000 shares,
121,537,353 and 124,555,447 shares issued and outstanding
at December 31, 1999 and 1998, respectively 1,208 1,245
Additional paid-in capital 2,229,680 2,336,621
Deferred compensation on restricted shares (41) (88)
Retained deficit (386,532) (110,196)
Accumulated other comprehensive income (loss) 12,459 (5,037)
----------- -----------
Total shareholders' equity 2,056,774 2,422,545
----------- -----------
Total liabilities and shareholders' equity $ 4,950,561 $ 5,043,447
=========== ===========
The accompanying notes are an integral part of these financial statements.
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
Office and retail properties $ 614,493 $ 563,005 $ 363,324
Hotel properties 65,237 53,355 37,270
Behavioral healthcare properties 41,091 55,295 29,789
Interest and other income 25,458 26,688 16,990
--------- --------- ---------
Total revenues 746,279 698,343 447,373
--------- --------- ---------
EXPENSES:
Real estate taxes 84,401 75,076 44,154
Repairs and maintenance 44,024 41,160 27,783
Other rental property operating 128,723 126,733 86,931
Corporate general and administrative 16,274 16,264 12,858
Interest expense 192,033 152,214 86,441
Amortization of deferred financing costs 10,283 6,486 3,499
Depreciation and amortization 131,657 118,082 74,426
Settlement of merger dispute 15,000 -- --
Carrying value in excess of market value of
asset held for sale 16,800 -- --
Impairment and other charges related to the
behavioral healthcare properties 162,038 -- --
Write-off of costs associated with
unsuccessful acquisitions -- 18,435 --
--------- --------- ---------
Total expenses 801,233 554,450 336,092
--------- --------- ---------
Operating income (loss) (54,954) 143,893 111,281
OTHER INCOME AND EXPENSES:
Equity in net income of unconsolidated
companies:
Office and retail properties 5,265 4,159 629
Temperature-controlled logistics properties 15,039 512 1,200
Residential development properties 42,871 33,517 18,770
Other 5,122 1,129 3,144
--------- --------- ---------
Total other income and expenses 68,297 39,317 23,743
--------- --------- ---------
INCOME BEFORE MINORITY INTERESTS 13,343 183,210 135,024
Minority interests (2,384) (17,610) (17,683)
--------- --------- ---------
NET INCOME 10,959 165,600 117,341
PREFERRED SHARE DISTRIBUTIONS (13,500) (11,700) --
RETURN ON SHARE REPURCHASE AGREEMENT (583) -- --
FORWARD SHARE PURCHASE
AGREEMENT RETURN (4,317) (3,316) --
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (7,441) $ 150,584 $ 117,341
========= ========= =========
PER COMMON SHARE DATA:
Net Income (loss) - Basic $ (0.06) $ 1.26 $ 1.25
========= ========= =========
Net Income (loss) - Diluted $ (0.06) $ 1.21 $ 1.20
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Preferred Shares Common Shares
---------------------------- ----------------------------
Shares Net Value Shares Par Value
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, December 31, 1996 -- $ -- 36,146,380 $ 361
Common Share Offerings -- -- 45,076,185 451
Issuance of Common Shares -- -- 341,112 3
Issuance of Restricted Shares -- -- 181 --
Common Share Dividend - 2 for 1 Split -- -- 36,162,095 362
Issuance of Common Shares in Exchange for
Operating Partnership Units -- -- 133,412 1
Exercise of Common Share Options -- -- 118,542 1
Amortization of Deferred Compensation -- -- -- --
Crescent Operating, Inc. share distribution -- -- -- --
Dividends Paid -- -- -- --
Net Income -- -- -- --
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, December 31, 1997 -- -- 117,977,907 1,179
Issuance of Common Shares -- -- 2,651,732 27
Issuance of Preferred Shares 14,948,734 425,000 -- --
Exercise of Common Share Options -- -- 52,164 --
Cancellation of Restricted Shares -- -- (6,638) --
Amortization of Deferred Compensation -- -- -- --
Issuance of Common Shares in Exchange for Operating
Partnership Units -- -- 286,792 3
Settlement of Equity Swap Agreement -- -- (6,659,254) (67)
Preferred Share Conversion (6,948,734) (225,000) 8,400,582 84
Forward Share Purchase Agreement -- -- 1,852,162 19
Dividends Paid -- -- -- --
Net Income -- -- -- --
Unrealized Net Loss on Available-For-Sale Securities -- -- -- --
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, December 31, 1998 8,000,000 200,000 124,555,447 1,245
Issuance of Common Shares -- -- 168,140 1
Exercise of Common Share Options -- -- 2,899,960 24
Cancellation of Restricted Shares -- -- (216) --
Amortization of Deferred Compensation -- -- -- --
Issuance of Common Shares in Exchange for Operating
Partnership Units -- -- 453,828 4
Preferred Share Conversion Adjustment -- -- 12,356 --
Forward Share Purchase Agreement -- -- 747,598 7
Settlement of Forward Share Purchase Agreement -- -- (7,299,760) (73)
Dividends Paid -- -- -- --
Net Loss -- -- -- --
Unrealized Net Gain on Available-For-Sale Securities -- -- -- --
Other Comprehensive Income -- -- -- --
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY, December 31, 1999 8,000,000 $ 200,000 121,537,353 $ 1,208
============ ============ ============ ============
Deferred Accumulated
Additional Compensation Retained Other
Paid-in on Restricted Earnings Comprehensive
Capital Shares (Deficit) Income Total
----------- ------------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, December 31, 1996 $ 905,724 $ (364) $ (40,561) $ -- $ 865,160
Common Share Offerings 1,317,873 -- -- -- 1,318,324
Issuance of Common Shares 28,245 -- -- -- 28,248
Issuance of Restricted Shares 10 (10) -- -- --
Common Share Dividend - 2 for 1 Split (362) -- -- -- --
Issuance of Common Shares in Exchange for
Operating Partnership Units 1,017 -- -- -- 1,018
Exercise of Common Share Options 1,421 -- -- -- 1,422
Amortization of Deferred Compensation -- 91 -- -- 91
Crescent Operating, Inc. share distribution -- -- (10,474) -- (10,474)
Dividends Paid -- -- (123,813) -- (123,813)
Net Income -- -- 117,341 -- 117,341
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, December 31, 1997 2,253,928 (283) (57,507) -- 2,197,317
Issuance of Common Shares 62,072 -- 687 -- 62,786
Issuance of Preferred Shares (9,000) -- -- -- 416,000
Exercise of Common Share Options 725 -- -- -- 725
Cancellation of Restricted Shares (100) 100 -- -- --
Amortization of Deferred Compensation -- 95 -- -- 95
Issuance of Common Shares in Exchange for Operating
Partnership Units 4,846 -- -- -- 4,849
Settlement of Equity Swap Agreement (200,766) -- (8,466) -- (209,299)
Preferred Share Conversion 224,916 -- -- -- --
Forward Share Purchase Agreement -- -- -- -- 19
Dividends Paid -- -- (198,810) -- (198,810)
Net Income -- -- 153,900 -- 153,900
Unrealized Net Loss on Available-For-Sale Securities -- -- -- (5,037) (5,037)
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, December 31,1998 2,336,621 (88) (110,196) (5,037) 2,422,545
Issuance of Common Shares 3,850 -- -- -- 3,851
Exercise of Common Share Options 32,610 -- -- -- 32,634
Cancellation of Restricted Shares (6) 6 -- -- --
Amortization of Deferred Compensation -- 41 -- -- 41
Issuance of Common Shares in Exchange for Operating
Partnership Units 1,935 -- -- -- 1,939
Preferred Share Conversion Adjustment -- -- -- -- --
Forward Share Purchase Agreement -- -- -- -- 7
Settlement of Forward Share Purchase Agreement (145,330) -- (3,981) -- (149,384)
Dividends Paid -- -- (269,814) -- (269,814)
Net Loss -- -- (2,541) -- (2,541)
Unrealized Net Gain on Available-For-Sale Securities -- -- -- 17,216 17,216
Other Comprehensive Income -- -- -- 280 280
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, December 31, 1999 $ 2,229,680 $ (41) $ (386,532) $ 12,459 $ 2,056,774
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,959 $ 165,600 $ 117,341
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 141,940 124,568 77,925
Impairment charge related to the
behavioral healthcare real estate assets 103,773 -- --
Carrying value in excess of market value of
asset held for sale 16,800 -- --
Minority interests 2,384 17,610 17,683
Non-cash compensation 118 174 172
Distributions received in excess of equity in earnings
from unconsolidated companies -- 9,308 --
Equity in earnings net of distributions received
from unconsolidated companies (17,202) -- (12,536)
Changes in assets and liabilities:
Accounts receivable (4,474) (2,551) (14,850)
Deferred rent receivable (636) (34,047) (23,371)
Other assets 30,857 (22,612) (29,029)
Restricted cash and cash equivalents (9,682) (3,161) (417)
Accounts payable, accrued expenses and other
liabilities 21,540 22,186 78,796
----------- ----------- -----------
Net cash provided by operating activities 296,377 277,075 211,714
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties -- (530,807) (1,523,735)
Development of investment properties (27,781) (31,875) (9,012)
Capital expenditures - rental properties (20,254) (31,339) (22,005)
Tenant improvement and leasing costs - rental properties (58,462) (68,779) (53,886)
Changes in assets and liabilities:
Restricted cash and cash equivalents (31,416) (2,152) (4,229)
Investment in unconsolidated companies (93,869) (147,208) (278,001)
Investment in residential development corporations 13,722 35,613 (270,174)
Notes receivable 52,432 (27,298) (127,786)
Escrow deposits (500) 5,760 (5,600)
----------- ----------- -----------
Net cash used in investing activities (166,128) (798,085) (2,294,428)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (16,665) (9,567) (12,132)
Borrowings under Credit Facility 51,920 672,150 1,171,000
Payments under Credit Facility (201,920) (362,150) (861,000)
Debt proceeds 929,700 418,100 1,127,596
Debt payments (498,927) (376,301) (493,203)
Capital distributions - joint venture partner (3,190) (2,951) (2,522)
Net proceeds from common share offerings -- 40,992 1,345,291
Proceeds from exercise of common share options 32,634 725 1,422
Net proceeds from preferred share offerings -- 416,000 --
Distribution of Crescent Operating, Inc. shares to
unitholders of Operating Partnership and shareholders
of Crescent Equities -- -- (11,907)
Settlement of Forward Share Purchase Agreement (149,384) -- --
Preferred dividends (13,500) (11,700) --
Dividends and unitholder distributions (298,283) (220,618) (140,801)
----------- ----------- -----------
Net cash (used in) provided by financing activities (167,615) 564,680 2,123,744
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37,366) 43,670 41,030
CASH AND CASH EQUIVALENTS,
Beginning of period 110,292 66,622 25,592
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
End of period $ 72,926 $ 110,292 $ 66,622
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust (a "REIT") for federal income tax purposes, and,
together with its subsidiaries, provides management, leasing and development
services to some of its properties.
The term "Company" includes, unless the context otherwise requires,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at December
31, 1999 include:
o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP;
The Operating Partnership
o CRESCENT REAL ESTATE EQUITIES, LTD.; The General
Partner of the Operating Partnership
o SEVEN SEPARATE SINGLE-PURPOSE LIMITED PARTNERSHIPS;
Formed for the purpose of obtaining securitized debt,
substantially all the economic interests owned
directly or indirectly by the Operating Partnership
and the remaining interests owned indirectly by
Crescent Equities through seven separate corporations
described below.
o SEVEN SEPARATE CORPORATIONS. Wholly owned
subsidiaries of the General Partner, each of which is
a general partner of one of the seven limited
partnerships described above.
Crescent Equities conducts all of its business directly through the
Operating Partnership and its other subsidiaries. The Company is structured to
facilitate and maintain the qualification of Crescent Equities as a REIT.
SEGMENTS
As of December 31, 1999, the Company's assets and operations were
composed of five major investment segments:
o Office and Retail Segment;
o Hospitality Segment;
o Residential Development Segment;
o Temperature-Controlled Logistics Segment; and
o Behavioral Healthcare Segment.
Within these segments, the Company owned directly or indirectly the
following real estate assets (the "Properties") as of December 31, 1999:
o OFFICE AND RETAIL SEGMENT consisted of 89 office properties
(collectively referred to as the "Office Properties") located in
31 metropolitan submarkets in nine states, with an aggregate of
approximately 31.8 million net rentable square feet and seven
retail properties (collectively referred to as the "Retail
68
70
Properties") with an aggregate of approximately 0.8 million net
rentable square feet. See Note 17. Dispositions.
o HOSPITALITY SEGMENT consisted of five upscale business class
hotels with a total of 2,168 rooms, three luxury resorts and spas
with a total of 516 rooms and two Canyon Ranch destination
fitness resorts and spas that can accommodate up to 462 guests
daily (collectively referred to as the "Hotel Properties"). All
Hotel Properties, except the Omni Austin Hotel, are leased to
subsidiaries of Crescent Operating, Inc. ("COI"). The Omni Austin
Hotel is leased to HCD Austin Corporation.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and non-voting common stock
representing interests ranging from 40% to 95% in five
unconsolidated residential development corporations (collectively
referred to as the "Residential Development Corporations"), which
in turn, through joint venture or partnership arrangements,
currently own 14 residential development properties (collectively
referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT (FORMERLY THE
REFRIGERATED STORAGE SEGMENT) consisted of the Company's indirect
39.6% interest in three partnerships (collectively referred to as
the "Temperature-Controlled Logistics Partnerships"), each of
which owns one or more corporations or limited liability
companies (collectively referred to as the
"Temperature-Controlled Logistics Corporations") which, as of
December 31, 1999, directly or indirectly owned 89
temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics Properties")
with an aggregate of approximately 428.3 million cubic feet (17.0
million square feet). This segment was restructured in 1999, and
the new ownership structure was effective as of March 12, 1999.
See Note 5. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies.
o BEHAVIORAL HEALTHCARE SEGMENT consisted of 88 properties in 24
states (collectively referred to as the "Behavioral Healthcare
Properties") that were leased to Charter Behavioral Health
Systems, LLC ("CBHS") and its subsidiaries. CBHS was formed to
operate the behavioral healthcare business located at the
Behavioral Healthcare Properties and is owned 10% by a subsidiary
of Magellan Health Services, Inc. ("Magellan") and 90% by COI and
an affiliate of COI. On February 16, 2000, CBHS and all of its
subsidiaries that are subject to the master lease with the
Company filed voluntary Chapter 11 bankruptcy petitions in the
United States Bankruptcy Court of the District of Delaware. Of
these 88 Behavioral Healthcare Properties, 37 are designated as
the "Core Properties" for the conduct of CBHS's business and
remain subject to a master lease. The other 51 Behavioral
Healthcare Properties, at which CBHS has ceased operations or is
planning to cease operations, are designated as the "Non-Core
Properties", and were being actively marketed for sale at
December 31, 1999. See Note 17. Dispositions and Note 18. CBHS
for a description of the current status of CBHS and the Company's
investment in the Behavioral Healthcare Properties.
See Note 4. Segment Reporting for a table showing revenues and funds
from operations for each of these investment segments for the years ended
December 31, 1999, 1998, and 1997 and identifiable assets for each of these
investment segments at December 31, 1999 and 1998.
The following table shows, by subsidiary, the Properties such subsidiaries owned
as of December 31, 1999:
Operating Partnership: 62 Office Properties, six Hotel Properties and
five Retail Properties
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P.: The Crescent Atrium, The Crescent Office Towers,
("Funding I") Regency Plaza One, UPR Plaza and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate
Funding II, L.P.: Office and Research Center, Hyatt Regency Albuquerque,
("Funding II") Hyatt Regency Beaver Creek, Las Colinas Plaza,
Liberty Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Centre, Two
Renaissance Square and 12404 Park Central
Crescent Real Estate Greenway Plaza Office Properties and Renaissance
Funding III, IV and V, L.P.: Houston Hotel(1)
("Funding III, IV and V")
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71
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")
Crescent Real Estate 88 Behavioral Healthcare
Properties
Funding VII, L.P.
("Funding VII")
- -------------------
(1) Funding III owns nine of the 10 Office Properties in the Greenway Plaza
Office portfolio and the Renaissance Houston Hotel; Funding IV owns the
central heated and chilled water plant building located at Greenway
Plaza; and Funding V owns Coastal Tower, the remaining Office Property
in the Greenway Plaza Office portfolio.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
include all direct and indirect subsidiary entities. The equity interests in
those direct and indirect subsidiaries the Company does not own are reflected as
minority interests. All significant intercompany balances and transactions have
been eliminated.
All information relating to common shares has been adjusted to reflect
the two-for-one stock split effected in the form of a 100% share dividend paid
on March 26, 1997 to shareholders of record on March 20, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NET INVESTMENTS IN REAL ESTATE
Real estate is carried at cost, net of accumulated depreciation.
Betterments, major renovations, and certain costs directly related to the
acquisition, improvements and leasing of real estate are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows:
Buildings and Improvements 5 to 40 years
Tenant Improvements Terms of leases
Furniture, Fixtures and Equipment 3 to 10 years
An impairment loss is recognized on a property by property basis on
Properties classified as held for use, when expected undiscounted cash flows are
less than the carrying value of the Property. In cases where the Company does
not expect to recover its carrying costs on a Property, the Company reduces its
carrying costs to fair value, and for Properties held for disposition, the
Company reduces its carrying costs to the fair value less costs to sell. See
Note 17. Dispositions and Note 18. CBHS for a description of
impairment losses recognized during 1999 for one of the Office Properties and
the Behavioral Healthcare Properties.
Depreciation expense is not recognized on Properties once classified as
held for disposition.
CONCENTRATION OF REAL ESTATE INVESTMENTS
The Company's Office Properties are located primarily in the
Dallas/Fort Worth and Houston, Texas metropolitan areas. As of December 31,
1999, the Office Properties in Dallas/Fort Worth and Houston represented
approximately 72% of the Company's office portfolio based on total net rentable
square feet. The Dallas/Fort Worth Office Properties accounted for approximately
39% of that amount, and the Houston Office Properties accounted for the
remaining approximately 33%. As a result of the geographic concentration, the
operations of the Company could be adversely affected by a recession or general
economic downturn in the areas where these Properties are located.
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72
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash and cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash includes escrows established pursuant to certain
mortgage financing arrangements for real estate taxes, insurance, security
deposits, ground lease expenditures, capital expenditures and monthly interest
carrying costs paid in arrears.
OTHER ASSETS
Other assets consist principally of leasing costs, deferred financing
costs, and marketable securities. Leasing costs are amortized on a straight-line
basis during the terms of the respective leases, and unamortized leasing costs
are written off upon early termination of lease agreements. Deferred financing
costs are amortized on a straight-line basis over the terms of the respective
loans. Marketable securities are considered available-for-sale and are marked to
market value on a monthly basis. The corresponding unrealized gains and losses
are included in accumulated other comprehensive income.
DEFERRED COMPENSATION ON RESTRICTED SHARES
Deferred compensation on restricted shares relates to the issuance of
restricted shares to employees of the Company. Such restricted shares are
amortized to expense during the applicable vesting period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financing instruments for trading
purposes, but utilizes them to manage exposure to variable rate debt. The
Company accounts for its derivative instruments under Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which was adopted in the third quarter of 1999.
Under SFAS No. 133, the Company's derivatives are considered cash flow
hedges which are used to mitigate the variability of cash flows. On a monthly
basis, the cash flow hedge is marked to fair value through comprehensive income
(outside earnings), and on a monthly basis the cash flow hedge's gain or loss
is reported in earnings when the interest on the underlying debt affects
earnings.
On November 19, 1999, the Company entered into an agreement with UBS AG
("UBS") that UBS would purchase the Company's common shares, and the Company
would be obligated to repurchase a portion of its common shares from UBS. The
Company may settle the agreement in cash or common shares at its option.
Therefore, the Company accounts for the transaction as an equity transaction.
The guaranteed return to UBS is equal to 30-day LIBOR plus 250 basis points, and
is accounted for as a preferred dividend.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents and short-term
investments are reasonable estimates of their fair values because of the short
maturities of these instruments. The fair value of notes receivable, which
approximates carrying value, is estimated based on year-end interest rates for
receivables of comparable maturity. Notes payable and borrowings under the
Company's line of credit with BankBoston N.A. ("Credit Facility") have aggregate
carrying values which approximate their estimated fair values based upon the
current interest rates for debt with similar terms and remaining maturities,
without considering the adequacy of the underlying collateral. Disclosure about
fair value of financial instruments is based on pertinent information available
to management as of December 31, 1999 and 1998.
REVENUE RECOGNITION
OFFICE & RETAIL PROPERTIES The Company, as a lessor, has retained
substantially all of the risks and benefits of ownership of the Office and
Retail Properties and accounts for its leases as operating leases. Income on
leases, which includes scheduled increases in rental rates during the lease term
and/or abated rent payments for various periods following the tenant's lease
commencement date, is recognized on a straight-line basis. Deferred rent
receivable represents the excess of rental revenue recognized on a straight-line
basis over cash received pursuant to the applicable lease provisions.
HOTEL PROPERTIES The Company cannot, consistent with its status as a
REIT, operate the Hotel Properties directly. It has leased all of the Hotel
Properties except The Omni Austin Hotel to subsidiaries of COI pursuant to nine
separate leases (See Note 16. Formation and Capitalization of COI). As of
January 1, 1999, the Omni Austin Hotel has been leased under a separate lease to
HCD Austin Corporation. The leases provide for the payment by the lessee of the
Hotel Property of (i) base rent, with periodic rent increases if applicable,
(ii) percentage rent based on a percentage of gross 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. Base rental income under these leases is recognized on a
straight-line basis over the terms of the respective leases. In 1999, percentage
rental income was recognized on an accrual basis. In December 1999, the SEC
staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition",
which prohibits contingent revenue from being accrued until the thresholds upon
which it is based have been met. However, SAB No. 101 had no material impact on
the Company's financial statements for the year ended December 31, 1999, because
all of the thresholds upon which percentage rental income is based had been met
by December 31, 1999. In accordance with SAB No. 101, percentage rental income
will not be recognized in the year 2000 until the thresholds upon which it is
based are met. Management does not believe this change will have a material
impact on its interim or annual financial statements.
BEHAVIORAL HEALTHCARE PROPERTIES The Company has leased the Behavioral
Healthcare Properties to CBHS and its subsidiaries under a triple-net lease.
CBHS's business has been negatively affected by many factors, including adverse
industry conditions. During 1999, CBHS failed to perform in accordance with its
operating budget. In the third quarter of 1999, the Company began to reflect
CBHS rent on a cash basis, and will continue to reflect rent on a cash basis
going forward. In the third quarter of 1999, the Company wrote-off the rent that
was deferred according to the CBHS lease agreement from the commencement of the
lease in June 1997 through June 30, 1999. The balance written-off totaled
$25,600. The Company deferred cash rent payments for November and December 1999
due from CBHS. See Note 18. CBHS for further discussion regarding the status of
CBHS, including the filing of voluntary Chapter 11 bankruptcy petitions
subsequent to December 31, 1999, and the status of the Company's investment in
the Behavioral Healthcare Properties.
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INCOME TAXES
The ongoing operations of the Properties generally will not be subject
to federal income taxes as long as the Company maintains its REIT status. A REIT
will generally not be subject to federal income taxation on that portion of its
income that qualifies as REIT taxable income to the extent that it distributes
such taxable income to its shareholders and complies with certain requirements
(including distribution of at least 95% of its REIT taxable income). As a REIT,
the Company is allowed to reduce REIT taxable income by all or a portion of its
distributions to shareholders. Because distributions have exceeded REIT taxable
income, no federal income tax provision (benefit) has been reflected in the
accompanying consolidated financial statements. State income taxes are not
significant.
EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share" ("EPS") specifies the computation,
presentation and disclosure requirements for earnings per share. Basic EPS
excludes all dilution while Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998
---------------------------------- -----------------------------------
Wtd. Avg. Per Share Wtd. Avg. Per Share
Loss Shares Amount Income Shares Amount
--------- --------- --------- --------- ------- ---------
Basic EPS -
Net income (loss) available
to common shareholders $ (7,441) 122,876 $ (0.06) $ 150,584 119,443 $ 1.26
========= =========
Effect of dilutive securities:
Share and unit options -- 1,674 -- 3,903
Assumed conversion of Series B
preferred shares -- -- -- 3,478
Additional common shares
obligation relating to:
Equity swap agreement -- -- -- 183
Forward share purchase
agreement -- 263 3,316 395
--------- --------- --------- --------- --------- ---------
Diluted EPS -
Net income (loss) available
to common shareholders $ (7,441) 124,813 $ (0.06) $ 153,900 127,402 $ 1.21
========= ========= ========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997
---------------------------------
Wtd. Avg. Per Share
Income Shares Amount
--------- ------ ---------
Basic EPS -
Net income (loss) available
to common shareholders $ 117,341 93,709 $ 1.25
=========
Effect of dilutive securities:
Share and unit options -- 4,138
Assumed conversion of
preferred shares -- --
Additional common shares
obligation relating to:
Equity swap agreement -- --
Forward share purchase
agreement -- --
--------- --------- ---------
Diluted EPS -
Net income (loss) available
to common shareholders $ 117,341 97,847 $ 1.20
========= ========= =========
The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the years
ended December 31, 1999 and 1998, since the effect of their conversion is
antidilutive.
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STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, all highly liquid
investments purchased with an original maturity of 90 days or less are included
in cash and cash equivalents.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ................................................... $ 188,819 $ 145,603 $ 78,980
Additional interest paid in conjunction with cash flow
hedge ........................................................ 344 -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of Operating Partnership units to common
shares with resulting reduction in minority interest
and increases in common shares and additional
paid-in capital .............................................. $ 1,939 $ 4,849 $ 1,018
Issuance of Operating Partnership units in conjunction
with settlement of an obligation ............................ 1,786 19,972 --
Common share obligation in conjunction with an
investment................................................... -- 21,000 1,200
Two-for-one common share dividend ............................... -- -- 362
Mortgage note assumed in conjunction with property
acquisitions ................................................. -- 46,934 97,923
Debt incurred in conjunction with the termination of
equity swap agreement ....................................... -- 184,299 --
Acquisition of partnership interests ............................ 3,774 -- --
Unrealized gain (loss) on available-for-sale securities ......... 17,216 5,037 --
Forward Share Purchase Agreement Return ......................... 4,317 3,316 --
Return on Share Repurchase Agreement ............................ 583 -- --
Impairment and other charges related to the
behavioral healthcare assets ............................... 162,038 -- --
Carrying value in excess of market value of asset held
for sale ................................................... 16,800 -- --
Adjustment of cash flow hedge to fair value...................... 280 -- --
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and
presentation of comprehensive income and its components (generally, total
nonowner changes in equity). As a result of the adoption of SFAS No. 130,
comprehensive income has been presented as part of the statements of
shareholders' equity. At December 31, 1999, the Company's comprehensive income
balance was $12,459, primarily attributable to unrealized gains on marketable
securities. In 1998, the Company's comprehensive income balance was ($5,037),
primarily attributable to unrealized losses on marketable securities. Prior to
1998, the Company's comprehensive income was not material to the Company's
financial statements.
Beginning with the fiscal year ended December 31, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
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shareholders. This statement was effective for financial statements for periods
beginning after December 15, 1997. See Note 4. Segment Reporting.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, which provides that all derivative instruments should be
recognized as either assets or liabilities depending on the rights or
obligations under the contract and that all derivative instruments be measured
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133", which
deferred the effective date of SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company elected
to implement SFAS No. 133 in the third quarter of 1999. See Note 8. Cash Flow
Hedges for a description of the impact on the Company's financial statements for
the year ended December 31,1999.
In December 1999, the SEC staff released SAB No. 101, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB No. 101 prohibits contingent revenue from being
accrued until the thresholds upon which it is based have been met. In 1999,
percentage rental income was recognized on an accrual basis. However, SAB No.
101 had no material impact on the Company's financial statements for the year
ended December 31, 1999, because all of the thresholds upon which percentage
rental income is based had been met by December 31, 1999. In accordance with SAB
No. 101, percentage rental income will not be recognized in the year 2000 until
the thresholds upon which it is based are met. Management does not believe this
change will have a material impact on its interim or annual financial
statements.
3. PROPERTIES HELD FOR DISPOSITION:
Office and Retail Segment
In pursuit of management's objective to dispose of non-strategic or
non-core assets, at December 31, 1999, the Company was actively marketing for
sale its wholly-owned interests in 10 Office Properties, which are included in
the Net Investment in Real Estate of $3,588,054. The carrying value of these
Properties at December 31, 1999 was approximately $183,323. The Company
continually evaluates the portfolio of Properties held for disposition. In the
fourth quarter of 1999, two Properties in Dallas, Texas were removed from the
original pool of 12 Properties held for disposition. Six of the Properties are
located in Dallas, Texas, two are located in New Orleans, Louisiana, one is
located in Denver, Colorado and one is located in Omaha, Nebraska. During the
year ended December 31, 1999, bids were received on these Properties either
individually or in various combinations. Management is currently in the process
of evaluating the bids for the remaining Office Properties to determine their
economic viability as well as the credit-worthiness of the potential purchasers
and their ability to close the transactions. The disposition of these Properties
remains subject to the negotiation of acceptable terms and other customary
conditions. The Company anticipates completing any economically justified sales
of these Office Properties by the end of the second quarter of 2000.
The following table summarizes the condensed results of operations for
the year ended December 31, 1999 and 1998 for the 10 Office Properties held for
disposition. These Properties are classified as held for sale, and depreciation
expense has not been recognized since June 30, 1999.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------- -------
Revenue $39,214 $38,190
Operating Expenses 18,120 16,390
------- -------
Net Operating Income $21,094 $21,800
======= =======
See Note 17. Dispositions for a description of the impairment loss
recognized on one of these Office Properties and a description of the
disposition of certain properties subsequent to December 31, 1999.
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Behavioral Healthcare Segment
The 51 Non-Core Behavioral Healthcare Properties were classified as
held for disposition at December 31, 1999, and depreciation expense has not been
recognized since November 10, 1999. The carrying value for these Properties at
December 31, 1999 was approximately $124,700. The Company is actively marketing
the Non-Core Properties for sale. See Note 17. Dispositions for a description of
the sale of certain Non-Core Properties.
Other
The Woodlands Commercial Properties Company, L.P., owned by the Company
and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for
sale certain property assets (multi-family, retail, and office/venture tech
portfolios) located in The Woodlands. These assets include the Company's 12
Office Properties and four Retail Properties located in The Woodlands.
4. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" beginning with the year ended December 31,
1998. The Company currently has five major investment segments: the Office and
Retail Segment; the Hospitality Segment; the Temperature-Controlled Logistics
Segment; the Residential Development Segment; and the Behavioral Healthcare
Segment. Management organizes the segments within the Company based on property
type for making operating decisions and assessing performance. Investment
segments for SFAS No. 131 are determined on the same basis.
The Company uses funds from operations ("FFO") as the measure of
segment profit or loss. FFO, based on the definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and as used in this document, means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from debt restructuring and sales of
property;
o excluding adjustments not of a normal or recurring nature;
o plus depreciation and amortization of real estate assets; and
o after adjustments for unconsolidated partnerships and joint
ventures.
NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. The Company considers
FFO an appropriate measure of performance for an equity REIT, and for its
operating segments. However, the Company's measure of FFO may not be comparable
to similarly titled measures of other REITs because these REITs may apply the
definition of FFO in a different manner than the Company.
76
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Selected financial information related to each segment for the years
ended December 31, 1999, 1998 and 1997 is presented below.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
REVENUES:
Office and Retail Properties $ 614,493 $ 563,005 $ 363,324
Hospitality Properties 65,237 53,355 37,270
Behavioral Healthcare Properties 41,091 55,295 29,789
Temperature-Controlled Logistics Properties -- -- --
Residential Development Properties -- -- --
Corporate and Other 25,458 26,688 16,990
----------- ----------- -----------
TOTAL CONSOLIDATED REVENUE $ 746,279 $ 698,343 $ 447,373
=========== =========== ===========
FUNDS FROM OPERATIONS:
Office and Retail Segment $ 367,830 $ 325,442 $ 204,243
Hospitality Segment 64,079 52,375 36,439
Behavioral Healthcare Segment 15,488 55,295 29,789
Temperature-Controlled Logistics Segment 37,439 28,626 2,200
Residential Development Segment 74,597 58,892 25,623
Corporate and other adjustments
Interest expense (192,033) (152,214) (86,441)
Preferred share dividends (13,500) (11,700) --
Interest and other income 18,151 19,696 15,401
Corporate general & administrative (16,274) (16,264) (12,858)
----------- ----------- -----------
TOTAL FUNDS FROM OPERATIONS $ 355,777 $ 360,148 $ 214,396
----------- ----------- -----------
ADJUSTMENTS TO RECONCILE FUNDS FROM OPERATIONS TO
CONSOLIDATED NET INCOME:
Depreciation and amortization of real estate assets $ (128,403) $ (115,678) $ (72,503)
Settlement of merger dispute (15,000) -- --
Carrying value in excess of market value of asset
held for sale (16,800) -- --
Impairment and other charges related to the
behavioral healthcare assets (136,435) -- --
Write-off costs associated with unsuccessful acquisitions -- (18,435) --
Gain on behavioral healthcare property disposition 439 -- --
Unitholder minority interests (1,273) (16,111) (16,249)
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office and Retail Properties (6,110) (2,530) (451)
Temperature-Controlled Logistics Properties (22,400) (28,115) (1,000)
Residential Development Properties (31,725) (25,379) (6,852)
Other (611) -- --
Preferred share dividends 13,500 11,700 --
----------- ----------- -----------
CONSOLIDATED NET INCOME $ 10,959 $ 165,600 $ 117,341
=========== =========== ===========
EQUITY IN NET INCOME OF UNCONSOLIDATED
COMPANIES:
Office and Retail Properties $ 5,265 $ 4,159 $ 629
Hospitality Properties -- -- --
Behavioral Healthcare Properties -- -- --
Temperature-Controlled Logistics Properties 15,039 512 1,200
Residential Development Properties 42,871 33,517 18,770
Corporate and other 5,122 1,129 3,144
----------- ----------- -----------
TOTAL EQUITY IN NET INCOME OF
UNCONSOLIDATED COMPANIES $ 68,297 $ 39,317 $ 23,743
=========== =========== ===========
IDENTIFIABLE ASSETS:
Office and Retail Segment $ 3,301,979 $ 3,214,208 $ 2,651,877
Hospitality Segment 458,266 453,583 363,424
Behavioral Healthcare Segment 249,049 386,434 384,796
Temperature-Controlled Logistics Segment 293,243 277,856 153,994
Residential Development Segment 279,197 289,615 317,950
Other 368,827 421,751 307,939
----------- ----------- -----------
TOTAL IDENTIFIABLE ASSETS $ 4,950,561 $ 5,043,447 $ 4,179,980
=========== =========== ===========
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During 1999, COI and CBHS were the Company's two largest lessees in
terms of total consolidated rental revenues derived from leases. Total rental
revenues from COI and total cash rental revenues from CBHS for the year ended
December 31, 1999 were approximately 8% and 5% respectively, of the Company's
total consolidated rental revenues. COI was the lessee for nine of the Hotel
Properties for the year ended December 31, 1999, and CBHS was the sole lessee of
the Behavioral Healthcare Properties during that period. Due to its
reorganization and bankruptcy proceedings, CBHS will no longer be one of the
Company's largest lessees. See Note 18. CBHS.
See Note 5. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies for a description of the sole lessee of the
Temperature-Controlled Logistics Properties.
5. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:
The following is a summary of the Company's ownership in significant
unconsolidated companies:
COMPANY'S OWNERSHIP
Entity CLASSIFICATIONS AS OF DECEMBER 31, 1999
- -------------------------------------------- ------------------------------------- --------------------------------
Desert Mountain Development Corporation Residential Development Corporation 95%(1)
Houston Area Development Corp. Residential Development Corporation 94%(1)
The Woodlands Land Company, Inc. Residential Development Corporation 95%(1)
Crescent Development Management Corp. Residential Development Corporation 90%(1)
Mira Vista Development Corp. Residential Development Corporation 94%(1)
Crescent CS Holdings Corp. Crescent Subsidiary 99%(2)
Crescent CS Holdings II Corp. Crescent Subsidiary 99%(2)
The Woodlands Commercial Office and Retail (various commercial
Properties Company, L.P. properties)(3) 42.50%
Main Street Partners, L.P. Office and Retail (office property -
Bank One Center) 50%
DBL Holdings, Inc. Other(4) 95%
Metropolitan Partners, LLC Other (5)
CRL Investments, Inc. Other 95%
- ---------------------
(1) See Item 2. Properties and the Residential Development Properties Table
included in that section for the Residential Development Corporation's
ownership interest in the Residential Development Properties.
(2) The Crescent Subsidiaries have a 39.6% interest in each of the
Temperature-Controlled Logistics Partnerships. Accordingly, each of the
Crescent Subsidiaries has an indirect 39.6% interest in the
Temperature-Controlled Logistics Properties. See "Temperature-Controlled
Logistics" section below.
(3) See the "Office and Retail Segment" section below for more information
regarding certain commercial property assets that the Company intends to
sell.
(4) See Note 17. Dispositions for more information regarding certain interests
that the Company has sold.
(5) See "Other" section below for a description of the Company's investment in
Metropolitan Partners, LLC.
RESIDENTIAL DEVELOPMENT PROPERTIES
On April 29, 1999, a partnership in which Crescent Development
Management Corporation ("CDMC") has a 64% economic interest finalized the
purchase of Riverfront Park (previously known as "The Commons"), a master
planned residential development on 23 acres in the Central Platte Valley near
downtown Denver, Colorado for approximately $25,000. In the first quarter of
2000, the partnership has entered into contracts relating to the sale of 9.7
acres of Riverfront Park, which is expected to close in the second quarter of
2000. The acreage is in close proximity to several major entertainment and
recreational facilities including Coors Field (home to the Major League
Baseball's Colorado Rockies), Elitch Gardens (an amusement park) the new Pepsi
Center (home to the National Hockey League's Colorado Avalanche and the National
Basketball Association's Denver Nuggets), and the new downtown Commons Park.
78
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TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of December 31, 1999, the Company held an indirect 39.6% interest in
the Temperature-Controlled Logistics Partnerships, which own the
Temperature-Controlled Logistics Corporations, which directly or indirectly own
the Temperature-Controlled Logistics Properties. The business operations
associated with the Temperature-Controlled Logistics Properties are owned by
AmeriCold Logistics, which is owned 60% by Vornado Operating L.P. and 40% by a
subsidiary of COI, in which the Company has no interest. COI holds an indirect
0.4% interest in the Temperature-Controlled Logistics Partnerships. COI has an
option to require the Company to purchase COI's remaining 1% economic interest,
representing all of the voting stock, in each of the Crescent Subsidiaries at
such time as the purchase would not, in the opinion of counsel to the Company,
adversely affect the status of Crescent Equities as a REIT, for an aggregate
price, payable by the Company, of approximately $3,400.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, entered into triple-net master leases of the
Temperature-Controlled Logistics Properties with certain of the
Temperature-Controlled Logistics Corporations. Each of the
Temperature-Controlled Logistics Properties is subject to one or more of the
leases, each of which has an initial term of 15 years, subject to two, five-year
renewal options. Under the leases, AmeriCold Logistics is required to pay for
all costs arising from the operation, maintenance and repair of property, as
well as property capital expenditures in excess of $5,000 annually. For the
period of March 12, 1999 to December 31, 1999, base rent and percentage rent was
approximately $135,800 of which base rent represented approximately 80%.
AmeriCold Logistics has the right to defer a portion of the rent for up to three
years beginning on March 12, 1999 to the extent that available cash, as defined
in the leases, is insufficient to pay such rent, and pursuant thereto, rent was
deferred as of December 31, 1999, of which the Company's share was $2,138.
OFFICE AND RETAIL PROPERTIES
The Woodlands Commercial Properties Company, L.P., owned by the Company
and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for
sale certain property assets (multi-family, retail and office/venture tech
portfolios) located in The Woodlands. As of December 31, 1999, the multi-family
portfolio had been sold. See Note 17. Dispositions for a description of the sale
of these properties.
OTHER
Metropolitan
On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates
Realty Corporation ("Reckson"), and Metropolitan Partners, LLC ("Metropolitan")
entered into a revised agreement and plan of merger that superseded the merger
agreement to which the Company was a party. Under the revised agreement,
Metropolitan agreed to acquire Tower for a combination of cash and Reckson
exchangeable Class B common shares. The Company, Reckson and Metropolitan agreed
that the Company's investment in Metropolitan would be an $85,000 preferred
member interest in Metropolitan. In connection with the revised agreement, the
Company contributed $10,000 of the $85,000 required capital contribution to
Metropolitan in December 1998 and contributed the remaining $75,000 to
Metropolitan upon satisfaction of all of the conditions to the funding on May
19, 1999. The Company's $85,000 preferred member interest in Metropolitan at
December 31, 1999 would equate to an approximate 20% equity interest.
The investment has a cash flow preference of 7.5% for a two-year period
and may be redeemed by Metropolitan within the two-year period for $85,000, plus
an amount sufficient to provide a 9.5% internal rate of return to the Company.
If Metropolitan does not redeem the preferred interest upon expiration of the
two-year
79
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period, the Company may convert the interest either into (i) a common equity
interest in Metropolitan or (ii) shares of common stock of Reckson at a
conversion price of $24.61.
CRL Investments, Inc.
The Company has a 95% economic interest, representing all of the
non-voting stock in CRL Investments, Inc. ("CRL"), which has a 20% economic
interest in CR License, LLC, the entity which owns the right to the future use
of the "Canyon Ranch" name. CRL has the opportunity through July 2000 to pay
$3,000 to obtain an additional 10% interest in CR License, LLC. CRL also has an
effective 60% economic interest in the Canyon Ranch Spa Club in the Venetian
Hotel in Las Vegas, Nevada. The Canyon Ranch Spa Club opened in June 1999 and is
the first project to expand the franchise value of the "Canyon Ranch" name.
The Company reports its share of income and losses based on its
ownership interest in its respective equity investments. The following
summarized information for all unconsolidated companies is presented on an
aggregate basis and classified under the captions "Residential Development
Corporations", "Temperature-Controlled Logistics Corporations", "Office and
Retail" and "Other", as applicable, as of December 31, 1999, 1998, and 1997.
80
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BALANCE SHEETS:
DECEMBER 31, 1999
------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
---------------- ---------------- --------------- ---------------
Real estate, net $ 692,033 $1,335,326 $ 433,632
Cash 30,184 8,295 24,223
Other assets 193,712 187,695 40,067
---------- ---------- ----------
Total assets $ 915,929 $1,531,316 $ 497,922
========== ========== ==========
Notes payable $ 321,655 $ 594,398 $ 296,858
Notes payable to the Company 148,990 11,333 --
Other liabilities 228,657 168,777 24,467
Equity 216,627 756,808 176,597
---------- ---------- ----------
Total liabilities and equity $ 915,929 $1,531,316 $ 497,922
========== ========== ==========
Company's share of unconsolidated debt $ 160,169 $ 235,382 $ 137,779
========== ========== ==========
Company's investments in real estate
mortgages and equity of uncon-
solidated companies $ 279,197 $ 293,243 $ 100,131 $139,923
========== ========== ========== ========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
---------------- ---------------- --------------- ---------------
Total revenues $ 502,583 $ 264,266 $ 78,534
Expenses:
Operating expense 394,858 127,516 (1) 27,008
Interest expense 4,920 47,273 19,321
Depreciation and amortization 14,295 54,574 19,273
Taxes 22,549 (6,084) --
--------- -------- --------
Total expenses 436,622 223,279 65,602
--------- -------- --------
Net income $ 65,961 $ 40,987 (1) $ 12,932
========= ======== =========
Company's equity in net income
of unconsolidated companies $ 42,871 $ 15,039 $ 5,265 $ 5,122
========= ========= ========= =========
- ----------------------------
(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
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BALANCE SHEETS:
DECEMBER 31, 1998
---------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
---------------------- ----------------- ------------------- -------------
Real estate, net $ 623,106 $1,308,059 $ 475,322
Cash 25,849 14,219 31,047
Other assets 156,782 420,934 16,485
---------- ---------- ----------
Total assets $ 805,737 $1,743,212 $ 522,854
========== ========== ==========
Notes payable $ 295,998 $ 617,166 $ 258,000
Notes payable to the Company 164,578 -- --
Other liabilities 131,874 396,836 42,193
Equity 213,287 729,210 222,662
---------- ---------- ----------
Total liabilities and equity $ 805,737 $1,743,212 $ 522,855
========== ========== ==========
Company's share of unconsolidated debt $ 137,098 $ 234,523 $ 121,275
========== ========== ==========
Company's investments in real estate
mortgages and equity of
unconsolidated companies $ 289,615 $ 277,856 $ 113,625 $ 62,421
========== ========== ========== ==========
SUMMARY STATEMENTS OF OPERATIONS:
DECEMBER 31, 1998
---------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
---------------------- ----------------- ------------------- -------------
Total revenues $ 372,378 $ 567,845 $ 69,326
Expenses:
Operating expense 283,138 448,972(1) 28,259
Interest expense 4,231 45,701 17,962
Depreciation and amortization 8,572 59,363 13,959
Taxes 21,227 4,548 --
---------- ---------- ----------
Total expenses 317,168 558,584 60,180
---------- ---------- ----------
Net income $ 55,210 $ 9,261(1) $ 9,146
========== ========== ==========
Company's equity in net income
of unconsolidated companies $ 33,517 $ 512 $ 4,159 $ 1,129
========== ========== ========== ==========
- -----------------
(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED
DECEMBER 31, 1997
-----------------------------------
TEMPERATURE-
CONTROLLED
LOGISTICS
RESIDENTIAL CORPORATIONS,
DEVELOPMENT OFFICE AND RETAIL,
CORPORATIONS AND OTHER
------------ -----------------
Total revenues $ 173,764 $ 103,796
Total expenses 151,090 90,995(1)
---------- ----------
Net income $ 22,674 $ 12,801(1)
========== ==========
Company's equity in net income
of unconsolidated companies $ 18,770 $ 4,973
========== ==========
- -----------------
(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
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6. OTHER ASSETS, NET:
Other assets, net consist of the following:
BALANCE AT DECEMBER 31,
----------------------
1999 1998
--------- ---------
Leasing costs $ 99,232 $ 76,385
Deferred financing costs 41,564 35,655
Escrow deposits 550 50
Prepaid expenses 2,759 2,829
Marketable securities 40,944 17,688
Other 21,548 26,456
--------- ---------
206,597 159,063
Less - Accumulated amortization (60,466) (48,519)
--------- ---------
$ 146,131 $ 110,544
========= =========
7. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
The following is a summary of the Company's debt financing at December 31, 1999
and 1998:
BALANCE AT DECEMBER 31,
1999 1998
---------- ----------
SECURED DEBT
BankBoston, N.A. ("BankBoston") Term Note I(1) due October 30, 2001, bears
interest at the Eurodollar rate plus 325 basis points or the Base Rate (as
defined in the Term Note Agreement) plus 100 basis points (at December 31,
1999, the rate was 9.38% based on the Eurodollar rate) with a three-year
interest-only term, secured by Greenway I and IA, Four Westlake Park,
Washington Harbour, Bank One Tower, Frost Bank Plaza, Central Park Plaza, 3333
Lee Parkway, The Addison, and Reverchon Plaza Office Properties with
a combined book value of $416,852 ............................................. $320,000 $260,000
AEGON Note(2) due July 1, 2009, bears interest at 7.53% with monthly principal
and interest payments based on a 25-year amortization schedule, secured by the
Funding III, IV and V Properties with a combined book value of $234,700 ........ 278,392 --
LaSalle Note I(3) bears interest at 7.83% with an initial seven-year
interest-only term (through August 2002), followed by principal amortization
based on a 25-year amortization schedule through maturity in August 2027,
secured by the Funding I Properties with a combined book value of
$292,385 ....................................................................... 239,000 239,000
BankBoston Term Note II(4) due August 13, 2003, bears interest at the 30-day
LIBOR rate plus 325 basis points (at December 31, 1999, the interest rate was
9.38%) with a four-year interest only term, secured by equity interests in
Funding I and II valued at approximately $200,000 .............................. 200,000 --
JP Morgan Mortgage Note(5) due October 1, 2016, bears interest at a fixed rate
of 8.31% with a two- year interest-only term, secured by the Houston Center
mixed-use Office Property complex with a combined book value of $245,865 ....... 200,000 --
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BALANCE AT DECEMBER 31,
1999 1998
--------- ----------
Merrill Lynch Promissory Note (subsequently sold in 1999 to Salomon Brothers
Realty Corp.) due September 14, 1999, bears interest at 30-day LIBOR plus 200
basis points (at December 31, 1998, the rate was 7.06%) with an interest-only
term, secured by the Houston Center mixed-use Property complex with a book
value of $271,479 at December 31, 1998 .............................................. -- 184,299
LaSalle Note II(6) bears interest at 7.79% with an initial seven-year
interest-only term (through March 2003), followed by principal amortization
based on a 25-year amortization schedule through maturity in March 2028, secured
by the Funding II Properties with a combined book value of $302,881.................. 161,000 161,000
LaSalle Note III(7) due July 1999, bears interest at 30-day LIBOR plus a
weighted average interest rate of 2.135% (at December 31, 1998 the rate was 7.20%,
subject to a rate cap of 10%) with an interest- only term, secured by the
Funding III, IV and V Properties with a combined book value of $242,096 at
December, 31, 1998 .................................................................. -- 115,000
SFT Whole Loans, Inc. ("SFT") Note due September 30, 2001, bears interest at 30-day
LIBOR plus an average rate of 1.75% (at December 31, 1999, the rate was 7.36%)
with an interest-only term, secured by the Fountain Place Office Property with
a combined book value of $112,794 ................................................... 97,123 97,123
CIGNA Note due December 2002, bears interest at 7.47% with an interest-only
term, secured by the MCI Tower Office Property and Denver Marriott City Center
Hotel Property with a combined book value of $97,116 ................................ 63,500 63,500
Metropolitan Life Note II(8) due December 2002, bears interest at 6.93% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Energy Centre Office Property with a combined book
value of $56,731 .................................................................... 43,623 44,364
Metropolitan Life Note III(9) due December 1999, bears interest at 7.74% with an
interest-only term, secured by the Datran Center Office Property with a combined
book value of $70,076 at December 31, 1998 .......................................... -- 40,000
Metropolitan Life Note V(9) due December 2005, bears interest at 8.49% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Datran Center Office Property with a combined book
value of $70,374 .................................................................... 39,700 --
Northwestern Life Note due January 2003, bears interest at 7.65% with an
interest-only term, by the 301 Congress Avenue Office Property with a combined
book value of $45,275 ............................................................... 26,000 26,000
Metropolitan Life Note I due September 2001, bears interest at 8.88% with
monthly principal and interest payments based on a 20-year amortization
schedule, secured by five of The Woodlands Office Properties with a combined
book value of $14,677 ............................................................... 11,388 11,777
Nomura Funding VI Note(10) bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
July 2020, secured by the Funding VI Property with a combined book value of
$33,418 ............................................................................. 8,480 8,586
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BALANCE AT DECEMBER 31,
1999 1998
---------- ----------
Metropolitan Life Note IV due December 1999, bears interest at 7.11% with
monthly principal and interest payments based on a 15-year amortization
schedule, secured by the Datran Center Office Property with a book value of
$70,076 at December 31, 1998 ................................................... -- 6,752
Rigney Promissory Note due November 2012, bears interest at 8.50% with
quarterly principal and interest payments based on a 15-year amortization
schedule, secured by a parcel of land with a value of $16,886 .................. 723 755
UNSECURED DEBT
Line of Credit with BankBoston ("Credit Facility")(1) (see description of
Credit Facility below) ......................................................... 510,000 660,000
2007 Notes(11) bear interest at a fixed rate of 7.50% with a ten-year
interest-only term, due September 2007 ......................................... 250,000 250,000
2002 Notes(11) bear interest at a fixed rate of 7.00% with a five-year
interest-only term, due September 2002 ......................................... 150,000 150,000
---------- ----------
Total Notes Payable $2,598,929 $2,318,156
========== ==========
- --------------------
(1) On February 4, 2000, the BankBoston Term Note I and the Credit Facility
were repaid and retired primarily with the proceeds of a new facility
("New Facility"), an $850,000 secured, variable-rate facility from UBS
described in greater detail below.
(2) The outstanding principal balance at maturity of this note will be
approximately $223,000.
(3) In August 2007, the interest rate increases, and the Company is required to
remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220,000.
(4) The Company entered into the BankBoston Term Note II Loan on September 14,
1999. This loan is secured by partnership interests in two pools of
underleveraged assets. The proceeds were used to repay the $150,000
BankBoston Bridge Loan and to repay $50,000 of outstanding indebtedness
under the BankBoston Credit Facility. On February 1, 2000, the Company
renegotiated certain terms and covenants under this Note. As a result, the
interest rate on the facility increased to 30-day LIBOR plus 400 basis
points. The Company entered into a four-year $200,000 cash flow hedge
agreement effective September 1, 1999 with Salomon Brothers Holding
Company, Inc. in a separate transaction related to the BankBoston Term
Note II. See Note 8. Cash Flow Hedges.
(5) On September 14, 1999, the Company refinanced the $184,299 Salomon Brothers
Realty Corp. Note with this note. The additional proceeds of $15,701 were
used to pay indebtedness outstanding under the BankBoston Credit Facility.
The refinancing did not include the Four Seasons Hotel that had served as
partial collateral for the Salomon Brothers Realty Corp. Note. At the end
of seven years (October 2006), the loan reprices based on current interest
rates at this time. It is the Company's intention to repay the note in full
at such time (October 2006) by making a final payment of approximately
$1,790.
(6) In March 2006, the interest rate increases, and the Company is required to
remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (March 2006) by making a final payment of approximately $154,000.
(7) In June, 1999, the Company refinanced the Greenway Plaza Office Property
complex with a $280,000 AEGON Note, which was used to repay this note.
(8) In the first quarter of 2000, this note was paid off with proceeds from the
disposition of the Energy Centre Office Property.
(9) On December 1, 1999, the Company refinanced the Metropolitan Life Note III
with the Metropolitan Life Note V.
(10) The Company has the option to defease the note, by purchasing Treasury
obligations in an amount sufficient to pay the note, without penalty. In
July 2010, the interest rate due under the note will change to a 10-year
Treasury yield plus 500 basis points or, if the Company so elects, it may
repay the note without penalty at that date.
(11) The notes were issued in an offering registered with the SEC.
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Below are the aggregate principal amounts due as of December 31, 1999
under the Credit Facility and other indebtedness of the Company by year.
Scheduled principal installments and amounts due at maturity are included.
SECURED UNSECURED TOTAL
------------ ------------ ------------
(in thousands)
2000 $ 5,913 $ 510,000 $ 515,913
2001 444,975 -- 444,975
2002 105,560 150,000 255,560
2003 315,515 -- 315,515
2004 53,129 -- 53,129
Thereafter 763,837 250,000 1,013,837
------------ ------------ ------------
$ 1,688,929 $ 910,000 $ 2,598,929
============ ============ ============
The Company had approximately $515,913 of secured and unsecured debt
that was scheduled to expire during 2000, consisting primarily of $510,000 due
under the Credit Facility with BankBoston, which was scheduled to expire in June
2000. In addition, the Company had approximately $444,975 of secured debt
scheduled to expire in 2001, consisting primarily of $320,000 due under the
BankBoston Term Note I. Effective January 31, the Company entered into the New
Facility, a $850,000 secured, variable-rate facility from UBS which refinanced
and extended these debt maturities described in greater detail below.
CREDIT FACILITY
At December 31, 1999, the Company's borrowing capacity under the Credit
Facility was limited to $560,000, of which $510,000 was outstanding. The
interest rate on advances under the Credit Facility was the Eurodollar rate plus
137 basis points. As of December 31, 1999, the weighted average interest rate
was 7.65%. The Credit Facility was unsecured and was scheduled to expire in June
2000. The Credit Facility required the Company to maintain compliance with a
number of customary financial and other covenants on an ongoing basis, including
leverage ratios based on book value and debt service coverage ratios,
limitations on additional secured and total indebtedness and distributions,
limitations on additional investments and the incurrence of additional liens,
restrictions on real estate development activity and a minimum net worth
requirement. The Company was in compliance with the financial covenants related
to the Credit Facility for the December 31, 1999 reporting period. During the
first quarter of 2000, the Credit Facility was repaid and retired primarily
with the proceeds of the New Facility described below.
NEW FACILITY
On February 4, 2000, the Company repaid and retired the Credit Facility
and the BankBoston Term Note I primarily with the proceeds of the New Facility,
a new $850,000 secured, variable-rate facility fully underwritten and funded by
UBS. The New Facility is comprised of three tranches: a three-year $300,000
revolving line of credit (the "UBS Line of Credit"), a $275,000 three-year term
loan ("UBS Term Loan I") and a $275,000 four-year term loan ("UBS Term Loan
II"). Borrowings under the UBS Line of Credit, the UBS Term Loan I and the UBS
Term Loan II at March 24, 2000 were approximately $258,527, $257,213 and
$257,213, respectively. The UBS Line of Credit and the UBS Term Loan I bear
interest at LIBOR plus 250 basis points. The UBS Term Loan II bears interest at
LIBOR plus 275 basis points. The New Facility is secured by 41 Office Properties
and four Hotel Properties. The Company has also entered into a cash flow hedge
agreement related to a portion of the New Facility in a separate transaction
subsequent to December 31, 1999, which is intended to mitigate its exposure to
variable-rate debt. See Note 8. Cash Flow Hedges for a description of this
agreement.
8. CASH FLOW HEDGES
The Company does not use derivative financial instruments for trading
purposes, but occasionally utilizes them to manage exposure to variable rate
debt. The Company accounts for its derivative instruments under SFAS No. 133,
which was adopted in the third quarter of 1999.
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In September 1999, the Company entered into a four-year cash flow hedge
agreement with Salomon Brothers Holding Company, Inc.("Saloman") The cash flow
hedge agreement is designated as such because it is intended to mitigate the
variability of cash flows. On a monthly basis, the cash flow hedge is marked to
fair value and the cash flow hedge's gain or loss is reported in earnings when
the interest on the underlying debt affects earnings. The cash flow hedge
agreement has a notional amount of $200,000, relating to the BankBoston Term
Note II. Pursuant to this agreement, the Company will pay Salomon on a quarterly
basis at 6.183% fixed interest rate and Salomon will pay the Company a floating
90-day LIBOR rate based on the same quarterly reset dates. The underlying note,
which was originally issued at a floating interest rate of 30-day LIBOR plus 325
basis points, was effectively converted to a fixed weighted average interest
rate of 9.43% through maturity. Effective February 1, 2000, the Company
renegotiated certain terms and covenants under the BankBoston Term Note II. At
such time, the interest rate on the facility increased to 30-day LIBOR plus 400
basis points, and consequently increased the effective fixed weighted average
interest rate to 10.18% through maturity. As of December 31, 1999, the cash flow
hedge agreement resulted in $344 of additional interest expense.
Effective February 4, 2000, the Company entered into a three-year cash
flow hedge agreement with Fleet Boston Financial, for a notional amount of
$200,000, relating to a portion of the New Facility. As a result, $200,000 of
the amount under the note, which was originally issued at a floating interest
rate of LIBOR plus 250 basis points, was effectively converted to a fixed
weighted average interest rate of 9.61% through maturity.
9. RENTALS UNDER OPERATING LEASES:
The Company receives rental income from the leasing of Office Property,
Retail Property, Hotel Property and Behavioral Healthcare Property space under
operating leases. For noncancelable operating leases that were in effect as of
December 31, 1999 for Properties owned as of March 24, 2000, future minimum
rentals (base rents) during the next five years and thereafter (excluding tenant
reimbursements of operating expenses for Office and Retail Properties) are as
follows:
OFFICE AND BEHAVIORAL
RETAIL HOTEL HEALTHCARE COMBINED
PROPERTIES PROPERTIES PROPERTIES PROPERTIES
---------- ---------- ---------- ----------
2000 $ 424,937 $ 44,036 $ -- $ 468,973
2001 387,864 46,961 -- 434,825
2002 323,476 48,161 -- 371,637
2003 267,603 48,561 -- 316,164
2004 199,964 49,618 -- 249,582
Thereafter 580,040 107,552 -- 687,592
---------- ---------- ---------- ----------
$2,183,884 $ 344,889 $ -- $2,528,773
========== ========== ========== ==========
For purposes of this Note, the Company has assumed that it will not
receive any future minimum rental revenues from the Behavioral Healthcare
Properties, due to the status of the bankruptcy proceedings of CBHS. See Note
18. CBHS.
Generally, the Office and Retail Property leases also require that
tenants reimburse the Company for increases in operating expenses above
operating expenses during the base year of the tenants lease. These amounts
totaled $92,865, $78,708, and $42,385 for the years ended December 31, 1999,
1998 and 1997, respectively. These increases are generally payable in equal
installments throughout the year, based on estimated increases, with any
differences adjusted at year end based upon actual expenses.
The Company recognized percentage rental income from the Hotel
Properties of approximately $19,648, $13,848, and $9,678 for the years ended
December 31, 1999, 1998 and 1997, respectively.
See Note 2. Summary of Significant Accounting Policies, for further
discussion of revenue recognition, and Note 4. Segment Reporting, for further
discussion of significant tenants.
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10. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company has 14 Properties located on land that is subject to
long-term ground leases which expire between 2015 and 2080. The Company also
leases parking spaces in a parking garage adjacent to one of its Properties
pursuant to a lease expiring in 2021. Lease expense associated with these leases
during each of the three years ended December 31, 1999, 1998, and 1997 was
$2,642, $2,482, and $1,247, respectively. Future minimum lease payments due
under such leases as of December 31, 1999, are as follows:
LEASES
COMMITMENTS
-----------
2000 $ 2,275
2001 2,258
2002 2,185
2003 2,191
2004 2,195
Thereafter 99,008
---------
$ 110,112
=========
CONTINGENCIES
ENVIRONMENTAL MATTERS
All of the Properties have been subjected to Phase I environmental
assessments, and some properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments have not
revealed, nor is management aware of, any environmental liabilities that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.
11. STOCK AND UNIT BASED COMPENSATION PLANS:
STOCK OPTION PLANS
The Company has two stock incentive plans, the 1995 Stock Incentive
Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994 Plan"). In
June 1996, the shareholders amended the 1995 Plan, which increased the maximum
number of options and/or restricted shares that the Company may grant to
2,850,000 shares. The maximum aggregate number of shares available for grant
under the 1995 Plan increases automatically on January 1 of each year by an
amount equal to 8.5% of the increase in the number of common shares and units
outstanding since January 1 of the preceding year, subject to certain adjustment
provisions. As of January 1, 2000, the number of shares the Company may grant
under the 1995 Plan is 9,650,505. Under the 1995 Plan, the Company had granted,
net of forfeitures, options and restricted shares of 7,275,494 and 23,718
respectively, through December 31, 1999. Due to the approval of the 1995 Plan,
additional options and restricted shares will no longer be granted under the
1994 Plan. Under the 1994 Plan, the Company had granted, net of forfeitures,
2,509,800 options and no restricted shares. Under both Plans, options are
granted at a price not less than the market value of the shares on the date of
grant and expire ten years from the date of grant. The options that have been
granted under the 1995 Plan vest over five years, with the exception of 500,000
options that vest over two years, 250,000 options that vest over three and a
half years and 60,000 options that vest six months from the initial date of
grant. The options that have been granted under the 1994 Plan vest over periods
ranging from one to five years.
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A summary of the status of the Company's 1994 and 1995 Plans as of
December 31, 1999, 1998 and 1997 and changes during the years then ended is
presented in the table below:
STOCK OPTIONS PLANS
1999 1998 1997
---------------------- ---------------------- -----------------------
OPTIONS TO OPTIONS TO OPTIONS TO
ACQUIRE WTD. AVG. ACQUIRE WTD. AVG. ACQUIRE WTD. AVG.
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
---------- --------- ---------- --------- ----------- ----------
Outstanding as of January 1, 6,967 $ 21 4,943 $ 16 4,681 $ 15
Granted 3,489 16 2,728 32 485 28
Exercised (2,900) 13 (52) 18 (134) 14
Forfeited (895) 30 (652) 29 (89) 21
Expired -- -- -- -- -- --
------ ------ ----- ------ ----- ------
Outstanding/Wtd. Avg. as of December 31, 6,661 $ 21 6,967 $ 21 4,943 $ 16
------ ------ ----- ------ ----- ------
Exercisable/Wtd. Avg. as of December 31, 1,721 $ 24 3,727 $ 15 3,285 $ 14
The following table summarizes information about the options
outstanding and exercisable at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WTD. AVG. YEARS NUMBER
OUTSTANDING REMAINING EXERCISABLE
RANGE OF AT 12/31/99 BEFORE WTD. AVG. AT 12/31/99 WTD. AVG.
EXERCISE PRICES (000) EXPIRATION EXERCISE PRICE (000) EXERCISE PRICE
- --------------- ----------- --------------- -------------- ----------- --------------
$11 to 18 4,210 8.9 years $ 16 674 $ 16
$19 to 27 974 7.9 23 391 23
$28 to 39 1,477 8.2 33 656 32
----- --------- -------- ----- --------
$11 to 39 6,661 8.6 years $ 21 1,721 $ 24
===== ========= ======== ===== ========
UNIT PLANS
The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust managers, officers or 10% shareholders of the Company. An aggregate of
100,000 common shares are reserved for issuance upon the exchange of 50,000
units available for issuance to employees and advisors under the 1995 Unit Plan.
As of December 31, 1999, an aggregate of 7,012 units had been distributed under
the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of
options. There was no activity in the 1995 Unit Plan in 1999. The 1996 Unit Plan
provides for the grant of options to acquire up to 2,000,000 units, all of which
were granted. The unit options granted under the 1996 Unit Plan were priced at
fair market value on the date of grant, vest over seven years, and expire ten
years from the date of grant. Pursuant to the terms of the unit options granted
under the 1996 Unit Plan, because the fair market value of the Company's common
shares equaled or exceeded $25 for each of ten consecutive trading days, the
vesting of an aggregate of 500,000 units was accelerated and such units became
immediately exercisable in 1996. Under the 1996 Unit Plan, each unit that may be
purchased is exchangeable, as a result of shareholder approval in June 1997, for
two common shares. In June 1999, Gerald Haddock forfeited approximately 322,000
units as part of his resignation as an officer and director of the Company.
These options are available for grant to participants. In addition, the 1996
Unit Plan was amended in November 1999, to provide for an additional grant of
100,000 unit options, available from such forfeitures, and to allow such unit
options to vest over five years.
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A summary of the status of the Company's 1996 Unit Plan as of December
31, 1999, 1998 and 1997, and changes during the years then ended is presented in
the table below (assumes each unit is exchanged for two common shares):
1996 UNIT INCENTIVE OPTION PLAN
1999 1998 1997
-------------------------- -------------------------- --------------------------
SHARES SHARES SHARES
UNDERLYING WTD. AVG. UNDERLYING WTD. AVG. UNDERLYING WTD. AVG.
UNIT OPTIONS EXERCISE UNIT OPTIONS EXERCISE UNIT OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------------ --------- ------------ --------- ------------ ----------
Outstanding as of January 1, 4,000 $ 18 4,000 $ 18 4,000 $ 18
Granted 200 16 -- -- -- --
Exercised (1,143) 18 -- -- -- --
Forfeited (643) 18 -- -- -- --
Expired -- -- -- -- -- --
------ ------ ----- ------ ----- ------
Outstanding/Wtd. Avg. as of December 31, 2,414 $ 17 4,000 $ 18 4,000 $ 18
------ ------ ----- ------ ----- ------
Exercisable/Wtd. Avg. as of December 31, 1,143 $ 18 1,857 $ 18 1,429 $ 18
STOCK OPTION AND UNIT PLANS
The Company applies APB No. 25 in accounting for options granted
pursuant to the 1995 Plan, the 1994 Plan and the 1996 Unit Plan (collectively,
the "Plans"). Accordingly, no compensation cost has been recognized for the
Plans. Had compensation cost for the Plans been determined based on the fair
value at the grant dates for awards under the Plans, consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
Basic EPS:
Net Income (Loss) available to
common shareholders $ (7,441) $ (12,998) $ 150,584 $ 145,155 $ 117,341 $ 114,442
Diluted EPS:
Net Income (Loss) available to
common shareholders $ (7,441) $ (12,998) $ 153,900 $ 143,431 $ 117,341 $ 114,442
Basic Earnings (Loss) per Share $ (0.06) $ (0.11) $ 1.26 $ 1.21 $ 1.25 $ 1.22
Diluted Earnings per Share $ (0.06) $ (0.11) $ 1.21 $ 1.17 $ 1.20 $ 1.17
Because SFAS No. 123 was not required to be applied to options granted
prior to January 1, 1995, the resulting compensation cost may not be
representative of what is to be expected in future years.
At December 31, 1999, 1998 and 1997, the weighted average fair value of
options granted was $2.80, $5.01, and $6.52, respectively. The fair value of
each option is estimated at the date of grant using the Black-Scholes
option-pricing model using the following expected weighted average assumptions
in the calculation.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Life of options 10 years 10 years 10 years
Risk-free interest rates 8.0% 7.0% 6.7%
Dividend yields 12.0% 7.0% 4.0%
Stock price volatility 27.0% 26.1% 19.3%
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12. SHAREHOLDERS' EQUITY:
PREFERRED SHARE OFFERINGS
On February 19, 1998, the Company completed an offering (the "February
1998 Preferred Offering") of 8,000,000 shares of 6 3/4% Series A convertible
cumulative preferred shares (the "Series A Preferred Shares") with a liquidation
preference of $25 per share. Series A Preferred Shares are convertible at any
time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common share per Series A Preferred
Share based on the original offering price), subject to adjustment in certain
circumstances. Net proceeds to the Company from the February 1998 Preferred
Offering, after underwriting discounts of $8,000 and other offering costs of
$750 were approximately $191,250. The net proceeds from the February 1998
Preferred Offering were used to repay borrowings under the BankBoston Credit
Facility. Dividends on the Series A Preferred Shares are cumulative from the
date of original issuance and are payable quarterly in arrears commencing on May
15, 1998. The dividend represents an annualized dividend of $1.69 per share, or
$.42 per share per quarter.
On June 30, 1998, the Company completed an offering (the June 1998
Preferred Offering") of 6,948,734 Series B convertible preferred shares at
$32.38 per share (the "Series B Preferred Shares") for aggregate total offering
proceeds of approximately $225,000 to The Prudential Insurance Company of
America and certain of its affiliates. The Company used the proceeds from the
offering, net of professional fees, of approximately $224,750, to repay
approximately $170,000 of short-term indebtedness and to make an indirect
investment of approximately $55,900 in five additional Temperature-Controlled
Logistics Properties. On October 7, 1998, the Series B Preferred Shares became
convertible at any time, at the option of the holder. On November 30, 1998, upon
the election of the holder, the Series B Preferred Shares were converted into
8,400,582 of the Company's common shares at a conversion rate which was
calculated by comparing the investment return produced by the common shares of
the Company and an investment return of a portfolio of equity REIT's as computed
by NAREIT.
COMMON SHARE OFFERING
On April 23, 1998, the Company completed an offering of 1,365,138
common shares at $32.27 per share (the "April 1998 Unit Investment Trust
Offering") to Merrill Lynch & Co. Net proceeds to the Company from the April
1998 Unit Investment Trust Offering were approximately $43,959. The net proceeds
were used to reduce borrowings outstanding under the BankBoston Credit
Facility.
On March 25, 1999, the Company issued 12,356 additional common shares
to the former holder of the Series B Preferred Shares, settling a dispute
regarding the calculation of the conversion rate used in the conversion of the
Series B Preferred Shares into the Company's common shares on November 30, 1998.
FORWARD SHARE PURCHASE AGREEMENT
On August 12, 1997, the Company entered into two transactions with
affiliates of the predecessor of UBS AG ("UBS"). In one transaction, the
Company sold 4,700,000 common shares to UBS for approximately $148,000 and
received approximately $145,000 in net proceeds. In the other transaction, the
Company entered into a forward share purchase agreement (the "Forward Share
Purchase Agreement") with UBS. On August 11, 1998, the Company paid a fee of
approximately $3,000 to UBS in connection with the exercise by the Company and
UBS of the right to extend the term of the Forward Share Purchase Agreement
until August 12, 1999.
On June 30, 1999, the Company settled the forward share purchase
agreement (the "Forward Share Purchase Agreement") with affiliates of the
predecessor of UBS. As settlement of the Forward Share Purchase Agreement, the
Company made a cash payment of approximately $149,000 to UBS in exchange for the
return by UBS to the Company of 7,299,760 common shares.
The number of common shares returned to the Company is equal to the
4,700,000 common shares originally issued to UBS plus 2,599,760 common shares
subsequently issued by the Company, because of a decline in its stock price. The
additional shares were issued as collateral for the Company's obligation to
purchase 4,700,000 common shares from UBS by August 12, 1999. The settlement
price was calculated based on the gross proceeds the Company received from the
original issuance of 4,700,000 common shares to UBS, plus a forward
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accretion component equal to 90-day LIBOR plus 75 basis points, minus an
adjustment for the Company's distributions paid to UBS. The forward accretion
component represented a guaranteed rate of return to UBS.
EQUITY SWAP AGREEMENT
On December 12, 1997, the Company entered into two transactions with
Merrill Lynch. In one transaction, pursuant to which the Company obtained
additional equity capital through the issuance of common shares, the Company
sold 5,375,000 common shares at $38.125 per share to Merrill Lynch for $204,900
($199,900 in net proceeds) (the "Merrill Lynch Offering"). The net proceeds
to the Company from the Merrill Lynch Offering were used to repay borrowings
under the BankBoston Credit Facility. In the other transaction, the Company
entered into an equity swap agreement (the "Swap Agreement") with Merrill Lynch
relating to 5,375,000 common shares (the "Settlement Shares"), pursuant to which
Merrill Lynch would sell, as directed by the Company on or before December 12,
1998, a sufficient number of common shares to achieve net sales proceeds equal
to the market value of the Settlement Shares on December 12, 1997, plus a
forward accretion component, minus an adjustment for the Company's distribution
rate.
On February 20, 1998, and June 25, 1998, the Company issued 525,000
common shares and 759,254 common shares, respectively, to Merrill Lynch,
pursuant to the terms of the Swap Agreement, as a result of the decline in
market price of the common shares from December 12, 1997 through February 12,
1998 and June 12, 1998, respectively. The issuance of these common shares did
not have a material impact on the Company's net income per common share or net
book value per common share.
Effective September 30, 1998, the Company terminated the Swap Agreement
with Merrill Lynch. As of that date, the Company repurchased the 6,659,254
common shares that Merrill Lynch held and terminated the additional contingent
share obligation provided for under the Swap Agreement by issuing a $209,299
promissory note (the "Merrill Lynch Note") due December 14, 1998. The Merrill
Lynch Note, which provided for interest at the rate of 75 basis points above
30-day LIBOR, is secured by a first mortgage lien on the Houston Center
mixed-use Property complex. On December 14, 1998, the Company and Merrill Lynch
modified the Merrill Lynch Note. In connection with the modification, (i) the
Company made a payment of $25,000 of principal, (ii) the term of the Merrill
Lynch Note was extended to September 14, 1999, and (iii) the interest rate was
increased to an initial rate of 200 basis points above 30-day LIBOR. In
connection with this extension, the Company paid an extension fee of $1,800. On
September 14, 1999, this note was refinanced with the JP Morgan Mortgage Note.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized
the repurchase of a portion of its outstanding common shares from time to time
in the open market or through privately negotiated transactions, in an amount
not to exceed $500,000. The proposed repurchases will be subject to prevailing
market conditions and other considerations.
The Company expects the share repurchase program to be funded through a
combination of asset sales and financing arrangements, which, in some cases, may
be secured by the repurchased shares. The amount of shares that the Company
actually will purchase will be determined from time to time, in its reasonable
judgment, based on market conditions and the availability of funds, among other
factors. There can be no assurance that any number of shares actually will be
purchased within any particular time period.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to
repurchase a portion of its common shares from UBS. As of December 31, 1999, the
Company was obligated to repurchase 4,789,580 common shares, or approximately
$84,100 of the Company's common shares. The agreement was amended on January 4,
2000, increasing the number of common shares the Company was obligated to
repurchase from UBS by January 4, 2001 to approximately 5,800,000 common shares,
or approximately $102,000 of the Company's common shares (as amended, the "Share
Repurchase Agreement"). The price the Company will pay for the common shares
(the "Settlement Price") will be calculated based on the average cost of the
common shares purchased by UBS in connection with the Share Repurchase Agreement
plus 30-day LIBOR plus 250 basis points, minus an adjustment for the Company's
distributions during the term of the Share Repurchase Agreement. The guaranteed
rate of return under the agreement is equal to 30-day LIBOR plus 250 basis
points.
The Company may settle the Share Repurchase Agreement in cash or common
shares. In the event that the Company elects to fulfill the Share Repurchase
Agreement in common shares, UBS will sell the common shares on behalf of the
Company on the open market. If, as a result of a decrease in the market price of
the common shares, the number of common shares required to be sold to achieve
the Settlement Price exceeds the number of common shares purchased by UBS in
connection with the agreement, the Company will deliver additional cash or
common shares to UBS. If the Company elects to fulfill the Share Repurchase
Agreement in common shares, and the market price of the common shares is greater
than the Settlement Price, UBS will return a portion of the common shares that
it purchased in the open market to the Company.
If the common share price on the NYSE falls below the Settlement Price
calculated approximately every two weeks, the Company is required to remit cash
collateral to UBS equal to the product of the number of common shares purchased
by UBS and 115% of the difference between the Settlement Price and the closing
price of the common shares as reported on the NYSE. If the Company elects to
settle the Share Repurchase Agreement in cash, any cash collateral held by UBS
will be used to "pay-down" the Settlement Price. If the Company elects to settle
the Share Repurchase Agreement in common shares, UBS will release all claims to
any cash collateral they hold at that time. As of December 31, 1999, no cash
collateral was due to UBS. On February 18, 2000, the Company posted cash
collateral of $8,700 to UBS, as a result of a decline in the common share price.
DISTRIBUTIONS
Common Shares
The distributions to common shareholders and unitholders paid during
the year ended December 31, 1999, were $298,125 or $2.20 per common share and
equivalent unit.
The distributions to common shareholders and unitholders paid during
the year ended December 31, 1998, were $220,618 or $1.69 per common share and
equivalent unit.
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Following is the income tax status of distributions paid on common
shares and equivalent units during the years ended December 31, 1999 and 1998 to
common shareholders:
1999 1998
---- ----
Ordinary income 50.1% 58.8%
Capital gain 2.0% 5.6%
Return of capital 47.9% 35.6%
Preferred Shares
The distribution to preferred shareholders during the year ended
December 31, 1999, were $13,500 or $1.69 per preferred share.
The distributions to preferred shareholders during the year ended
December 31, 1998, were $11,700 or $1.46 per preferred share.
Following is the income tax status of distributions paid during the
years ended December 31, 1999 and 1998 to preferred shareholders:
1999 1998
---- ----
Ordinary income 96.4% 94.4%
Capital gain 3.6% 5.6%
13. SETTLEMENT OF MERGER DISPUTE:
STATION CASINOS, INC. ("STATION")
As of April 14, 1999, the Company and Station entered into a settlement
agreement for the mutual settlement and release of all claims between the
Company and Station arising out of the agreement and plan of merger between the
Company and Station, which the Company terminated in August 1998. As part of the
settlement agreement, the Company paid $15,000 to Station on April 22, 1999.
14. MINORITY INTEREST:
Minority interest represents (i) the limited partnership interests
owned by limited partners in the Operating Partnership ("units"), and (ii) joint
venture interests held by third parties. Each unit may be exchanged for either
two common shares or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, Crescent Equities' percentage interest in the Operating
Partnership increases. During the year ended December 31, 1999, there were
226,914 units exchanged for 453,828 common shares of Crescent Equities.
15. RELATED PARTY INVESTMENT:
As of December 31, 1999, the Company, upon the approval of the
independent members of its Board of Trust Managers, contributed approximately
$22,500 of a $25,000 commitment to DBL Holdings, Inc. ("DBL"). The Operating
Partnership has a 95% non-voting interest in DBL.
The contribution was used by DBL to invest in DBL-ABC, Inc., which, in
turn, acquired a limited partnership interest of 12.5% in the G2 Opportunity
Fund, LP ("G2"). G2 was formed for the purpose of investing in commercial
mortgage backed securities and is managed by an entity that is owned equally by
Goff Moore Strategic Partners, LP ("GMSP") and GMAC Commercial Mortgage
Corporation. John Goff, Vice-Chairman of the Board of Trust Managers and
President and Chief Executive Officer of the Company, and Darla Moore, who is
married to Richard Rainwater, Chairman of the Board of Trust Managers of the
Company, each own 50% of the
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entity that ultimately controls GMSP. Mr. Rainwater is a limited partner of
GMSP. At December 31, 1999, DBL's primary holdings consisted of the 12.5%
investment in G2.
16. FORMATION AND CAPITALIZATION OF COI
In April 1997, the Company established a new Delaware corporation, COI.
All of the outstanding common stock of COI, valued at $0.99 per share, was
distributed, effective June 12, 1997, to those persons who were limited partners
of the Operating Partnership or shareholders of the Company on May 30, 1997, in
a spin-off.
COI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the "Intercompany Agreement" between COI
and the Company, pursuant to which each has agreed to provide the other with
rights to participate in certain transactions. As a result of the formation of
COI and the execution of the "Intercompany Agreement", persons who own equity
interests in both the Company and COI have the opportunity to participate in the
benefits of both the real estate investments of the Company (including ownership
of real estate assets) and the lease of certain of such assets and the ownership
of other non-real estate assets by COI. The certificate of incorporation, as
amended and restated, of COI generally prohibits COI, for so long as the
Intercompany Agreement remains in effect, from engaging in activities or making
investments that a REIT could make, unless the Company was first given the
opportunity, but elected not to pursue such activities or investments.
In connection with the formation and capitalization of COI, the Company
provided to COI approximately $50,000 in the form of cash contributions and
loans to be used by COI to acquire certain assets. The Company also made
available to COI a line of credit to be used by COI to fulfill certain ongoing
obligations associated with these assets. As of December 31, 1999, COI had
$36,700 and $22,824 outstanding under the line of credit and term loans,
respectively, with the Company.
17. DISPOSITIONS:
Office & Retail Segment
For the year ended December 31, 1999, the Company recognized an
impairment loss of approximately $16,800 on one of the Office Properties held
for disposition, which was sold during the first quarter of 2000. The impairment
loss represented the difference between the carrying value of the Office
Property and the sales price less costs of the sale. As of March 24, 2000, the
Company completed the sale of six wholly-owned Office Properties, which were
included in the group of ten Office Properties held for disposition at December
31, 1999 and were being actively marketed for sale. The sales generated
approximately $146,600 of net proceeds. The proceeds were primarily used to pay
down variable-rate debt. Excluding the impairment loss on one of the six Office
Properties held for disposition at December 31, 1999, the Company recognized a
net gain of approximately $13,300 in the first quarter of 2000, related to the
sales of the other five Office Properties that were classified as held for
disposition at December 31, 1999. In addition, the Company has entered into
contracts relating to the sale of two additional Office Properties.
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Behavioral Healthcare Segment
The Company is actively marketing the Non-Core Properties for sale. The
Non-Core Properties were classified as held for disposition at December 31,
1999, and depreciation expense has not been recognized since November 10, 1999.
From January 1 through March 24, 2000, the Company completed the sale of 11
Non-Core Properties. The sales generated approximately $34,900 in net proceeds.
The proceeds were primarily used to pay down variable-rate debt. The Company has
also entered into contracts or letters of intent to sell an additional six
Non-Core Properties. See Note 18. CBHS.
Other
On October 27, 1999, the Company completed the sale of its non-core
equity and debt interests in the Dallas Mavericks, interest in the new Dallas
sports arena development and surrounding mixed-use development projects, and
certain promissory notes related to the Dallas Mavericks for approximately
$89,000 in cash. In connection with the sale, the Company recognized a net loss
of approximately $700. The proceeds were primarily used to pay down
variable-rate debt.
The Woodlands Commercial Properties Company, L.P., owned by the Company
and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for
sale certain property assets (multi-family, retail and office/venture tech
portfolios) located in The Woodlands. As of December 31, 1999, the multi-family
portfolio had been sold, generating net proceeds of approximately $28,800, of
which the Company's portion was approximately $12,200. The sale generated a net
gain of approximately $11,600, of which the Company's portion was approximately
4,900. The sale of the retail portfolio, including the Company's four Retail
Properties located in The Woodlands, closed on January 5, 2000, and generated
approximately $49,800 of net proceeds, of which the Company's portion was
approximately $37,300. The Woodlands Retail Properties were sold at a net gain
of approximately $9,000, of which the Company's portion was approximately
$7,700. All of the proceeds were primarily used to pay down variable-rate debt.
18. CBHS:
BEHAVIORAL HEALTHCARE SEGMENT
During the year ended December 31,1999, the Company received cash
rental payments of approximately $35,300 from CBHS. CBHS's business has been
negatively affected by many factors, including adverse industry conditions.
During 1999, CBHS failed to perform in accordance with its operating budget.
In the fourth quarter of 1999, the Company, COI, Magellan and CBHS
completed a recapitalization of CBHS. Pursuant to the recapitalization,
Magellan transferred its remaining hospital-based assets to CBHS, canceled its
accrued franchise fees and terminated the franchise agreements, pursuant to
which Magellan had provided certain services to CBHS in exchange for certain
franchise fees. The Company also deferred the monthly rental payments due from
CBHS for November and December 1999 and amended its master lease with CBHS to
provide a mechanism to terminate the master lease as to the Non-Core
Properties, and agreed that, upon each sale by the Company of a Non-Core
Property, the monthly minimum rent due from CBHS under the master lease would
be reduced by a specified percentage of the net proceeds of such sale. In
addition, the Company obtained appraisals of the underlying behavioral
healthcare real estate assets completed in November 1999.
In connection with the above events, the following financial statement
charges were made with respect to the Company's investment in the Behavioral
Healthcare Properties for the year ended December 31, 1999:
o CBHS rent is reflected on a cash basis beginning in the third quarter of
1999 and CBHS rent will continue to be reflected on a cash basis going
forward;
o The Company wrote-off the rent that was deferred according to the CBHS
lease agreement from the commencement of the lease in June of 1997 through
June 30, 1999. The balance written-off totaled $25,600;
o The Company wrote-down its behavioral healthcare real estate assets by
approximately $103,800, to a book value of $245,000;
o The Company recorded approximately $15,000 of additional expense to
be used by CBHS as working capital; and
o The Company has not recorded depreciation expense on the Non-Core
Properties (as described below) since November 1999, when such Properties
were classified as held for disposition.
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As of December 31, 1999, the Behavioral Healthcare Segment consisted of 88
Behavioral Healthcare Properties in 24 states, all of which were leased to CBHS
and its subsidiaries under a triple-net master lease. Of these 88 Behavioral
Healthcare Properties, 51 are designated as Non-Core Properties and the
remaining 37 are designated as Core Properties. The 51 Non-Core Properties,
which are the Properties at which CBHS has ceased operations or is planning to
cease operations, were being actively marketed for sale at December 31, 1999.
On February 16, 2000, CBHS and all of its subsidiaries that are subject to
the master lease with the Company filed voluntary Chapter 11 bankruptcy
petitions in the United States Bankruptcy Court for the District of Delaware.
CBHS has announced that it intends to sell all of the ongoing businesses of CBHS
and its subsidiaries by mid-May of 2000 or develop an appropriate liquidation
procedure if the sales have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties were terminated from
the master lease. See Note 17. Dispositions for a description of recent
dispositions of Non-Core Properties. The Core Properties remain subject to the
master lease. Payment and treatment of rent for the Behavioral Healthcare
Properties is subject to a rent stipulation agreed to by certain of the parties
involved in the CBHS bankruptcy proceeding.
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19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
1999
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- --------- ------------- ------------
Revenues $ 185,747 $ 192,397 $ 185,525 $ 182,610
Income before minority interests 39,660 61,313 (113,316) 25,686
Minority interests (3,649) (6,149) 11,034 (3,620)
Net income (loss) applicable to common shareholders
- basic 30,484 49,624 (105,657) 18,108
- diluted 30,484 49,624 (105,657) 18,108
Per share data:
Basic Earnings (loss) Per Common Share 0.24 0.39 (0.88) 0.19
Diluted Earnings (loss) Per Common Share 0.24 0.39 (0.88) 0.19
1998
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- --------- ------------- ------------
Revenues $ 161,149 $ 169,104 $ 179,793 $ 188,297
Income before minority interests 47,154 48,278 32,795 54,983
Minority interests (4,746) (4,834) (3,217) (4,813)
Net income applicable to common shareholders
- basic 40,833 40,069 26,203 43,479
- diluted 40,833 40,069 26,203 46,795
Per share data:
Basic Earnings Per Common Share 0.35 0.33 0.22 0.37
Diluted Earnings Per Common Share 0.33 0.32 0.21 0.37
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SCHEDULE III
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(dollars in thousands)
Costs
Capitalized Impairment
Subsequent to to Carrying
Initial Costs Acquisition Value
------------------------ ----------------- -------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Buildings and Fixtures and Fixtures and
Description Land Improvements Equipment Equipment
- ------------------------------------------------ ---------- -------------- ----------------- -------------
The Crescent Office Towers, Dallas, TX $ 6,723 $ 153,383 $ 77,016 $ --
UPR Plaza, Fort Worth, TX 1,375 66,649 35,444 --
The Citadel, Denver, CO 1,803 17,259 3,928 --
MacArthur Center I & II, Irving, TX 704 17,247 2,984 --
Las Colinas Plaza, Irving, TX 2,576 7,125 1,744 --
Caltex House, Irving, TX 2,200 48,744 1,870 --
Liberty Plaza I & II, Dallas, TX 1,650 15,956 495 --
Regency Plaza One, Denver, CO 950 31,797 1,704 --
Waterside Commons, Irving, TX 3,650 20,135 1,985 --
The Avallon, Austin, TX 475 11,207 52 --
Two Renaissance Square, Phoenix, AZ -- 54,412 6,308 --
Stanford Corporate Centre, Dallas, TX -- 16,493 1,426 --
Hyatt Regency Beaver Creek, Avon, CO 10,882 40,789 9,562 --
The Aberdeen, Dallas, TX 850 25,895 322 --
Barton Oaks Plaza One, Austin, TX 900 8,207 1,435 --
12404 Park Central, Dallas, TX 1,604 14,504 4,846 --
MCI Tower, Denver, CO -- 56,593 708 --
Denver Marriott City Center, Denver, CO -- 50,364 3,966 --
The Woodlands Office Properties, Houston, TX 12,007 35,865 4,911 --
Spectrum Center, Dallas, TX 2,000 41,096 10,460 --
Ptarmigan Place, Denver, CO 3,145 28,815 5,039 --
6225 North 24th Street, Phoenix, AZ 719 6,566 3,182 --
Briargate Office and Research --
Center, Colorado Springs, CO 2,000 18,044 940 --
Albuquerque Plaza, Albuquerque, NM -- 36,667 1,996 --
Hyatt Regency Albuquerque, Albuquerque, NM -- 32,241 2,449 --
3333 Lee Parkway, Dallas, TX 1,450 13,177 3,699 --
301 Congress Avenue, Austin, TX 2,000 41,735 6,314 --
Central Park Plaza, Omaha, NE(2) 2,514 23,236 113 --
Canyon Ranch, Tucson, AZ 14,500 43,038 5,079 --
The Woodlands Office Properties, Houston, TX 2,393 8,523 -- --
Three Westlake Park, Houston, TX 2,920 26,512 735 --
1615 Poydras, New Orleans, LA(2) -- 37,087 2,279 --
Greenway Plaza Office Portfolio, Houston, TX 27,204 184,765 59,226 --
Chancellor Park, San Diego, CA 8,028 23,430 (5,688) --
Gross Amount at Which
Carried at Close of Period
--------------------------------------
Buildings,
Improvements,
Furniture,
Fixtures and Accumulated Date of
Description Land Equipment Total Depreciation Construction
- ------------------------------------------------ ---------------- -------------------- ------------- ------------- ------------
The Crescent Office Towers, Dallas, TX $ 6,723 $ 230,399 $ 237,122 $ (147,037) 1985
UPR Plaza, Fort Worth, TX 1,375 102,093 103,468 (40,171) 1982
The Citadel, Denver, CO 1,803 21,187 22,990 (13,902) 1987
MacArthur Center I & II, Irving, TX 880 20,055 20,935 (6,470) 1982/1986
Las Colinas Plaza, Irving, TX 2,581 8,864 11,445 (3,823) 1989
Caltex House, Irving, TX 2,200 50,614 52,814 (7,557) 1982
Liberty Plaza I & II, Dallas, TX 1,650 16,451 18,101 (2,279) 1981/1986
Regency Plaza One, Denver, CO 950 33,501 34,451 (4,884) 1985
Waterside Commons, Irving, TX 3,650 22,120 25,770 (3,772) 1986
The Avallon, Austin, TX 475 11,259 11,734 (1,461) 1986
Two Renaissance Square, Phoenix, AZ -- 60,720 60,720 (9,694) 1990
Stanford Corporate Centre, Dallas, TX -- 17,919 17,919 (3,004) 1985
Hyatt Regency Beaver Creek, Avon, CO 10,882 50,351 61,233 (5,812) 1989
The Aberdeen, Dallas, TX 850 26,217 27,067 (4,247) 1986
Barton Oaks Plaza One, Austin, TX 900 9,642 10,542 (1,519) 1986
12404 Park Central, Dallas, TX 1,604 19,350 20,954 (2,332) 1987
MCI Tower, Denver, CO -- 57,301 57,301 (6,438) 1982
Denver Marriott City Center, Denver, CO -- 54,330 54,330 (8,077) 1982
The Woodlands Office Properties, Houston, TX 12,204 40,579 52,783 (9,560) 1980-1993
Spectrum Center, Dallas, TX 5,125 48,431 53,556 (6,721) 1983
Ptarmigan Place, Denver, CO 3,145 33,854 36,999 (4,453) 1984
6225 North 24th Street, Phoenix, AZ 719 9,748 10,467 (1,450) 1981
Briargate Office and Research
Center, Colorado Springs, CO 2,000 18,984 20,984 (2,234) 1988
Albuquerque Plaza, Albuquerque, NM -- 38,663 38,663 (4,044) 1990
Hyatt Regency Albuquerque, Albuquerque, NM -- 34,690 34,690 (4,713) 1990
3333 Lee Parkway, Dallas, TX 1,468 16,858 18,326 (1,843) 1983
301 Congress Avenue, Austin, TX 2,000 48,049 50,049 (4,775) 1986
Central Park Plaza, Omaha, NE(2) 2,514 23,349 25,863 (2,234) 1982
Canyon Ranch, Tucson, AZ 17,846 44,771 62,617 (3,662) 1980
The Woodlands Office Properties, Houston, TX 2,393 8,523 10,916 (1,026) 1995-1996
Three Westlake Park, Houston, TX 2,920 27,247 30,167 (2,267) 1983
1615 Poydras, New Orleans, LA(2) 1,104 38,262 39,366 (2,825) 1984
Greenway Plaza Office Portfolio, Houston, TX 27,204 243,991 271,195 (26,946) 1969-1982
Chancellor Park, San Diego, CA 2,328 23,442 25,770 (1,972) 1988
Life on Which
Depreciation in
Latest Income
Acquisition Statement Is
Description Date Computed
- ------------------------------------------------ ------------ ---------------
The Crescent Office Towers, Dallas, TX -- (1)
UPR Plaza, Fort Worth, TX 1990 (1)
The Citadel, Denver, CO 1987 (1)
MacArthur Center I & II, Irving, TX 1993 (1)
Las Colinas Plaza, Irving, TX 1989 (1)
Caltex House, Irving, TX 1994 (1)
Liberty Plaza I & II, Dallas, TX 1994 (1)
Regency Plaza One, Denver, CO 1994 (1)
Waterside Commons, Irving, TX 1994 (1)
The Avallon, Austin, TX 1994 (1)
Two Renaissance Square, Phoenix, AZ 1994 (1)
Stanford Corporate Centre, Dallas, TX 1995 (1)
Hyatt Regency Beaver Creek, Avon, CO 1995 (1)
The Aberdeen, Dallas, TX 1995 (1)
Barton Oaks Plaza One, Austin, TX 1995 (1)
12404 Park Central, Dallas, TX 1995 (1)
MCI Tower, Denver, CO 1995 (1)
Denver Marriott City Center, Denver, CO 1995 (1)
The Woodlands Office Properties, Houston, TX 1995 (1)
Spectrum Center, Dallas, TX 1995 (1)
Ptarmigan Place, Denver, CO 1995 (1)
6225 North 24th Street, Phoenix, AZ 1995 (1)
Briargate Office and Research
Center, Colorado Springs, CO 1995 (1)
Albuquerque Plaza, Albuquerque, NM 1995 (1)
Hyatt Regency Albuquerque, Albuquerque, NM 1995 (1)
3333 Lee Parkway, Dallas, TX 1996 (1)
301 Congress Avenue, Austin, TX 1996 (1)
Central Park Plaza, Omaha, NE(2) 1996 (1)
Canyon Ranch, Tucson, AZ 1996 (1)
The Woodlands Office Properties, Houston, TX 1996 (1)
Three Westlake Park, Houston, TX 1996 (1)
1615 Poydras, New Orleans, LA(2) 1996 (1)
Greenway Plaza Office Portfolio, Houston, TX 1996 (1)
Chancellor Park, San Diego, CA 1996 (1)
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SCHEDULE III
Costs
Capitalized Impairment
Subsequent to to Carrying
Initial Costs Acquisition Value
------------------------ ----------------- -------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Buildings and Fixtures and Fixtures and
Description Land Improvements Equipment Equipment
- ------------------------------------------------ ---------- -------------- ----------------- -------------
The Woodlands Retail Properties, Houston, TX 11,340 18,948 1,613 --
Sonoma Mission Inn & Spa, Sonoma, CA 10,000 44,922 25,803 --
Canyon Ranch, Lenox, MA 4,200 25,218 7,639 --
160 Spear Street, San Francisco, CA -- 35,656 2,624 --
Greenway I & IA, Richardson, TX 1,701 15,312 458 --
Bank One Tower, Austin, TX 3,879 35,431 1,622 --
Frost Bank Plaza, Austin, TX -- 36,019 4,617 --
Greenway II, Richardson, TX 1,823 16,421 144 --
55 Madison, Denver, CO 1,451 13,253 548 --
44 Cook, Denver, CO 1,451 13,253 1,105 --
AT&T Building, Denver, CO(2) 1,366 12,471 1,667 --
Trammell Crow Center, Dallas, TX 25,029 137,320 8,589 --
The Addison, Dallas, TX 1,990 17,998 606 --
Addison Tower, Dallas, TX 830 7,701 373 --
The Amberton, Dallas, TX(2) 1,050 9,634 1,038 --
Cedar Springs Plaza, Dallas, TX 700 6,549 776 --
Concourse Office Park, Dallas, TX(2) 800 7,449 620 --
The Meridian, Dallas, TX(2) 1,500 13,613 933 --
One Preston Park, Dallas, TX(2) 180 1,694 290 --
Palidades Central I, Dallas, TX 1,300 11,797 643 --
Palidades Central II, Dallas, TX 2,100 19,176 650 --
5050 Quorum, Dallas, TX 898 8,243 317 --
Reverchon Plaza, Dallas, TX 2,850 26,302 1,126 --
Stemmons Place, Dallas, TX -- 37,537 950 --
Valley Centre, Dallas, TX(2) 421 3,873 454 --
Walnut Green, Dallas, TX(2) 980 8,923 833 --
Carter-Crowley Land/Multi-Family, Dallas, TX 46,900 3,600 (29,439) --
Behavioral Healthcare Facilities(3)(4) 89,000 301,269 (2,751) (103,773)
Houston Center, Houston, TX 52,504 224,041 5,620 --
Four Seasons Hotel, Houston, TX 5,569 45,138 6,273 --
Miami Center, Miami, FL 13,145 118,763 3,720 --
1800 West Loop South, Houston, TX 4,165 40,857 976 --
Fountain Place, Dallas, TX 10,364 103,212 5,242 --
Energy Centre, New Orleans, LA(2)(5) 7,500 67,704 1,820 (16,800)
Ventana Country Inn, Big Sur, CA 2,782 26,744 3,112 --
Avallon Phase II, Austin, TX 1,102 -- 11,377 --
Austin Centre, Austin, TX 2,007 48,566 1,931 --
Omni Hotel, Austin, TX 1,896 44,579 1,716 --
Post Oak Central, Houston, TX 15,525 139,777 3,471 --
Washington Harbor, Washington, D.C 16,100 146,438 1,663 --
Datran Center, Miami, FL -- 71,091 2,276 --
Gross Amount at Which
Carried at Close of Period
---------------------------------------
Buildings,
Improvements,
Furniture,
Fixtures and Accumulated Date of
Description Land Equipment Total Depreciation Construction
- ------------------------------------------------ ------------------ -------------------- ------------- ------------ ------------
The Woodlands Retail Properties, Houston, TX 11,360 20,541 31,901 (3,537) 1984
Sonoma Mission Inn & Spa, Sonoma, CA 10,000 70,725 80,725 (5,945) 1927
Canyon Ranch, Lenox, MA 4,200 32,857 37,057 (3,639) 1989
160 Spear Street, San Francisco, CA -- 38,280 38,280 (3,420) 1984
Greenway I & IA, Richardson, TX 1,701 15,770 17,471 (1,186) 1983
Bank One Tower, Austin, TX 3,879 37,053 40,932 (2,970) 1974
Frost Bank Plaza, Austin, TX -- 40,636 40,636 (3,301) 1984
Greenway II, Richardson, TX 1,823 16,565 18,388 (1,231) 1985
55 Madison, Denver, CO 1,451 13,801 15,252 (1,121) 1982
44 Cook, Denver, CO 1,451 14,358 15,809 (1,207) 1984
AT&T Building, Denver, CO(2) 1,366 14,138 15,504 (1,462) 1982
Trammell Crow Center, Dallas, TX 25,029 145,909 170,938 (10,550) 1984
The Addison, Dallas, TX 1,990 18,604 20,594 (1,213) 1980/1986
Addison Tower, Dallas, TX 830 8,074 8,904 (665) 1980/1986
The Amberton, Dallas, TX(2) 1,050 10,672 11,722 (563) 1980/1986
Cedar Springs Plaza, Dallas, TX 700 7,325 8,025 (621) 1980/1986
Concourse Office Park, Dallas, TX(2) 800 8,069 8,869 (654) 1980/1986
The Meridian, Dallas, TX(2) 1,500 14,546 16,046 (760) 1980/1986
One Preston Park, Dallas, TX(2) 180 1,984 2,164 (121) 1980/1986
Palidades Central I, Dallas, TX 1,300 12,440 13,740 (880) 1980/1986
Palidades Central II, Dallas, TX 2,100 19,826 21,926 (1,311) 1980/1986
5050 Quorum, Dallas, TX 898 8,560 9,458 (620) 1980/1986
Reverchon Plaza, Dallas, TX 2,850 27,428 30,278 (1,931) 1980/1986
Stemmons Place, Dallas, TX -- 38,487 38,487 (2,713) 1980/1986
Valley Centre, Dallas, TX(2) 421 4,327 4,748 (232) 1980/1986
Walnut Green, Dallas, TX(2) 980 9,756 10,736 (487) 1980/1986
Carter-Crowley Land/Multi-Family, Dallas, TX 21,061 -- 21,061 --
Behavioral Healthcare Facilities(3)(4) 85,805 197,940 283,745 (34,696) 1850-1992
Houston Center, Houston, TX 47,388 234,777 282,165 (13,881) 1974-1983
Four Seasons Hotel, Houston, TX 5,569 51,411 56,980 (4,222) 1983
Miami Center, Miami, FL 13,145 122,483 135,628 (6,673) 1983
1800 West Loop South, Houston, TX 4,165 41,833 45,998 (2,368) 1982
Fountain Place, Dallas, TX 10,364 108,454 118,818 (6,023) 1986
Energy Centre, New Orleans, LA(2)(5) 7,500 52,724 60,224 (2,581) 1984
Ventana Country Inn, Big Sur, CA 2,782 29,856 32,638 (1,792) 1975-1988
Avallon Phase II, Austin, TX 1,188 11,291 12,479 (837) 1997
Austin Centre, Austin, TX 2,007 50,497 52,504 (1,819) 1986
Omni Hotel, Austin, TX 1,896 46,295 48,191 (3,445) 1986
Post Oak Central, Houston, TX 15,525 143,248 158,773 (6,444) 1974-1981
Washington Harbor, Washington, D.C 16,100 148,101 164,201 (6,750) 1986
Datran Center, Miami, FL -- 73,367 73,367 (2,993) 1986-1992
Life on Which
Depreciation in
Latest Income
Acquisition Statement Is
Description Date Computed
- ------------------------------------------------ ------------ ---------------
The Woodlands Retail Properties, Houston, TX 1996 (1)
Sonoma Mission Inn & Spa, Sonoma, CA 1996 (1)
Canyon Ranch, Lenox, MA 1996 (1)
160 Spear Street, San Francisco, CA 1996 (1)
Greenway I & IA, Richardson, TX 1996 (1)
Bank One Tower, Austin, TX 1996 (1)
Frost Bank Plaza, Austin, TX 1996 (1)
Greenway II, Richardson, TX 1997 (1)
55 Madison, Denver, CO 1997 (1)
44 Cook, Denver, CO 1997 (1)
AT&T Building, Denver, CO(2) 1997 (1)
Trammell Crow Center, Dallas, TX 1997 (1)
The Addison, Dallas, TX 1997 (1)
Addison Tower, Dallas, TX 1997 (1)
The Amberton, Dallas, TX(2) 1997 (1)
Cedar Springs Plaza, Dallas, TX 1997 (1)
Concourse Office Park, Dallas, TX(2) 1997 (1)
The Meridian, Dallas, TX(2) 1997 (1)
One Preston Park, Dallas, TX(2) 1997 (1)
Palidades Central I, Dallas, TX 1997 (1)
Palidades Central II, Dallas, TX 1997 (1)
5050 Quorum, Dallas, TX 1997 (1)
Reverchon Plaza, Dallas, TX 1997 (1)
Stemmons Place, Dallas, TX 1997 (1)
Valley Centre, Dallas, TX(2) 1997 (1)
Walnut Green, Dallas, TX(2) 1997 (1)
Carter-Crowley Land/Multi-Family, Dallas, TX -- --
Behavioral Healthcare Facilities(3)(4) 1997 (1)
Houston Center, Houston, TX 1997 (1)
Four Seasons Hotel, Houston, TX 1997 (1)
Miami Center, Miami, FL 1997 (1)
1800 West Loop South, Houston, TX 1997 (1)
Fountain Place, Dallas, TX 1997 (1)
Energy Centre, New Orleans, LA(2)(5) 1997 (1)
Ventana Country Inn, Big Sur, CA 1997 (1)
Avallon Phase II, Austin, TX -- (1)
Austin Centre, Austin, TX 1998 (1)
Omni Hotel, Austin, TX 1998 (1)
Post Oak Central, Houston, TX 1998 (1)
Washington Harbor, Washington, D.C 1998 (1)
Datran Center, Miami, FL 1998 (1)
99
101
SCHEDULE III
Costs
Capitalized Impairment
Subsequent to to Carrying
Initial Costs Acquisition Value
------------------------ ----------------- -------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Buildings and Fixtures and Fixtures and
Description Land Improvements Equipment Equipment
- ------------------------------------------------ ---------- -------------- ----------------- -------------
Four Westlake Plaza, Houston, TX 3,910 79,190 213 --
Sonoma Golf Course, Sonoma, CA 14,956 -- 1,016 --
Plaza Park Garage 2,032 14,125 472 --
Washington Harbor Phase II, Washington, D.C 15,279 411 347 --
Crescent Real Estate Equities L.P. -- -- 16,620 --
Other 23,270 2,874 14,190 --
---------- ---------- ---------- ----------
Total $ 523,067 $3,320,648 $ 372,432 $ (120,573)
========== ========== ========== ==========
Gross Amount at Which
Carried at Close of Period
----------------------------------------
Buildings,
Improvements,
Furniture,
Fixtures and Accumulated Date of
Description Land Equipment Total Depreciation Construction
- ------------------------------------------------ ------------------ -------------------- ------------- ------------ ------------
Four Westlake Plaza, Houston, TX 3,910 79,403 83,313 (2,975) 1992
Sonoma Golf Course, Sonoma, CA 11,795 4,177 15,972 (353) 1929
Plaza Park Garage 2,032 14,597 16,629 (78) 1998
Washington Harbor Phase II, Washington, D.C 15,322 715 16,037 -- 1998
Crescent Real Estate Equities L.P. -- 16,620 16,620 (4,046) --
Other 29,608 10,726 40,334 -- --
---------- ---------- ---------- ---------
Total $ 494,514 $3,601,060 $4,095,574 $ (507,520)
========== ========== ========== =========
Life on Which
Depreciation in
Latest Income
Acquisition Statement Is
Description Date Computed
- ------------------------------------------------ ------------ ---------------
Four Westlake Plaza, Houston, TX 1998 (1)
Sonoma Golf Course, Sonoma, CA 1998 (1)
Plaza Park Garage -- (1)
Washington Harbor Phase II, Washington, D.C -- (1)
Crescent Real Estate Equities L.P. -- (1)
Other -- (1)
100
102
- --------------------------
(1) Depreciation of the real estate assets is calculated over the following
estimated useful lives using the straight-line method:
Building and improvements 5 to 40 years
Tenant improvements Terms of leases
Furniture, fixtures, and equipment 3 to 10 years
(2) Depreciation on these Office Properties held for sale ceased from 7/1/99
through 12/31/99 (the period over which these properties were held for
sale).
(3) Depreciation on Behavioral Healthcare Properties held for sale ceased from
11/11/99 through 12/31/99 (the period over which these properties were held
for sale).
(4) Write-down on Behavioral Healthcare Properties represents adjustment to
estimated fair value.
(5) Write-down on Energy Centre represents the difference between the carrying
value of the asset and the expected selling price less costs to sell.
A summary of combined real estate investments and accumulated depreciation is as
follows:
1999 1998 1997
----------- ----------- -----------
Real estate investments:
Balance, beginning of year $ 4,129,372 $ 3,423,130 $ 1,732,626
Acquisitions -- 580,694 1,643,587
Improvements 95,210 145,409 58,634
Disposition (8,435) (19,861) (11,717)
Impairments (120,573) -- --
----------- ----------- -----------
Balance, end of year $ 4,095,574 $ 4,129,372 $ 3,423,130
=========== =========== ===========
Accumulated depreciation:
Balance, beginning of year $ 387,457 $ 278,194 $ 208,808
Depreciation 120,745 109,551 69,457
Disposition (682) (288) (71)
----------- ----------- -----------
Balance, end of year $ 507,520 $ 387,457 $ 278,194
=========== =========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Certain information Part III requires is omitted from the Report. The
Registrant will file a definitive proxy statement with the SEC pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information to be included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.
ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2000.
101
103
ITEM 11. EXECUTIVE COMPENSATION
The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information this Item requires is incorporated by reference to the
Company's Proxy Statement to be filed with the SEC for its annual shareholders'
meeting to be held in June 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Report of Independent Public Accountants
Crescent Real Estate Equities Company Consolidated Balance Sheets at
December 31, 1999 and 1998.
Crescent Real Estate Equities Company Consolidated Statements of
Operations for the years ended December 31, 1999, 1998 and 1997.
Crescent Real Estate Equities Company Consolidated Statements of
Shareholders' Equity for the years ended December 31, 1999, 1998 and
1997.
Crescent Real Estate Equities Company Consolidated Statements of Cash
Flows for the years ended December 31, 1999, 1998 and 1997.
Crescent Real Estate Equities Company Notes to Financial Statements.
(a)(2) Financial Statement Schedules
Schedule III - Crescent Real Estate Equities Company Consolidated Real
Estate Investments and Accumulated Depreciation at December 31, 1999.
All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in
the Financial Statements and related notes included in the consolidated
and combined statements.
102
104
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.01 Restated Declaration of Trust of Crescent Real Estate
Equities Company (filed as Exhibit No. 4.01 to the
Registrant's Registration Statement on Form S-3 (File
No. 333-21905) (the "1997 S-3") and incorporated herein
by reference)
3.02 Amended and Restated Bylaws of Crescent Real Estate
Equities Company, as amended (filed as Exhibit No. 3.02
to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1998 (the "1998
3Q 10-Q") and incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No.
4.03 to the 1997 S-3 and incorporated herein by
reference)
4.02 Statement of Designation of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate
Equities Company (filed as Exhibit 4.07 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 10-K") and
incorporated herein by reference)
4.03 Form of Certificate of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate
Equities Company (filed as Exhibit No. 4 to the
Registrant's Registration Statement on Form 8-A/A filed
on February 18, 1998 and incorporated by reference)
4.04 Statement of Designation of Series B Convertible
Preferred Shares of the Registrant (filed as Exhibit
4.01 to the Registrant's Current Report on Form 8-K
dated June 29, 1998 and filed June 30, 1998 and
incorporated herein by reference)
4.05 Form of Certificate of Series B Convertible Preferred
Shares (filed as Exhibit 4.05 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (the "1998 2Q 10-Q") and incorporated
herein by reference)
4.06 Indenture, dated as of September 22, 1997, between
Crescent Real Estate Equities Limited Partnership and
State Street Bank and Trust Company of Missouri, N.A.
(filed as Exhibit No. 4.01 to the Registration
Statement on Form S-4 (File No. 333-42293) of Crescent
Real Estate Equities Limited Partnership (the "Form
S-4") and incorporated herein by reference)
4.07 6-5/8% Note due 2002 (filed as Exhibit No. 4.07 to the
1998 2Q 10-Q and incorporated herein by reference)
4.08 7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the
1998 2Q 10-Q and incorporated herein by reference)
4* Pursuant to Regulation S-K Item 601 (6) (4) (iii), the
Registrant by this filing agrees, upon request to
furnish to the SEC a copy of other instruments defining
the rights of holders of long-term debt of the
Registrant
103
105
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.01 Second Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Equities Limited
Partnership, dated as of November 1, 1997, as amended
(filed herewith)
10.02 Noncompetition of Richard E. Rainwater, as assigned to
Crescent Real Estate Equities Limited Partnership on
May 5, 1994 (filed as Exhibit 10.02 to the 1997 10-K
and incorporated herein by reference)
10.03 Noncompetition Agreement of John C. Goff, as assigned
to Crescent Real Estate Equities Limited Partnership on
May 5, 1994 (filed as Exhibit 10.03 to the 1997 10-K
and incorporated herein by reference)
10.04 Employment Agreement with John C. Goff, as assigned to
Crescent Real Estate Equities Limited Partnership on
May 5, 1994, and as further amended (filed herewith)
10.05 Employment Agreement of Gerald W. Haddock, as assigned
to Crescent Real Estate Equities Limited Partnership on
May 5, 1994, and as further amended (filed as Exhibit
10.06 to the 1997 10-K and incorporated herein by
reference)
10.06 Amendment No. 4 to the Haddock Employment Agreement,
dated March 10, 1998 (filed as Exhibit 10.30 to the
Form S-4 and incorporated herein by reference)
10.07 Amendment No. 5 to the Haddock Employment Agreement,
dated March 1, 1999 (filed as Exhibit 10.09 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 10-K") and
incorporated herein by reference )
10.08 Employment Agreement of Jerry R. Crenshaw, Jr. dated as
of December 14, 1998 (filed herewith)
10.09 Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Registrant and
each of its executive officers and trust managers
(filed as Exhibit No. 10.07 to the Form S-4 and
incorporated herein by reference)
10.10 Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the
Registrant's Registration Statement on Form S-11 (File
No. 33-75188) (the "Form S-11") and incorporated herein
by reference)
10.11 Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan, as amended (filed as Exhibit
10.12 to the 1998 10-K and incorporated herein by
reference)
10.12 Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as Exhibit
10.13 to the Form S-4 and incorporated herein by
reference)
104
106
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.13 Amended and Restated 1995 Crescent Real Estate Equities
Limited Partnership Unit Incentive Plan (filed as
Exhibit 99.01 to the Registrant's Registration
Statement on Form S-8 (File No. 333-3452) and
incorporated herein by reference)
10.14 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan, as amended (filed herewith)
10.15 Fifth Amended and Restated Revolving Credit Agreement,
dated June 30, 1998, among Crescent Real Estate Limited
Partnership, BankBoston, N.A. and the other banks named
therein (filed as Exhibit 10.17 to the 1998 2Q 10-Q and
incorporated herein by reference)
10.16 Intercompany Agreement, dated June 3, 1997, between
Crescent Real Estate Equities Limited Partnership and
Crescent Operating, Inc. (filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (File No. 333-25223)
of Crescent Operating, Inc. and incorporated herein by
reference)
10.17 Form of Registration Rights, Lock-Up and Pledge
Agreement (filed as Exhibit No. 10.05 to the Form S-11
and incorporated herein by reference)
10.18 Agreement dated June 11, 1999 by and between Gerald
Haddock and Crescent Real Estate Equities Company,
Crescent Real Estate Equities Limited Partnership and
Crescent Real Estate Equities, Ltd. (filed as Exhibit
10.19 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 and incorporated
herein by reference)
21.01 List of Subsidiaries (filed herewith)
23.01 Consent of Arthur Andersen LLP (filed herewith)
27.01 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
(c) Exhibits
See Item 14(a)(3) above.
105
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 2000.
CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)
By /s/ John C. Goff
-----------------------------------------
John C. Goff
Vice Chairman of the Board, Chief Executive
Officer and President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard E. Rainwater Trust Manager and Chairman of the Board 4/4/00
- -------------------------------
Richard E. Rainwater
/s/ John C. Goff Vice Chairman of the Board, Chief Executive 4/4/00
- ------------------------------- Officer and President (Principal Executive Officer)
John C. Goff
/s/ Jerry R. Crenshaw Jr. Senior Vice President and Chief Financial 4/4/00
- ------------------------------- Officer (Principal Accounting and Financial Officer)
Jerry R. Crenshaw Jr.
/s/ Anthony M. Frank Trust Manager 4/4/00
- -------------------------------
Anthony M. Frank
/s/ Morton H. Meyerson Trust Manager 4/4/00
- -------------------------------
Morton H. Meyerson
/s/ William F. Quinn Trust Manager 4/4/00
- -------------------------------
William F. Quinn
/s/ Paul E. Rowsey, III Trust Manager 4/4/00
- -------------------------------
Paul E. Rowsey, III
106
108
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.01 Restated Declaration of Trust of Crescent Real Estate
Equities Company (filed as Exhibit No. 4.01 to the
Registrant's Registration Statement on Form S-3 (File
No. 333-21905) (the "1997 S-3") and incorporated herein
by reference)
3.02 Amended and Restated Bylaws of Crescent Real Estate
Equities Company, as amended (filed as Exhibit No. 3.02
to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1998 (the "1998
3Q 10-Q") and incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No.
4.03 to the 1997 S-3 and incorporated herein by
reference)
4.02 Statement of Designation of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate
Equities Company (filed as Exhibit 4.07 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 10-K") and
incorporated herein by reference)
4.03 Form of Certificate of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate
Equities Company (filed as Exhibit No. 4 to the
Registrant's Registration Statement on Form 8-A/A filed
on February 18, 1998 and incorporated by reference)
4.04 Statement of Designation of Series B Convertible
Preferred Shares of the Registrant (filed as Exhibit
4.01 to the Registrant's Current Report on Form 8-K
dated June 29, 1998 and filed June 30, 1998 and
incorporated herein by reference)
4.05 Form of Certificate of Series B Convertible Preferred
Shares (filed as Exhibit 4.05 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (the "1998 2Q 10-Q") and incorporated
herein by reference)
4.06 Indenture, dated as of September 22, 1997, between
Crescent Real Estate Equities Limited Partnership and
State Street Bank and Trust Company of Missouri, N.A.
(filed as Exhibit No. 4.01 to the Registration
Statement on Form S-4 (File No. 333-42293) of Crescent
Real Estate Equities Limited Partnership (the "Form
S-4") and incorporated herein by reference)
4.07 6-5/8% Note due 2002 (filed as Exhibit No. 4.07 to the
1998 2Q 10-Q and incorporated herein by reference)
4.08 7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the
1998 2Q 10-Q and incorporated herein by reference)
4* Pursuant to Regulation S-K Item 601 (6) (4) (iii), the
Registrant by this filing agrees, upon request to
furnish to the SEC a copy of other instruments defining
the rights of holders of long-term debt of the
Registrant
109
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.01 Second Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Equities Limited
Partnership, dated as of November 1, 1997, as amended
(filed herewith)
10.02 Noncompetition of Richard E. Rainwater, as assigned to
Crescent Real Estate Equities Limited Partnership on
May 5, 1994 (filed as Exhibit 10.02 to the 1997 10-K
and incorporated herein by reference)
10.03 Noncompetition Agreement of John C. Goff, as assigned
to Crescent Real Estate Equities Limited Partnership on
May 5, 1994 (filed as Exhibit 10.03 to the 1997 10-K
and incorporated herein by reference)
10.04 Employment Agreement with John C. Goff, as assigned to
Crescent Real Estate Equities Limited Partnership on
May 5, 1994, and as further amended (filed herewith)
10.05 Employment Agreement of Gerald W. Haddock, as assigned
to Crescent Real Estate Equities Limited Partnership on
May 5, 1994, and as further amended (filed as Exhibit
10.06 to the 1997 10-K and incorporated herein by
reference)
10.06 Amendment No. 4 to the Haddock Employment Agreement,
dated March 10, 1998 (filed as Exhibit 10.30 to the
Form S-4 and incorporated herein by reference)
10.07 Amendment No. 5 to the Haddock Employment Agreement,
dated March 1, 1999 (filed as Exhibit 10.09 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 10-K") and
incorporated herein by reference )
10.08 Employment Agreement of Jerry R. Crenshaw, Jr. dated as
of December 14, 1998 (filed herewith)
10.09 Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Registrant and
each of its executive officers and trust managers
(filed as Exhibit No. 10.07 to the Form S-4 and
incorporated herein by reference)
10.10 Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the
Registrant's Registration Statement on Form S-11 (File
No. 33-75188) (the "Form S-11") and incorporated herein
by reference)
10.11 Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan, as amended (filed as Exhibit
10.12 to the 1998 10-K and incorporated herein by
reference)
10.12 Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as Exhibit
10.13 to the Form S-4 and incorporated herein by
reference)
110
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.13 Amended and Restated 1995 Crescent Real Estate Equities
Limited Partnership Unit Incentive Plan (filed as
Exhibit 99.01 to the Registrant's Registration
Statement on Form S-8 (File No. 333-3452) and
incorporated herein by reference)
10.14 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan, as amended (filed herewith)
10.15 Fifth Amended and Restated Revolving Credit Agreement,
dated June 30, 1998, among Crescent Real Estate Limited
Partnership, BankBoston, N.A. and the other banks named
therein (filed as Exhibit 10.17 to the 1998 2Q 10-Q and
incorporated herein by reference)
10.16 Intercompany Agreement, dated June 3, 1997, between
Crescent Real Estate Equities Limited Partnership and
Crescent Operating, Inc. (filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (File No. 333-25223)
of Crescent Operating, Inc. and incorporated herein by
reference)
10.17 Form of Registration Rights, Lock-Up and Pledge
Agreement (filed as Exhibit No. 10.05 to the Form S-11
and incorporated herein by reference)
10.18 Agreement dated June 11, 1999 by and between Gerald
Haddock and Crescent Real Estate Equities Company,
Crescent Real Estate Equities Limited Partnership and
Crescent Real Estate Equities, Ltd. (filed as Exhibit
10.19 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 and incorporated
herein by reference)
21.01 List of Subsidiaries (filed herewith)
23.01 Consent of Arthur Andersen LLP (filed herewith)
27.01 Financial Data Schedule (filed herewith)