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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2003
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of May 5, 2003.
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 10,800,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,171,182
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002
(audited)............................................................................. 3
Consolidated Statements of Operations for the three months ended March
31, 2003 and 2002 (unaudited)......................................................... 4
Consolidated Statements of Shareholders' Equity for the three months ended
March 31, 2003 (unaudited)............................................................ 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2003
and 2002 (unaudited).................................................................. 6
Notes to Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 56
Item 4. Controls and Procedures............................................................... 56
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................. 56
Item 6. Exhibits and Reports on Form 8-K...................................................... 56
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(UNAUDITED) (AUDITED)
ASSETS:
Investments in real estate:
Land $ 314,828 $ 304,319
Land held for investment or development 454,948 447,778
Building and improvements 2,914,577 2,901,107
Furniture, fixtures and equipment 117,460 114,715
Properties held for disposition, net 45,625 63,270
Less - accumulated depreciation (763,193) (732,353)
------------- -------------
Net investment in real estate $ 3,084,245 $ 3,098,836
Cash and cash equivalents $ 75,795 $ 78,444
Restricted cash and cash equivalents 87,923 105,786
Accounts receivable, net 43,993 42,046
Deferred rent receivable 61,790 60,973
Investments in real estate mortgages and equity
of unconsolidated companies 549,126 562,643
Notes receivable, net 98,776 115,494
Income tax asset-current and deferred, net 42,287 39,709
Other assets, net 179,679 184,468
------------- -------------
Total assets $ 4,223,614 $ 4,288,399
============= =============
LIABILITIES:
Borrowings under Credit Facility $ 285,000 $ 164,000
Notes payable 2,159,293 2,218,910
Accounts payable, accrued expenses and other liabilities 319,926 375,902
------------- -------------
Total liabilities $ 2,764,219 $ 2,758,812
------------- -------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,875,044 and 8,878,342 units, at March 31, 2003
and December 31, 2002, respectively $ 121,842 $ 130,802
Consolidated real estate partnerships 39,495 43,972
------------- -------------
Total minority interests $ 161,337 $ 174,774
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
10,800,000 shares issued and outstanding
at March 31, 2003 and December 31, 2002 $ 248,160 $ 248,160
Series B Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
3,400,000 shares issued and outstanding
at March 31, 2003 and December 31, 2002 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,291,267 and 124,280,867 shares issued and outstanding
at March 31, 2003 and December 31, 2002, respectively 1,236 1,236
Additional paid-in capital 2,243,416 2,243,419
Deferred compensation on restricted shares (5,253) (5,253)
Accumulated deficit (784,604) (728,060)
Accumulated other comprehensive income (26,637) (27,252)
------------- -------------
$ 1,758,241 $ 1,814,173
Less - shares held in treasury, at cost, 25,123,759 and 25,068,759
common shares at March 31, 2003 and December 31, 2002, respectively (460,183) (459,360)
------------- -------------
Total shareholders' equity $ 1,298,058 $ 1,354,813
------------- -------------
Total liabilities and shareholders' equity $ 4,223,614 $ 4,288,399
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
2003 2002
------------- -------------
(UNAUDITED)
REVENUE:
Office Property $ 128,682 $ 139,589
Resort/Hotel Property 63,721 38,524
Residential Development Property 35,365 38,750
Interest and other income 1,668 2,226
------------- -------------
Total revenue 229,436 219,089
------------- -------------
EXPENSE:
Office Property real estate taxes 18,148 20,489
Office Property operating expenses 42,907 43,159
Resort/Hotel Property expense 49,740 23,890
Residential Development Property expense 32,929 36,818
Corporate general and administrative 6,415 6,392
Interest expense 43,233 42,272
Amortization of deferred financing costs 2,424 2,320
Depreciation and amortization 38,772 32,640
Other expenses 127 --
------------- -------------
Total expense 234,695 207,980
------------- -------------
Operating (loss) income (5,259) 11,109
------------- -------------
OTHER INCOME AND EXPENSE:
Equity in net income (loss) of unconsolidated
companies:
Office Properties 1,458 1,310
Resort/Hotel Properties 743 --
Residential Development Properties 970 12,483
Temperature-Controlled Logistics Properties 1,507 (310)
Other (1,029) (4,061)
------------- -------------
Total equity in net income (loss) of unconsolidated companies 3,649 9,422
------------- -------------
Gain on property sales, net 52 --
------------- -------------
Total other income and expense 3,701 9,422
------------- -------------
(LOSS) INCOME BEFORE MINORITY INTERESTS, INCOME TAXES,
DISCONTINUED OPERATIONS, AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (1,558) 20,531
Minority interests 799 (7,010)
Income tax benefit 2,515 5,380
------------- -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,756 18,901
Discontinued operations - income (loss) on assets sold and held for sale 171 2,144
Discontinued operations - (loss) gain on assets sold and held for sale (14,682) 2,088
Cumulative effect of a change in accounting principle -- (9,172)
------------- -------------
NET (LOSS) INCOME (12,755) 13,961
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
------------- -------------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS $ (19,330) $ 10,586
============= =============
BASIC EARNINGS PER SHARE DATA:
Net (loss) income before discontinued operations and cumulative effect
of a change in accounting principle $ (0.04) $ 0.15
Discontinued operations - income (loss) on assets sold and held for sale -- 0.02
Discontinued operations - (loss) gain on assets sold and held for sale (0.15) 0.02
Cumulative effect of a change in accounting principle -- (0.09)
------------- -------------
Net (loss) income - basic $ (0.19) $ 0.10
============= =============
DILUTED EARNINGS PER SHARE DATA:
Net (loss) income before discontinued operations and cumulative effect
of a change in accounting principle $ (0.04) $ 0.15
Discontinued operations - income (loss) on assets sold and held for sale -- 0.02
Discontinued operations - (loss) gain on assets sold and held for sale (0.15) 0.02
Cumulative effect of a change in accounting principle -- (0.09)
------------- -------------
Net (loss) income - diluted $ (0.19) $ 0.10
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
4
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Series A Series B
Preferred Shares Preferred Shares Treasury Shares
------------------------- ------------------------- -------------------------
Shares Net Value Shares Net Value Shares Net Value
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY,
December 31, 2002 10,800,000 $ 248,160 3,400,000 $ 81,923 25,068,759 $ (459,360)
Issuance of Common Shares -- -- -- -- -- --
Exercise of Common Share Options -- -- -- -- -- --
Accretion of Discount on
Employee Stock Option Notes -- -- -- -- -- --
Issuance of Shares in
Exchange for Operating
Partnership Units -- -- -- -- -- --
Share Purchase under
Compensation Plan -- -- -- -- 55,000 (823)
Dividends Paid -- -- -- -- -- --
Net Income -- -- -- -- -- --
Unrealized Loss on
Marketable Securities -- -- -- -- -- --
Unrealized Net Gain on
Cash Flow Hedges -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY,
March 31, 2003 10,800,000 $ 248,160 3,400,000 $ 81,923 25,123,759 $ (460,183)
=========== =========== =========== =========== =========== ===========
Deferred Accumulated
Common Shares Additional Compensation Other
------------------------- Paid-in on Restricted Accumulated Comprehensive
Shares Par Value Capital Shares (Deficit) Income Total
----------- ----------- ----------- ------------- ----------- ------------- -----------
SHAREHOLDERS' EQUITY,
December 31, 2002 124,280,867 $ 1,236 $ 2,243,419 $ (5,253) $ (728,060) $ (27,252) $ 1,354,813
Issuance of Common Shares 3,804 -- 62 -- -- -- 62
Exercise of Common Share Options -- -- (9) -- -- -- (9)
Accretion of Discount on
Employee Stock Option Notes -- -- (63) -- -- -- (63)
Issuance of Shares in
Exchange for Operating
Partnership Units 6,596 -- 7 -- -- -- 7
Share Purchase under
Compensation Plan -- -- -- -- -- -- (823)
Dividends Paid -- -- -- -- (37,214) -- (37,214)
Net Income -- -- -- -- (19,330) -- (19,330)
Unrealized Loss on
Marketable Securities -- -- -- -- -- (601) (601)
Unrealized Net Gain on
Cash Flow Hedges -- -- -- -- -- 1,216 1,216
----------- ----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY,
March 31, 2003 124,291,267 $ 1,236 $ 2,243,416 $ (5,253) $ (784,604) $ (26,637) $ 1,298,058
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
5
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (12,755) $ 13,961
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 41,196 34,960
Residential Development cost of sales 13,591 32,342
Residential Development capital expenditures (23,728) (21,092)
Discontinued operations 15,167 (136)
Gain on property sales, net (52) --
Minority interests (799) 7,010
Cumulative effect of a change in accounting principle -- 9,172
Non-cash compensation 62 37
Distributions received in excess of earnings from
unconsolidated companies:
Office Properties -- 894
Other 926 4,083
Equity in (earnings) loss net of distributions received from
unconsolidated companies:
Office Properties (893) --
Residential Development Properties (936) (5,315)
Temperature-Controlled Logistics Properties (1,507) (385)
Resort/Hotel Properties (743) --
Change in assets and liabilities, net of effects of DBL consolidation/COPI transaction:
Restricted cash and cash equivalents 19,204 27,495
Accounts receivable 1,063 (801)
Deferred rent receivable (817) 523
Income tax asset-current and deferred (2,578) (6,022)
Other assets 1,838 3,313
Accounts payable, accrued expenses and
other liabilities (68,482) (80,489)
------------- -------------
Net cash (used in) provided by operating activities (20,243) 19,550
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction 11,374 38,226
Proceeds from property sales 1,116 11,878
Acquisition of rental properties (2,000) (8,410)
Development of investment properties (522) (637)
Property improvements - Office Properties (2,211) (3,735)
Property improvements - Resort/Hotel Properties (2,404) (5,760)
Tenant improvement and leasing costs - Office Properties (12,456) (8,347)
(Increase) decrease in restricted cash and cash equivalents (1,341) 9,752
Return of investment in unconsolidated companies:
Office Properties 287 376
Residential Development Properties -- 7,173
Other 4,753 --
Investment in unconsolidated companies:
Office Properties (52) --
Residential Development Properties (1,038) (14,203)
Temperature-Controlled Logistics Properties (828) --
Resort/Hotel Properties (2) --
Decrease (increase) in notes receivable 16,743 (1,421)
------------- -------------
Net cash provided by investing activities 11,419 24,892
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (68) (107)
Borrowings under Credit Facility 136,000 51,500
Payments under Credit Facility (15,000) --
Notes payable proceeds 10,000 --
Notes payable payments (66,750) (2,274)
Residential Development Properties note payable borrowings 17,529 6,553
Residential Development Properties note payable payments (20,724) (18,647)
Capital distributions - joint venture preferred equity -- (3,522)
Capital distributions - joint venture partner (3,534) (128)
Proceeds from exercise of share options (9) 455
Treasury shares purchase under compensation plan (823) (12)
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
Dividends and unitholder distributions (43,871) (44,280)
------------- -------------
Net cash provided by (used in) financing activities 6,175 (13,837)
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,649) 30,605
CASH AND CASH EQUIVALENTS,
Beginning of period 78,444 36,285
------------- -------------
CASH AND CASH EQUIVALENTS,
End of period $ 75,795 $ 66,890
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
6
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas real estate investment trust, and all of its direct
and indirect subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at March 31,
2003 included:
o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."
o CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.
o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE
GENERAL PARTNER
Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.
The following table shows the consolidated subsidiaries of the Company
that owned or had an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of March 31, 2003.
Operating Partnership Wholly-owned assets - The Avallon IV, Chancellor
Park, Datran Center (two office properties),
Houston Center (three office properties) and The
Park Shops at Houston Center. These properties are
included in the Company's Office Segment.
Joint Venture assets, consolidated - 301 Congress
Avenue (50% interest) and The Woodlands Office
Properties (85.6% interest) (four office
properties). These five properties are included in
the Company's Office Segment. Sonoma Mission Inn &
Spa (80.1% interest), included in the Company's
Resort/Hotel Segment.
Equity Investments, unconsolidated - Bank One
Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest),
Four Westlake Park (20% interest), Miami Center
(40% interest), 5 Houston Center (25% interest)
and Five Post Oak Park (30% interest). These
properties are included in the Company's Office
Segment. Ritz Carlton Palm Beach (50% interest),
included in the Company's Resort/Hotel Segment.
The temperature-controlled logistics properties
(40% interest in 88 properties). These properties
are included in the Company's
Temperature-Controlled Logistics Segment.
Crescent Real Estate Wholly-owned assets - The Aberdeen, The Avallon I,
Funding I, L.P. II & III, Carter Burgess Plaza, The Citadel, The
("Funding I") Crescent Atrium, The Crescent Office Towers,
Regency Plaza One, Waterside Commons and 125 E.
John Carpenter Freeway. These properties are
included in the Company's Office Segment.
Crescent Real Estate Wholly-owned assets - Albuquerque Plaza, Barton
Funding II, L.P. Oaks Plaza One, Briargate Office and Research
("Funding II") Center, Las Colinas Plaza, Liberty Plaza I & II,
MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404
Park Central. These properties are included in the
Company's Office Segment. The Hyatt Regency
Albuquerque and the Park Hyatt Beaver Creek Resort
& Spa. These properties are included in the
Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties). These
L.P. ("Funding III, IV properties are included in the Company's Office
and V")(1) Segment, and Renaissance Houston Hotel, included
in the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel Segment.
("Funding VI")
Crescent Real Estate Wholly-owned assets - Six behavioral healthcare
Funding VII, L.P. properties.
("Funding VII")
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Frost Bank Plaza,
("Funding VIII") Greenway I and IA (two office properties),
Greenway II, Johns Manville Plaza, Palisades
Central I, Palisades Central II, Stemmons Place,
Trammell Crow Center(2), 3333 Lee Parkway, 1800
West Loop South, 5050 Quorum, 44 Cook and 55
Madison. These Properties are included in the
Company's Office Segment. The Canyon Ranch -
Tucson, Omni Austin Hotel, and Ventana Inn & Spa,
all of which are included in the Company's
Resort/Hotel Segment.
Crescent Real Estate Wholly-owned asset - 707 17th Street,
Funding IX, L.P. included in the Company's Office Segment.
("Funding IX") The Denver Marriott City Center, included in
the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Fountain Place and Post Oak
Funding X, L.P. Central (three office properties), all of which
("Funding X") are included in the Company's Office Segment.
Crescent Spectrum Wholly-owned asset - Spectrum Center, included in
Center, L.P.(3) the Company's Office Segment.
Mira Vista Development Equity Investments, consolidated - Mira Vista (98%
Corp. ("MVDC") interest), included in the Company's Residential
Development Segment.
Houston Area Development Equity Investments, consolidated - Falcon Point
Corp. ("HADC") (98% interest), Falcon Landing (98% interest) and
Spring Lakes (98% interest). These Properties are
included in the Company's Residential Development
Segment.
Desert Mountain Equity Investments, consolidated - Desert Mountain
Development Corporation (93% interest), included in the Company's
("DMDC") Residential Development Segment.
The Woodlands Land Equity Investments, unconsolidated - The Woodlands
Company ("TWLC") (42.5% interest),(4) included in the Company's
Residential Development Segment.
Crescent Resort Equity Investments, consolidated - Eagle Ranch
Development Inc. ("CRDI") (60% interest), Main Street Junction (30%
interest), Main Street Station (30% interest),
Main Street Station Vacation Club (30% interest),
Riverbend (60% interest), Park Place at Riverfront
(64% interest), Park Tower at Riverfront (64%
interest), Promenade Lofts at Riverfront (64%
interest), Creekside at Riverfront (64% interest),
Cresta (60% interest), Snow Cloud (64% interest),
Horizon Pass Lodge (64% interest), One Vendue
Range (62% interest), Old Greenwood (71.2%
interest), Tahoe Mountain Resorts (57% - 71.2%
interest). These Properties are included in the
Company's Residential Development Segment.
Equity Investment, unconsolidated - Three Peaks
(Eagle's Nest) (50% interest), included in the
Company's Residential Development Segment.
Crescent TRS Holdings Equity Investments, unconsolidated - two quarries
Corp. (56% interest). These Properties are included in
the Company's Temperature-Controlled Logistics
Segment.
- ----------
(1) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.
(2) 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 the building.
(3) Crescent Spectrum Center, L.P. holds its interest in Spectrum Center
through its ownership of the underlying land and notes and a mortgage
on the Property.
(4) Distributions are made to Partners based on specified payout
percentages. During the three months ended March 31, 2003, the
Company's payout percentage and economic interest was 52.5%.
See Note 6, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," for a table that lists the Company's ownership in
significant unconsolidated joint ventures and equity investments as of March 31,
2003.
See Note 7, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Company were divided into four
investment segments at March 31, 2003, as follows:
o Office Segment;
o Resort/Hotel Segment;
o Residential Development Segment; and
o Temperature-Controlled Logistics Segment.
Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of March 31, 2003:
o OFFICE SEGMENT consisted of 73 office properties, including
three retail properties (collectively referred to as the
"Office Properties"), located in 25 metropolitan submarkets in
six states, with an aggregate of approximately 29.5 million
net rentable square feet. Sixty-one of the Office Properties
are wholly-owned and 12 are owned through joint ventures, five
of which are consolidated and seven of which are
unconsolidated.
o RESORT/HOTEL SEGMENT consisted of six luxury and destination
fitness resorts and spas with a total of 1,306 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties"). Eight of the Resort/Hotel
Properties are wholly-owned, one is owned through a joint
venture that is consolidated, and one is owned through a joint
venture that is unconsolidated.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 98% to 100% in five
residential development corporations (collectively referred to
as the "Residential Development Corporations"), which in turn,
through partnership arrangements, owned in whole or in part 22
upscale residential development properties (collectively
referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland
Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% interest in the Vornado Crescent
Carthage and KC Quarry L.L.C. The Temperature-Controlled
Logistics Partnership owns all of the common stock,
representing substantially all of the economic interest, of
AmeriCold Corporation (the "Temperature-Controlled Logistics
Corporation"), a REIT. As of March 31, 2003, the
Temperature-Controlled Logistics Corporation directly or
indirectly owned 88 temperature-controlled logistics
properties (collectively referred to as the
"Temperature-Controlled Logistics Properties") with an
aggregate of approximately 441.5 million cubic feet (17.5
million square feet) of warehouse space. As of March 31, 2003,
the Vornado Crescent Carthage and KC Quarry, L.L.C. owned two
quarries and the related land.
See Note 3, "Segment Reporting," for a table showing total revenues,
operating expenses, equity in net income (loss) of unconsolidated companies and
funds from operations for each of these investment segments for the three months
ended March 31, 2003 and 2002, and identifiable assets for each of these
investment segments at March 31, 2003 and December 31, 2002.
For purposes of segment reporting as defined in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and this Quarterly Report on Form 10-Q, the
Resort/Hotel Properties, the Residential Development Properties and the
Temperature-Controlled Logistics Properties are considered three separate
reportable segments, as described above. However, for purposes of investor
communications, the Company classifies its luxury and destination fitness
resorts and spas and Residential Development Properties as a single group
referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Company's "Investment
Sector."
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP") for interim financial information, as well as in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
information and footnotes required by GAAP for complete financial statements are
not included. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements are included. Operating results for
interim periods reflected do not necessarily indicate the results that may be
expected for a full fiscal year. You should read these financial statements in
conjunction with the financial statements and the accompanying notes included in
the Company's Form 10-K for the year ended December 31, 2002.
Certain amounts in prior period financial statements have been
reclassified to conform to current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ADOPTION OF NEW ACCOUNTING STANDARDS
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 145. In April
2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145,
"Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." SFAS No. 145 requires the reporting of gains and
losses from early extinguishment of debt be included in the determination of net
income unless criteria in Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations," which allows for extraordinary item classification,
are met. The provisions of this Statement related to the rescission of Statement
No. 4 are to be applied in fiscal years beginning after May 15, 2002. The
Company adopted this Statement for fiscal 2003 and expects no impact in 2003
beyond the classification of costs related to early extinguishments of debt,
which were shown in the Company's 2001 Consolidated Statements of Operations as
an extraordinary item.
SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," effective
for fiscal years ending after December 15, 2002, to amend the transition and
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In addition to the prospective transition method of accounting
for Stock-Based Employee Compensation using the fair value method provided in
SFAS No. 123, SFAS No. 148 permits two additional transition methods, both of
which avoid the ramp-up effect arising from prospective application of the fair
value method. The Retroactive Restatement Method requires companies to restate
all periods presented to reflect the Stock-Based Employee Compensation under the
fair value method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. The Modified Prospective Method
requires companies to recognize Stock-Based Employee Compensation from the
beginning of the fiscal year in which the recognition provisions are first
applied as if the fair value method in SFAS No. 123 had been used to account for
employee awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. Also, in the absence of a single accounting method for
Stock-Based Employee Compensation, SFAS No. 148 expands disclosure requirements
from those existing in SFAS No. 123, and requires disclosure of whether, when,
and how an entity adopted the preferable, fair value method of accounting.
Effective January 1, 2003, the Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. As the Company did not
grant any stock options in the three months ended March 31, 2003, there was no
impact of this adoption to the financial statements. With respect to the
Company's stock options which were granted prior to 2003, the Company accounted
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25"). Under APB No. 25,
compensation cost is measured as the excess, if any, of the quoted market price
of the Company's common shares at the date of grant over the exercise price of
the option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. During the three months ended March 31, 2003,
no compensation cost was recognized for grants of stock options made prior to
2003 under the Company stock option plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. Had compensation cost
for the Plans been determined
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
(in thousands, except per share amounts) 2003 2002
---------------------------------------- ------------- -------------
Net (loss) income available to common
shareholders, as reported $ (19,330) $ 10,586
Deduct: total stock-based employee
compensation expense determined under fair
value based method for all awards (838) (980)
Pro forma net (loss) income $ (20,168) $ 9,606
(Loss) earnings per share:
Basic - as reported $ (0.19) $ 0.10
Basic - pro forma $ (0.20) $ 0.09
Diluted - as reported $ (0.19) $ 0.10
Diluted - pro forma $ (0.20) $ 0.09
FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued and liability-recognition requirements for a guarantor of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 9, "Commitments and Contingencies," for disclosure of the Company's
guarantees at March 31, 2003. The Company adopted FIN 45 effective January 1,
2003. The Company has not entered into additional debt guarantees during the
three months ended March 31, 2003.
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs in
the first fiscal year or interim period beginning after June 15, 2003. VIEs are
generally a legal structure used for business enterprises that either do not
have equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of another entity such as a VIE. FIN 46 requires a VIE to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIEs activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIE was
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the variable interest entity; and, (b) the
enterprise's maximum exposure to loss as a result of its involvement with the
VIE. FIN 46 may be applied prospectively with a cumulative effect adjustment as
of the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative effect adjustment
as of the beginning of the first year restated. The Company is assessing the
impact of this Interpretation, if any, on its existing entities and does not
believe the impact will be significant on its liquidity, financial position, and
results of operations. The Company did not create any VIEs subsequent to January
31, 2003.
SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.
Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents reconciliation for the three months ended
March 31, 2003 and 2002 of basic and diluted earnings per share from "Net income
before discontinued operations and cumulative effect of a change in accounting
principle" to "Net (loss) income available to common shareholders." The table
also includes weighted average shares on a basic and diluted basis.
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
2003 2002
-------------------------------- ---------------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- -------- -------- -------- -------- -------- --------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 1,756 99,218 $ 18,901 104,938
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
-------- -------- -------- -------- -------- --------
Net (loss) income available to common
shareholders before discontinued operations and
cumulative effect of a change in accounting principle $ (4,819) 99,218 $ (0.04) $ 15,526 104,938 $ 0.15
Discontinued operations - income
(loss) on assets sold and held for
sale 171 -- 2,144 0.02
Discontinued operations - (loss) gain
on assets sold and held for sale (14,682) (0.15) 2,088 0.02
Cumulative effect of a change in
accounting principle -- -- (9,172) (0.09)
-------- -------- -------- -------- -------- --------
Net (loss) income available to common
shareholders $(19,330) 99,218 $ (0.19) $ 10,586 104,938 $ 0.10
======== ======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------
2003 2002
-------------------------------- -----------------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- --------- -------- -------- -------- --------- ---------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 1,756 99,218 $ 18,901 104,938
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
--------- -------- -------- -------- --------- ---------
Effect of dilutive securities
Additional common shares relating to
share and unit options 4 510
Net (loss) income available to common
shareholders before discontinued operations
and cumulative effect of a change in
accounting principle (4,819) 99,222 $ (0.04) $ 15,526 105,448 $ 0.15
Discontinued operations - income
(loss) on assets sold and held for
sale 171 -- 2,144 0.02
Discontinued operations - (loss) gain
on assets sold and held for sale (14,682) (0.15) 2,088 0.02
Cumulative effect of a change in
accounting principle -- -- (9,172) (0.09)
--------- -------- -------- -------- --------- ---------
Net (loss) income available to common
shareholders $ (19,330) 99,222 $ (0.19) $ 10,586 105,448 $ 0.10
========= ======== ======== ======== ========= =========
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the three
months ended March 31, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
(in thousands) 2003 2002
- -------------- --------- ---------
Interest paid on debt $ 30,735 $ 42,655
Interest capitalized - Office -- 129
Interest capitalized - Residential Development 4,239 1,890
Additional interest paid in conjunction with cash flow hedges 5,276 5,745
--------- ---------
Total interest paid $ 40,250 $ 50,419
========= =========
Cash paid for income taxes $ -- $ 2
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH 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 $ 7 $ 8
Unrealized loss on available-for-sale securities (601) (631)
Impairment and other charges related to real estate assets (17,028) (600)
Adjustment of cash flow hedge to fair value 1,216 7,193
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC
AND HADC AND THE 2002 TRANSFER OF ASSETS AND ASSUMPTIONS
OF LIABILITIES PURSUANT TO THE FEBRUARY 14, 2002
AGREEMENT WITH COPI:
Net investment in real estate $ (13,256) $(570,175)
Restricted cash and cash equivalents -- (3,968)
Accounts receivable, net (3,057) (23,338)
Investments in real estate mortgages and equity of
unconsolidated companies 13,552 309,103
Notes receivable, net (25) 29,816
Income tax asset - current and deferred, net -- (21,784)
Other assets, net (820) (63,263)
Notes payable 312 129,157
Accounts payable, accrued expenses and other liabilities 12,696 201,159
Minority interest - consolidated real estate partnerships 1,972 51,519
--------- ---------
Increase in cash $ 11,374 $ 38,226
========= =========
3. SEGMENT REPORTING
For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company currently has four major investment segments based on property type: the
Office Segment; the Resort/Hotel Segment; the Residential Development Segment;
and the Temperature-Controlled Logistics Segment. Management utilizes this
segment structure for making operating decisions and assessing performance.
The Company uses FFO as the measure of segment profit or loss. FFO, as
used in this document, is based on the definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and means:
o Net Income (Loss) - determined in conformity with
GAAP;
o excluding gains (losses) from sales of depreciable
operating property;
o excluding extraordinary items (as defined by GAAP);
o including depreciation and amortization of real
estate assets; and
o after adjusting for unconsolidated partnerships and
joint ventures.
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
investment segments. However, FFO should not be considered as an alternative to
net income determined in accordance with GAAP as an indication of the Company's
operating performance.
The Company's measure of FFO may not be comparable to similarly titled
measures of other REITs if those REITs apply the definition of FFO in a
different manner than the Company.
Selected financial information related to each segment for the three
months ended March 31, 2003 and 2002, and identifiable assets for each of the
segments at March 31, 2003 and December 31, 2002, are presented below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- -------------- ---------- ------------ ----------- ------------ ---------- ----------
Property revenues $ 128,682(2) $ 63,721 $ 35,365 -- $ -- $ 227,768
Other income -- -- -- -- 1,668 1,668
---------- ---------- ---------- ---------- ---------- ----------
Total revenue $ 128,682 $ 63,721 $ 35,365 -- $ 1,668(1) $ 229,436
========== ========== ========== ========== ========== ==========
Property operating expenses $ 61,055 $ 49,740 $ 32,929 -- $ -- $ 143,724
Other operating expenses -- -- -- -- 90,971 90,971
---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 61,055 $ 49,740 $ 32,929 -- $ 90,971(1) $ 234,695
========== ========== ========== ========== ========== ==========
Equity in net income (loss) of
unconsolidated companies $ 1,458 $ 743 $ 970 $ 1,507 $ (1,029) $ 3,649
========== ========== ========== ========== ========== ==========
Funds from operations $ 72,260 $ 15,631 $ 5,288 $ 7,017 $ (58,779) $ 41,417(3)
========== ========== ========== ========== ========== ==========
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED MARCH 31, 2002
---------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- -------------- ---------- ------------ ----------- ------------ ----------- ------------
Property revenues $ 139,589(2) $ 38,524 $ 38,750 -- $ -- $ 216,863
Other income -- -- -- -- 2,226 2,226
---------- ---------- ----------- --------- ----------- ------------
Total revenue $ 139,589 $ 38,524 $ 38,750 -- $ 2,226(1) $ 219,089
========== ========== =========== ========= =========== ============
Property operating expenses $ 63,648 $ 23,890 $ 36,818 -- $ -- $ 124,356
Other operating expenses -- -- -- -- 83,624 83,624
---------- ---------- ----------- --------- ----------- ------------
Total expenses $ 63,648 $ 23,890 $ 36,818 -- $ 83,624(1) $ 207,980
========== ========== =========== ========= =========== ============
Equity in net income (loss)
of unconsolidated companies $ 1,310 $ -- $ 12,483 (310) $ (4,061) $ 9,422
========== ========== =========== ========= =========== ============
Funds from operations $ 80,572 $ 20,910 $ 15,561 $ 5,401 $ (58,317) $ 64,127(3)
========== ========== =========== ========= =========== ============
See footnotes to table on next page.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
IDENTIFIABLE NET ASSETS: SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------------------ ------- ------------ ----------- ------------ --------- ------
(in millions)
Balance at March 31, 2003 $2,484 $ 487 $ 727 $ 307 $ 219 $4,224
Balance at December 31, 2002 $2,575 $ 485 $ 721 $ 304 $ 203 $4,288
------ ------ ------ ------ ------ ------
- ----------
(1) For purposes of this Note, Corporate and Other include corporate
interest and other income, general and administrative, interest
expense, depreciation and amortization, amortization of deferred
financing costs, preferred return paid to GMAC Commercial Mortgage
Corporation ("GMACCM") for 2002, preferred dividends, other
unconsolidated companies, impairment and other charges and other
expenses.
(2) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $2.0 million and $1.1 million for the
three months ended March 31, 2003 and 2002, respectively.
(3) The following table presents a reconciliation of Consolidated Funds
from Operations to Net (Loss) Income.
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(In thousands) 2003 2002
- -------------- -------- --------
Consolidated Funds from Operations $ 41,417 $ 64,127
Adjustments to reconcile Consolidated
Funds from Operations to Net (Loss) Income:
Depreciation and amortization of real
estate assets (36,301) (32,139)
(Loss) gain on property sales, net (226) 2,796
Impairment and other adjustments
related to real estate assets (17,028) (600)
Cumulative effect of a change in -- (9,172)
accounting principle
Adjustment for investments in real
estate mortgages and equity of
unconsolidated companies:
Office Properties (2,822) (2,162)
Resort/Hotel Properties (394) --
Residential Development Properties (739) (903)
Temperature-Controlled Logistics Properties (5,510) (5,711)
Other (22) (2,646)
Unitholder minority interest 2,295 (3,004)
Series A Preferred share distributions 4,556 3,375
Series B Preferred share distributions 2,019 --
-------- --------
Net (loss) Income $(12,755) $ 13,961
======== ========
4. DISCONTINUED OPERATIONS
In August 2001, the FASB issued SFAS No. 144, which requires that the
results of operations of assets sold or held for sale, and any gains or losses
recognized on assets sold and held for sale, be disclosed separately in the
Company's Consolidated Statements of Operations. The Company adopted SFAS No.
144 on January 1, 2002. In accordance with SFAS No. 144, the results of
operations of the assets sold or held for sale have been presented as
"Discontinued operations - income (loss) on assets sold and held for sale," and
gain or loss and impairments in the assets sold or held for sale have been
presented as "Discontinued operations - (loss) gain on assets sold and held for
sale" in the accompanying Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002. The carrying value of the assets held for
sale has been reflected as "Properties held for disposition, net" in the
accompanying Consolidated Balance Sheets as of March 31, 2003 and December 31,
2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of March 31, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale and the
North Dallas Athletic Club, a building located adjacent to the Stanford
Corporate Centre Office Property in the Far North Dallas submarket in Dallas,
Texas, was held for sale.
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Company sold one behavioral healthcare
property for $2.0 million, consisting of $1.3 million in cash and a $0.7 million
note receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.6 million impairment charge was recognized
during 2002 related to this property. As of March 31, 2003, the Company owned
six behavioral healthcare properties.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
MARCH 31, DECEMBER 31,
(in thousands) 2003(1) 2002
- -------------- --------- ------------
Land $ 10,862 $ 12,802
Buildings and improvements 43,518 59,012
Furniture, fixture and equipment 1,649 2,148
Accumulated depreciation (10,404) (10,692)
-------- --------
Net investment in real estate $ 45,625 $ 63,270
======== ========
- ----------
(1) Includes the 1800 West Loop South Office Property, North Dallas
Athletic Club and six Behavioral Healthcare Properties.
The following table presents rental revenue, operating expenses,
depreciation and amortization, net income and impairments for three months ended
March 31, 2003 and 2002 for properties held for sale as of March 31, 2003.
OPERATING DEPRECIATION AND NET
(in thousands) REVENUE(1) EXPENSES(1) AMORTIZATION(1) INCOME(1) IMPAIRMENTS(2)
- -------------- ---------- ----------- ---------------- --------- --------------
2003 $ 1,397 $ 772 $ 454 $ 171 $17,028
2002 1,452 771 413 268 --
- ----------
(1) Includes the 1800 West Loop South Office Property and the North Dallas
Athletic Club located adjacent to the Stanford Corporate Centre
Property.
(2) Includes impairments on 1800 West Loop South, North Dallas Athletic
Club and one behavioral healthcare property, before minority interests
of $2.6 million.
IMPAIRMENTS
The Company recognizes impairment charges representing the difference
between the carrying value of properties and the estimated sales price, less
costs of sale, and reflects such impairment charges in "Discontinued operations
- - (loss) gain on assets sold and held for sale."
During the three months ended March 31, 2003, the Company also
recognized a $12.7 million impairment, net of minority interests, on the 1800
West Loop South Office Property in Houston, Texas and the Company recognized a
$1.0 million impairment, net of minority interests, on the North Dallas Athletic
Club, located adjacent to the Stanford Corporate Centre Office property in
Dallas, Texas. The Company also recognized an impairment charge of approximately
$0.7 million, net of minority interests, on one of the six behavioral healthcare
properties held for sale. This property is under contract for sale.
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of March 31, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 14,
"COPI," for information on the proposed acquisition of COPI's 40% interest in
AmeriCold Logistics by a new entity to be owned by the Company's shareholders.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000) and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 7, 2003, the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.
AmeriCold Logistics deferred $5.6 million of the total $37.0 million of
rent payable for the three months ended March 31, 2003. The Company's share of
the deferred rent was $2.2 million. The Company recognizes rental income from
the Temperature-Controlled Logistics Properties when earned and collected and
has not recognized the $2.2 million of deferred rent in equity in net income of
the Temperature-Controlled Logistics Properties for the three months ended March
31, 2003. As of March 31, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $47.9 million and $39.8 million, respectively, of which the Company's
portions were $19.2 million and $15.9 million, respectively.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C. ("VCQ")
As of March 31, 2003, the Company held a 56% interest in Vornado
Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). The assets of VCQ include two
quarries and the related land. The Company accounts for this investment as an
unconsolidated equity investment because the Company does not control the joint
venture.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.
On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. As of May
5, 2003, these receivables were collected.
6. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. The Company does not have control of
these joint ventures, and therefore, these investments are accounted for using
the equity method of accounting.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has other unconsolidated equity investments with interests
ranging from 12.5% to 65%. The Company does not have control of these
investments due to ownership interests of 50% or less or the ownership of
non-voting interests only, and therefore, these investments also are accounted
for using the equity method of accounting.
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of March 31, 2003.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF MARCH 31, 2003
------ -------------- --------------------
Joint Ventures
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0%(1)
Crescent Miami Center L.L.C. Office (Miami Center - Miami) 40.0%(2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0%(3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0%(4)
Houston PT Four Westlake Park Office Limited
Partnership Office (Four Westlake Park-Houston) 20.0%(4)
Houston PT Three Westlake Park Office Limited Office (Three Westlake Park -
Partnership Houston) 20.0%(4)
Crescent Five Post Oak Park Limited Partnership Office (Five Post Oak - Houston) 30.0%(5)
Equity Investments
The Woodlands Land Development Company, L.P. Residential Development 42.5%(6)(7)
Blue River Land Company, L.L.C. Residential Development 50.0%(8)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0%(9)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0%(10)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0%(11)
The Woodlands Commercial Properties Company, L.P. Office 42.5%(6)(7)
CR License, L.L.C. Other 30.0%(12)
The Woodlands Operating Company, L.P. Other 42.5%(6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0%(13)
SunTx Fulcrum Fund, L.P. Other 27.8%(14)
G2 Opportunity Fund, L.P. Other 12.5%(15)
- ----------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by
an affiliate of a fund managed by JP Morgan Fleming Asset Management,
Inc.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned
by a pension fund advised by JP Morgan Fleming Asset Management, Inc.
(4) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Park Office Limited
Partnership and Houston PT Four Westlake Park Office Limited
Partnership is owned by an affiliate of General Electric Pension Trust.
(5) The remaining 70% interest in Crescent Five Post Oak Park Limited
Partnership is owned by an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the Woodlands Land Development
Company, L.P. ("WLDC"), The Woodlands Commercial Properties Company,
L.P. and The Woodlands Operating Company, L.P. is owned by an affiliate
of Morgan Stanley.
(7) Distributions are made to partners based on specified payout
percentages. During the three months ended March 31, 2003, the payout
percentage to the Company was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Company.
(9) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C.
(10) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(11) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(12) The remaining 70% interest in CR License, L.L.C. is owned by an
affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(13) The remaining 35% interest in Canyon Ranch Las Vegas, L.L.C. is owned
by an affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(14) The SunTx Fulcrum Fund, L.P.'s (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 72.2% of the Fund is owned by a
group of individuals unrelated to the Company. The Company's ownership
percentage will decline by the closing date of the Fund as capital
commitments from third parties are secured. The Company's projected
ownership interest at the closing of the Fund is approximately 7.5%
based on the Fund manager's expectations for the final Fund
capitalization. The Company accounts for its investment in the Fund
under the cost method. The Company's investment at March 31, 2003 was
$6.1 million.
(15) G2 Opportunity Fund, L.P. ("G2") was formed for the purpose of
investing in commercial mortgage backed securities and other commercial
real estate investments. Goff-Moore Strategic Partners, L.P. ("GMSP")
and GMAC Commercial Mortgage Corporation ("GMACCM") each own 21.875% of
G2, with the remaining 43.75% owned by parties unrelated to the
Company. See Note 13, "Related Party Transactions," in Item 1,
"Financial Statements," for information regarding the ownership
interests of trust managers and officers of the Company in GMSP.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY FINANCIAL INFORMATION
The Company reports its share of income and losses based on its
ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Company's transaction with COPI on
February 14, 2002, certain entities that were reported as unconsolidated
entities in the first quarter of 2002 prior to February 14, 2002 are
consolidated in the March 31, 2003 financial statements. Additionally, certain
unconsolidated subsidiaries of the newly consolidated entities are now shown
separately as unconsolidated entities of the Company. As a result of the
Company's January 2, 2003 purchase of the remaining 2.56% economic interest,
representing 100% of the voting stock in DBL Holdings, Inc. ("DBL"), DBL is
consolidated in the March 31, 2003 financial statements. Because DBL owns a
majority of the voting stock of MVDC and HADC, these two Residential Development
Corporations are consolidated in the March 31, 2003 financial statements.
The unconsolidated entities that are included under the headings on the
following tables are summarized below.
Balance Sheets as of March 31, 2003:
o The Woodlands Land Development Company, L.P. - This
is an unconsolidated investment of TWLC;
o Other Residential Development Corporations - This
includes the Blue River Land Company, L.L.C., an
unconsolidated investment of CRDI;
o Resort/Hotel - This includes Manalapan;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
o Office - This includes Main Street Partners, L.P.,
Houston PT Three Westlake Park Office Limited
Partnership, Houston PT Four Westlake Park Office
Limited Partnership, Austin PT BK One Tower Office
Limited Partnership, Crescent 5 Houston Center, L.P.,
Crescent Miami Center, L.L.C., Crescent Five Post Oak
Park Limited Partnership and The Woodlands Commercial
Properties Company, L.P. ("Woodlands CPC"); and
o Other - This includes CR License, L.L.C., Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas,
L.L.C., SunTx Fulcrum Fund, L.P. and G2 Opportunity
Fund, L.P.
Balance Sheets as of December 31, 2002:
o The Woodlands Land Development Company, L.P. - This
is an unconsolidated investment of TWLC;
o Other Residential Development Corporations - This
includes the Blue River Land Company, L.L.C., an
unconsolidated investment of CRDI and includes MVDC
and HADC;
o Resort/Hotel - This includes Manalapan;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
o Office - This includes Main Street Partners, L.P.,
Houston PT Three Westlake Park Office Limited
Partnership, Houston PT Four Westlake Park Office
Limited Partnership, Austin PT BK One Tower Office
Limited Partnership, Crescent 5 Houston Center,
L.P., Crescent Miami Center, L.L.C., Crescent Five
Post Oak Park Limited Partnership and Woodlands CPC;
and
o Other - This includes DBL Holdings, Inc., CR License,
L.L.C., Woodlands Operating Company, L.P., Canyon
Ranch Las Vegas, L.L.C. and SunTx Fulcrum Fund, L.P.
Summary Statements of Operations for the three months ended March 31,
2003:
o The Woodlands Land Development Company, L.P. - This
includes the operating results for WLDC, an
unconsolidated investment of TWLC;
o Other Residential Development Corporations - This
includes the operating results for Blue River Land
Company, L.L.C., an unconsolidated investment of
CRDI;
o Resort/Hotel - This includes the operating results
for Manalapan;
o Temperature-Controlled Logistics - This includes the
operating results for the Temperature-Controlled
Logistics Partnership and VCQ;
o Office - This includes the operating results for Main
Street Partners, L.P., Houston PT Three Westlake Park
Office Limited Partnership, Houston PT Four Westlake
Park Office Limited Partnership, Austin PT
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BK One Tower Office Limited Partnership, Crescent
5 Houston Center, L.P., Crescent Miami Center
L.L.C., Crescent Five Post Oak Park Limited
Partnership and Woodlands CPC; and
o Other - This includes CR License, L.L.C., Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas,
L.L.C., SunTX Fulcrum Fund, L.P. and G2 Opportunity
Fund, L.P.
Summary Statements of Operations for the three months ended March 31,
2002:
o The Woodlands Land Development Company, L.P. - This
includes WLDC's operating results for the period
February 15 through March 31, 2002 and TWLC's
operating results for the period January 1 through
February 14, 2002. WLDC is an unconsolidated
subsidiary of TWLC;
o Other Residential Development Corporations - This
includes the operating results for DMDC and CRDI for
the period January 1 through February 14, 2002, the
operating results of Blue River Land Company, L.L.C.
and Manalapan for the period February 15 through
March 31, 2002, and the operating results of MVDC and
HADC;
o Temperature-Controlled Logistics - This includes the
operating results for the Temperature-Controlled
Logistics Partnership;
o Office - This includes the operating results for Main
Street Partners, L.P., Houston PT Four Westlake
Office Limited Partnership, Austin PT BK One Tower
Office Limited Partnership, Crescent 5 Houston
Center, L.P. and Woodlands CPC; and
o Other - This includes DBL Holdings, Inc., CR License,
L.L.C., Canyon Ranch Las Vegas, L.L.C. and SunTx
Fulcrum Fund, L.P.
BALANCE SHEETS:
AS OF MARCH 31, 2003
-----------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- -------------- ------------- ------------ ---------- ------------ ---------- ---------- ----------
Real estate, net $ 391,082 $ 53,329 $ 80,915 $1,223,030 $ 832,571
Cash 6,553 2,544 2,563 23,552 34,616
Other assets 41,111 1,312 7,257 97,231 36,715
---------- ---------- ---------- ---------- ----------
Total assets $ 438,746 $ 57,185 $ 90,735 $1,343,813 $ 903,902
========== ========== ========== ========== ==========
Notes Payable $ 288,215 $ 7,654 $ 56,000 $ 571,340 $ 509,270
Notes Payable to the
Company 10,725 -- -- -- --
Other liabilities 52,458 6,494 6,303 7,350 28,319
Equity 87,348 43,037 28,432 765,123 366,313
---------- ---------- ---------- ---------- ----------
Total liabilities and equity $ 438,746 $ 57,185 $ 90,735 $1,343,813 $ 903,902
========== ========== ========== ========== ==========
Company's share of
unconsolidated debt $ 122,493 $ 3,827 $ 28,000 $ 228,536 $ 180,402 $ -- $ 563,258
========== ========== ========== ========== ========== ========== ==========
Company's investments in
real estate mortgages
and equity of
unconsolidated companies $ 34,885 $ 27,306 $ 14,218 $ 306,881 $ 134,188 $ 31,648 $ 549,126
========== ========== ========== ========== ========== ========== ==========
AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- -------------- -------------- ------------ ---------- ----------- ---------- ---------- ----------
Real estate, net $ 388,587 $ 68,235 $ 81,510 $1,238,810 $ 845,019
Cash 15,289 7,112 3,022 13,213 43,296
Other assets 46,934 3,303 4,415 88,327 35,609
---------- ---------- ---------- ---------- ----------
Total assets $ 450,810 $ 78,650 $ 88,947 $1,340,350 $ 923,924
========== ========== ========== ========== ==========
Notes Payable $ 284,547 $ -- $ 56,000 $ 574,931 $ 507,679
Notes Payable to the
Company 10,625 -- -- -- --
Other liabilities 70,053 19,125 5,996 9,579 53,312
Equity 85,585 59,525 26,951 755,840 362,933
---------- ---------- ---------- ---------- ----------
Total liabilities and equity $ 450,810 $ 78,650 $ 88,947 $1,340,350 $ 923,924
========== ========== ========== ========== ==========
Company's share of
unconsolidated debt $ 120,933 $ -- $ 28,000 $ 229,972 $ 180,132 $ -- $ 559,037
========== ========== ========== ========== ========== ========== ==========
Company's investments in
real estate mortgages
and equity of
unconsolidated companies $ 33,960 $ 39,187 $ 13,473 $ 304,545 $ 133,530 $ 37,948 $ 562,643
========== ========== ========== ========== ========== ========== ==========
20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS RESORT/HOTEL LOGISTICS OFFICE(1) OTHER TOTAL
- -------------- ------------- ------------ ------------ ------------ --------- -------- --------
Total revenues $ 25,569 $ 120 $ 12,237 $ 34,032 $ 34,373
Expenses:
Operating expense 20,435 13 8,257 6,008(2) 14,708
Interest expense 1,708 -- 830 10,244 6,194
Depreciation and amortization 1,663 -- 707 14,643 7,865
Tax expense (benefit) -- -- 962 -- --
Other (income) expense -- -- -- (615) --
-------- -------- -------- -------- --------
Total expenses $ 23,806 $ 13 $ 10,756 $ 30,280 $ 28,767
-------- -------- -------- -------- --------
Gain (loss) on sale of
properties -- -- -- 21 --
Net income (loss) $ 1,763 $ 107 $ 1,481 $ 3,773 $ 5,606
======== ======== ======== ======== ========
Company's equity in net
income (loss) of
unconsolidated companies $ 926 $ 44 $ 743 $ 1,507 $ 1,458 $ (1,029) $ 3,649
======== ======== ======== ======== ======== ======== ========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS LOGISTICS OFFICE OTHER TOTAL
- -------------- -------------- ------------ ------------ -------- -------- --------
Total revenues $ 35,856 $ 88,014 $ 31,959 $ 24,111
Expenses:
Operating expense 15,383 79,498 6,986(2) 10,638
Interest expense 929 1,619 10,932 4,420
Depreciation and amortization 871 1,830 14,816 5,493
Tax expense (benefit) 406 (70) -- --
-------- -------- -------- --------
Total expenses $ 17,589 $ 82,877 $ 32,734 $ 20,551
-------- -------- -------- --------
Net income (loss) $ 18,267 $ 5,137 $ (775) $ 3,560
======== ======== ======== ========
Company's equity in net
income (loss) of
unconsolidated companies $ 9,700 $ 2,783 $ (310) $ 1,310 $ (4,061) $ 9,422
======== ======== ======== ======== ======== ========
- ----------
(1) This column includes information for Three Westlake Park, which was
contributed by the Company to a joint venture on August 21, 2002, Miami
Center, which was contributed by the Company to a joint venture on
September 25, 2002, and Five Post Oak Park, which was acquired by the
Company in a joint venture transaction on December 20, 2002.
(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).
21
UNCONSOLIDATED DEBT ANALYSIS
The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of March 31, 2003 are shown below.
BALANCE COMPANY'S SHARE
OUTSTANDING AT OF BALANCE AT INTEREST RATE AT MATURITY FIXED/VARIABLE
DESCRIPTION MARCH 31, 2003 MARCH 31, 2003 MARCH 31, 2003 DATE SECURED/UNSECURED
- ----------- -------------- --------------- ---------------- --------------------- -----------------
TEMPERATURE-CONTROLLED
LOGISTICS SEGMENT:
Vornado Crescent Portland
Partnership - 40% Company
Goldman Sachs (1) 505,008 202,003 6.89% 5/11/2023 Fixed/Secured
Various Mortgage Notes 28,931 11,572 4.25 to 12.88% 7/30/2003 to 4/1/2009 Fixed/Secured
Various Capital Leases 37,401 14,961 7.00 to 13.63% 6/1/2006 to 2/12/2016 Fixed/Secured
------------- -----------
571,340 228,536
------------- -----------
OFFICE SEGMENT:
Main Street Partners, L.P.
- 50% Company (2)(3)(4) 132,295 66,147 5.62% 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P.
- 25% Company (5) 65,470 16,368 3.60% 5/31/2004 Variable/Secured
Austin PT Bk One Tower Office
Limited Partnership - 20% Company 37,774 7,555 7.13% 8/1/2006 Fixed/Secured
Houston PT Four Westlake Park Office
Limited Partnership - 20% Company 48,567 9,713 7.13% 8/1/2006 Fixed/Secured
Houston PT Three Westlake Park Office
Limited Partnership - 20% Company 33,000 6,600 5.61% 9/1/2007 Fixed/Secured
Crescent Miami Center, LLC
- 40% Company 81,000 32,400 5.04% 9/25/2007 Fixed/Secured
Crescent Five Post Oak Park, L.P.
- 30% Company 45,000 13,500 4.82% 1/1/2008 Fixed/Secured
The Woodlands Commercial Properties Co.
(Woodlands CPC) - 42.5% Company
Fleet National Bank credit facility 55,000 23,375 4.38% 11/27/2005 Variable/Secured
Fleet National Bank (3)(6) 3,208 1,363 3.34% 10/31/2003 Variable/Secured
Various Mortgage Notes 7,956 3,381 6.30 to 7.50% 11/1/2021 to 12/2/2024 Fixed/Secured
------------- -----------
509,270 180,402
------------- -----------
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co.
(WLDC) - 42.5% Company:
Fleet National Bank credit
facility 230,000 97,750 4.38% 11/27/2005 Variable/Secured
Fleet National Bank (3)(6) 6,581 2,797 3.34% 10/31/2003 Variable/Secured
Fleet National Bank (7) 36,611 15,560 4.09% 12/31/2005 Variable/Secured
Jack Eckerd Corp. 101 43 4.25% 12/31/2008 Variable/Secured
Various Mortgage Notes 14,922 6,343 4.25 to 6.25% 7/1/2005 to 12/31/2008 Fixed/Secured
Blue River Land Company, L.L.C.
- 50% Company(8) 7,654 3,827 4.34% 6/30/2004 Variable/Secured
------------- -----------
295,869 126,320
------------- -----------
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners,
L.L.C. - 50% Company
Corus Bank (3)(9) 56,000 28,000 5.35% 10/21/2005 Variable/Secured
------------- -----------
TOTAL UNCONSOLIDATED DEBT $ 1,432,479 $ 563,258
============= ===========
FIXED RATE/WEIGHTED AVERAGE 6.85% 15.3 years
VARIABLE RATE/WEIGHTED AVERAGE 4.72% 2.3 years
--------- ---------------
TOTAL WEIGHTED AVERAGE 5.89% 9.4 years (10)
--------- ---------------
- ----------
(1) The Temperature-Controlled Logistics Corporation expects to repay this
note on the Optional Prepayment Date of April 11, 2008.
(2) Senior Note - Note A: $83.3 million at variable interest rate, LIBOR +
189 basis points, $4.9 million at variable interest rate, LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $24.5 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.6 million at variable interest rate, LIBOR
+ 890 basis points with a LIBOR floor of 3.0%. Interest-rate cap
agreement maximum LIBOR of 4.52% on all notes. All notes amortized
based on a 25-year schedule.
(3) This Facility has two one-year extension options.
(4) The Company and its joint venture partner each obtained a Letter of
Credit to guarantee the repayment of up to $4.3 million of principal of
the Main Street Partners, L.P. loan.
(5) The Company provides a full and unconditional guarantee of this loan
for the construction of 5 Houston Center. The guarantee amount reduces
to $41.3 million upon achievement of specified conditions, including
specified customers occupying space and obtaining a certificate of
occupancy; further reduction to $20.6 million upon achievement of 90%
occupancy and a 1.3x debt service coverage.
(6) Woodlands CPC and WLDC entered into an Interest Rate Cap Agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.
(7) WLDC entered into an Interest Rate Cap Agreement which limits interest
rate exposure on the notional amount of $19.5 million to a maximum
LIBOR rate of 8.5%.
(8) The variable rate loan has an interest rate of LIBOR + 3%. A fully
consolidated entity of CRDI, in which CRDI owns 88.3%, provides a
guarantee of up to 70% of the outstanding balance of the $9.0 million
loan to Blue River Land Company, L.L.C. There was approximately $7.7
million outstanding at March 31, 2003 and the guarantee was $5.4
million.
(9) The Company and its joint venture partner each obtained a Letter of
Credit to guarantee repayment of up to $3.0 million of this facility.
(10) The overall weighted average maturity would be 4.3 years if all
extensions and prepayment options were exercised.
22
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows, as of March 31, 2003, information about the
Company's share of unconsolidated fixed and variable rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.
PERCENTAGE WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT AVERAGE RATE MATURITY(1)
- -------------- -------- ---------- ------------ ----------------
Fixed Rate Debt $308,028 54.69% 6.85% 15.3 years
Variable Rate Debt 255,230 45.31% 4.72% 2.3 years
-------- -------- -------- --------
Total Debt $563,258 100.00% 5.89% 9.4 years
======== ======== ======== ========
- ----------
(1) Based on contractual maturities. The overall weighted average maturity
would be 4.3 years assuming the election of extension options on debt
instruments and expected repayment of a note on the optional prepayment
date.
Listed below is the Company's share of aggregate principal payments, by
year, required as of March 31, 2003 related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are included.
SECURED
(in thousands) DEBT(1)
- -------------- -----------
2003 $ 18,534
2004 97,059
2005 151,744
2006 17,486
2007 41,151
Thereafter 237,284
-----------
$ 563,258
===========
- ----------
(1) These amounts do not reflect the effect of extension options.
23
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Company's debt financing at March 31,
2003:
SECURED DEBT
March 31, 2003
--------------
(in thousands)
Fleet Fund I and II Term Loan due May 2005, bears interest at LIBOR plus 325
basis points (at March 31, 2003, the interest rate was 4.59%), with a
four-year interest-only term, secured by equity interests in Funding I
and II ....................................................................... $ 275,000
AEGON Partnership Note(1) due July 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............................... 263,961
LaSalle Note I(2) 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........................................... 237,264
Deutsche Bank-CMBS Loan(3) due May 2004, bears interest at the 30-day LIBOR
rate plus 234 basis points (at March 31, 2003, the interest rate was 5.84%),
with a three-year interest-only term and two one-year extension options,
secured by the Funding X Properties and Spectrum Center....................... 220,000
JP Morgan Mortgage Note(4) bears interest at 8.31% with principal
amortization based on a 25-year amortization schedule through maturity in
October 2016, secured by the Houston Center mixed-use Office Property
complex....................................................................... 194,497
LaSalle Note II(5) 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.......................................... 161,000
Metropolitan Life Note V(6) 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........................ 37,977
National Bank of Arizona Revolving Line of Credit (7) due December 2005,
bears interest at 4.43%, secured by certain DMDC assets....................... 36,621
Northwestern Life Note due January 2004, bears interest at 7.66% with an
interest-only term, secured by the 301 Congress Avenue Office Property........ 26,000
Woodmen of the World Note(8) due April 2009, bears interest at 8.20% with an
initial five-year interest-only term (through April 2006), followed by
principal amortization based on a 25-year amortization schedule, secured by
the Avallon IV Office Property................................................ 8,500
Nomura Funding VI Note(9) 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..................... 7,986
Mitchell Mortgage Note due September 2003, bears interest at 7.0% with an
interest-only term, secured by one of The Woodlands Office Properties......... 1,743
Construction, acquisition and other obligations, bearing fixed and variable
interest rates ranging from 2.9% to 10.95% at March 31, 2003, with maturities
ranging between April 2003 and November 2007, secured by various CRDI and MVDC
projects...................................................................... 53,744
UNSECURED DEBT
2009(10) Notes bear interest at a fixed rate of 9.25% with a seven-year
interest-only term, due April 2009............................................ 375,000
2007(10) Notes bear interest at a fixed rate of 7.50% with a ten-year
interest-only term, due September 2007........................................ 250,000
24
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
--------------
(in thousands)
UNSECURED DEBT - REVOLVING LINE OF CREDIT
Credit Facility(11) interest only due May 2004, bears interest at LIBOR plus
187.5 basis points (at March 31, 2003, the interest rate was 3.2%), with a
one-year extension option..................................................... 285,000
JP Morgan Loan Sales Facility (12), bears interest at Fed Funds plus 150
basis points (at March 31, 2003, the interest rate was 2.75%)................. 10,000
----------
Total Notes Payable $2,444,293
==========
- ----------
(1) The outstanding balance of this note at maturity will be approximately
$224.1 million.
(2) In August 2007, the interest rate will increase, 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 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 $221.7
million.
(3) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine
note. The notes are due May 2004 and bear interest at the 30-day LIBOR
rate plus a spread of (i) 164.7 basis points for the CMBS note (at
March 31, 2003, the interest rate was 5.147%), and (ii) 600 basis
points for the Mezzanine note (at March 31, 2003, the interest rate was
9.5%). The blended rate March 31, 2003 for the two notes was 5.84%.
Both notes have a LIBOR floor of 3.5%. The notes have three-year
interest only terms and two one-year extension options. The
Fleet-Mezzanine note is secured by the Company's interests in Funding X
and Crescent Spectrum Center, L.P. and the Company's interest in their
general partner.
(4) At the end of seven years (October 2006), the interest rate will also
adjust based on current interest rates at that 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 $177.8 million.
(5) In March 2006, the interest rate will increase, 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 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 $154.5 million.
(6) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.
(7) This facility is a $50.0 million line of credit secured by certain DMDC
land and improvements ("vertical facility"), club facilities ("club
loan"), and notes receivable ("warehouse facility"). The line restricts
the vertical facility and club loan to a maximum outstanding amount of
$40.0 million and is subject to certain borrowing base limitations and
bears interest at Prime (at March 31, 2003, the interest rate was
4.25%). The warehouse facility bears interest at Prime plus 100 basis
points (at March 31, 2003, the interest rate was 5.25%) and is limited
to $10.0 million. The blended rate at March 31, 2003 for the vertical
facility and club loan and the warehouse facility was 4.43%.
(8) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.
(9) 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 by making a
final payment of approximately $6.1 million.
(10) The Notes were issued in an offering registered with the Securities and
Exchange Commission.
(11) The $400.0 million credit facility with Fleet is an unsecured revolving
line of credit to Funding VIII and guaranteed by the Operating
Partnership. Availability under the line of credit is subject to
certain covenants including limitations on total leverage, fixed charge
ratio, debt service coverage, minimum tangible net worth, and specific
mix of office and hotel assets and average occupancy of Office
Properties. At March 31, 2003, the maximum borrowing capacity under the
credit facility was $400.0 million. The outstanding balance excludes
letters of credit issued under the Company's credit facility of $15.2
million which reduce the Company's maximum borrowing capacity.
(12) The JP Morgan Loan Sales Facility is an uncommitted $50.0 million
unsecured credit facility. The Operating Partnership maintains
sufficient availability under the Fleet Facility to repay this loan at
any time due to lack of obligation by the lender to fund the loan.
The following table shows information about the Company's consolidated
fixed and variable rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT(1) RATE MATURITY
- -------------- ------------- ------------- ------------- ----------------
Fixed Rate Debt $ 1,584,652 65% 8.1% 11.2 years
Variable Rate Debt 859,641 35 4.1 1.4 years
------------- ------------- ------------- -------------
Total Debt $ 2,444,293 100% 6.8%(2) 7.3 years(3)
============= ============= ============= =============
- ----------
(1) Balance excludes hedges. The percentages for fixed rate debt and
variable rate debt, including the $508.4 million of hedged variable
rate debt, are 86% and 14%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted
average interest rate would have been 7.16%.
(3) Based on contractual maturities. The overall weighted average maturity
is 3.7 years based on the Company's expected payoff dates.
25
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Listed below are the aggregate principal payments by year required as
of March 31, 2003 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.
SECURED UNSECURED DEBT
(in thousands) DEBT UNSECURED DEBT LINE OF CREDIT TOTAL(1)
- -------------- ---------- -------------- -------------- ----------
2003(2) $ 48,583 $ 10,000 $ -- $ 58,583
2004 273,799 -- 285,000 558,799
2005 365,567 -- -- 365,567
2006 18,359 -- -- 18,359
2007 26,382 250,000 -- 276,382
Thereafter 791,603 375,000 -- 1,166,603
---------- ---------- ---------- ----------
$1,524,293 $ 635,000 $ 285,000 $2,444,293
========== ========== ========== ==========
- ----------
(1) These amounts do not reflect the effect of a one-year extension option
on the credit facility and two one-year extension options on the
Deutsche Bank - CMBS Loan.
(2) On March 31, 2003, the Company paid the $63.5 million Cigna Note in
full with funds from a draw under the Company's credit facility.
The Company has $58.6 million of secured and unsecured debt maturing
through December 31, 2003, consisting primarily of debt related to the
Residential Development Segment. The Company plans to meet its maturing debt
obligations through December 31, 2003 of approximately $58.6 million, primarily
through cash from operations, return of capital investment from the Residential
Development Segment, construction loan refinancings, borrowings under the JP
Morgan loan sales facility and additional borrowings under the Company's credit
facility.
Any uncured or unwaived events of default under the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, an event
of default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in an event of
default under the credit facility and the Fleet Fund I and II Term Loan after
the notice and cure periods for the other indebtedness have passed. As of March
31, 2003, no event of default had occurred, and the Company was in compliance
with all of its debt service coverage ratios and other covenants related to its
outstanding debt. The Company's debt facilities generally prohibit loan
pre-payment for an initial period, allow pre-payment with a penalty during a
following specified period and allow pre-payment without penalty after the
expiration of that period. During the three months ended March 31, 2003, there
were no circumstances that required pre-payment penalties or increased
collateral related to the Company's existing debt.
In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate are: Funding I and Funding
II Properties (CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent
Funding Interest, LLC, CRE Management I Corp., CRE Management II Corp.); Funding
III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management
IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VI Properties
(CRE Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC);
Funding IX Properties (CRE Management IX, LLC); Funding X Properties (CREF X
Holdings Management, LLC, CREF X Holdings, L.P., CRE Management X, LLC);
Spectrum Center (Spectrum Center Partners, L.P., Spectrum Mortgage Associates,
L.P., CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management,
LLC), and Crescent Finance Company.
8. CASH FLOW HEDGES
The Company uses derivative financial instruments to convert a portion
of its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of March 31, 2003, the Company had entered into five cash
flow hedge agreements which are accounted for in conformity with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133."
26
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information regarding the Company's cash flow
hedge agreements during the three months ended March 31, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").
EFFECTIVE NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
DATE(1) AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- -------------- ---------- -------- ---------- ------------ ---------------- ----------------
(in thousands)
9/01/99 $ 200,000 9/02/03 6.18% $ (5,002) $ 2,393 $ 2,285
5/15/01 200,000 2/03/03 7.11% -- 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (6,045) 1,351 1,048
2/15/03 100,000 2/15/06 3.25% (3,197) 242 (679)
2/15/03 100,000 2/15/06 3.26% (3,204) 242 (678)
9/02/03 200,000 9/01/06 3.72% (6,571) -- (1,873)
------------ ------------ -------------
$ (24,019) $ 5,276 $ 1,160
============ ============ =============
- ----------
(1) During 2002, the Company entered into agreements for three cash flow
hedges, two of which were effective in the first quarter of 2003, and
one of which will be effective in the third quarter of 2003. These
three cash flow hedges replace two of the Company's existing cash flow
hedges.
The Company has designated its five cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable rate LIBOR indexed debt that re-prices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in DIG Issue E8.
The DIG is a task force designed to assist the FASB in answering questions that
companies have resulting from implementation of SFAS No. 133 and SFAS No. 138.
The Company uses the change in variable cash flows method as described in DIG
Issue G7 for prospective testing as well as for the actual recording of
ineffectiveness, if any. Under this method, the Company will compare the changes
in the floating rate portion of each cash flow hedge to the floating rate of the
hedged items. The cash flow hedges have been and are expected to remain highly
effective. Changes in the fair value of these highly effective hedging
instruments are recorded in accumulated other comprehensive income. The
effective portion that has been deferred in OCI will be reclassified to earnings
as interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge and no longer
qualify for accounting in conformity with SFAS Nos. 133 and 138.
CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt. As of March 31, 2003, CRDI had two cash flow hedge agreements in
place which are accounted for in conformity with SFAS Nos. 133 and 138.
The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of March 31, 2003.
Unlike the additional interest on the Company's cash flow hedges, which was
expensed, the additional interest on CRDI's cash flow hedges was capitalized, as
it is related to debt incurred for projects that are currently under
development. Also presented are the unrealized gains in OCI for the three months
ended March 31, 2003.
ADDITIONAL
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
DATE AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- -------------- ------------ -------- --------- ------------ ----------- ------------
(in thousands)
9/4/01 $ 4,650 9/4/03 4.12% $ (69) $ 33 $ 32
9/4/01 $ 3,700 9/4/03 4.12% (54) 25 24
------------ ----------- -----------
$ (123) $ 58 $ 56
============ =========== ===========
CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes that the hedges are highly effective.
27
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
GUARANTEE COMMITMENTS
The Financial Standards Accounting Board ("FASB") issued Interpretation
45 requiring a guarantor to disclose its guarantees. The Company's guarantees in
place as of March 31, 2003 are listed in the table below. No triggering events
or conditions are anticipated to occur that would require payment under the
guarantees and the Company's collateral supporting the loans that are guaranteed
is sufficient to cover the maximum potential amount of future payments and
therefore, would not require the Company to provide additional capital to
support the guarantees.
Guaranteed Amount
Outstanding Maximum Guaranteed
at March 31, 2003 Amount
----------------- -----------------
DEBTOR (in thousands)
Crescent 5 Houston Center, L.P.(1)(2) $ 65,470 $ 82,500
CRDI - Eagle Ranch Metropolitan District - Letter of
Credit(3) 15,197 15,197
Blue River Land Company, L.L.C.(1)(4) 5,358 6,300
Main Street Partners, L.P. - Letter of Credit(1)(5) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit(1)(6) 3,000 3,000
----------------- -----------------
Total Guarantees $ 93,275 $ 111,247
================= =================
- ----------
(1) See Note 6, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," in Item 1,
"Financial Statements," for a description of the terms of this debt.
(2) The Company provides a full guarantee of principal up to $82.5 million
for the construction loan on 5 Houston Center, which was completed in
2002. The guarantee amount reduces to $41.3 million upon achievement of
specified conditions, including specified tenants occupying space and
obtaining a certificate of occupancy; further reduction to $20.6
million upon achievement of 90% occupancy and 1.3x debt service
coverage.
(3) The Company provides a $15.2 million Letter of Credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan
District Revenue Development Bonds and Limited Tax Bonds.
(4) A fully consolidated entity of CRDI in which CRDI owns 88.3%, provides
a guarantee of up to 70% of the outstanding balance of the $9.0 million
loan to Blue River Land Company, L.L.C.
(5) The Company and its joint venture partner each provide a Letter of
Credit to guarantee $4.3 million of the principal repayment of the loan
to Main Street Partners, L.P.
(6) The Company and its joint venture partner each provide a $3.0 million
Letter of Credit to guarantee repayment of up to $3.0 million of
principal of the Manalapan Hotel Partners, L.L.C. debt with Corus Bank.
COPI COMMITMENTS
See Note 14, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.
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.
28
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LITIGATION
The Company is involved from time to time in various claims and legal
actions in the ordinary course of business. Management does not believe that the
impact of such matters will have a material adverse effect on the Company's
financial position or results of operations when resolved.
10. MINORITY INTEREST
Minority interest in the Operating Partnership represents the
proportionate share of the equity in the Operating Partnership of limited
partners other than the Company. The ownership share of limited partners other
than the Company is evidenced by Operating Partnership units. The Operating
Partnership pays a regular quarterly distribution to the holders of Operating
Partnership units.
Each Operating Partnership unit may be exchanged for either two common
shares of the Company 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, the Company's percentage interest in the Operating Partnership
increases. During the three months ended March 31, 2003, there were 3,298 units
exchanged for 6,596 common shares of the Company.
Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Company holds a controlling interest in the real estate
partnerships and consolidates the real estate partnerships into the financial
statements of the Company. Income in the real estate partnerships is allocated
to minority interest based on weighted average percentage ownership during the
year.
The following table summarizes the minority interest liability as of
March 31, 2003 and December 31, 2002:
(in thousands) 2003 2002
- -------------- -------- --------
Limited partners in the Operating Partnership $121,842 $130,802
Development joint venture partners - Residential Development Segment 24,255 24,937
Joint venture partners - Office Segment 7,756 11,202
Joint venture partners - Resort/Hotel Segment 7,484 7,833
-------- --------
$161,337 $174,774
======== ========
The following table summarizes the minority interests' share of net
income (loss) for the three months ended March 31, 2003 and 2002:
(in thousands) 2003 2002
- -------------- ------- -------
Limited partners in the Operating Partnership $ (311) $(2,645)
Development joint venture partners - Residential Development Segment 846 (436)
Joint venture partners - Office Segment (85) (270)
Joint venture partners - Resort/Hotel Segment 349 --
Funding IX preferred equity -- (3,659)
------- -------
$ 799 $(7,010)
======= =======
29
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the three
months ended March 31, 2003 (dollars in thousands, except per share amounts).
ANNUAL
DIVIDEND/ RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION TOTAL AMOUNT DATE DATE DISTRIBUTION
-------- --------------- ------------- -------- -------- --------------
Common Shares/Units(1) $ 0.375 $ 43,871 01/31/03 02/14/03 $ 1.50
Common Shares/Units(1) $ 0.375 $ 43,872 04/30/03 05/15/03 $ 1.50
Series A Preferred Shares $ 0.422 $ 4,556 01/31/03 02/14/03 $ 1.6875
Series A Preferred Shares $ 0.422 $ 4,556 04/30/03 05/15/03 $ 1.6875
Series B Preferred Shares $ 0.594 $ 2,019 01/31/03 02/14/03 $ 2.3750
Series B Preferred Shares $ 0.594 $ 2,019 04/30/03 05/15/03 $ 2.3750
- ----------
(1) Represents one-half the amount of the distribution per unit because
each unit is exchangeable for two common shares.
12. INCOME TAXES
TAXABLE CONSOLIDATED ENTITIES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the three months ended March 31, 2003, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.
The Company intends to maintain its qualification as a REIT under
section 856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code").
As a REIT the Company generally will not be subject to federal corporate income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the federal level or in
most of the states in which it operates. The Company consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the three months ended March 31, 2003 and 2002, the Company's federal income
tax benefit was $2.5 million and $5.4 million, respectively. The Company's $2.5
million income tax benefit at March 31, 2003 consists primarily of $1.9 million
for the Residential Development Segment and $0.4 million for the Resort/Hotel
Segment.
The Company's total net tax asset of approximately $42.3 million at
March 31, 2003 includes $29.5 million of net deferred tax assets. SFAS No. 109,
"Accounting for Income Taxes," requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. There was no change in the valuation allowance during the three months
ended March 31, 2003.
30
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC. ("DBL")
Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2 Opportunity Fund, L.P. ("G2"). G2 was formed for the
purpose of investing in commercial mortgage backed securities and other
commercial real estate investments and is managed and controlled by an entity
that is owned equally by Goff-Moore Strategic Partners, L.P. ("GMSP") and
GMACCM. The ownership structure of GMSP consists of an approximately 86% limited
partnership interest owned directly and indirectly by Richard Rainwater,
Chairman of the Board of Trust Managers of the Company, and an approximately 14%
general partnership interest, of which approximately 6% is owned by Darla Moore,
who is married to Mr. Rainwater, and approximately 6% is owned by John Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At March 31, 2003, DBL
had an approximately $13.6 million investment in G2.
On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL Holdings, Inc. from Mr.
Goff. Total consideration paid for Mr. Goff's interest was $0.4 million. The
Board of Trust Managers of the Company, including all the independent trust
managers, approved the transaction based in part on an appraisal of the assets
of DBL by an independent appraisal firm. As a result of this transaction, DBL is
wholly-owned by the Company and is consolidated in the Residential Development
Segment as of and for the three months ended March 31, 2003. Also, because DBL
owns a majority of the voting stock in MVDC and HADC, the Company has
consolidated these two Residential Development Corporations as of and for the
three months ended March 31, 2003.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of March 31, 2003, the Company had approximately $37.8 million of
loans outstanding to certain employees and trust managers of the Company on a
recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty. Mr. Goff had a loan representing $26.3 million of
the $37.8 million total outstanding loans at March 31, 2003. Approximately $0.3
million of interest was outstanding related to these loans as of March 31, 2003.
No conditions exist at March 31, 2003 which would cause any of the loans to be
in default. Effective July 29, 2002, the Company ceased offering to its
employees and Trust Managers the option to obtain loans pursuant to the
Company's stock and unit incentive plans.
OTHER
On June 28, 2002, the Company purchased, and is holding for sale, the
home of an executive officer of the Company for approximately $2.7 million,
which approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.
14. COPI
In April 1997, the Company established a new Delaware corporation,
COPI. All of the outstanding common stock of COPI, valued at $0.99 per share,
was distributed in a spin-off, effective June 12, 1997, to those persons who
were limited partners of the Operating Partnership or shareholders of the
Company on May 30, 1997.
COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax laws in effect and applicable to
REITs at that time. In connection with the formation and capitalization of COPI,
and the subsequent operations and investments of COPI since 1997, the Company
made loans to COPI under a line of credit and various term loans.
31
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its taxable REIT subsidiaries, to
operate or lease certain of its investments that had previously been operated or
leased by COPI.
On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, all of COPI's voting interests in three of the Company's
Residential Development Corporations and other assets. The Company agreed to
assist and provide funding to COPI for the implementation of a pre-packaged
bankruptcy of COPI. In connection with the transfer, COPI's rent and debt
obligations to the Company were reduced.
The Company holds the lessee interests in the eight Resort/Hotel
Properties and the voting interests in the three Residential Development
Corporations through three newly organized entities that are wholly-owned
taxable REIT subsidiaries of the Company. The Company has included these assets
in its Resort/Hotel Segment and its Residential Development Segment, and fully
consolidated the operations of the eight Resort/Hotel Properties and the three
Residential Development Corporations, beginning on the dates of the transfers of
the assets.
The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to provide approximately $14.0 million to COPI in the form of cash
and common shares of the Company to fund costs, claims and expenses relating to
the bankruptcy and related transactions, and to provide for the distribution of
the Company's common shares to the COPI stockholders. The Company also agreed,
however, that it will issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders, even if it would cause the
total costs, claims and expenses that it pays to exceed $14.0 million.
Currently, the Company estimates that the value of the common shares that will
be issued to the COPI stockholders will be between approximately $2.2 million
and $4.0 million. The actual value of the common shares issued to the COPI
stockholders will not be determined until the confirmation of COPI's bankruptcy
plan and could vary from the estimated amounts, but will have a value of at
least $2.2 million.
In addition, the Company has agreed to use commercially reasonable
efforts to assist COPI in arranging COPI's repayment of its $15.0 million
obligation to Bank of America, together with any accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
COPI has agreed that it will use the proceeds of the sale of the AmeriCold
Logistics interest to repay Bank of America in full.
COPI obtained the loan from Bank of America primarily to participate in
investments with the Company. At the time COPI obtained the loan, Bank of
America required, as a condition to making the loan, that Richard E. Rainwater,
the Chairman of the Board of Trust Managers of the Company, and John C. Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, enter into a support agreement with COPI and Bank of America. Pursuant
to the support agreement, Messrs. Rainwater and Goff agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and if the net proceeds of an offering of
COPI securities were insufficient to allow COPI to repay Bank of America in
full. Effective December 31, 2001, the parties executed an amendment to the line
of credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default
occurs.
Previously, the Company held a first lien security interest in COPI's
entire membership interest in AmeriCold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
AmeriCold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to that of Bank of
America.
On March 6, 2003, the stockholders of COPI approved the pre-packaged
bankruptcy plan for COPI. On March 10, 2003, COPI filed the plan under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Northern District of Texas.
If the COPI bankruptcy plan is approved by bankruptcy court, the
holders of COPI's common stock will receive the Company's common shares. As
stockholders of COPI, Mr. Rainwater and Mr. Goff will also receive the Company's
common shares.
32
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Agreement, the current and former directors and
officers of COPI and the current and former trust managers and officers of the
Company also have received a release from COPI of liability for any actions
taken prior to February 14, 2002, and, depending on various factors, will
receive certain liability releases from COPI and its stockholders under the COPI
bankruptcy plan.
Completion and effectiveness of the pre-packaged bankruptcy plan for
COPI is contingent upon a number of conditions, including the approval of the
plan by certain of COPI's creditors and the confirmation of the plan by the
bankruptcy court.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements ....................................... 35
Results of Operations
Three months ended March 31, 2003 and 2002 .................. 36
Liquidity and Capital Resources
Cash Flows for the three months ended March 31, 2003 ........ 40
Debt Financing ................................................... 44
Recent Developments .............................................. 46
Unconsolidated Investments ....................................... 47
Significant Accounting Policies .................................. 51
Funds from Operations ............................................ 53
34
FORWARD-LOOKING STATEMENTS
You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2002. In management's
opinion, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation of the unaudited interim financial
statements are included. Capitalized terms used but not otherwise defined in
this section have the meanings given to them in the notes to the financial
statements in Item 1,"Financial Statements."
This Form 10-Q 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, which reflect the Company's results
of operations and financial condition. The words "anticipates," "believes,"
"expects," "intends," "future," "may," "will," "should," "plans," "estimates,"
"potential," or "continue," or the negative of these terms, or other similar
expressions, identify forward-looking statements.
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 described in the
forward-looking statements.
The following factors might cause such a difference:
o The Company's ability, at its Office Properties, to timely lease
unoccupied square footage and timely re-lease occupied square footage
upon expiration on favorable terms, which may continue to be adversely
affected by existing real estate conditions (including changes in
vacancy rates in a particular market or markets, decreases in rental
rates, increased competition from other properties or by a general
downturn in the economy);
o Adverse changes in the financial condition of existing tenants;
o Further deterioration in the resort/business-class hotel markets or in
the market for residential land or luxury residences, including
single-family homes, townhomes and condominiums, or in the economy
generally;
o Financing risks, such as the ability to generate revenue sufficient to
service and repay existing or additional debt, increases in debt
service associated with increased debt and with variable rate debt, the
ability to meet financial covenants, the Company's ability to fund the
share repurchase program and the Company's ability to consummate
financings and refinancings on favorable terms and within any
applicable time frames;
o Further or continued adverse conditions in the temperature-controlled
logistics business (including both industry-specific conditions and a
general downturn in the economy which may further jeopardize the
ability of the tenant to pay all current and deferred rent due);
o The inability of the Company to complete the distribution to its
shareholders of the shares of a new entity to purchase the AmeriCold
Logistics tenant interest from COPI;
o The concentration of a significant percentage of the Company's assets
in Texas;
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 The Company's ability to find acquisition and development opportunities
which meet the Company's investment strategy; 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.
35
CRESCENT REAL ESTATE EQUITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table shows the Company's financial data as a percentage
of total revenues for the three months ended March 31, 2003 and 2002, and the
variance in dollars between the three months ended March 31, 2003 and 2002.
TOTAL VARIANCE
FINANCIAL DATA AS A IN DOLLARS
PERCENTAGE OF TOTAL BETWEEN THE
REVENUES FOR THE THREE THREE MONTHS
MONTHS ENDED MARCH 31, ENDED MARCH 31,
------------------------------- ---------------
(in millions)
2003 2002 2003 AND 2002
------------ ------------ -------------
REVENUE
Office Property 56.1% 63.7% $ (10.9)
Resort/Hotel Property 27.8 17.6 25.2
Residential Development Property 15.4 17.7 (3.4)
Interest and other income 0.7 1.0 (0.5)
------------ ------------ ------------
TOTAL REVENUE 100.0% 100.0% $ 10.4
------------ ------------ ------------
EXPENSE
Office Property real estate taxes 7.9% 9.4% $ (2.3)
Office Property operating expenses 18.7 19.7 (0.3)
Resort/Hotel Property expense 21.7 10.9 25.9
Residential Development Property expense 14.3 16.8 (3.9)
Corporate general and administrative 2.8 2.9 --
Interest expense 18.8 19.3 1.0
Amortization of deferred financing costs 1.0 1.0 0.1
Depreciation and amortization 16.9 14.9 6.2
Other expenses -- -- --
------------ ------------ ------------
TOTAL EXPENSE 102.1% 94.9% 26.7
------------ ------------ ------------
OPERATING (LOSS) INCOME (2.1)% 5.1% $ (16.3)
------------ ------------ ------------
OTHER INCOME AND EXPENSE
Equity in net income (loss) of unconsolidated companies:
Office Properties 0.7 0.6 0.1
Resort/Hotel Properties 0.3 -- 0.7
Residential Development Properties 0.4 5.7 (11.5)
Temperature-Controlled Logistics Properties 0.7 (0.1) 1.8
Other (0.4) (1.9) 3.1
------------ ------------ ------------
TOTAL EQUITY IN NET INCOME (LOSS) OF
UNCONSOLIDATED COMPANIES 1.7% 4.3% $ (5.8)
Gain on property sales, net -- -- --
------------ ------------ ------------
TOTAL OTHER INCOME AND EXPENSE 1.7% 4.3% $ (5.8)
------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTERESTS, INCOME
TAXES, DISCONTINUED OPERATIONS, AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (0.4)% 9.4% $ (22.1)
Minority Interests 0.3 (3.2) 7.8
Income tax benefit 1.1 2.5 (2.9)
------------ ------------ ------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 1.0% 8.7% $ (17.2)
Discontinued operations - income (loss) on
assets sold and held for sale 0.1 1.0 (1.9)
Discontinued operations - (loss) gain on
assets sold and held for sale (6.4) 1.0 (16.8)
Cumulative effect of a change in accounting
principle -- (4.2) 9.2
------------ ------------ ------------
NET (LOSS) INCOME (5.3)% 6.5% $ (26.7)
Series A Preferred Share distributions (2.0) (1.6) (1.2)
Series B Preferred Share distributions (0.9) -- (2.0)
------------ ------------ ------------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS (8.2)% 4.9% $ (29.9)
============ ============ ============
36
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 TO THE THREE MONTHS ENDED
MARCH 31, 2002
The following comparison of the results of operations for the three
months ended March 31, 2003 and the three months ended March 31, 2002 reflects
the consolidation of eight of the Resort/Hotel Properties and three of the
Residential Development Properties commencing on February 14, 2002, as a result
of the COPI transaction. Prior to February 14, 2002, the results of operations
of the Resort/Hotel Properties were reflected in the Company's consolidated
financial statements as lease payments and as equity in net income for the
Residential Development Properties. Because the results of operations of these
Properties are consolidated for the full period in 2003, as compared to a
partial period in 2002, the Company's financial statements do not provide a
direct comparison of the results of operations of the Resort/Hotel Properties or
the Residential Development Properties for the full periods in 2003 and 2002.
Additional information on the results of operations of the Resort/Hotel
Properties or the Residential Development Properties for the full periods in
both 2003 and 2002 is provided below under the captions "Resort/Hotel
Properties" and "Residential Development Properties."
REVENUES
Total revenues increased $10.4 million, or 4.7%, to $229.4 million for
the three months ended March 31, 2003, as compared to $219.1 million for the
three months ended March 31, 2002. The components of the increase in total
revenues are discussed below.
Resort/Hotel Property revenues increased $25.2 million, or 65.4%, to
$63.7 million, primarily due to the consolidation of the operations of eight of
the Resort/Hotel Properties for the full period in 2003 as compared to a partial
period in 2002 as a result of the COPI transaction (prior to February 14, 2002
the Company recognized lease payments related to these properties).
o Office Property revenues decreased $10.9 million, or 7.7%, to $128.7
million, due to:
o a decrease of $9.6 million from the 64 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, primarily due
to a decline in the weighted average full-service rental rates,
reflecting decreases in both rental revenue and operating expense
recoveries, a decrease in occupancy, and a decrease in net
parking revenues;
o a decrease of $7.8 million resulting from the contribution of two
Office Properties to joint ventures in the third quarter of 2002;
and
o a decrease of $0.4 million in other revenues; partially offset by
o an increase of $3.6 million from the Johns Manville Office
Property acquired in August 2002;
o an increase of $1.4 million attributable to third party
management services and related direct expense reimbursements;
o an increase of $1.0 million attributable to non-recurring revenue
received in 2003; and
o an increase of $0.9 million in net lease termination fees to $2.0
million in 2003.
Residential Development revenues decreased $3.4 million, or 8.8%, to
$35.4 million, primarily due to a reduction in lot and unit sales at Desert
Mountain and CRDI.
EXPENSES
Expenses increased $26.7 million, or 12.8%, to $234.7 million for the
three months ended March 31, 2003, as compared to $208.0 million for the three
months ended March 31, 2002. The components of the increase in expenses are
discussed below.
o Resort/Hotel Property expense increased $25.9 million, or 108.4%, to
$49.7 million, primarily due to the consolidation of the operations of
eight of the Resort/Hotel Properties for a full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction on February 14, 2002.
o Residential Development Property expenses decreased $3.9 million, or
10.6%, to $32.9 million, primarily due to a reduction in cost of sales
for lots and units at Desert Mountain and CRDI.
o Office Property expenses decreased $2.6 million, or 4.1%, to $61.0
million, primarily due to:
o a decrease of $3.0 million due to the contribution of two Office
Properties to joint ventures in 2002;
37
o a decrease of $3.5 million from the 64 consolidated Office
Properties (excluding 2002 acquisitions and properties held for
sale) that the Company owned or had an interest in, due to:
o $1.7 million decrease in property taxes;
o $0.9 million decrease in building repairs and
maintenance expense; and
o $0.9 million decrease in bad debt expense; partially
offset by
o an increase of $1.3 million due to the acquisition of the Johns
Manville Office Property in August 2002;
o an increase of $1.2 million in utilities expense, primarily
attributable to a new utility contract for the Texas Office
Properties; and
o an increase of $1.2 million attributable to the cost of providing third
party management services to joint venture properties.
o Depreciation expense increased $6.2 million, or 18.8%, to $38.8
million, primarily due to;
o an increase of $2.5 million in Office Property depreciation
expense, primarily attributable to:
o an increase of $2.7 million due to the write off of
tenant improvements and lease commissions due to early
termination of leases; and
o an increase of $0.5 million from the Johns Manville
Office Property acquired in August 2002; partially
offset by
o a decrease of $0.9 million associated with the
contribution of two Office Properties to joint ventures
in 2002, and
o an increase of $3.2 million in Residential Development Property
and Resort/Hotel Property depreciation expense due primarily to
the consolidation of the operations of three Residential
Development Corporations and eight Resort/Hotel Properties for
the full period in 2003 as compared to a partial period in 2002
as a result of the COPI transaction on February 14, 2002.
OTHER INCOME
Other Income decreased $5.8 million, or 60.7%, to $3.7 million for the
three months ended March 31, 2003, as compared to $9.4 million for the three
months ended March 31, 2002. The primary components of the decrease in Other
Income are discussed below.
o Equity in net income of unconsolidated companies decreased $5.8
million, or 61.7%, to $3.7 million, primarily due to:
o a decrease of $11.5 million in Residential Development Property
equity in net income due to the consolidation of the operations
of three of the Residential Development Corporations for the full
period in 2003 as compared to a partial period in 2002 as a
result of the COPI transaction on February 14, 2002; partially
offset by
o an increase of $3.1 million in other unconsolidated companies due
primarily to losses recognized in the three months ended March
31, 2002 of $2.6 million on the Company's investment in DBL
Holdings, Inc.;
o an increase of $1.8 million in Temperature-Controlled Logistics
Property equity in net income, primarily due to $1.7 million of
deferred partnership costs in 2002; and
o an increase of $0.7 million in Resort/Hotel Property equity in
net income, primarily due to a series of transactions in October
2002 in which the Company increased its equity interest in the
entity that owns the Ritz Carlton Palm Beach Hotel from 25%
to 50%.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $18.7 million, or 445.2%, to a loss of $14.5 million, primarily due
to:
o a decrease of approximately $12.7 million, net of $2.3 million
minority interest, due to the impairment in 2003 on the 1800 West
Loop South Office Property;
o a decrease of $4.5 million, net of minority interest, due to the
gain on the sale of one Office Property in the first quarter of
2002;
o a decrease of $2.2 million due to net operating income in 2002
from seven Office Properties and two transportation companies
sold during 2002;
o a decrease of $1.0 million, net of $0.2 million minority
interest, due to the impairment in 2003 on the North Dallas
Athletic Club, a building located adjacent to the Stanford
Corporate Centre Office Property; partially offset by
38
o an increase of $1.4 million due to the write-off of goodwill for
two transportation companies sold in 2002.
RESIDENTIAL DEVELOPMENT PROPERTIES
The following provides a comparison of the results of operations of the
Residential Development Properties for the three months ended March 31, 2003 and
2002.
For three months ended March 31,
------------------------------------------------
(in thousands) 2003 2002 Variance
- -------------- ------------ ------------ ------------
Operating revenues $ 35,365 $ 38,750
Operating expenses (32,929) (36,818)
Depreciation and amortization (2,722) (948)
Equity in net income of
unconsolidated companies 970 12,483
Income tax benefit (provision) 1,899 (898)
Minority interests 847 (435)
Discontinued operations -- 419
------------ ------------ ------------
Net Income $ 3,430 $ 12,553 $ (9,123)
============ ============ ============
Net income for the Residential Development Properties decreased $9.1
million, or 72.7%, to $3.4 million, primarily due to:
o a decrease of approximately $6.0 million as a result of gains
recognized on the disposition of two properties at the Woodlands in
2002;
o a decrease of approximately $3.1 million due to lower lot, unit and
acreage sales at Desert Mountain, CRDI and the Woodlands in 2003;
o a decrease of $1.9 million due to the sale of two transportation
companies in December 2002 by CRDI; partially offset by
o $1.4 million goodwill impairment at CRDI in 2002 resulting from the
adoption of Statement of Financial Accounting Standards No. 142.
RESORT/HOTEL PROPERTIES
The following provides a comparison of the results of operations of the
Resort/Hotel Properties for the three months ended March 31, 2003 and 2002.
For three months ended March 31,
------------------------------------------------
(in thousands) 2003 2002 Variance
- -------------- ------------ ------------ ------------
Lease revenues $ 1,369 $ 7,243
Operating revenues 62,352 31,281
Operating expenses (49,740) (23,890)
------------ ------------ ------------
Net Operating Income $ 13,981 $ 14,634 $ (653)
============ ============ ============
The net operating income for the Resort/Hotel Properties decreased $0.7
million, or 4.5%, to $14.0 million, primarily due to:
o a decrease of $1.5 million from the resort properties due to a 4 point
decline in occupancy (from 75% to 71%) and a 2.2% decline in revenue
per available room from $378 to $370; partially offset by
o an increase of $0.8 million from the business class hotel properties
due to a 10 point increase in occupancy (from 65% to 75%) and a 15.8%
increase in revenue per available room from $76 to $88.
39
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE THREE
MONTHS ENDED
MARCH 31,
(in millions) 2003
-------------- -------------
Cash used in Operating Activities $ (20.2)
Cash provided by Investing Activities 11.4
Cash provided by Financing Activities 6.2
------------
Decrease in Cash and Cash
Equivalents $ (2.6)
Cash and Cash Equivalents, Beginning of
Period 78.4
------------
Cash and Cash Equivalents, End of Period $ 75.8
============
OPERATING ACTIVITIES
The Company's cash used in operating activities of $20.2 million is
attributable to Property operations.
INVESTING ACTIVITIES
The Company's cash provided by investing activities of $11.4 million is
primarily attributable to:
o $16.7 million resulting from a decrease in notes receivable,
primarily due to payment on a short-term seller financing
note attributable to the sale of two Office Properties in
The Woodlands;
o $11.4 million in cash resulting from the consolidation of
entities;
o $5.0 million from return of investments in SunTx, a private
equity fund, and Office Properties; and
o $1.1 million of proceeds from property sales.
The cash provided by investing activities is partially offset by:
o $12.5 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
o $4.6 million for property improvements for rental
properties, primarily attributable to non-recoverable
building improvements for the Office Properties and
replacement of furniture, fixtures and equipment for the
Resort/Hotel Properties;
o $2.0 million for the acquisition of rental properties;
o $1.9 million of additional investment in unconsolidated
companies, consisting primarily of investments in the
Residential Development Properties and in TCL;
o $1.3 million resulting from an increase in restricted cash,
due primarily to an increase in escrow deposits for capital
expenditures at the Company's Office Properties; and
o $0.5 million for development of investment properties.
FINANCING ACTIVITIES
The Company's cash provided by financing activities of $6.2 million is
attributable to:
o $136.0 million borrowings under the Company's credit
facility, which were used to pay off the Cigna Note and for
investment in Residential Development Properties and tenant
improvements, leasehold commissions and property
improvements for the Office Segment;
o $17.5 million of proceeds from borrowings for construction
costs for infrastructure development on Residential
Development Properties; and
o $10.0 million of proceeds from an increase in notes payable.
The cash provided by financing activities is partially offset by:
o $66.8 million decrease in notes payable, primarily resulting
from the payoff of the Cigna Note;
o $43.9 million for distributions to common shareholders and
unitholders;
40
o $20.7 million of Residential Development Property note
payments;
o $15.0 million of payments under the Company's credit
facility;
o $6.6 million of distributions to preferred shareholders;
o $3.5 million of net capital distributions to joint venture
partners; and
o $0.8 million for common shares purchased under a
compensation plan.
LIQUIDITY REQUIREMENTS
As of March 31, 2003, the Company had unfunded capital expenditures of
approximately $76.4 million relating to capital investments that are not in the
ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures and its
amounts funded as of March 31, 2003, and amounts remaining to be funded (future
fundings classified between short-term and long-term capital requirements):
CAPITAL EXPENDITURES
----------------------------
AMOUNT
TOTAL FUNDED AS OF AMOUNT SHORT-TERM
PROJECT MARCH 31, REMAINING (NEXT 12 LONG-TERM (12+
(in millions) PROJECT COST(1) 2003 TO FUND MONTHS)(2) MONTHS)(2)
- --------------------- ----------- ------------ ----------- ----------- --------------
OFFICE SEGMENT
Acquired or Developed Properties(3) $ 2.2 $ (0.6) $ 1.6 $ 1.6 $ --
The Park Shops Redevelopment(4) 15.0 (1.0) 14.0 11.8 2.2
RESIDENTIAL DEVELOPMENT SEGMENT(5)
Tahoe Mountain Properties & Club 85.3 (71.3) 14.0 14.0 --
Desert Mountain Golf Course and
Water Supply Pipeline 47.7 (33.1) 14.6 14.6 --
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land -
Construction Loan(6) 3.2 -- 3.2 1.6 1.6
Canyon Ranch - Lenox Aquatic Center 3.1 (2.5) 0.6 0.6 --
OTHER
SunTx(7) 19.0 (6.1) 12.9 4.0 8.9
Spinco(8) 15.5 -- 15.5 15.5 --
----------- ----------- ----------- ----------- -----------
TOTAL $ 191.0 $ (114.6) $ 76.4 $ 63.7 $ 12.7
=========== =========== =========== =========== ===========
- ----------
(1) All amounts are approximate.
(2) Reflects the Company's estimate of the breakdown between short-term and
long-term capital expenditures.
(3) The capital expenditures reflect the Company's ownership percentage in
the Property, 25% for 5 Houston Center and 30% for Five Post Oak Park
Office Properties.
(4) Located within the Houston Center Office Property complex.
(5) Represents capital expenditures for infrastructure and amenities. The
Tahoe Mountain Properties and Club project costs exclude costs for
projects in which the Company anticipates sales to occur over the next
18 months.
(6) The Company committed to fund a construction loan to the purchaser of
the land which will be secured by 20 developed lots and a $0.6 million
letter of credit.
(7) This commitment is related to the Company's investment in a private
equity fund.
(8) The Company expects to form and capitalize Spinco, which will be a
separate entity to be owned by the Company's shareholders and
unitholders, and to cause the new entity to commit to acquire COPI's
entire membership interest in AmeriCold Logistics.
41
The Company expects to fund its short-term capital requirements of
approximately $63.7 million through a combination of cash, construction
financing, net cash flow from operations, and borrowings under the Company's
credit facility. The Company plans to meet its maturing debt obligations through
December 31, 2003 of approximately $58.6 million, primarily through cash from
operations, return of capital investment from the Residential Development
Segment, construction loan refinancings, borrowings under the JP Morgan loan
sales facility and additional borrowings under the Company's credit facility.
The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, debt service
requirements, non-revenue enhancing capital expenditures and revenue enhancing
capital expenditures (such as property improvements, tenant improvement and
leasing costs), distributions to shareholders and unitholders, and unfunded
expenses related to the COPI bankruptcy, primarily through cash flow provided by
operating activities. To the extent that the Company's cash flow from operating
activities is not sufficient to finance such short-term liquidity requirements,
the Company expects to finance such requirements with borrowings under the
Company's credit facility.
The Company's long-term liquidity requirements as of March 31, 2003
consist primarily of debt maturities after December 31, 2003, which totaled
approximately $2.4 billion. The Company also has $12.7 million of long-term
capital expenditure requirements. The Company expects to meet these long-term
liquidity requirements primarily through long-term secured and unsecured
borrowings and other debt and equity financing alternatives as well as cash
proceeds received from the sale or joint venture of Properties and return of
capital investment from the Residential Development Segment.
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 Company's credit facility, under which the
Company has up to $99.8 million of borrowing capacity available as of
March 31, 2003;
o Additional proceeds from the refinancing of existing secured and
unsecured debt;
o Additional debt secured by existing underleveraged properties;
o Issuance of additional unsecured debt;
o Equity offerings including preferred and/or convertible securities; and
o Proceeds from joint ventures and Property sales.
The following factors could limit the Company's ability to utilize
these financing alternatives:
o The reduction in net operating income of the Properties supporting the
Company's credit facility to a level that would reduce the availability
under the credit facility;
o The Company may be unable to obtain debt or equity financing on
favorable terms, or at all, as a result of the financial condition of
the Company or market conditions at the time the Company seeks
additional financing;
o Restrictions on the Company's debt instruments or outstanding equity
may prohibit it from incurring debt or issuing equity on terms
available under then-prevailing market conditions or at all; and
o The Company may be unable to service additional or replacement debt due
to increases in interest rates and a decline in the Company's operating
performance.
42
GUARANTEE COMMITMENTS
The Company's guarantees in place as of March 31, 2003 are listed in
the table below.
Guaranteed Amount Maximum
Outstanding Guaranteed
at March 31, 2003 Amount
----------------- ------------
DEBTOR (in thousands)
- ------
Crescent 5 Houston Center, L.P.(1)(2) $ 65,470 $ 82,500
CRDI - Eagle Ranch Metropolitan District - Letter of
Credit(3) 15,197 15,197
Blue River Land Company, L.L.C.(1)(4) 5,358 6,300
Main Street Partners, L.P. - Letter of Credit(1)(5) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit(1)(6) 3,000 3,000
------------ ------------
Total Guarantees $ 93,275 $ 111,247
============ ============
- ----------
(1) See Note 6, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," in Item 1,
"Financial Statements," for a description of the terms of this debt.
(2) The Company provides a full guarantee of principal up to $82.5 million
for the construction loan on 5 Houston Center, which was completed in
2002. The guarantee amount reduces to $41.3 million upon achievement of
specified conditions, including specified tenants occupying space and
obtaining a certificate of occupancy; further reduction to $20.6
million upon achievement of 90% occupancy and 1.3x debt service
coverage.
(3) The Company provides a $15.2 million Letter of Credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan
District Revenue Development Bonds and Limited Tax Bonds.
(4) A fully consolidated entity of CRDI in which CRDI owns 88.3%, provides
a guarantee of up to 70% of the outstanding balance of the $9.0 million
loan to Blue River Land Company, L.L.C.
(5) The Company and its joint venture partner each provide a Letter of
Credit to guarantee $4.3 million of the principal repayment of the loan
to Main Street Partners, L.P.
(6) The Company and its joint venture partner each provide a $3.0 million
Letter of Credit to guarantee repayment of up to $3.0 million of
principal of the Manalapan Hotel Partners, L.L.C. debt with Corus Bank.
REIT QUALIFICATION
The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended and operates
in a manner intended to enable it to continue to qualify as a REIT. As a REIT,
the Company generally will not be subject to corporate federal income tax on
income that it currently distributes to its shareholders, provided that the
Company satisfies certain organizational and operational requirements of the
Code, including the requirement to distribute at least 90% of its REIT taxable
income to its shareholders.
43
DEBT FINANCING
DEBT FINANCING ARRANGEMENTS
The significant terms of the Company's primary debt financing
arrangements existing as of March 31, 2003, are shown below:
BALANCE INTEREST
OUTSTANDING AT RATE AT EXPECTED
MAXIMUM MARCH 31, MARCH 31, MATURITY PAYOFF
DESCRIPTION(1) BORROWINGS 2003 2003 DATE DATE
-------------- ------------ -------------- ------------ ---------------- ---------------
SECURED FIXED RATE DEBT: (dollars in thousands)
AEGON Partnership Note $ 263,961 $ 263,961 7.53% July 2009 July 2009
LaSalle Note I 237,264 237,264 7.83 August 2027 August 2007
JP Morgan Mortgage Note 194,497 194,497 8.31 October 2016 September 2006
LaSalle Note II 161,000 161,000 7.79 March 2028 March 2006
Northwestern Life Note 26,000 26,000 7.66 January 2004 January 2004
Nomura Funding VI Note 7,986 7,986 10.07 July 2020 July 2010
Mitchell Mortgage Note 1,743 1,743 7.00 September 2003 September 2003
Metropolitan Life Note V 37,977 37,977 8.49 December 2005 December 2005
Woodmen of the World Note 8,500 8,500 8.20 April 2009 April 2009
Construction, Acquisition and
other obligations for various April 2003 to April 2003 to
CRDI and MVDC projects 22,709 20,724 2.90 to 11.25 November 2007 November 2007
------------ ------------ -------------
Subtotal/Weighted Average $ 961,637 $ 959,652 7.83%
------------ ------------ -------------
UNSECURED FIXED RATE DEBT:
The 2009 Notes $ 375,000 $ 375,000 9.25% April 2009 April 2009
The 2007 Notes 250,000 250,000 7.50 September 2007 September 2007
------------ ------------ -------------
Subtotal/Weighted Average $ 625,000 $ 625,000 8.55%
------------ ------------ -------------
SECURED VARIABLE RATE DEBT:
Fleet Fund I and II Term Loan $ 275,000 $ 275,000 4.59% May 2005 May 2005
Deutsche Bank - CMBS Loan(2) 220,000 220,000 5.84 May 2004 May 2006
Construction, Acquisition and
other obligations for various April 2003 to April 2003 to
CRDI projects 58,623 33,020 3.84 to 5.25 December 2004 December 2004
National Bank of Arizona 50,000 36,621 4.43 December 2005 December 2005
------------ ------------ -------------
Subtotal/Weighted Average $ 603,623 $ 564,641 5.03%
------------ ------------ -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility(3) $ 400,000 $ 285,000(5) 3.20% May 2004 May 2005
JP Morgan Loan Sales Facility(4) 50,000 10,000 2.75 -- --
------------ ------------ -------------
Subtotal/Weighted Average $ 450,000 $ 295,000 3.18%
------------ ------------ -------------
TOTAL/WEIGHTED AVERAGE $ 2,640,260 $ 2,444,293 6.80%(6)
============ ============ =============
AVERAGE REMAINING TERM 7.3 years 3.7 years
- ----------
(1) For more information regarding the terms of the Company's debt
financing arrangements, including the amounts payable at maturity for
non-amortizing loans, properties securing the Company's secured debt
and the method of calculation of the interest rate for the Company's
variable rate debt, see Note 7, "Notes Payable and Borrowings under the
Credit Facility," included in Item 1, "Financial Statements."
(2) This loan has two one-year extension options.
(3) This facility has a one-year extension option.
(4) This is an uncommitted facility.
(5) The outstanding balance excludes Letters of Credit issued under the
facility of $15.2 million.
(6) The overall weighted average interest rate does not include the effect
of the Company's cash flow hedge agreements. Including the effect of
these agreements, the overall weighted average interest rate would have
been 7.16%.
Any uncured or unwaived events of default under the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, an event
of default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in an event of
default under the credit facility and the Fleet Fund I and II Term Loan after
the notice and cure periods for the other indebtedness have passed. As of March
31, 2003, no event of default had occurred, and the Company was in compliance
with all of its debt service coverage ratios and other covenants related to its
outstanding debt. The Company's debt facilities generally prohibit loan
pre-payment for an initial period, allow pre-payment with a penalty during a
following specified period and allow pre-payment without penalty after the
expiration of that period. During the three months ended March 31, 2003, there
were no circumstances that required pre-payment penalties or increased
collateral related to the Company's existing debt.
44
The following table shows information about the Company's consolidated
fixed and variable rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT(1) RATE MATURITY
- ------------------ ------------ ------------ ------------ ----------------
Fixed Rate Debt $ 1,584,652 65% 8.1% 11.2 years
Variable Rate Debt 859,641 35 4.1 1.4 years
------------ ------------ ------------ --------------
Total Debt $ 2,444,293 100% 6.8%(2) 7.3 years(3)
============ ============ ============ ==============
- ----------
(1) Balance excludes hedges. The percentages for fixed rate debt and
variable rate debt, including the $508.4 million of hedged variable
rate debt, are 86% and 14%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted
average interest rate would have been 7.16%.
(3) Based on contractual maturities. The overall weighted average maturity
is 3.7 years based on the Company's expected payoff dates.
Listed below are the aggregate principal payments by year required as
of March 31, 2003 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL(1)
- -------------- ------------ ------------ -------------- ------------
2003(2) $ 48,583 $ 10,000 $ -- $ 58,583
2004 273,799 -- 285,000 558,799
2005 365,567 -- -- 365,567
2006 18,359 -- -- 18,359
2007 26,382 250,000 -- 276,382
Thereafter 791,603 375,000 -- 1,166,603
------------ ------------ ------------ ------------
$ 1,524,293 $ 635,000 $ 285,000 $ 2,444,293
============ ============ ============ ============
- ----------
(1) These amounts do not reflect the effect of a one-year extension option
on the credit facility and two one-year extension options on the
Deutsche Bank - CMBS Loan.
(2) On March 31, 2003, the Company paid the $63.5 million Cigna Note in
full with funds from a draw under the Company's credit facility.
The Company's policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of the following:
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; variable or
fixed);
o the effect of additional debt on existing covenant 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's objective in using derivatives is to add stability to
interest expense and to manage its exposure to interest rate movements or other
identified risks. Derivative financial instruments are used to convert a portion
of the Company's variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. To accomplish this objective, the Company primarily
uses interest rate swaps as part of its cash flow hedging strategy. Interest
rate swaps designated as cash flow hedges involve the payment of fixed rate
amounts in exchange for variable rate payments over the life of the agreements
without exchange of the underlying principal amount. For the three months ended
March 31, 2003, such derivatives were used to hedge the variable cash flows
associated with existing variable rate debt.
45
The following table shows information regarding the Company's cash flow
hedge agreements during the three months ended March 31, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").
EFFECTIVE NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
DATE(1) AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- -------------- ------------ ------------ ------------ ------------ ---------------- ----------------
(in thousands)
9/01/99 $ 200,000 9/02/03 6.18% $ (5,002) $ 2,393 $ 2,285
5/15/01 200,000 2/03/03 7.11% -- 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (6,045) 1,351 1,048
2/15/03 100,000 2/15/06 3.25% (3,197) 242 (679)
2/15/03 100,000 2/15/06 3.26% (3,204) 242 (678)
9/02/03 200,000 9/01/06 3.72% (6,571) -- (1,873)
------------ ------------ ------------
$ (24,019) $ 5,276 $ 1,160
============ ============ ============
- ----------
(1) During 2002, the Company entered into agreements for three cash flow
hedges, two of which were effective in the first quarter of 2003, and
one of which will be effective in the third quarter of 2003. These
three cash flow hedges replace two of the Company's existing cash flow
hedges.
CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt.
The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest thereon as of March 31, 2003.
Unlike the additional interest on the Company's cash flow hedges, which was
expensed, the additional interest on CRDI's cash flow hedges was capitalized, as
it is related to debt incurred for projects that are currently under
development. Also presented are the unrealized gains in OCI for the three months
ended March 31, 2003.
ADDITIONAL
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
DATE AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- -------------- ------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
9/4/01 $ 4,650 9/4/03 4.12% $ (69) $ 33 $ 32
9/4/01 $ 3,700 9/4/03 4.12% (54) 25 24
------------ ------------ ------------
$ (123) $ 58 $ 56
============ ============ ============
RECENT DEVELOPMENTS
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of March 31, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale and the
North Dallas Athletic Club, a building located adjacent to the Stanford
Corporate Centre Office Property in the Far North Dallas submarket in Dallas,
Texas, was held for sale. The Company recognized, as of March 31, 2003, an
approximately $12.7 million impairment, net of minority interests, on the 1800
West Loop South Office Property and an approximately $1.0 million impairment,
net of minority interests, on the North Dallas Athletic Club.
SALE OF PROPERTY
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Company sold one behavioral healthcare
property for $2.0 million, consisting of $1.3 million in cash and a $0.7 million
note receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.6 million impairment charge had been recognized
during 2002 related to this property.
46
DBL HOLDINGS, INC. ("DBL")
Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2 Opportunity Fund, L.P. ("G2"). G2 was formed for the
purpose of investing in commercial mortgage backed securities and other
commercial real estate investments and is managed and controlled by an entity
that is owned equally by Goff-Moore Strategic Partners, L.P. ("GMSP") and
GMACCM. The ownership structure of GMSP consists of an approximately 86% limited
partnership interest owned directly and indirectly by Richard Rainwater,
Chairman of the Board of Trust Managers of the Company, and an approximately 14%
general partnership interest, of which approximately 6% is owned by Darla Moore,
who is married to Mr. Rainwater, and approximately 6% is owned by John Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At March 31, 2003, DBL
had an approximately $13.6 million investment in G2.
On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL Holdings, Inc. from Mr.
Goff. Total consideration paid for Mr. Goff's interest was $0.4 million. The
Board of Trust Managers of the Company, including all the independent trust
managers, approved the transaction based in part on an appraisal of the assets
of DBL by an independent appraisal firm. As a result of this transaction, DBL is
wholly-owned by the Company and is consolidated in the Residential Development
Segment as of and for the three months ended March 31, 2003. Also, because DBL
owns a majority of the voting stock in MVDC and HADC, the Company has
consolidated these two Residential Development Corporations as of and for the
three months ended March 31, 2003.
UNCONSOLIDATED INVESTMENTS
INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. The Company does not have control of
these joint ventures, and therefore, these investments are accounted for using
the equity method of accounting.
The Company has other unconsolidated equity investments with interests
ranging from 12.5% to 65%. The Company does not have control of these
investments due to ownership interests of 50% or less or the ownership of
non-voting interests only, and therefore, these investments also are accounted
for using the equity method of accounting.
47
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of March 31, 2003.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF MARCH 31, 2003
------ -------------- --------------------
Joint Ventures
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0%(1)
Crescent Miami Center L.L.C. Office (Miami Center-Miami) 40.0%(2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0%(3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0%(4)
Houston PT Four Westlake Park Office Limited Partnership Office (Four Westlake Park-Houston) 20.0%(4)
Houston PT Three Westlake Park Office Limited Partnership Office (Three Westlake Park-Houston) 20.0%(4)
Crescent Five Post Oak Park Limited Partnership Office (Five Post Oak-Houston) 30.0%(5)
Equity Investments
The Woodlands Land Development Company, L.P. Residential Development 42.5%(6)(7)
Blue River Land Company, L.L.C. Residential Development 50.0%(8)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0%(9)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0%(10)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0%(11)
The Woodlands Commercial Properties Company, L.P. Office 42.5%(6)(7)
CR License, L.L.C. Other 30.0%(12)
The Woodlands Operating Company, L.P. Other 42.5%(6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0%(13)
SunTx Fulcrum Fund, L.P. Other 27.8%(14)
G2 Opportunity Fund, L.P. Other 12.5%(15)
- ----------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by
an affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned
by a pension fund advised by JP Morgan Fleming Asset Management, Inc.
(4) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Park Office Limited
Partnership and Houston PT Four Westlake Park Office Limited Partnership
is owned by an affiliate of General Electric Pension Trust.
(5) The remaining 70% interest in Crescent Five Post Oak Park Limited
Partnership is owned by an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the Woodlands Land Development
Company, L.P. ("WLDC"), The Woodlands Commercial Properties Company, L.P.
and The Woodlands Operating Company, L.P. is owned by an affiliate of
Morgan Stanley.
(7) Distributions are made to partners based on specified payout percentages.
During the three months ended March 31, 2003, the payout percentage to the
Company was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.
(9) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C.
(10) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(11) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(12) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Company's Resort/Hotel Properties.
(13) The remaining 35% interest in Canyon Ranch Las Vegas, L.L.C. is owned by
an affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(14) The SunTx Fulcrum Fund, L.P.'s (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 72.2% of the Fund is owned by a group of
individuals unrelated to the Company. The Company's ownership percentage
will decline by the closing date of the Fund as capital commitments from
third parties are secured. The Company's projected ownership interest at
the closing of the Fund is approximately 7.5% based on the Fund manager's
expectations for the final Fund capitalization. The Company accounts for
its investment in the Fund under the cost method. The Company's investment
at March 31, 2003 was $6.1 million.
(15) G2 Opportunity Fund, L.P. ("G2") was formed for the purpose of investing
in commercial mortgage backed securities and other commercial real estate
investments. Goff-Moore Strategic Partners, L.P. ("GMSP") and GMAC
Commercial Mortgage Corporation ("GMACCM") each own 21.875% of G2, with
the remaining 43.75% owned by parties unrelated to the Company. See
Note 13, "Related Party Transactions," in Item 1, "Financial Statements,"
for information regarding the ownership interests of trust managers and
officers of the Company in GMSP.
48
UNCONSOLIDATED DEBT ANALYSIS
The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of March 31, 2003 are shown below.
BALANCE COMPANY'S SHARE
OUTSTANDING AT OF BALANCE AT INTEREST RATE AT
DESCRIPTION MARCH 31, 2003 MARCH 31, 2003 MARCH 31, 2003
- ----------- -------------- --------------- ----------------
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Company
Goldman Sachs (1) 505,008 202,003 6.89%
Various Mortgage Notes 28,931 11,572 4.25 to 12.88%
Various Capital Leases 37,401 14,961 7.00 to 13.63%
--------------- --------------
571,340 228,536
--------------- --------------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Company (2)(3)(4) 132,295 66,147 5.62%
Crescent 5 Houston Center, L.P. - 25% Company (5) 65,470 16,368 3.60%
Austin PT Bk One Tower Office Limited Partnership - 20% Company 37,774 7,555 7.13%
Houston PT Four Westlake Park Office Limited Partnership - 20% Company 48,567 9,713 7.13%
Houston PT Three Westlake Park Office Limited Partnership - 20% Company 33,000 6,600 5.61%
Crescent Miami Center, LLC - 40% Company 81,000 32,400 5.04%
Crescent Five Post Oak Park, L.P. - 30% Company 45,000 13,500 4.82%
The Woodlands Commercial Properties Co. (Woodlands CPC) - 42.5% Company
Fleet National Bank credit facility 55,000 23,375 4.38%
Fleet National Bank (3)(6) 3,208 1,363 3.34%
Various Mortgage Notes 7,956 3,381 6.30 to 7.50%
--------------- --------------
509,270 180,402
--------------- --------------
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. (WLDC) - 42.5% Company:
Fleet National Bank credit facility 230,000 97,750 4.38%
Fleet National Bank (3)(6) 6,581 2,797 3.34%
Fleet National Bank (7) 36,611 15,560 4.09%
Jack Eckerd Corp. 101 43 4.25%
Various Mortgage Notes 14,922 6,343 4.25 to 6.25%
Blue River Land Company, L.L.C.- 50% Company(8) 7,654 3,827 4.34%
--------------- --------------
295,869 126,320
--------------- --------------
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Company
Corus Bank (3)(9) 56,000 28,000 5.35%
--------------- --------------
TOTAL UNCONSOLIDATED DEBT $ 1,432,479 $ 563,258
=============== ==============
FIXED RATE/WEIGHTED AVERAGE 6.85%
VARIABLE RATE/WEIGHTED AVERAGE 4.72%
--------------
TOTAL WEIGHTED AVERAGE 5.89%
--------------
MATURITY FIXED/VARIABLE
DESCRIPTION DATE SECURED/UNSECURED
- ----------- ----------------- -----------------
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Company
Goldman Sachs (1) 5/11/2023 Fixed/Secured
Various Mortgage Notes 7/30/2003 to 4/1/2009 Fixed/Secured
Various Capital Leases 6/1/2006 to 2/12/2016 Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Company (2)(3)(4) 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P. - 25% Company (5) 5/31/2004 Variable/Secured
Austin PT Bk One Tower Office Limited Partnership - 20% Company 8/1/2006 Fixed/Secured
Houston PT Four Westlake Park Office Limited Partnership - 20% Company 8/1/2006 Fixed/Secured
Houston PT Three Westlake Park Office Limited Partnership - 20% Company 9/1/2007 Fixed/Secured
Crescent Miami Center, LLC - 40% Company 9/25/2007 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% Company 1/1/2008 Fixed/Secured
The Woodlands Commercial Properties Co. (Woodlands CPC) - 42.5% Company
Fleet National Bank credit facility 11/27/2005 Variable/Secured
Fleet National Bank (3)(6) 10/31/2003 Variable/Secured
Various Mortgage Notes 11/1/2021 to 12/2/2024 Fixed/Secured
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. (WLDC) - 42.5% Company:
Fleet National Bank credit facility 11/27/2005 Variable/Secured
Fleet National Bank (3)(6) 10/31/2003 Variable/Secured
Fleet National Bank (7) 12/31/2005 Variable/Secured
Jack Eckerd Corp. 12/31/2008 Variable/Secured
Various Mortgage Notes 7/1/2005 to 12/31/2008 Fixed/Secured
Blue River Land Company, L.L.C.- 50% Company(8) 6/30/2004 Variable/Secured
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Company
Corus Bank (3)(9) 10/21/2005 Variable/Secured
TOTAL UNCONSOLIDATED DEBT
FIXED RATE/WEIGHTED AVERAGE 15.3 years
VARIABLE RATE/WEIGHTED AVERAGE 2.3 years
-----------------
TOTAL WEIGHTED AVERAGE 9.4 years(10)
-----------------
- ----------
(1) The Temperature-Controlled Logistics Corporation expects to repay this
note on the Optional Prepayment Date of April 11, 2008.
(2) Senior Note - Note A: $83.3 million at variable interest rate, LIBOR +
189 basis points, $4.9 million at variable interest rate, LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $24.5 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.6 million at variable interest rate, LIBOR
+ 890 basis points with a LIBOR floor of 3.0%. Interest-rate cap
agreement maximum LIBOR of 4.52% on all notes. All notes amortized
based on a 25-year schedule.
(3) This Facility has two one-year extension options.
(4) The Company and its joint venture partner each obtained a Letter of
Credit to guarantee the repayment of up to $4.3 million of principal of
the Main Street Partners, L.P. loan.
(5) The Company provides a full and unconditional guarantee of this loan
for the construction of 5 Houston Center. The guarantee amount reduces
to $41.3 million upon achievement of specified conditions, including
specified customers occupying space and obtaining a certificate of
occupancy; further reduction to $20.6 million upon achievement of 90%
occupancy and a 1.3x debt service coverage.
(6) Woodlands CPC and WLDC entered into an Interest Rate Cap Agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.
(7) WLDC entered into an Interest Rate Cap Agreement which limits interest
rate exposure on the notional amount of $19.5 million to a maximum
LIBOR rate of 8.5%.
(8) The variable rate loan has an interest rate of LIBOR + 3%. A fully
consolidated entity of CRDI, in which CRDI owns 88.3%, provides a
guarantee of up to 70% of the outstanding balance of the $9.0 million
loan to Blue River Land Company, L.L.C. There was approximately $7.7
million outstanding at March 31, 2003 and the guarantee was $5.4
million.
(9) The Company and its joint venture partner each obtained a Letter of
Credit to guarantee repayment of up to $3.0 million of this facility.
(10) The overall weighted average maturity would be 4.3 years if all
extensions and prepayment options were exercised.
49
The following table shows, as of March 31, 2003, information about the
Company's share of unconsolidated fixed and variable rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.
PERCENTAGE WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT AVERAGE RATE MATURITY(1)
- ------------------ ------------ ------------ ------------ ----------------
Fixed Rate Debt $ 308,028 54.69% 6.85% 15.3 years
Variable Rate Debt 255,230 45.31% 4.72% 2.3 years
------------ ------------ ------------ ------------
Total Debt $ 563,258 100.00% 5.89% 9.4 years
============ ============ ============ ============
- ----------
(1) Based on contractual maturities. The overall weighted average maturity
would be 4.3 years assuming the election of extension options on debt
instruments and expected repayment of a note on the optional prepayment
date.
Listed below is the Company's share of aggregate principal payments, by
year, required as of March 31, 2003 related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are included.
SECURED
(in thousands) DEBT(1)
-------------- ------------
2003 $ 18,534
2004 97,059
2005 151,744
2006 17,486
2007 41,151
Thereafter 237,284
------------
$ 563,258
============
- ----------
(1) These amounts do not reflect the effect of extension options.
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of March 31, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 14,
"COPI," for information on the proposed acquisition of COPI's 40% interest in
AmeriCold Logistics by a new entity to be owned by the Company's shareholders.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000) and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 7, 2003, the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.
AmeriCold Logistics deferred $5.6 million of the total $37.0 million of
rent payable for the three months ended March 31, 2003. The Company's share of
the deferred rent was $2.2 million. The Company recognizes rental income from
the Temperature-Controlled Logistics Properties when earned and collected and
has not recognized the $2.2 million of deferred rent in equity in net income of
the Temperature-Controlled Logistics Properties for the three months ended March
31, 2003. As of March 31, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $47.9 million and $39.8 million, respectively, of which the Company's
portions were $19.2 million and $15.9 million, respectively.
50
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C. ("VCQ")
As of March 31, 2003, the Company held a 56% interest in Vornado
Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). The assets of VCQ include two
quarries and the related land. The Company accounts for this investment as an
unconsolidated equity investment because the Company does not control the joint
venture.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.
On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. As of
May 5, 2003, the receivables were collected.
SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, and contingencies as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company evaluates its assumptions and estimates on an
ongoing basis. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities where that information is available
from other sources. Certain estimates are particularly sensitive due to their
significance to the financial statements. Actual results may differ
significantly from management's estimates. The Company believes that the most
significant accounting policies that involve the use estimates and assumptions
as to future uncertainties and, therefore, may result in actual amounts that
differ from estimates are the following:
o Valuation for impairment of the Company's assets and investments,
o Relative Fair Value Method/Cost of Sales (Residential Development
entities),
o Capitalization of Interest (Residential Development entities), and
o Allowance for doubtful accounts.
IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company records assets held for sale at the lower of
carrying value or sales price less costs to sell. For assets classified as held
and used, these assets are tested for recoverability when events or changes in
circumstances indicate that the estimated carrying amount may not be
recoverable. An impairment loss is recognized when expected undiscounted future
cash flows from a Property is less than the carrying value of the Property. The
Company's estimates of cash flows of the Properties requires the Company to make
assumptions related to future rental rates, occupancies, operating expenses, the
ability of the Company's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Company's Properties.
Any changes in estimated future cash flows due to changes in the Company's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.
If events or circumstances indicate that the fair value of an
investment accounted for using the equity or cost method has declined below its
carrying value and the Company considers the decline to be "other than
temporary," the investment is written down to fair value and an impairment loss
is recognized. The evaluation of impairment for an investment would be based on
a number of factors, including financial condition and operating results for the
investment, inability to remain in compliance with provisions of any related
debt agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.
RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company
recognizes earnings from the sale of Residential Development Properties when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. The cost of residential property sold is defined based
on the type of product being purchased. The cost of sales for residential lots
is generally determined as a specific percentage of the sales revenues
recognized for each Residential Development project. The percentages are based
on total estimated development costs and sales revenue for each Residential
Development project. These estimates are revised annually and are based on the
then-current development strategy and operating assumptions utilizing internally
developed projections for product type, revenue and related development costs.
The cost of sale
51
for residential units (such as townhomes and condominiums) is determined using
the relative sales value method. If the residential unit has been sold prior to
the completion of infrastructure cost, and those uncompleted costs are not
significant in relation to total costs; the full accrual method is utilized.
Under this method, 100% of the revenue is recognized and a commitment liability
is established to reflect the allocated estimated future costs to complete the
residential unit. If the Company's estimates of costs or the percentage of
completion is incorrect; it could result in either an increase or decrease in
cost of sales expense or revenue recognized and therefore, an increase or
decrease in net income.
CAPITALIZATION OF INTEREST. The Company commences capitalization of
interest when development activities and expenditures begin and ceases to
capitalize interest upon "completion," which is defined as the time when the
asset is ready for its intended use. The Company uses judgment in determining
the time period over which to capitalize such interest and these assumptions
have a direct impact on net income because capitalized costs are not subtracted
in calculating net income. If the time period is extended, more interest is
capitalized, thereby increasing net income.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable
balance is reduced by an allowance for amounts that may become uncollectible in
the future. The Company's receivable balance is composed primarily of rents and
operating cost recoveries due from its tenants. The Company also maintains an
allowance for deferred rent receivables which arise from the straight-lining of
rents. The allowance for doubtful accounts is reviewed at least quarterly for
adequacy by reviewing such factors as the credit quality of the Company's
tenants, any delinquency in payment, historical trends and current economic
conditions. If the assumptions regarding the collectibility of accounts
receivable prove incorrect, the Company could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.
ADOPTION OF NEW ACCOUNTING STANDARDS
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 145. In April
2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145,
"Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." SFAS No. 145 requires the reporting of gains and
losses from early extinguishment of debt be included in the determination of net
income unless criteria in Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations," which allows for extraordinary item classification,
are met. The provisions of this Statement related to the rescission of Statement
No. 4 are to be applied in fiscal years beginning after May 15, 2002. The
Company adopted this Statement for fiscal 2003 and expects no impact in 2003
beyond the classification of costs related to early extinguishments of debt,
which were shown in the Company's 2001 Consolidated Statements of Operations as
an extraordinary item.
SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," effective
for fiscal years ending after December 15, 2002, to amend the transition and
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In addition to the prospective transition method of accounting
for Stock-Based Employee Compensation using the fair value method provided in
SFAS No. 123, SFAS No. 148 permits two additional transition methods, both of
which avoid the ramp-up effect arising from prospective application of the fair
value method. The Retroactive Restatement Method requires companies to restate
all periods presented to reflect the Stock-Based Employee Compensation under the
fair value method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. The Modified Prospective Method
requires companies to recognize Stock-Based Employee Compensation from the
beginning of the fiscal year in which the recognition provisions are first
applied as if the fair value method in SFAS No. 123 had been used to account for
employee awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. Also, in the absence of a single accounting method for
Stock-Based Employee Compensation, SFAS No. 148 expands disclosure requirements
from those existing in SFAS No. 123, and requires disclosure of whether, when,
and how an entity adopted the preferable, fair value method of accounting.
Effective January 1, 2003, the Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. As the Company did not
grant any stock options in the three months ended March 31, 2003, there was no
impact of this adoption to the financial statements. With respect to the
Company's stock options which were granted prior to 2003, the Company accounted
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25"). Under APB No. 25,
compensation cost is measured as the excess, if any, of the quoted market price
of the Company's common shares at the date of grant over the exercise price of
the option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. During the three months ended March 31, 2003,
no compensation cost was recognized for grants of stock options made prior to
2003 under the Company stock option plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. 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:
52
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(in thousands, except per share amounts) 2003 2002
- ---------------------------------------- ------------ ------------
Net (loss) income available to common
shareholders, as reported $ (19,330) $ 10,586
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (838) (980)
Pro forma net (loss) income $ (20,168) $ 9,606
(Loss) Earnings per share:
Basic - as reported $ (0.19) $ 0.10
Basic - pro forma $ (0.20) $ 0.09
Diluted - as reported $ (0.19) $ 0.10
Diluted - pro forma $ (0.20) $ 0.09
FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued and liability-recognition requirements for a guarantor of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 9, "Commitments and Contingencies" in Item 1, "Financial Information," for
disclosure of the Company's guarantees at March 31, 2003. The Company adopted
FIN 45 effective January 1, 2003. The Company has not entered into additional
debt guarantees during the three months ended March 31, 2003.
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs in
the first fiscal year or interim period beginning after June 15, 2003. VIEs are
generally a legal structure used for business enterprises that either do not
have equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of another entity such as a VIE. FIN 46 requires a VIE to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIEs activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIE was
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the variable interest entity; and, (b) the
enterprise's maximum exposure to loss as a result of its involvement with the
VIE. FIN 46 may be applied prospectively with a cumulative effect adjustment as
of the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative effect adjustment
as of the beginning of the first year restated. The Company is assessing the
impact of this Interpretation, if any, on its existing entities and does not
believe the impact will be significant on its liquidity, financial position, and
results of operations. The Company did not create any VIEs subsequent to January
31, 2003.
FUNDS FROM OPERATIONS
FFO, as used in this document, means:
o Net Income (Loss) - determined in conformity with GAAP;
o excluding gains (losses) from sales of depreciable operating
property;
o excluding extraordinary items (as defined by GAAP);
o including depreciation and amortization of real estate assets;
and
o after adjusting for unconsolidated partnerships and joint
ventures.
The National Association of Real Estate Investment Trusts ("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 investment
segments. However, FFO should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the Company's operating
performance.
53
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 three months ended March 31, 2003 and 2002 were $43.8 million, and $49.7
million, respectively. The Company reported FFO of $41.4 million and $64.1
million for the three months ended March 31, 2003 and 2002, 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 90% 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 and cash
flows reported in the consolidated financial statements and notes to the
consolidated 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.
54
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
(in thousands)
Net (loss) income $ (12,755) $ 13,961
Adjustments to reconcile net (loss) income to
funds from operations:
Depreciation and amortization of real estate assets 36,301 32,139
Loss (gain) on property sales, net 226 (2,796)
Cumulative effect of a change in accounting principle -- 9,172
Impairment and other adjustments related to
real estate assets and assets held for sale 17,028 600
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office Properties 2,822 2,162
Resort/Hotel Properties 394 --
Residential Development Properties 739 903
Temperature-Controlled Logistics Properties 5,510 5,711
Other 22 2,646
Unitholder minority interest (2,295) 3,004
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
------------ ------------
Funds from operations(1) $ 41,417 $ 64,127
============ ============
Investment Segments:
Office Segment $ 72,260 $ 80,572
Resort/Hotel Segment 15,631 20,910
Residential Development Segment 5,288 15,561
Temperature-Controlled Logistics Segment 7,017 5,401
Other:
Corporate general and administrative (6,415) (6,392)
Corporate and other adjustments:
Interest expense (43,233) (42,272)
Series A Preferred Share distributions (4,556) (3,375)
Series B Preferred Share distributions (2,019) --
Other(2) (2,556) (6,278)
------------ ------------
Funds from operations(1) $ 41,417 $ 64,127
============ ============
Basic weighted average shares 99,218 104,938
============ ============
Diluted weighted average shares and units(3) 116,974 118,633
============ ============
- ----------
(1) To calculate basic funds from operations, deduct unitholder minority
interest.
(2) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMACCM in 2002, other unconsolidated companies,
less depreciation and amortization of non-real estate assets and
amortization of deferred financing costs and other expenses.
(3) See calculations for the amounts presented in the reconciliation following
this table.
55
The following schedule reconciles the Company's basic weighted average
shares to the diluted weighted average shares/units presented above:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
(shares/units in thousands) 2003 2002
- ---------------------------------------- ------------ ------------
Basic weighted average shares: 99,218 104,938
Add: Weighted average units 17,752 13,185
Share and unit options 4 510
------------ ------------
Diluted weighted average shares and
units 116,974 118,633
============ ============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH FLOW HEDGES
No material changes in the Company's market risk occurred from December
31, 2002 through March 31, 2003. Information regarding the Company's market risk
at December 31, 2002 is contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its Chief Financial and Accounting
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and its Chief
Financial and Accounting Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and its Chief Financial and
Accounting Officer concluded that the Company's disclosure controls and
procedures were effective.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2003, the Company issued an
aggregate of 6,596 common shares to holders of Operating partnership units in
exchange for 3,298 units. The issuances of common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). The Company has registered the resale
of such common shares under the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
(b) Reports on Form 8-K
Form 8-K dated May 6, 2003, furnished May 6, 2003, under Item
9 in accordance with interim guidance issued by the Securities and
Exchange Commission in release No. 33-8216, for the purpose of
reporting, under Item 12 - Results of Operations and Financial
Condition, the Company's 2003 first quarter earnings.
56
SIGNATURES
Pursuant to the requirements 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.
CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)
By /s/ John C. Goff
----------------------------------------------
John C. Goff
Date: May 7, 2003 Vice-Chairman of the Board and Chief
Executive Officer
By /s/ Jerry R. Crenshaw, Jr
----------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial Officer
Date: May 7, 2003 (Principal Financial and Accounting
Officer)
57
CERTIFICATIONS
I, John C. Goff, the Chief Executive Officer of Crescent Real Estate
Equities Company, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crescent Real
Estate Equities Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trust managers (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ John C. Goff
-----------------------------------
Name: John C. Goff
Title: Chief Executive Officer
58
CERTIFICATIONS
I, Jerry R. Crenshaw, Jr., the Executive Vice President and Chief Financial
and Accounting Officer of Crescent Real Estate Equities Company, hereby certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Crescent Real
Estate Equities Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee registrant's board of trust managers (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Jerry R. Crenshaw, Jr.
--------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President, Chief Financial
and Accounting Officer
59
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.01 Restated Declaration of Trust of Crescent Real Estate
Equities Company, as amended (filed as Exhibit No.
3.01 to the Registrant's Current Report on Form 8-K
filed April 25, 2002 (the "April 2002 8-K") 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 quarter ended September 30, 1998 and
incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit
No. 4.03 to the Registrant's Registration Statement
on Form S-3 (File No. 333-21905) 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 dated February 13, 1998
(filed as Exhibit No. 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 6-3/4% Series A
Convertible Cumulative Preferred Shares of Crescent
Real Estate Equities Company dated April 25, 2002
(filed as Exhibit No. 4.1 to the April 2002 8-K and
incorporated herein by reference)
4.05 Statement of Designation of 9.50% Series B Cumulative
Redeemable Preferred Shares of Crescent Real Estate
Equities Company dated May 13, 2002 (filed as Exhibit
No. 2 to the Registrant's Form 8-A dated May 14, 2002
(the "Form 8-A") and incorporated herein by
reference)
4.06 Form of Certificate of 9.50% Series B Cumulative
Redeemable Preferred Shares of Crescent Real Estate
Equities Company (filed as Exhibit No. 4 to the Form
8-A and incorporated herein by reference)
*4 Pursuant to Regulation S-K Item 601 (b) (4) (iii),
the Registrant by this filing agrees, upon request,
to furnish to the Securities and Exchange Commission
a copy of other instruments defining the rights of
holders of long-term debt of the Registrant
10.01 Third Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Equities Limited
Partnership, dated as of January 2, 2003 (filed
herewith)
99.01 Certifications of Chief Executive Officer and Chief
Financial and Accounting Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
60