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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 JUNE 30, 2003
COMMISSION FILE NO. 333-42293
333-89194-01
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY *
-------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2531304
DELAWARE 42-1536518
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation 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 [ ]
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002
(audited).................................................................................................... 3
Consolidated Statements of Operations for the three and six months ended June
30, 2003 and 2002 (unaudited)................................................................................ 4
Consolidated Statement of Partners' Capital for the six months ended
June 30, 2003 (unaudited).................................................................................... 5
Consolidated Statements of Cash Flows for the six months ended June 30, 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................................................................................................ 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 61
Item 4. Controls and Procedures...................................................................................... 61
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................................. 61
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
JUNE 30, DECEMBER 31,
2003 2002
---------------- --------------
(UNAUDITED) (AUDITED)
ASSETS:
Investments in real estate:
Land $ 318,404 $ 304,319
Land held for investment or development 441,941 447,778
Building and improvements 2,933,203 2,903,244
Furniture, fixtures and equipment 120,693 115,198
Properties held for disposition, net 40,902 61,469
Less - accumulated depreciation (794,568) (733,172)
---------------- --------------
Net investment in real estate $ 3,060,575 $ 3,098,836
Cash and cash equivalents $ 66,208 $ 75,418
Restricted cash and cash equivalents 91,028 105,786
Accounts receivable, net 40,163 41,999
Deferred rent receivable 61,283 60,973
Investments in real estate mortgages and equity of
unconsolidated companies 542,956 562,643
Notes receivable, net 107,556 115,494
Income tax asset-current and deferred, net 50,322 39,709
Other assets, net 182,196 184,251
---------------- --------------
Total assets $ 4,202,287 $ 4,285,109
================ ==============
LIABILITIES:
Borrowings under Credit Facility $ 252,000 $ 164,000
Notes payable 2,212,751 2,218,910
Accounts payable, accrued expenses and other liabilities 328,171 373,020
---------------- --------------
Total liabilities $ 2,792,922 $ 2,755,930
---------------- --------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 38,822 $ 43,972
---------------- --------------
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference of $25.00 per unit,
10,800,000 units issued and outstanding
at June 30, 2003 and December 31, 2002 $ 248,160 $ 248,160
Series B Cumulative Preferred Units
liquidation preference of $25.00 per unit,
3,400,000 units issued and outstanding
at June 30, 2003 and December 31, 2002 81,923 81,923
Units of Partnership Interest, 58,459,048 and 58,484,396 issued
and outstanding at June 30, 2003 and December 31, 2002,
respectively:
General Partner - outstanding 584,590 and 584,844 10,950 12,097
Limited Partners - outstanding 57,874,458 and 57,899,552 1,056,751 1,170,279
Accumulated other comprehensive income (27,241) (27,252)
---------------- --------------
Total partners' capital $ 1,370,543 $ 1,485,207
---------------- --------------
Total liabilities and partners' capital $ 4,202,287 $ 4,285,109
================ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ -----------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE:
Office Property $ 127,334 $ 138,378 $ 256,068 $ 277,967
Resort/Hotel Property 51,632 53,523 115,353 92,047
Residential Development Property 54,207 83,480 89,572 126,541
----------- ----------- ---------- -----------
Total Property revenue 233,173 275,381 460,993 496,555
----------- ----------- ---------- -----------
EXPENSE:
Office Property real estate taxes 18,475 19,973 36,606 40,461
Office Property operating expenses 43,977 40,978 86,798 84,138
Resort/Hotel Property expense 42,658 42,212 92,399 66,102
Residential Development Property expense 47,831 74,327 80,760 113,678
----------- ----------- ---------- -----------
Total Property expense 152,941 177,490 296,563 304,379
----------- ----------- ---------- -----------
Income from Property Operations 80,232 97,891 164,430 192,176
----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 1,627 - 1,728 -
Interest and other income 1,185 7,268 2,853 14,918
Corporate general and administrative (6,185) (5,333) (12,600) (11,725)
Interest expense (43,073) (46,450) (86,306) (88,722)
Amortization of deferred financing costs (2,544) (2,701) (4,968) (5,021)
Depreciation and amortization (35,958) (34,444) (74,653) (67,084)
Impairment and other charges related
to real estate assets - (1,000) (1,200) (1,000)
Other expenses (368) - (495) -
Equity in net income (loss) of unconsolidated companies:
Office Properties 1,864 1,471 3,322 2,781
Resort/Hotel Properties 1,382 - 2,125 -
Residential Development Properties 1,540 6,179 2,510 18,662
Temperature-Controlled Logistics Properties (406) (417) 1,101 (727)
Other 214 (465) (815) (4,526)
----------- ----------- ---------- -----------
Total Other Income (Expense) (80,722) (75,892) (167,398) (142,444)
----------- ----------- ---------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES (490) 21,999 (2,968) 49,732
Minority interests (1,699) (3,433) (589) (8,229)
Income tax benefit (provision) 3,090 (874) 5,605 4,008
----------- ----------- ---------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 901 17,692 2,048 45,511
Discontinued operations - income (loss) on assets sold and held for sale 765 (662) 736 883
Discontinued operations - (loss) gain on assets sold and held for sale (1,038) 1,855 (17,206) 4,052
Cumulative effect of a change in accounting principle - - - (10,327)
----------- ----------- ---------- -----------
NET INCOME (LOSS) 628 18,885 (14,422) 40,119
Series A Preferred Unit distributions (4,556) (4,215) (9,112) (7,590)
Series B Preferred Unit distributions (2,019) (1,009) (4,038) (1,009)
----------- ----------- ---------- -----------
NET (LOSS) INCOME AVAILABLE TO PARTNERS $ (5,947) $ 13,661 $ (27,572) $ 31,520
=========== =========== ========== ===========
BASIC EARNINGS PER UNIT DATA:
Net (loss) income before discontinued operations and
cumulative effect of a change in accounting principle $ (0.09) $ 0.19 $ (0.19) $ 0.56
Discontinued operations - income (loss) on assets sold and held for sale 0.01 (0.01) 0.01 0.01
Discontinued operations - (loss) gain on assets sold and held for sale (0.02) 0.03 (0.29) 0.06
Cumulative effect of a change in accounting principle - - - (0.16)
----------- ----------- ---------- -----------
Net (loss) income available to partners - basic $ (0.10) $ 0.21 $ (0.47) $ 0.47
=========== =========== ========== ===========
DILUTED EARNINGS PER UNIT DATA:
Net (loss) income before discontinued operations and
cumulative effect of a change in accounting principle $ (0.09) $ 0.19 $ (0.19) $ 0.55
Discontinued operations - income (loss) on assets sold and held for sale 0.01 (0.01) 0.01 0.01
Discontinued operations - (loss) gain on assets sold and held for sale (0.02) 0.03 (0.29) 0.06
Cumulative effect of a change in accounting principle - - - (0.15)
----------- ----------- ---------- -----------
Net (loss) income available to partners - diluted $ (0.10) $ 0.21 $ (0.47) $ 0.47
=========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)
Accumulated
Preferred General Limited Other Total
Partners' Partners' Partners' Comprehensive Partners'
Capital Capital Capital Income Capital
--------- --------- ----------- ------------- -----------
PARTNERS' CAPITAL, December 31, 2002 $ 330,083 $ 12,097 $ 1,170,279 $ (27,252) $ 1,485,207
Contributions, Net - - (30) - (30)
Distributions - (871) (86,202) - (87,073)
Net (Loss) Income - (276) (27,296) - (27,572)
Unrealized and Realized Gain (Loss) on
Marketable Securities - - - 383 383
Unrealized Net Loss on Cash Flow Hedges - - - (372) (372)
--------- --------- ----------- ------------- -----------
PARTNERS' CAPITAL, June 30, 2003 $ 330,083 $ 10,950 $ 1,056,751 $ (27,241) $ 1,370,543
========= ========= =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (14,422) $ 40,119
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 79,621 72,105
Residential Development cost of sales 50,158 94,088
Residential Development capital expenditures (50,196) (49,981)
Discontinued operations 17,589 (813)
Impairment and other charges related to real estate assets 1,200 1,000
Income from investment land sales, net (1,728) -
Minority interests 589 8,228
Cumulative effect of change in accounting principle - 10,327
Non-cash compensation (30) 84
Distributions received in excess of earnings
from unconsolidated companies:
Office Properties 3,012 -
Other 1,217 -
Equity in (earnings) loss net of distributions received from
unconsolidated companies:
Office Properties - (373)
Resort/Hotel Properties (2,125) -
Residential Development Properties (2,463) (5,866)
Temperature-Controlled Logistics Properties (1,101) 727
Other - 5,522
Change in assets and liabilities, net of effects of DBL consolidation/COPI transaction:
Restricted cash and cash equivalents 17,487 13,992
Accounts receivable 4,510 11,347
Deferred rent receivable (310) (1,124)
Income tax asset-current and deferred (7,049) (15,887)
Other assets 4,073 10,644
Accounts payable, accrued expenses and
other liabilities (65,766) (69,840)
--------- ---------
Net cash provided by operating activities $ 34,266 $ 124,299
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction 11,374 38,226
Proceeds from property sales 6,428 20,381
Acquisition of rental properties (2,000) (8,410)
Development of investment properties (1,158) (1,178)
Property improvements - Office Properties (7,908) (7,757)
Property improvements - Resort/Hotel Properties (3,360) (10,230)
Tenant improvement and leasing costs - Office Properties (28,555) (18,028)
Residential Development Properties Investments (15,218) (7,269)
(Increase) Decrease in restricted cash and cash equivalents (2,729) 8,931
Return of investment in unconsolidated companies:
Office Properties 2,344 256
Residential Development Properties - 8,082
Temperature-Controlled Logistics Properties 3,201 -
Other 5,409 -
Investment in unconsolidated companies:
Office Properties (83) -
Residential Development Properties (1,691) (24,478)
Temperature-controlled logistics Properties (834) (128)
Other (750) (446)
Decrease (increase) in notes receivable 20,513 (5,906)
--------- ---------
Net cash (used in) investing activities $ (15,017) $ (7,954)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (1,932) (10,057)
Borrowings under Credit Facility 187,000 110,000
Payments under Credit Facility (99,000) (256,500)
Notes Payable proceeds 92,435 375,000
Notes Payable payments (92,416) (66,186)
Residential Development Properties note payable borrowings 41,316 32,087
Residential Development Properties note payable payments (47,808) (65,221)
Purchase of GMAC preferred interest - (187,000)
Capital distributions - joint venture partner (7,831) (3,805)
Capital distributions - joint venture preferred equity - (6,437)
Capital contributions to the Operating Partnership - 496
Issuance of preferred units-Series A - 48,160
Issuance of preferred units-Series B - 81,923
6 3/4% Series A Preferred Unit distributions (9,112) (7,590)
9 1/2% Series B Preferred Unit distributions (4,038) (1,009)
Dividends and unitholder distributions (87,073) (128,140)
--------- ---------
Net cash (used in) financing activities $ (28,459) $ (84,279)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,210) 32,066
CASH AND CASH EQUIVALENTS,
Beginning of period 75,418 31,644
--------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 66,208 $ 63,710
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company"), through the Company's ownership of all of the
outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation
("the General Partner"), which owns a 1% general partner interest in the
Operating Partnership. In addition, the Company owns an approximately 84%
limited partner interest in the Operating Partnership, with the remaining
approximately 15% limited partner interest held by other limited partners.
All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of June 30,
2003, the Company's approximately 84% limited partner interest has been treated
as equivalent, for purposes of this report, to 49,000,056 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,874,402 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 584,590 units.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.
The following table shows, by consolidated entity, the real estate
assets that the Operating Partnership owned or had an interest in as of June 30,
2003.
Operating Partnership Wholly-owned assets - The Avallon IV, Chancellor
Park, Datran Center (two office properties),
Houston Center (three office properties and the
Houston Center Shops)(1). These properties are
included in the Operating Partnership'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 Operating Partnership's Office Segment. Sonoma
Mission Inn & Spa (80.1% interest), included in
the Operating Partnership'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 Operating
Partnership's Office Segment. Ritz Carlton Palm
Beach (50% interest), included in the Operating
Partnership's Resort/Hotel Segment. The
temperature-controlled logistics properties (40%
interest in 88 properties). These properties are
included in the Operating Partnership'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 Operating Partnership'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
Operating Partnership's Office Segment. The Hyatt
Regency Albuquerque and the Park Hyatt Beaver
Creek Resort & Spa. These properties are included
in the Operating Partnership's Resort/Hotel
Segment.
Crescent 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 Operating
and V")(2) Partnership's Office Segment. Renaissance Houston
Hotel is included in the Operating Partnership's
Resort/Hotel Segment.
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Operating Partnership's
("Funding VI") Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Five behavioral healthcare
Funding VII, L.P. properties.
("Funding VII")
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(3), 3333 Lee Parkway, 1800
West Loop South, 5050 Quorum, 44 Cook and 55
Madison. These properties are included in the
Operating Partnership's Office Segment. The Canyon
Ranch - Tucson, Omni Austin Hotel, and Ventana Inn
& Spa, all of which are included in the Operating
Partnership's Resort/Hotel Segment.
Crescent 707 17th Wholly-owned assets - 707 17th Street, included in
Street, L.L.C. the Operating Partnership's Office Segment, and
The Denver Marriott City Center, included in the
Operating Partnership'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 Operating Partnership's Office
Segment.
Crescent Spectrum Wholly-owned asset - Spectrum Center, included in
Center, L.P.(4) the Operating Partnership's Office Segment.
Mira Vista Development Equity Investments, consolidated - Mira Vista (98%
Corp. ("MVDC") interest), included in the Operating Partnership'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 Operating Partnership's
Residential Development Segment.
Desert Mountain Equity Investments, consolidated - Desert Mountain
Development Corporation (93% interest), included in the Operating
("DMDC") Partnership's Residential Development Segment.
The Woodlands Land Equity Investments, unconsolidated - The Woodlands
Company ("TWLC") (42.5% interest)(5), included in the Operating
Partnership'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
Operating Partnership's Residential Development
Segment.
Equity Investment, unconsolidated - Blue River
Land Company, L.L.C. - Three Peaks (30% interest),
included in the Operating Partnership's
Residential Development Segment.
Crescent TRS Holdings Equity Investments, unconsolidated - two quarries
Corp. (56% interest). These properties are included in
the Operating Partnership's Temperature-Controlled
Logistics Segment.
- --------------------------
(1) During the second quarter of 2003, The Park Shops was renamed the
Houston Center Shops.
(2) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.
(3) The Operating Partnership owns the 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.
(4) In May 2003, Crescent Spectrum Center, L.P. exercised its option to
acquire the Spectrum Center property in exchange for the mortgage on
the property.
(5) Distributions are made to partners based on specified payout
percentages. During the six months ended June 30, 2003, the Operating
Partnership's payout percentage and economic interest were 52.5%.
8
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies," for a table that lists the Operating Partnership's
ownership in significant unconsolidated joint ventures and equity investments as
of June 30, 2003.
See Note 8, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Operating Partnership and the Company,
all of which are consolidated by the Operating Partnership or the Company, in
the Operating Partnership's or the Company's financial statements and were
formed primarily for the purpose of obtaining secured debt or joint venture
financing.
SEGMENTS
The assets and operations of the Operating Partnership were divided
into four investment segments at June 30, 2003, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of June 30, 2003:
- 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. 61 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.
- 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.
- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership'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 23
upscale residential development properties, 21 of which are
consolidated and two of which are unconsolidated (collectively
referred to as the "Residential Development Properties").
- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the Operating
Partnership's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
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 June 30, 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 June 30, 2003, the
Vornado Crescent Carthage and KC Quarry, L.L.C. owned two quarries
and the related land. The Operating Partnership accounts for its
interests in the Temperature-Controlled Logistics Partnership and
in the Vornado Crescent Carthage and KC Quarry L.L.C. as
unconsolidated equity investments.
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 and
six months ended June 30, 2003 and 2002, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of these investment segments at June 30, 2003 and December 31, 2002.
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Operating Partnership 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 Operating Partnership's
"Investment Sector."
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 Operating Partnership'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 period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Operating Partnership's significant accounting
policies contained in the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 2002.
ADOPTION OF NEW 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 Operating Partnership 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 Operating Partnership'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.
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 2003, the Operating Partnership 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 and unit options at
the date of grant be amortized ratably into expense over the appropriate vesting
period. During the six months ended June 30, 2003, the Company and the Operating
Partnership granted stock options and unit options and recognized compensation
expense that was not significant to results of operations. With respect to the
Company's stock options and the Operating Partnership's unit options which were
granted prior to 2003, the Operating Partnership accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25"). Under APB No. 25, compensation cost is
measured as the excess, if any, of the quoted market price of the Company's
common shares (doubled for unit options) 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 six months ended June 30,
2003, no compensation cost was recognized for grants of stock options or unit
options made prior to 2003 under the Company and Operating Partnership stock and
unit option plans because the Company's and the Operating Partnership's policy
is to grant stock options and unit options with an exercise price equal to the
quoted closing market price of the Company's common shares (doubled for unit
options) 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 Operating Partnership's net (loss) income and (loss)
earnings per unit would have been reduced to the following pro forma amounts:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
(in thousands, except per unit amounts) 2003 2002 2003 2002
- ------------------------------------------- ---------- --------- ----------- ----------
Net (loss) income available to partners, as
reported $ (5,947) $ 13,661 $ (27,572) $ 31,520
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (765) (1,093) (1,602) (2,073)
---------- --------- ----------- ----------
Pro forma net (loss) income $ (6,712) $ 12,568 $ (29,174) $ 29,447
(Loss) earnings per unit:
Basic - as reported $ (0.10) $ 0.21 $ (0.47) $ 0.47
Basic - pro forma $ (0.11) $ 0.19 $ (0.50) $ 0.44
Diluted - as reported $ (0.10) $ 0.21 $ (0.47) $ 0.47
Diluted - pro forma $ (0.11) $ 0.19 $ (0.50) $ 0.44
SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact, if any, on the Operating
Partnership's financial condition or its results of operations.
SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. The provisions of this Statement are to be applied to financial
instruments entered into or modified after May 31, 2003 and to existing
instruments as of the beginning of the first interim financial reporting period
after June 15, 2003. The adoption of this statement is not expected to have a
material impact, if any, on the Operating Partnership's financial condition or
its results of operations.
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
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. See Note 10, "Commitments
and Contingencies," for disclosure of the Operating Partnership's guarantees at
June 30, 2003. The Operating Partnership adopted FIN 45 effective January 1,
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 VIE's 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership presents both basic and diluted earnings per
unit.
The following tables present reconciliations for the three and six
months ended June 30, 2003 and 2002 of basic and diluted earnings per unit from
"Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net (loss) income available to partners." The table
also includes weighted average units on a basic and diluted basis.
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
2003 2002
--------------------------------- --------------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------------------- --------------------------------- --------------------------------
BASIC EPS -
Income before discontinued operations $ 901 58,460 $ 17,692 66,277
Series A Preferred Unit distributions (4,556) (4,215)
Series B Preferred Unit distributions (2,019) (1,009)
------------ -------- -------- -------- --------- --------
Net (loss) income available to partners
before discontinued operations $ (5,674) 58,460 (0.09) $ 12,468 66,277 $ 0.19
Discontinued operations - income (loss) on assets
sold and held for sale 765 0.01 (662) (0.01)
Discontinued operations- (loss) gain on assets sold
and held for sale (1,038) (0.02) 1,855 0.03
------------ -------- -------- -------- -------- ------
Net (loss) income available to partners $ (5,947) 58,460 (0.10) $ 13,661 66,277 $ 0.21
============ ======== ======== ======== ======== ======
12
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- ----------------------------- -----------------------------
DILUTED EPS -
Income before discontinued operations $ 901 58,460 $17,692 66,277
Series A Preferred Unit distributions (4,556) (4,215)
Series B Preferred Unit distributions (2,019) (1,009)
Effect of dilutive securities
Additional common units relating to
unit options 6 612
-------- -------- -------- ------- ------- --------
Net (loss) income available to
partners before discontinued operations $ (5,674) 58,466 (0.09) $12,468 66,889 $ 0.19
Discontinued operations - income
(loss) on assets sold and held for
sale 765 0.01 (662) (0.01)
Discontinued operations - (loss) gain
on assets sold and held for sale (1,038) (0.02) 1,855 0.03
-------- -------- -------- ------- ------- --------
Net (loss) income available to partners $ (5,947) 58,466 (0.10) $13,661 66,889 $ 0.21
======== ======== ======== ======= ======= ========
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- ----------------------------- -----------------------------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 2,048 58,472 $ 45,512 66,290
Series A Preferred Unit distributions (9,112) (7,590)
Series B Preferred Unit distributions (4,038) (1,009)
-------- -------- -------- ------- ------ --------
Net (loss) income available to
partners before discontinued operations
and cumulative effect of a change in
accounting principle $(11,102) 58,472 (0.19) $ 36,913 66,290 $ 0.56
Discontinued operations - income on
assets sold and held for sale 736 0.01 883 0.01
Discontinued operations- (loss) gain
on assets sold and held for sale (17,206) (0.29) 4,051 0.06
Cumulative effect of a change in
accounting principle - - (10,327) (0.16)
-------- -------- -------- -------- ------ --------
Net (loss) income available to partners $(27,572) 58,472 (0.47) $ 31,520 66,290 $ 0.47
======== ======== ======== ======== ====== ========
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2003 2002
----------------------------- ------------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- ----------------------------- ------------------------------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 2,048 58,472 $ 45,512 66,290
Series A Preferred Unit distributions (9,112) (7,590)
Series B Preferred Unit distributions (4,038) (1,009)
Effect of dilutive securities
Additional common units relating to
unit options 4 419
-------- -------- -------- -------- ------- --------
Net (loss) income available to
partners before discontinued operations
and cumulative effect of a change in
accounting principle $(11,102) 58,476 (0.19) $ 36,913 66,709 $ 0.55
Discontinued operations - income on
assets sold and held for sale 736 0.01 883 0.01
Discontinued operations - (loss) gain
on assets sold and held for sale (17,206) (0.29) 4,051 0.06
Cumulative effect of a change in
accounting principle - - (10,327) (0.15)
-------- -------- -------- -------- ------- --------
Net (loss) income available to partners $(27,572) 58,476 (0.47) $ 31,520 66,709 $ 0.47
======== ======== ======== ======== ======= ========
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the six
months ended June 30, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(in thousands) 2003 2002
- ----------------------------------------------------------------- --------- ---------
Interest paid on debt $ 76,240 $ 71,064
Interest capitalized - Office Properties -- 248
Interest capitalized - Residential Development Properties 8,297 5,558
Additional interest paid in conjunction with cash flow hedges 10,114 12,012
--------- ---------
Total interest paid $ 94,651 $ 88,882
========= =========
Cash paid for income taxes $ 1,640 $ 11,000
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
Unrealized and realized gain (loss) on marketable securities $ 383 $ (1,149)
Impairment and other charges related to real estate assets 18,018 3,048
Adjustment of cash flow hedge to fair value (487) 6,046
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC AND HADC
AND THE 2002 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
PURSUANT TO THE FEBRUARY 14, 2002 AGREEMENT WITH COPI:
Net investment in real estate $ (9,692) $(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 (3,564) (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
Operating Partnership currently has four major investment segments based on
property type: the Office Segment; the Resort/Hotel Segment; the Residential
Development Segment; and the Temperature-Controlled Logistics Segment.
Management utilizes this segment structure for making operating decisions and
assessing performance.
The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, as used in this document, is based on
the definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and means:
- Net Income (Loss) - determined in conformity with GAAP;
- excluding gains (losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- including depreciation and amortization of real estate assets; and
- after adjusting for unconsolidated partnerships and joint
ventures.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO an appropriate measure of performance for an operating partnership
of 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 Operating Partnership's operating performance.
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Operating Partnership's measure of FFO may not be comparable to
similarly titled measures of operating partnerships of REITs (other than the
Company) if those REITs apply the definition of FFO in a different manner than
the Operating Partnership.
Selected financial information related to each segment for the three
and six months ended June 30, 2003 and 2002, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at June 30, 2003 and December 31, 2002, are presented
below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- --------------------------- -------- ------------ ----------- ------------ ----------- --------
Property revenues $ 127,334(1) $ 51,632 $ 54,207 $ - $ - $233,173
Other income - - - - 2,812 2,812
-------- -------- -------- -------- -------- --------
Total revenue $127,334 $ 51,632 $ 54,207 $ - $ 2,812(2) $235,985
======== ======== ======== ======== ======== ========
Property operating expenses $ 62,452 $ 42,658 $ 47,831 - $ -- $152,941
Other operating expenses - - - $ - 88,128 88,128
-------- -------- -------- -------- -------- --------
Total expenses $ 62,452 $ 42,658 $ 47,831 $ - $ 88,128(2) $241,069
======== ======== ======== ======== ======== ========
Equity in net income
(loss) of unconsolidated companies $ 1,864 $ 1,382 $ 1,540 $ (406) $ 214 $ 4,594
======== ======== ======== ======== ======== ========
Funds from operations $ 70,011 $ 12,356 $ 5,705 $ 5,079 $(56,710) $ 36,441(5)
======== ======== ======== ======== ======== ========
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- --------------------------- -------- -------- -------- -------- -------- --------
Property revenues $138,378(1) $ 53,523 $ 83,480 $ - $ - $275,381
Other income - - - - 7,268 7,268
-------- -------- -------- -------- -------- --------
Total revenue $138,378 $ 53,523 $ 83,480 $ - $ 7,268(2) $282,649
======== ======== ======== ======== ======== ========
Property operating expenses $ 60,951 $ 42,212 $ 74,327 $ - $ - $177,490
Other operating expenses - - - - 89,928 89,928
-------- -------- -------- -------- -------- --------
Total expenses $ 60,951 $ 42,212 $ 74,327 $ - $ 89,928(2) $267,418
======== ======== ======== ======== ======== ========
Equity in net income
(loss) of unconsolidated companies $ 1,471 $ - $ 6,179 $ (417) $ (465) $ 6,768
======== ======== ======== ======== ======== ========
Funds from operations $ 80,502 $ 12,637 $ 12,474 $ 5,374 $(52,357) $ 58,630(5)
======== ======== ======== ======== ======== ========
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- --------------------------- --------- --------- --------- --------- --------- --------
Property revenues $ 256,068(1) $ 115,353 $ 89,572 $ -- $ -- $ 460,993
Other income -- -- -- -- 4,581 4,581
--------- --------- --------- --------- --------- ---------
Total revenue $ 256,068 $ 115,353 $ 89,572 $ -- $ 4,581(2) $ 465,574
========= ========= ========= ========= ========= =========
Property operating expenses $ 123,404 $ 92,399 $ 80,760 $ -- $ -- $ 296,563
Other operating expenses -- -- -- -- 180,222 180,222
--------- --------- --------- --------- --------- ---------
Total expenses $ 123,404 $ 92,399 $ 80,760 $ -- $ 180,222(2) $ 476,785
========= ========= ========= ========= ========= =========
Equity in net income
(loss) of unconsolidated companies $ 3,322 $ 2,125 $ 2,510 $ 1,101 $ (815) $ 8,243
========= ========= ========= ========= ========= =========
Funds from operations $ 142,271 $ 27,987 $ 10,993 $ 12,096 $(115,489) $ 77,858(5)
========= ========= ========= ========= ========= =========
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION:
FOR THE SIX MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- --------------------------- --------------- ------------ ------------ ------------ --------- ---------
Property revenues $ 277,967 (1) $ 92,047 $ 126,541 $ - $ - $ 496,555
Other income - - - - $ 14,918 14,918
----------- ---------- ------------ ---------- --------- ---------
Total revenue $ 277,967 $ 92,047 $ 126,541 $ - $ 14,918 (2) $ 511,473
=========== ========== ============ ========== ========= =========
Property operating expenses $ 124,599 $ 66,102 $ 113,678 $ - - $ 304,379
Other operating expenses - - - - $ 173,552 173,552
----------- ---------- ------------ ---------- --------- ---------
Total expenses $ 124,599 $ 66,102 $ 113,678 $ - $ 173,552 (2) $ 477,931
=========== ========== ============ ========== ========= =========
Equity in net income (loss) of
unconsolidated companies $ 2,781 $ - $ 18,662 $ (727) $ (4,526) $ 16,190
=========== ========== ============ ========== ========= =========
Funds from operations $ 161,074 $ 33,547 $ 28,035 $ 10,775 $(105,250) $ 128,181(5)
=========== ========== ============ ========== ========= =========
- -----------------------------------
See footnotes to the following table.
TERMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in millions) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- -------------------------------------- -------- ------------ ----------- ------------- --------- -----
TOTAL ASSETS BY SEGMENT:(3)
Balance at June 30, 2003 $ 2,529 $ 499 $ 748 $ 303 $ 123 $ 4,202
Balance at December 31, 2002 2,626 502 723 304 130 4,285
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at June 30, 2003 $ (1,368) $ (133) $ (87) $ - $(877)(4) $(2,465)
Balance at December 31, 2002 (1,371) (130) (93) - (789)(4) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at June 30, 2003 $ (92) $ (40) $ (136) $ - $ (60) $ (328)
Balance at December 31, 2002 (135) (44) (125) - (69) (373)
MINORITY INTERESTS:
Balance at June 30, 2003 $ (8) $ (7) $ (24) $ - $ - $ (39)
Balance at December 31, 2002 (11) (8) (25) - - (44)
- ------------------------------------
(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $0.9 million and $0.6 million for the
three months ended June 30, 2003 and 2002, respectively and $2.9
million and $1.7 million for the six months ended June 30, 2003 and
2002, respectively.
(2) For purposes of this Note, Corporate and Other include income from
investment land sales, net, 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.
(3) Total assets by segment is inclusive of investments in real estate
mortgages and equity of unconsolidated companies, net of unconsolidated
debt.
(4) Inclusive of Corporate bonds and credit facility.
(5) The following table presents a reconciliation of Consolidated Funds
from Operations to Net Income (Loss).
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
(In thousands) 2003 2002 2003 2002
- ----------------------------------------- -------- -------- --------- ---------
Consolidated Funds from Operations $ 36,441 $ 58,630 $ 77,858 $ 128,181
Adjustments to reconcile Consolidated
Funds from
Operations to Net Income (Loss):
Depreciation and amortization of
real estate assets (33,099) (33,529) (69,400) (65,669)
(Loss) gain on property sales, net (61) 1,420 (287) 5,665
Impairment and other adjustments
related to real estate assets and
assets held for sale (990) - (18,018) (2,048)
Cumulative effect of a change in
accounting principle - - - (10,327)
Adjustment for investments in real
estate mortgages and equity of
unconsolidated companies:
Office Properties (3,013) (1,889) (5,835) (4,051)
Resort/Hotel Properties (355) - (749) -
Residential Development
Properties 512 (2,051) (227) (2,954)
Temperature-Controlled Logistics
Properties (5,486) (5,790) (10,996) (11,501)
Other 104 (3,130) 82 (5,776)
Series A Preferred unit distributions 4,556 4,215 9,112 7,590
Series B Preferred unit distributions 2,019 1,009 4,038 1,009
-------- -------- --------- ---------
Net Income (Loss) $ 628 $ 18,885 $ (14,422) $ 40,119
======== ======== ========= =========
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
Operating Partnership's Consolidated Statements of Operations. The Operating
Partnership 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 and six months ended June 30, 2003 and 2002. The impairment charges
represent the difference between the carrying value of assets sold or held for
sale and the actual or estimated sales price, less costs of sale. 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 June 30,
2003 and December 31, 2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of June 30, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale. During
the six months ended June 30, 2003, the Operating Partnership recognized an
approximately $15.0 million impairment charge on the 1800 West Loop South Office
Property.
As of June 30, 2003, the Operating Partnership determined that the
North Dallas Athletic Club, a building adjacent to the Stanford Corporate Centre
Office Property in the Far North Dallas submarket in Dallas, Texas was no longer
held for sale due to the Operating Partnership's negotiations to contract a new
operator. The Property has been reclassified from "Properties held for
disposition, net" to "Building and improvements," "Furniture, fixtures and
equipment" and "Accumulated depreciation" in the accompanying Consolidated
Balance Sheets with a book value of $0.6 million, net of accumulated
depreciation of $0.8 million. The impairment charge of $1.2 million, recorded
during the first quarter of 2003, has been reclassified from "Discontinued
operations - (loss) gain on assets sold and held for sale" to "Impairment and
other charges related to real estate assets" in the accompanying Consolidated
Statement of Operations.
17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.0 million, consisting of $1.3 million in cash and a
$0.7 million note receivable. The Operating Partnership 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.
On May 2, 2003, the Operating Partnership sold one additional
behavioral healthcare property for $2.1 million. The Operating Partnership
recognized a loss on the sale of this property of approximately $0.1 million. A
$0.8 million impairment charge was recognized during the first quarter of 2003
related to this property.
The Operating Partnership also recognized a $1.0 million impairment
charge during the second quarter of 2003 on a behavioral healthcare property
held for sale and under contract for sale at June 30, 2003. This property was
sold on July 10, 2003.
As of June 30, 2003, the Operating Partnership owned five behavioral
healthcare properties.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
(in thousands) JUNE 30, 2003(1) DECEMBER 31, 2002
- -------------------------------- ---------------- -----------------
Land $ 9,523 $ 12,802
Buildings and improvements 39,291 56,875
Furniture, fixture and equipment 935 1,665
Accumulated depreciation (8,847) (9,873)
-------- --------
Net investment in real estate $ 40,902 $ 61,469
======== ========
- ---------------------------
(1) Includes the 1800 West Loop South Office Property and five behavioral
healthcare properties.
The following table presents rental revenue, operating expenses,
depreciation and amortization, net income and impairments for the six months
ended June 30, 2003 and 2002 for Properties held for sale as of June 30, 2003.
FOR THE SIX MONTHS ENDED JUNE 30,
DEPRECIATION
OPERATING AND NET
(in thousands) REVENUE(1) EXPENSES(1) AMORTIZATION(1) INCOME (1) IMPAIRMENTS (2)
- -------------- ---------- ----------- --------------- ---------- ---------------
2003 $ 2,889 $ 1,548 $ 303 $1,038 $ 16,818
2002 2,802 1,623 819 360 -
- ------------------------
(1) Includes the 1800 West Loop South Office Property.
(2) Includes impairments of 1800 West Loop South and two behavioral healthcare
properties.
5. OTHER ASSET DISPOSITIONS
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Operating Partnership completed the sale of
approximately one-half acre of undeveloped land located in Dallas, Texas. The
sale generated net proceeds and a net gain of approximately $0.3 million. This
land was wholly-owned by the Operating Partnership.
On May 15, 2003, the Operating Partnership completed the sale of
approximately 24.8 acres of undeveloped land located in Coppell, Texas. The sale
generated net proceeds of $3.0 million and a net gain of approximately $1.1
million. This land was wholly-owned by the Operating Partnership.
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2003, the Operating Partnership sold approximately 3.5
acres of undeveloped land located in Houston, Texas. Subsequent to the end of
the second quarter, the sale agreement was modified. Under the terms of the
modified sale agreement, the Operating Partnership generated proceeds of $2.1
million, net of closing costs, and a note receivable in the amount of $11.8
million, with annual installments of principal and interest payments beginning
June 27, 2004 through maturity on June 27, 2010. The principal payment amounts
are calculated based upon a 20-year amortization and the interest rate is 4% for
the first two years and thereafter the prime rate, as defined in the note,
through maturity. Based on the terms of the modified sale agreement, the
Operating Partnership will fully recognize a net gain of approximately $8.9
million in the third quarter of 2003. This land was wholly-owned by the
Operating Partnership.
6. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of June 30, 2003, the Operating Partnership 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
Crescent Operating, Inc. ("COPI"). The Operating Partnership has no economic
interest in AmeriCold Logistics. See Note 15, "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 and the Operating Partnership's
unitholders.
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 $18.5 million of the total $76.4 million
of rent payable for the six months ended June 30, 2003. The Operating
Partnership's share of the deferred rent was $7.4 million. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $7.4 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the six months ended June 30, 2003. As of June 30, 2003, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $59.1 million and $52.8 million,
respectively, of which the Operating Partnership's portions were $23.6 million
and $21.1 million, respectively.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of June 30, 2003, the Operating Partnership 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 Operating Partnership accounts
for this investment as an unconsolidated equity investment because the Operating
Partnership 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 Operating Partnership 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 Operating Partnership's contribution, for the purchase of the trade
receivables. The receivables were collected during the three months ended June
30, 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Operating
Partnership.
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED
COMPANIES
The Operating Partnership has investments of 20% to 50% in seven
unconsolidated joint ventures that own seven Office Properties. The Operating
Partnership does not have control of these joint ventures, and therefore, these
investments are accounted for using the equity method of accounting.
The Operating Partnership, through ownership interests of 50% or less,
or ownership of non-voting interests only, has other unconsolidated investments
which it does not control; these investments are accounted for using the equity
method of accounting.
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and equity investments as of June 30,
2003.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF JUNE 30, 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 L.P. 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)
Resort/Hotel (Ritz Carlton Palm
Manalapan Hotel Partners, L.L.C. 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 28.1% (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 L.P. 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. ("Woodlands CPC") 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 six months ended June 30, 2003, the payout
percentage to the Operating Partnership was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Operating Partnership.
(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 Operating
Partnership'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 Operating
Partnership's Resort/Hotel Properties.
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) The SunTx Fulcrum Fund, L.P.'s ("SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 71.9% of SunTx is owned by a group
of individuals unrelated to the Operating Partnership. The Operating
Partnership's ownership percentage will decline by the closing date of
SunTx as capital commitments from third parties are secured. The
Operating Partnership's projected ownership interest at the closing of
SunTx is approximately 7.5% based on SunTx manager's expectations for
the final SunTx capitalization. The Operating Partnership accounts for
its investment in SunTx under the cost method. The Operating
Partnership's investment at June 30, 2003 was $6.3 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 GMACCM each own 21.875% of G2, with the remaining 43.75% owned by
parties unrelated to the Operating Partnership. See Note 14, "Related
Party Transactions," for information regarding the ownership interests
of trust managers and officers of the Company and the General Partner
in GMSP.
SUMMARY FINANCIAL INFORMATION
The Operating Partnership 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 Operating Partnership's transaction with
COPI on February 14, 2002, certain entities that were reported as unconsolidated
entities in 2002 prior to February 14, 2002 are consolidated in the June 30,
2003 financial statements. Additionally, certain unconsolidated subsidiaries of
the newly consolidated entities are now shown separately as unconsolidated
entities of the Operating Partnership. As a result of the Operating
Partnership'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 June 30, 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 June 30, 2003 financial statements.
The unconsolidated entities that are included under the headings on the
following tables are summarized below.
Balance Sheets as of June 30, 2003:
- WLDC;
- Other Residential Development - This includes the
Blue River Land Company, L.L.C.;
- Resort/Hotel - This includes Manalapan;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- 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 L.P. and Woodlands CPC; and
- Other - This includes CR License, L.L.C., The
Woodlands Operating Company, L.P., Canyon Ranch Las
Vegas, L.L.C., SunTx and G2.
Balance Sheets as of December 31, 2002:
- WLDC;
- Other Residential Development - This includes the
Blue River Land Company, L.L.C., MVDC and HADC;
- Resort/Hotel - This includes Manalapan;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- 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 L.P. and Woodlands CPC; and
- Other - This includes DBL, CR License, L.L.C., The
Woodlands Operating Company, L.P., Canyon Ranch Las
Vegas, L.L.C. and SunTx.
Summary Statements of Operations for the six months ended June 30,
2003:
- WLDC;
- Other Residential Development - This includes the
operating results for Blue River Land Company,
L.L.C.;
- Resort/Hotel - This includes the operating results
for Manalapan;
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Temperature-Controlled Logistics - This includes the operating
results for the Temperature-Controlled Logistics Partnership
and VCQ;
- 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 BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami
Center, L.L.C., Crescent Five Post Oak Park L.P. and Woodlands
CPC; and
- Other - This includes the operating results for CR License,
L.L.C., The Woodlands Operating Company, L.P., Canyon Ranch
Las Vegas, L.L.C., SunTx and G2.
Summary Statements of Operations for the six months ended June 30, 2002:
- WLDC - This includes WLDC's operating results for the period
February 15 through June 30, 2002 and TWLC's operating results
for the period January 1 through February 14, 2002;
- Other Residential Development - 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 June 30, 2002, and the operating results of MVDC and
HADC;
- Temperature-Controlled Logistics - This includes the operating
results for the Temperature-Controlled Logistics Partnership;
- Office - This includes the operating results for Main Street
Partners, L.P., Houston PT Four Westlake Park Office Limited
Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P. and Woodlands
CPC; and
- Other - This includes the operating results for DBL, CR
License, L.L.C., The Woodlands Operating Company, Canyon Ranch
Las Vegas, L.L.C. and SunTx.
BALANCE SHEETS:
AS OF JUNE 30, 2003
-------------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- --------------------------------- ---------------- ------------ -------- ------------ --------- -------- ---------
Real estate, net $ 390,043 $ 54,584 $ 80,732 $ 1,210,630 $ 824,808
Cash 6,627 1,233 8,436 35,514 31,623
Other assets 47,340 781 5,243 90,713 49,779
--------- -------- -------- ----------- ---------
Total assets $ 444,010 $ 56,598 $ 94,411 $ 1,336,857 $ 906,210
========= ======== ======== =========== =========
Notes Payable $ 288,230 $ 7,650 $ 56,000 $ 567,349 $ 515,047
Notes Payable to the Operating
Partnership 11,122 - - - -
Other liabilities 53,987 4,400 7,215 8,433 37,599
Equity 90,671 44,548 31,196 761,075 353,564
--------- -------- -------- ----------- ---------
Total liabilities and equity $ 444,010 $ 56,598 $ 94,411 $ 1,336,857 $ 906,210
========= ======== ======== =========== =========
Operating Partnership's share of
unconsolidated debt $ 122,500 $ 3,825 $ 28,000 $ 226,940 $ 182,878 $ - $ 564,143
========= ======== ======== =========== ========= ======== =========
Operating Partnership's
investments in real estate
mortgages and equity of
unconsolidated companies $ 36,630 $ 27,741 $ 15,598 $ 303,279 $ 128,257 $ 31,451 $ 542,956
========= ======== ======== =========== ========= ======== =========
22
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS:
AS OF DECEMBER 31, 2002
-------------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND 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 Operating
Partnership 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
========= ======== ======== =========== =========
Operating Partnership's share of
unconsolidated debt $ 120,933 $ - $ 28,000 $ 229,972 $ 180,132 $ - $ 559,037
========= ======== ======== =========== ========= ======== =========
Operating Partnership'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
========= ======== ======== =========== ========= ======== =========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE SIX MONTHS ENDED JUNE 30,2003
-----------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- ------------------------------------ ---------------- ------------ -------- ------------ -------- ------- -------
Total revenues $ 54,434 $ 396 $ 25,905 $ 63,441 $ 67,058
Expenses:
Operating expense 42,552 314 16,137 12,384(1) 29,870
Interest expense 3,508 - 1,648 20,572 12,547
Depreciation and amortization 3,288 - 1,417 29,362 15,181
Tax expense - - 2,458 - -
Other (income) expense - - - (1,418) -
-------- ------- -------- --------- --------
Total expenses $ 49,348 $ 314 $ 21,660 $ 60,900 $ 57,598
-------- ------- -------- --------- --------
Gain (loss) on sale of properties - - - - -
-------- ------- -------- --------- --------
Net income $ 5,086 $ 82 $ 4,245 $ 2,541(1) $ 9,460
======== ======= ======== ========= ========
Operating Partnership's equity in
net income (loss) of
unconsolidated companies $ 2,670 $ (160) $ 2,125 $ 1,101 $ 3,322 $ (815) $ 8,243
======== ======= ======== ========= ======== ====== =======
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE SIX MONTHS ENDED JUNE 30,2002
--------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS LOGISTICS OFFICE OTHER TOTAL
- ------------------------------------ ---------------- ------------ ------------ --------- -------- --------
Total revenues $ 68,465 $ 102,812 $ 59,619 $ 46,461
Expenses:
Operating expense 36,373 92,788 8,075(1) 21,843
Interest expense 2,152 1,610 21,873 9,040
Depreciation and amortization 1,827 2,971 29,686 11,172
Tax expense (benefit) 406 (4) - -
Other (income) expense - (27) 1,804 -
-------- --------- -------- ---------
Total expenses $ 40,758 $ 97,338 $ 61,438 $ 42,055
-------- --------- -------- ---------
Gain (loss) on sale of properties - - - -
-------- --------- -------- ---------
Net income (loss) $ 27,707 $ 5,474 $ (1,819)(1)(2) $ 4,406
======== ========= ======== =========
Operating Partnership's equity in
net income (loss) of
unconsolidated companies $ 14,334 $ 4,328 $ (727) $ 2,781 $ (4,526) $ 16,190
======== ========= ======== ========= ======== ========
- -------------------
(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).
(2) Excludes the goodwill write-off for the Temperature-Controlled
Logistics Properties, which was recorded as a cumulative change in
accounting principle in the accompanying financial statements.
23
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The significant terms of the Operating Partnership's share of
unconsolidated debt financing arrangements existing as of June 30, 2003 are
shown below.
OPERATING
BALANCE PARTNERSHIP'S
OUTSTANDING AT SHARE OF BALANCE AT
DESCRIPTION JUNE 30, 2003 JUNE 30, 2003
- ---------------------------------------------------------------------------------------- -------------- -------------------
(dollars in thousands)
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Operating Partnership
Goldman Sachs Notes(1) $ 502,128 $ 200,851
Various Capital Leases 37,037 14,816
Various Mortgage Notes 28,184 11,273
----------- ---------
$ 567,349 $ 226,940
----------- ---------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership(2)(3)(4) $ 131,726 $ 65,863
Crescent Miami Center, LLC - 40% Operating Partnership 81,000 32,400
Crescent 5 Houston Center, L.P. - 25% Operating Partnership(5) 65,470 16,367
Houston PT Four Westlake Park Office Limited Partnership - 20% Operating Partnership 48,410 9,682
Crescent Five Post Oak Park, L.P. - 30% Operating Partnership 45,000 13,500
Austin PT Bank One Tower Office Limited Partnership - 20% Operating Partnership 37,652 7,530
Houston PT Three Westlake Park Office Limited Partnership - 20% Operating Partnership 33,000 6,600
The Woodlands Commercial Properties Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) 62,000 26,350
Fleet National Bank(3)(7) 2,867 1,218
Various Mortgage Notes 7,923 3,368
----------- ---------
$ 515,048 $ 182,878
----------- ---------
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) $ 230,000 $ 97,750
Fleet National Bank(8) 37,420 15,904
Fleet National Bank(3)(7) 5,882 2,500
Various Mortgage Notes 14,928 6,346
Blue River Land Company, L.L.C.- 50% Operating Partnership(9) 7,650 3,825
----------- ---------
$ 295,880 $ 126,325
----------- ---------
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Operating Partnership
Corus Bank(3)(10) 56,000 28,000
----------- ---------
TOTAL UNCONSOLIDATED DEBT $ 1,434,277 $ 564,143
=========== =========
INTEREST RATE AT MATURITY
DESCRIPTION JUNE 30, 2003 DATE
- ---------------------------------------------------------------------------------------- ---------------- ----------------------
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Operating Partnership
Goldman Sachs Notes(1) 6.89% 5/11/2023
Various Capital Leases 4.84 to 13.63% 6/1/2006 to 2/12/2016
Various Mortgage Notes 4.25 to 12.88% 8/1/2003 to 4/1/2009
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership(2)(3)(4) 5.61% 12/1/2004
Crescent Miami Center, LLC - 40% Operating Partnership 5.04% 9/25/2007
Crescent 5 Houston Center, L.P. - 25% Operating Partnership(5) 3.46% 5/31/2004
Houston PT Four Westlake Park Office Limited Partnership - 20% Operating Partnership 7.13% 8/1/2006
Crescent Five Post Oak Park, L.P. - 30% Operating Partnership 4.82% 1/1/2008
Austin PT Bank One Tower Office Limited Partnership - 20% Operating Partnership 7.13% 8/1/2006
Houston PT Three Westlake Park Office Limited Partnership - 20% Operating Partnership 5.61% 9/1/2007
The Woodlands Commercial Properties Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) 4.25% 11/27/2005
Fleet National Bank(3)(7) 3.34% 10/31/2003
Various Mortgage Notes 6.30 to 7.50% 11/1/2021 to 12/2/2024
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) 4.31% 11/27/2005
Fleet National Bank(8) 4.09% 12/31/2005
Fleet National Bank(3)(7) 3.34% 10/31/2003
Various Mortgage Notes 4.00 to 6.25% 7/1/2005 to 12/31/2008
Blue River Land Company, L.L.C.- 50% Operating Partnership(9) 4.32% 6/30/2004
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Operating Partnership
Corus Bank(3)(10) 5.31% 10/21/2005
TOTAL UNCONSOLIDATED DEBT
FIXED/VARIABLE
DESCRIPTION SECURED/UNSECURED
- ---------------------------------------------------------------------------------------- -----------------
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Operating Partnership
Goldman Sachs Notes(1) Fixed/Secured
Various Capital Leases Fixed/Secured
Various Mortgage Notes Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership(2)(3)(4) Variable/Secured
Crescent Miami Center, LLC - 40% Operating Partnership Fixed/Secured
Crescent 5 Houston Center, L.P. - 25% Operating Partnership(5) Variable/Secured
Houston PT Four Westlake Park Office Limited Partnership - 20% Operating Partnership Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% Operating Partnership Fixed/Secured
Austin PT Bank One Tower Office Limited Partnership - 20% Operating Partnership Fixed/Secured
Houston PT Three Westlake Park Office Limited Partnership - 20% Operating Partnership Fixed/Secured
The Woodlands Commercial Properties Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) Variable/Secured
Fleet National Bank(3)(7) Variable/Secured
Various Mortgage Notes Fixed/Secured
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5% Operating Partnership
Fleet National Bank credit facility(6) Variable/Secured
Fleet National Bank(8) Variable/Secured
Fleet National Bank(3)(7) Variable/Secured
Various Mortgage Notes Fixed/Secured
Blue River Land Company, L.L.C.- 50% Operating Partnership(9) Variable/Secured
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Operating Partnership
Corus Bank(3)(10) Variable/Secured
TOTAL UNCONSOLIDATED DEBT
- ---------------------------
(1) URS Real Estate, L.P. and Americold Real Estate, L.P., subsidiaries of
the Temperature-Controlled Logistics Corporation, expect to repay the
notes on the Optional Prepayment Date of April 11, 2008.
(2) Senior Note - Note A: $82.9 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: $24.4 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Mezzanine Note - $19.5 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 Operating Partnership and its joint venture partner each obtained a
letter of credit to guarantee the repayment of up to $4.3 million of
the Main Street Partners, L.P. loan.
(5) The Operating Partnership provides a full guarantee 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 a 1.3x debt service
coverage.
(6) Woodlands CPC and WLDC entered into two $50 million interest rate swap
agreements which limit interest rate exposure to a LIBOR rate of
1.735%. The swaps are effective August 4, 2003.
(7) 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%.
(8) 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%.
(9) The variable rate loan has an interest rate of LIBOR + 300 basis
points. A fully consolidated entity of CRDI, of which CRDI owns 88.3%,
provides a guarantee of up to 70% of the outstanding balance of up to a
$9.0 million loan to Blue River Land Company, L.L.C. There was
approximately $7.7 million outstanding at June 30, 2003 and the amount
guaranteed was $5.4 million.
(10) The Operating Partnership and its joint venture partner each obtained a
letter of credit to guarantee repayment of up to $3.0 million of this
facility.
24
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows, as of June 30, 2003, information about the
Operating Partnership'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 $ 306,366 54.3% 6.85% 15.04 years
Variable Rate Debt 257,777 45.7% 4.66% 2.04 years
---------- ----- ---- -----------
Total Debt $ 564,143 100.0% 5.85% 9.09 years
========== ===== ==== ===========
- ---------------------
(1) Based on contractual maturities. The overall weighted average maturity
would be 4.0 years assuming the election of extension options on debt
instruments and expected repayment of the Goldman Sachs notes on the
optional prepayment date.
Listed below is the Operating Partnership's share of aggregate
principal payments, by year, required as of June 30, 2003, related to the
Operating Partnership's unconsolidated debt. Scheduled principal installments
and amounts due at maturity are included.
SECURED
(in thousands) DEBT(1)(2)
- -------------- ----------
2003 $ 17,432
2004 103,277
2005 167,084
2006 23,977
2007 48,384
Thereafter 203,989
---------
$ 564,143
=========
- ---------------------
(1) These amounts do not reflect the effect of extension options.
(2) Based on contractual maturities.
25
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Operating Partnership's debt
financing at June 30, 2003:
Secured Debt
June 30, 2003
--------------
(in thousands)
Fleet Fund I and II Term Loan due May 2005, bears interest at LIBOR plus 325 basis points (at June 30, 2003,
the interest rate was 4.52%), with a four-year interest-only term, secured by equity interests in Funding I and
II Properties...................................................................................................... $ 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 ................ 262,699
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................................................................................ 236,554
Deutsche Bank-CMBS Loan(3) due May 2004, bears interest at the 30-day LIBOR rate plus 234 basis points
(at June 30, 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............................................................................................................ 193,457
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............................................................................... 160,541
Cigna Note due June 2010, bears interest at 5.22% with an interest-only term, secured by the 707 17th Street
Office Property(6)................................................................................................. 70,000
National Bank of Arizona Revolving Line of Credit(7) with maturities ranging from November 2004 to December
2005, bears interest ranging from 4.00% to 5.00%, secured by certain DMDC assets................................... 47,397
Metropolitan Life Note V(8) 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.................... 37,823
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(9) 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(10) bears interest at 10.07% with monthly principal and interest payments based on a
25-year amortization schedule through maturity in July 2020, secured by the Funding VI Property.................... 7,943
26
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Secured Debt
June 30, 2003
--------------
(in thousands)
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
FHI Finance Loan bears interest at LIBOR plus 450 basis points (at June 30, 2003, the interest rate was 5.82%),
with an initial interest only term until the Net Operating Income Hurdle Date(11), followed by principal
amortization based on a 20-year amortization schedule through maturity in September 2009, secured by the Sonoma
Mission Inn & Spa.................................................................................................. 435
Construction, acquisition and other obligations, bearing fixed and variable interest rates ranging from 2.9% to
11.25% at June 30, 2003, with maturities ranging between July 2003 and June 2008, secured by various CRDI and
MVDC projects(12).................................................................................................. 39,659
Unsecured Debt
2009(13) Notes bear interest at a fixed rate of 9.25% with a seven-year interest-only term, due April 2009 with
a call date of April 2006.......................................................................................... 375,000
2007(13) Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due September 2007...... 250,000
Unsecured Debt - Revolving Line of Credit
Credit Facility(14) interest only due May 2004, bears interest at LIBOR plus 187.5 basis points (at June 30,
2003, the interest rate was 3.17%), with a one-year extension option............................................... 252,000
JP Morgan Loan Sales Facility(15), bears interest at the federal funds rate plus 150 basis points.................. -
Total Notes Payable $2,464,751
==========
- ----------------------------------
(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 Operating
Partnership 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 Operating Partnership'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 June 30, 2003, the
interest rate was 5.147%), and (ii) 600 basis points for the Mezzanine note
(at June 30, 2003, the interest rate was 9.5%). The blended rate at June
30, 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 Operating
Partnership's interests in Funding X and Crescent Spectrum Center, L.P. and
the Operating Partnership's interest in their general partner.
(4) In October 2006, the interest rate will adjust based on current interest
rates at that time. It is the Operating Partnership'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 Operating
Partnership 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 Operating Partnership's intention to repay the note in full at such
time (March 2006) by making a final payment of approximately $154.5
million.
(6) During the first quarter of 2003, the Operating Partnership paid the $63.5
million Cigna Note, bearing interest at 7.47%, which matured in March 2003,
in full with a draw under the Operating Partnership's credit facility.
(7) This facility is a $51.8 million line of credit secured by certain DMDC
land and improvements ("vertical facility"), club facilities ("club loan"),
notes receivable ("warehouse facility") and additional land ("short-term
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 June 30, 2003,
the interest rate was 4.00%). The warehouse facility bears interest at
prime plus 100 basis points (at June 30, 2003, the interest rate was 5.00%)
and is limited to $10.0 million. The short-term facility bears interest at
prime plus 50 basis points (at June 30, 2003, the interest rate was 4.50%)
and is limited to $1.8 million. The blended rate at June 30, 2003 for the
vertical facility and club loan, the warehouse facility and the short-term
facility was 4.21%.
(8) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.
(9) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.
(10) 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 Operating Partnership so
elects, it may repay the note without penalty at that date by making a
final payment of approximately $6.1 million.
(11) The Operating Partnership's joint venture partner, which owns a 19.9%
interest in the Sonoma Mission Inn & Spa, has a commitment to fund $10.0
million of future renovations at the Sonoma Mission Inn & Spa through a
mezzanine loan. The Net Operating Income Hurdle Date, as defined in the
loan agreement, is the date as of which the Sonoma Mission Inn & Spa has
achieved an aggregate Adjusted Net Operating Income, as defined in the loan
agreement, of $12 million for a period of 12 consecutive calendar months.
27
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) In June 2003, CRDI entered into an interest rate cap agreement with Bank of
America for a loan with an initial notional amount of $0.8 million,
increasing monthly to up to $28.3 million in September 2004, based on the
amount of the loan. Under the Agreement, in the event the prime rate, as
defined in the agreement, exceeds 4.1%, Bank of America will reimburse the
interest paid in excess of such rate.
(13) The Notes were issued in offerings registered with the Securities and
Exchange Commission.
(14) 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 June 30, 2003, the
maximum borrowing capacity under the credit facility was $372.3 million.
The outstanding balance excludes letters of credit issued under the
Operating Partnership's credit facility of $15.2 million which reduce the
Operating Partnership's maximum borrowing capacity.
(15) 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 Operating Partnership's
consolidated fixed and variable rate debt and does not take into account any
extension options, hedging arrangements or the Operating Partnership's
anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT(1) RATE MATURITY
- ------------------ ----------- ---------- -------- ----------------
Fixed Rate Debt $ 1,643,432 66.7% 8.00% 10.9 years
Variable Rate Debt 821,319 33.3 4.06 1.3 years
----------- ----- ---- ----------
Total Debt $ 2,464,751 100.0% 6.82%(2) 7.0 years(3)
=========== ===== ==== ==========
- -----------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $508.3 million of hedged variable rate debt, are
87% and 13%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 7.19%.
(3) Based on contractual maturities. The overall weighted average maturity is
3.5 years based on the Operating Partnership's expected payoff dates.
Listed below are the aggregate principal payments by year required as
of June 30, 2003 under indebtedness of the Operating Partnership. Scheduled
principal installments and amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL(1)
- -------------- ----------- --------- -------------- -----------
2003 $ 21,707 $ -- $ -- $ 21,707
2004 283,799 -- 252,000 535,799
2005 375,341 -- -- 375,341
2006 18,359 -- -- 18,359
2007 26,344 250,000 -- 276,344
Thereafter 862,201 375,000 -- 1,237,201
----------- --------- --------- -----------
$ 1,587,751 $ 625,000 $ 252,000 $ 2,464,751
=========== ========= ========= ===========
- ----------------------
(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.
The Operating Partnership has $21.7 million of secured debt maturing
through December 31, 2003, consisting primarily of debt related to the
Residential Development Segment. The Operating Partnership plans to meet these
maturing debt obligations, primarily through cash from operations, construction
loan refinancings, and additional borrowings under the Operating Partnership's
credit facility.
Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an acceleration of payment on the loan in
default. In addition, an event of default by the Operating Partnership 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 June 30, 2003, no event of default had occurred,
and the Operating Partnership was in compliance with all of its covenants
related to its outstanding debt. The Operating Partnership's debt facilities
generally prohibit loan prepayment for an initial period, allow prepayment with
a penalty during a following specified period and allow prepayment without
penalty after the
28
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expiration of that period. During the six months ended June 30, 2003, there were
no circumstances that required prepayment penalties or increased collateral
related to the Operating Partnership's existing debt.
In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Operating Partnership
were formed primarily for the purpose of obtaining secured and unsecured debt or
joint venture financings. These entities, all of which are consolidated by the
Operating Partnership or the Company 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); 707 17th Street Property
(CRE Management IX, LLC); Funding X Properties (CREF X Holdings Management, LLC,
CREF X Holdings, L.P., CRE Management X, LLC); Spectrum Center (Spectrum
Mortgage Associates, L.P., CSC Holdings Management, LLC, Crescent SC Holdings,
L.P., CSC Management, LLC), and Crescent Finance Company.
9. CASH FLOW HEDGES
The Operating Partnership 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 June 30, 2003, the Operating
Partnership 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."
The following table shows information regarding the Operating
Partnership's cash flow hedge agreements during the six months ended June 30,
2003, and additional interest expense and unrealized gains (losses) recorded in
Accumulated Other Comprehensive Income ("OCI").
EFFECTIVE
DATE(1) CHANGE IN
- ------------- NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL INTEREST UNREALIZED GAINS
(in thousands) AMOUNT DATE RATE VALUE EXPENSE (LOSSES) IN 0CI
- ------------- --------- -------- --------- ----------- ------------------- ----------------
9/01/99 $ 200,000 9/02/03(2) 6.18% $ (2,503) $ 4,851 $ 4,794
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (4,790) 2,734 2,294
2/15/03 100,000 2/15/06 3.26% (4,098) 741 (1,574)
2/15/03 100,000 2/15/06 3.25% (4,091) 740 (1,574)
9/02/03 200,000 9/01/06 3.72% (10,184) - (5,485)
--------- -------- ---------
$ (25,666) $ 10,114 $ (488)
========= ======== =========
- ---------------------------------
(1) During 2002, the Operating Partnership 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 the Operating Partnership's cash flow hedges
with maturity dates of February 3, 2003 and September 2, 2003.
(2) In June 2003, the Operating Partnership terminated its $200 million
interest rate swap with Salomon Brothers prior to its September 2, 2003
stated maturity by prepaying the interest that would have been due at
maturity. The remaining unrealized gains in OCI and the prepaid interest
amounts will be amortized through the September 2, 2003 maturity date.
The Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 OCI. 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
29
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Operating Partnership, also uses
derivative financial instruments to convert a portion of its variable rate debt
to fixed rate debt. As of June 30, 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 June 30, 2003.
Unlike the additional interest on the Operating Partnership'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 six
months ended June 30, 2003.
ISSUE
DATE ADDITIONAL CHANGE IN
- -------------- NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
(in thousands) AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- -------------- -------- -------- --------- ----------- ----------- ------------
9/4/01 $ 4,650 9/4/03 4.12% $ 36 $ 33 $ 66
9/4/01 3,700 9/4/03 4.12% 28 26 50
----- ----- ------
$ 64 $ 59 $ 116
===== ===== ======
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America for a loan with an initial notional amount of $0.8 million,
increasing monthly to up to $28.3 million in September 2004, based on the
amount of the loan. Under the agreement, in the event the prime rate, as
defined in the agreement, exceeds 4.1%, Bank of America will reimburse the
interest paid in excess of such rate.
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.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
GUARANTEE COMMITMENTS
The FASB issued Interpretation 45 requiring a guarantor to disclose its
guarantees. The Operating Partnership's guarantees in place as of June 30, 2003
are listed in the table below. For the guarantees on indebtedness, no triggering
events or conditions are anticipated to occur that would require payment under
the guarantees and management believes the assets associated with the loans that
are guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Operating Partnership to provide
additional collateral to support the guarantees.
30
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING GUARANTEED
AT JUNE 30, 2003 AMOUNT
---------------- ----------
(in thousands)
DEBTOR
- --------------------------------------------------------------
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) 5,355 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 $ 93,272 $ 111,247
========= ==========
- ------------------------------
(1) See Note 7, "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Unconsolidated Debt Analysis," for a description
of the terms of this debt.
(2) The Operating Partnership provides a full guarantee 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 Operating Partnership 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, of which CRDI owns 88.3%, provides a
guarantee of 70% of the outstanding balance of up to a $9.0 million loan to
Blue River Land Company, L.L.C. There was approximately $7.7 million
outstanding at June 30, 2003 and the amount guaranteed was $5.4 million.
(5) The Operating Partnership and its joint venture partner each provide a $4.3
million letter of credit to guarantee repayment of up to $8.5 million of
the loan to Main Street Partners, L.P.
(6) The Operating Partnership and its joint venture partner each provide a $3.0
million letter of credit to guarantee repayment of up to $6.0 million of
the Manalapan debt with Corus Bank.
OTHER COMMITMENTS
A consolidated subsidiary of the Operating Partnership, CRDI, has a
purchase commitment of $12.1 million related to a purchase agreement for a tract
of land in Eagle County, Colorado. The amount will be paid at closing of the
transaction, which is anticipated to occur in the third quarter of 2003.
See Note 15, "COPI," for a description of the Operating Partnership'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 Operating Partnership.
LITIGATION
The Operating Partnership 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 Operating Partnership's financial position or results of operations when
resolved.
31
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. MINORITY INTEREST
Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the Operating Partnership. 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
June 30, 2003 and December 31, 2002:
2003 2002
(in thousands) --------- ---------
Development joint venture partners - Residential Development Segment $ 23,815 $ 24,937
Joint venture partners - Office Segment 7,594 11,202
Joint venture partners - Resort/Hotel Segment 7,413 7,833
--------- ---------
$ 38,822 $ 43,972
========= =========
The following table summarizes the minority interests' share of net
income (loss) for the six months ended June 30, 2003 and 2002:
2003 2002
(in thousands) ---------- ---------
Development joint venture partners - Residential Development Segment $ (1,095) $ (1,996)
Joint venture partners - Office Segment (33) (839)
Joint venture partners - Resort/Hotel Segment 539 -
Subsidiary preferred equity - (5,394)
---------- ---------
$ (589) $ (8,229)
========== =========
12. PARTNERS' CAPITAL
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 six months ended June 30, 2003, there were 3,940 units
exchanged for 7,880 common shares of the Company.
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the six months ended June 30, 2003
(dollars in thousands, except per unit amounts).
ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
- ------------------------ ------------ --------- -------- -------- ------------
Units $ 0.75 $ 43,871 01/31/03 02/14/03 $ 3.00
Units $ 0.75 $ 43,872 04/30/03 05/15/03 $ 3.00
Units $ 0.75 $ 43,873 07/31/03 08/15/03 $ 3.00
Series A Preferred Units $ 0.422 $ 4,556 01/31/03 02/14/03 $ 1.6875
Series A Preferred Units $ 0.422 $ 4,556 04/30/03 05/15/03 $ 1.6875
Series A Preferred Units $ 0.422 $ 4,556 07/31/03 08/15/03 $ 1.6875
Series B Preferred Units $ 0.594 $ 2,019 01/31/03 02/14/03 $ 2.3750
Series B Preferred Units $ 0.594 $ 2,019 04/30/03 05/15/03 $ 2.3750
Series B Preferred Units $ 0.594 $ 2,019 07/31/03 08/15/03 $ 2.3750
32
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 six months ended June 30, 2003, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.
Income or losses of the Operating Partnership are allocated to the
partners of the Operating Partnership for inclusion in their respective income
tax calculations. Accordingly, no provision or benefit for income taxes has been
made other than for certain consolidated subsidiaries. The Operating Partnership
consolidates certain taxable REIT subsidiaries, which are subject to federal and
state income tax. For the six months ended June 30, 2003 and 2002, the Operating
Partnership's federal income tax benefit was $5.6 million and $4.0 million,
respectively. The Operating Partnership's $5.6 million income tax benefit at
June 30, 2003 consists primarily of $3.4 million for the Residential Development
Segment and $2.1 million for the Resort/Hotel Segment.
The Operating Partnership's total net tax asset of approximately $50.3
million at June 30, 2003 includes $33.1 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 six
months ended June 30, 2003.
14. RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC. ("DBL")
Since June 1999, the Operating Partnership 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. 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 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 C. Goff, Vice-Chairman of the Company's Board of Trust Managers
and Chief Executive Officer of the Company and sole director and Chief Executive
Officer of the General Partner. The remaining approximately 2% general
partnership interest is owned by parties unrelated to the Operating Partnership.
At June 30, 2003, DBL had an approximately $13.4 million investment in G2.
On January 2, 2003, the Operating Partnership purchased the remaining
2.56% economic interest, representing 100% of the voting stock, in DBL 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 Operating Partnership and is consolidated in the Residential
Development Segment as of and for the six months ended June 30, 2003. Also,
because DBL owns a majority of the voting stock in MVDC and HADC, the Operating
Partnership consolidated these two Residential Development Corporations as of
and for the six months ended June 30, 2003.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of June 30, 2003, the Operating Partnership had approximately $37.8
million of loans outstanding to certain employees and trust managers of the
General Partner and the Company on a recourse basis pursuant to the Company's
and the Operating Partnership's stock incentive plans and unit incentive plans
pursuant to an agreement approved by the Board of Trust Managers 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.
33
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mr. Goff had a loan representing $26.3 million of the $37.8 million total
outstanding loans at June 30, 2003. Approximately $0.3 million of interest was
outstanding related to these loans as of June 30, 2003. No conditions exist at
June 30, 2003 which would cause any of the loans to be in default. Effective
July 29, 2002, the Operating Partnership ceased offering to the employees and
trust managers the option to obtain loans pursuant to the Company's and the
Operating Partnership's stock and unit incentive plans.
OTHER
On June 28, 2002, the Operating Partnership purchased, and is holding
for sale, the home of an executive officer of the General Partner and 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
Operating Partnership.
15. COPI
In April 1997, the Operating Partnership 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 Operating Partnership and to perform the intercompany agreement
between COPI and the Operating Partnership, pursuant to which each party agreed
to provide the other with rights to participate in certain transactions. The
Operating Partnership 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 Operating Partnership made loans to COPI
under a line of credit and various term loans.
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Operating Partnership, through taxable REIT subsidiaries
of the Company, to operate or lease certain of its investments that had
previously been operated or leased by COPI.
On February 14, 2002, the Operating Partnership executed an agreement
(the "Agreement") with COPI, pursuant to which COPI transferred to subsidiaries
of the Operating Partnership, 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
Operating Partnership's Residential Development Corporations and other assets.
The Operating Partnership 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 Operating Partnership were
reduced.
The Operating Partnership 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 Operating Partnership
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 Operating Partnership 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 Operating Partnership 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 Operating Partnership also agreed, however, that the Company 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 Operating Partnership
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 Operating Partnership 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
Operating Partnership expects to form and capitalize a new entity ("Crescent
Spinco"), to be owned by the unitholders of the Operating
34
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Partnership and 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 Operating Partnership. 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 and sole director and Chief Executive Officer of the
General Partner, 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 Operating Partnership 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 Operating Partnership
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.
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.
35
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............................................................ 37
Results of Operations
Three and six months ended June 30, 2003 and 2002................................ 38
Liquidity and Capital Resources
Cash Flows for the six months ended June 30, 2003................................ 44
Debt Financing........................................................................ 49
Recent Developments................................................................... 52
Unconsolidated Investments............................................................ 53
Significant Accounting Policies....................................................... 55
Funds from Operations................................................................. 59
36
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
Operating Partnership'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 consolidated 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. 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 Operating Partnership believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Operating Partnership's actual results could differ materially
from those described in the forward-looking statements.
The following factors might cause such a difference:
- The Operating Partnership'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);
- Adverse changes in the financial condition of existing tenants;
- 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;
- 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 Operating Partnership's
ability to fund the Company's share repurchase program and the
Operating Partnership's ability to consummate financings and
refinancings on favorable terms and within any applicable time frames;
- The ability of the Operating Partnership to implement planned operating
expense and capital expenditure reductions within anticipated time
frames;
- The ability of the Operating Partnership to consummate anticipated
office acquisitions and investment land and other dispositions on
favorable terms and within anticipated time frames;
- 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);
- The inability of the Operating Partnership to complete the distribution
to its unitholders and the shareholders of the Company of the shares of
a new entity to purchase the AmeriCold Logistics tenant interest from
COPI;
- The concentration of a significant percentage of the Operating
Partnership's assets in Texas;
- 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; and
- Other risks detailed from time to time in the Operating Partnership's
filings with the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Operating Partnership is not obligated to
update these forward-looking statements to reflect any future events or
circumstances.
37
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's financial data as
a percentage of total revenue for the three and six months ended June 30, 2003
and 2002, and the variance in dollars between the three and six months ended
June 30, 2003 and 2002.
FINANCIAL DATA AS A FINANCIAL DATA AS A
PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL
REVENUES FOR THE THREE REVENUES FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
---------------------- ---------------------
2003 2002 2003 2002
----- ----- ------ -----
REVENUE:
Office Property 54.6% 50.3% 55.6% 56.0%
Resort/Hotel Property 22.1 19.4 25.0 18.5
Residential Development Property 23.3 30.3 19.4 25.5
----- ----- ------ -----
TOTAL PROPERTY REVENUE 100.0% 100.0% 100.0% 100.0%
----- ----- ------ -----
EXPENSES
Office Property real estate taxes 7.9% 7.3% 7.9% 8.1%
Office Property operating expenses 18.9 14.9 18.8 17.0
Resort/Hotel property expense 18.3 15.3 20.1 13.3
Residential Development Property expense 20.5 27.0 17.5 22.9
----- ----- ------ -----
TOTAL PROPERTY EXPENSE 65.6% 64.5% 64.3% 61.3%
----- ----- ------ -----
INCOME FROM PROPERTY OPERATIONS 34.4% 35.5% 35.7% 38.7%
----- ----- ------ -----
OTHER INCOME (EXPENSES):
Income from investment land sales, net 0.7% 0.0% 0.4% 0.0%
Interest and other income 0.5 2.6 0.6 3.0
Corporate general and administrative (2.6) (1.9) (2.7) (2.4)
Interest expense (18.5) (16.8) (18.7) (17.9)
Amortization of deferred financing costs (1.1) (1.0) (1.1) (1.0)
Depreciation and amortization (15.4) (12.4) (16.1) (13.5)
Impairment and other charges related to real estate assets 0.0 (0.4) (0.1) (0.2)
Other expenses (0.1) (0.1) (0.1) (0.1)
Equity in net income (loss) of unconsolidated
companies:
Office Properties 0.8 0.5 0.7 0.6
Resort/Hotel Properties 0.6 0.0 0.5 0.0
Residential Development Properties 0.7 2.2 0.5 3.8
Temperature-Controlled Logistics Properties (0.2) (0.2) 0.2 (0.2)
Other 0.1 (0.2) (0.2) (0.9)
----- ----- ------ -----
TOTAL OTHER INCOME (EXPENSE) (34.5)% (27.7)% (36.1)% (28.8)%
----- ----- ------ -----
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS AND INCOME TAXES (0.1) 7.8 (0.4) 9.9%
Minority interests (0.7) (1.2) (0.1) (1.7)
Income tax benefit (provision) 1.3 (0.3) 1.2 0.8
----- ----- ------ -----
INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
Discontinued operations-income (loss) on assets sold and held
for sale 0.5% 6.3% 0.7% 9.0%
Discontinued operations-(loss) gain on assets sold and held for sale 0.3 (0.2) 0.2 0.2
Cumulative effect of a change in accounting principle (0.4) 0.7 (3.7) 0.8
0.0 0.0 0.0 (2.1)
----- ----- ------ -----
NET INCOME (LOSS)
0.4% 6.8% (2.8)% 7.9%
Series A Preferred Unit distributions
Series B Preferred Unit distributions (2.0) (1.5) (2.0) (1.5)
(0.9) (0.4) (0.9) (0.2)
----- ----- ------ -----
NET (LOSS) INCOME AVAILABLE TO PARTNERS (2.5)% 4.9% (5.7)% 6.2%
===== ===== ====== =====
TOTAL VARIANCE IN TOTAL VARIANCE IN
DOLLARS BETWEEN DOLLARS BETWEEN
THE THREE MONTHS THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
(IN MILLIONS) (IN MILLIONS)
2003 AND 2002 2003 AND 2002
----------------- -----------------
REVENUE:
Office Property $ (11.0) $ (21.9)
Resort/Hotel Property (1.9) 23.3
Residential Development Property (29.3) (37.0)
---------------- -----------------
TOTAL PROPERTY REVENUE $ (42.2) $ (35.6)
---------------- -----------------
EXPENSES
Office Property real estate taxes $ (1.5) $ (3.9)
Office Property operating expenses 3.0 2.7
Resort/Hotel property expense 0.5 26.3
Residential Development Property expense (26.5) (32.9)
---------------- -----------------
TOTAL PROPERTY EXPENSE $ (24.5) $ (7.8)
---------------- -----------------
INCOME FROM PROPERTY OPERATIONS $ (17.7) $ (27.8)
---------------- -----------------
OTHER INCOME (EXPENSES):
Income from investment land sales, net $ 1.6 $ 1.7
Interest and other income (6.1) (12.1)
Corporate general and administrative (0.9) (0.9)
Interest expense 3.4 2.4
Amortization of deferred financing costs 0.3 0.1
Depreciation and amortization (1.5) (7.6)
Impairment and other charges related to real estate assets 1.0 (0.2)
Other expenses (0.5) (0.3)
Equity in net income (loss) of unconsolidated
companies:
Office Properties 0.4 0.5
Resort/Hotel Properties 1.4 2.1
Residential Development Properties (4.6) (16.2)
Temperature-Controlled Logistics Properties 0.0 1.8
Other 0.7 3.7
---------------- -----------------
TOTAL OTHER INCOME (EXPENSE) $ (4.8) $ (25.0)
---------------- -----------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS AND INCOME TAXES $ (22.5) $ (52.8)
Minority interests 1.7 7.6
Income tax benefit (provision) 4.0 1.6
---------------- -----------------
INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ (16.8) $ (43.6)
Discontinued operations-income (loss) on assets sold and held 1.4 (0.1)
for sale (2.9) (21.3)
Discontinued operations-(loss) gain on assets sold and held for sale 0.0 10.3
Cumulative effect of a change in accounting principle ---------------- -----------------
NET INCOME (LOSS) $ (18.3) $ (54.7)
Series A Preferred Unit distributions (0.3) (1.5)
Series B Preferred Unit distributions (1.0) (3.0)
---------------- -----------------
NET (LOSS) INCOME AVAILABLE TO PARTNERS $ (19.6) $ (59.2)
================ =================
38
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 TO THE THREE MONTHS ENDED
JUNE 30, 2002
PROPERTY REVENUES
Total property revenues decreased $42.2 million, or 15.3%, to $233.2
million for the three months ended June 30, 2003, as compared to $275.4 million
for the three months ended June 30, 2002. The primary components of the decrease
in total property revenues are discussed below.
- Office Property revenues decreased $11.0 million, or 8.0%, to $127.3
million, due to:
- a decrease of $8.2 million resulting from the contribution
of two Office Properties to joint ventures in the third
quarter of 2002; and
- a decrease of $7.6 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held
for sale) that the Operating Partnership owned or had an
interest in, primarily due to a decline in occupancy resulting
in decreases in both rental revenue and operating expense
recoveries, and a decrease in antenna revenue and other
revenue; partially offset by
- an increase of $3.3 million from the Johns Manville Office
Property acquired in August 2002; and
- an increase of $1.3 million resulting from third party
management services provided to joint ventures and related
direct expense reimbursements.
- Residential Development revenues decreased $29.3 million, or 35.1%, to
$54.2 million, primarily due to:
- a decrease of $20.2 million primarily due to the sale of 16
fewer units and 138 fewer lots at CRDI;
- a decrease of $14.1 million primarily due to the sale of 14
fewer lots at Desert Mountain; partially offset by
- an increase of $4.2 million due to consolidation of MVDC and
HADC in 2003.
PROPERTY EXPENSES
Total property expenses decreased $24.5 million, or 13.8%, to $152.9
million for the three months ended June 30, 2003, as compared to $177.4 million
for the three months ended June 30, 2002. The primary components of the decrease
in total property expenses are discussed below.
- Office Property expenses increased $1.5 million, or 2.5%, to $62.5
million, primarily due to:
- an increase of $2.3 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held
for sale) that the Operating Partnership owned or had an
interest in, due to:
- $4.2 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and
- $0.6 million increase in bad debt expense; partially
offset by
- $1.3 million decrease in building repairs and
maintenance expense; and
- $1.2 million decrease in property taxes and other
taxes and assessments;
- an increase of $1.3 million due to the acquisition of the
Johns Manville Office Property in August 2002; and
- an increase of $0.9 million attributable to the cost of
providing third party management services to joint venture
properties, which are recouped by increased third party fee
income and direct expense reimbursements; partially offset by
- a decrease of $3.4 million due to the contribution of two
Office Properties to joint ventures in 2002.
- Residential Development Property expenses decreased $26.5 million, or
35.6%, to $47.8 million, primarily due to:
- a decrease of $18.4 million primarily due to a reduction in
cost of sales related to the sale of 16 fewer units and 138
fewer lots at CRDI;
- a decrease of $12.6 million primarily due to a reduction in
cost of sales related to the sale of 14 fewer lots at Desert
Mountain; partially offset by
- an increase of $2.5 million primarily due to increased cost of
sales from the consolidation of MVDC and HADC.
39
OTHER INCOME/EXPENSE
Total other expenses decreased $4.8 million, or 6.3%, to $80.7 million
for the three months ended June 30, 2003, as compared to $75.9 million for the
three months ended June 30, 2002. The primary components of the decrease in
total other expenses are discussed below.
OTHER INCOME
Other income decreased $6.6 million, or 47.2%, to $7.4 million for the
three months ended June 30, 2003, as compared to $14.0 million for the three
months ended June 30, 2002. The primary components of the decrease in other
income are discussed below.
- Equity in net income of unconsolidated companies decreased $2.1
million, or 32.1%, to $4.6 million, primarily due to:
- a decrease of $4.6 million in Residential Development Property
equity in net income due to a reduction in lot and acreage
sales at the Woodlands Land Development Company, L.P. and
consolidation of MVDC and HADC in 2003; partially offset by
- an increase of $1.4 million in Resort/Hotel Property equity in
net income, primarily due to a series of transactions in
October 2002 in which the Operating Partnership increased its
equity interest in the entity that owns the Ritz Carlton Palm
Beach Hotel from 25% to 50% and the Operating Partnership's
$1.1 million portion of a payment received from the operator
of the Resort/Hotel Property pursuant to the terms of the
operating agreement because the Property did not achieve the
specified net operating income level for 2002;
- an increase of $0.7 million in other unconsolidated companies
due primarily to losses recognized for the three months ended
June 30, 2002; and
- an increase of $0.4 million in Office Property equity in net
income.
- Interest and other income decreased $6.1 million, or 83.7%, to $1.2
million due to:
- a decrease in interest income of $5.4 million as a result of
the repayment in full in August 2002 of a loan that was
originated in March 2000 from the Operating Partnership to
Crescent SH IX, Inc. ("SH IX"), a subsidiary of the Company,
in connection with the repurchase of 14,468,623 common shares
of the Company; and
- the payoff of two notes receivable, with an aggregate
principal balance of $19.9 million, in 2002.
- Income from investment land sales, net increased $1.6 million, due to
net income from the sales of two parcels of undeveloped land, located
in Dallas, Texas and Coppell, Texas, in 2003.
OTHER EXPENSES
Other expenses decreased $1.8 million, or 2.0%, to $88.1 million for
the three months ended June 30, 2003, as compared to $89.9 million for the three
months ended June 30, 2002. The primary components of the decrease in other
expenses are discussed below.
- Interest expense decreased $3.4 million, or 7.3%, to $43.1 million due
to a decrease of $17.8 million in the weighted average debt balance and
a decrease of 0.74% in the weighted average interest rate.
- Depreciation and amortization expense increased $1.5 million, or 4.4%,
to $36.0 million, primarily due to an increase of $1.7 million in
Residential Development Property and Resort/Hotel Property depreciation
and amortization expense.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $1.5 million, or 122.9%, to a loss of $0.3 million, primarily due to:
- a decrease of $1.8 million due to the gain on the sale of two
office properties in 2002; and
- a decrease of $1.0 million, due to the impairment of a
behavioral healthcare property in 2003; partially offset by
40
- an increase of $1.3 million due to net operating loss in 2002
from six office properties and two transportation companies
sold during 2002.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 TO THE SIX MONTHS ENDED JUNE
30, 2002
The following comparison of the results of operations for the six
months ended June 30, 2003 and the six months ended June 30, 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 Operating Partnership'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 Operating Partnership'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."
PROPERTY REVENUES
Total property revenues decreased $35.6 million, or 7.2%, to $461.0
million for the six months ended June 30, 2003, as compared to $496.6 million
for the six months ended June 30, 2002. The components of the decrease in total
property revenues are discussed below.
- Office Property revenues decreased $21.9 million, or 7.9%, to $256.1
million, due to:
- a decrease of $17.0 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held
for sale) that the Operating Partnership owned or had an
interest in, primarily due to a decline in occupancy resulting
in decreases in both rental revenue and operating expense
recoveries, and a decrease in antenna revenue and other
revenue;
- a decrease of $16.0 million resulting from the contribution of
two Office Properties to joint ventures in the third quarter
of 2002; and
- a decrease of $0.1 million in other revenues; partially offset
by
- an increase of $6.7 million from the Johns Manville Office
Property acquired in August 2002;
- an increase of $2.3 million attributable to third party
management services and related direct expense reimbursements;
- an increase of $1.2 million in net lease termination fees to
$3.0 million in 2003; and
- an increase of $1.0 million attributable to non-recurring
revenue received in 2003.
- Resort/Hotel Property revenues increased $23.3 million, or 25.3%, to
$115.4 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 Operating Partnership
recognized lease payments related to these properties).
- Residential Development revenues decreased $37.0 million, or 29.2%, to
$89.6 million, primarily due to a reduction in lot and unit sales at
Desert Mountain and CRDI.
PROPERTY EXPENSES
Total property expenses decreased $7.8 million, or 2.6%, to $296.6
million for the six months ended June 30, 2003, as compared to $304.4 million
for the six months ended June 30, 2002. The components of the decrease in total
property expenses are discussed below.
- Office Property expenses decreased $1.2 million, or 1.0%, to $123.4
million, primarily due to:
- a decrease of $6.7 million due to the contribution of two
Office Properties to joint ventures in 2002; and
- a decrease of $0.7 million from the 65 consolidated Office
Properties (excluding 2002 acquisitions and properties held
for sale) that the Operating Partnership owned or had an
interest in, due to:
- $3.0 million decrease in property taxes;
- $2.2 million decrease in building repairs and
maintenance expense; and
- $0.8 million decrease in management fee expenses;
partially offset by
41
- $5.3 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; partially offset by
- an increase of $2.6 million due to the acquisition of the
Johns Manville Office Property in August 2002;
- an increase of $2.0 million attributable to the cost of
providing third party management services to joint venture
properties, which are recouped by increased third party fee
income and direct expense reimbursements;
- an increase of $0.9 million in taxes/assessments related to
various land parcels; and
- an increase of $0.4 million of other expenses.
- Resort/Hotel Property expense increased $26.3 million, or 39.8%, to
$92.4 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.
- Residential Development Property expenses decreased $32.9 million, or
29.0%, to $80.8 million, primarily due to a reduction in lot and unit
sales and related costs at Desert Mountain and CRDI.
OTHER INCOME/EXPENSE
Total other expenses increased $25.0 million, or 17.6%, to $167.4
million for the six months ended June 30, 2003, as compared to $142.4 million
for the six months ended June 30, 2002. The primary components of the increase
in total other expenses are discussed below.
OTHER INCOME
Other income decreased $18.5 million, or 59.5%, to $12.8 million for
the six months ended June 30, 2003, as compared to $31.1 million for the six
months ended June 30, 2002. The primary components of the decrease in other
income are discussed below.
- Equity in net income of unconsolidated companies decreased $8.1
million, or 49.1%, to $8.2 million, primarily due to:
- a decrease of $16.2 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
- an increase of $3.7 million in other unconsolidated companies
due primarily to losses recognized in the six months ended
June 30, 2002;
- an increase of $2.1 million in Resort/Hotel Property equity in
net income, primarily due to a series of transactions in
October 2002 in which the Operating Partnership increased its
equity interest in the entity that owns the Ritz Carlton Palm
Beach Hotel from 25% to 50% and the Operating Partnership's
$1.1 million portion of a payment received from the operator
of the Resort/Hotel Property pursuant to the terms of the
operating agreement because the Property did not achieve the
specified net operating income level for 2002;
- an increase of $1.8 million in Temperature-Controlled
Logistics Property equity in net income, primarily due to an
increase in other income, partially offset by a decrease in
interest expense resulting from a decrease of $3.0 million in
the overall debt balance and a decrease in administrative
expenses; and
- an increase of $0.5 million in Office Property equity in net
income.
- Interest and other income decreased $12.1 million, or 80.9%, to $2.9
million due to:
- a decrease in interest income of $10.8 million as a result of
the repayment in full in August 2002 of a loan that was
originated in March 2000 from the Operating Partnership to SH
IX in connection with the repurchase of 14,468,623 common
shares of the Company; and
- the payoff of two notes receivable, with an aggregate
principal balance of $19.9 million, in 2002.
- Income from investment land sales, net increased $1.7 million, due to
net income from the sales of two parcels of undeveloped land, located
in Dallas, Texas and Coppell, Texas, in 2003.
42
OTHER EXPENSES
Other expenses increased $6.5 million, or 3.8%, to $180.2 million for
the six months ended June 30, 2003, as compared to $173.5 million for the three
months ended June 30, 2002. The primary components of the increase in other
expenses are discussed below.
- Depreciation expense increased $7.6 million, or 11.3%, to $74.7
million, due to;
- an increase of $4.9 million in Residential Development
Property and Resort/Hotel Property depreciation expense.
- an increase of $2.7 million in Office Property depreciation
expense, primarily attributable to:
- an increase of $4.6 million due to the write-off of
tenant improvements and lease commissions due to
early termination of leases; and
- an increase of $1.0 million from Johns Manville
Office Property acquired in August 2002; partially
offset by
- a decrease of $3.0 million associated with the
contribution of two Office Properties to joint
ventures in 2002.
- Corporate, general and administrative expenses increased $0.9 million,
or 7.5%, to $12.6 million, primarily due to increased legal expenses,
shareholder services, and consulting costs related to compliance with
the Sarbanes-Oxley Act.
- Other expenses increased $0.3 million due to a loss resulting from the
sale of marketable securities in 2003.
- Interest expense decreased $2.4 million, or 2.7%, to $86.3 million
primarily due to a decrease of 0.38%, from 7.69% to 7.31%, in the
weighted average interest rate.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $21.4 million, or 436.7%, to a loss of $16.5 million, primarily due
to:
- a decrease of approximately $15.0 million due to the
impairment in 2003 of the 1800 West Loop South Office
Property;
- a decrease of $6.0 million due to the gain on the sale of
three office properties in 2002; and
- a decrease of approximately $1.8 million due to the impairment
in 2003 of two of the behavioral healthcare properties;
partially offset by
- an increase of $1.4 million due to the impairment in 2002 of
two transportation companies sold in 2002.
RESORT/HOTEL PROPERTIES
The following provides a comparison of the results of operations of the
Resort/Hotel Properties for the six months ended June 30, 2003 and 2002.
For the six months ended June 30,
----------------------------------------
(in thousands) 2003 2002 Variance
- ----------------------- ------------- ------------ ---------
Lease revenues $ 2,542 $ 7,913
Operating revenues 112,811 84,134
Operating expenses (92,399) (66,102)
------------- ------------ ---------
Net Operating Income $ 22,954 $ 25,945 $ (2,991)
------------- ------------ ---------
43
The net operating income for the Resort/Hotel Properties decreased $3.0
million, or 11.5%, to $22.9 million, primarily due to an increase of $2.9
million in Resort/Hotel Property operating expenses, primarily consisting of
insurance and workers' compensation expenses.
RESIDENTIAL DEVELOPMENT PROPERTIES
The following provides a comparison of the results of operations of the
Residential Development Properties for the six months ended June 30, 2003 and
2002.
For the six months ended June 30,
----------------------------------------
(in thousands) 2003 2002 Variance
- ----------------------- ------------ ------------ ---------
Operating revenues $ 89,572 $ 126,541
Operating expenses (80,760) (113,678)
Depreciation and amortization (5,330) (2,849)
Equity in net income of
unconsolidated companies 2,510 18,662
Income tax benefit (provision) 3,443 (3,463)
Minority interests (1,095) (1,995)
Discontinued operations - (1,205)
------------ ------------ ---------
Net Income $ 8,340 $ 22,013 $ (13,673)
------------ ------------ ---------
Net income for the Residential Development Properties decreased $13.7
million, or 62.1%, to $8.3 million, primarily due to:
- a decrease of approximately $7.8 million due to lower lot, unit
and acreage sales at Desert Mountain, CRDI and The Woodlands in
2003;
- a decrease of approximately $6.0 million as a result of gains
recognized on the disposition of two properties at The Woodlands
in 2002; and
- a decrease of $1.1 million due to the sale of two transportation
companies in December 2002 by CRDI; partially offset by
- an increase of $1.4 million due to a goodwill impairment at CRDI
in 2002 resulting from the adoption of Statement of Financial
Accounting Standards No. 142.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30,
(in millions) 2003
- ----------------------------------------- -------------------
Cash provided by Operating Activities $ 34.3
Cash used in Investing Activities (15.0)
Cash used in Financing Activities (28.5)
------------------
Decrease in Cash and Cash Equivalents $ (9.2)
Cash and Cash Equivalents, Beginning of
Period 75.4
------------------
Cash and Cash Equivalents, End of Period $ 66.2
==================
OPERATING ACTIVITIES
The Operating Partnership's cash provided by operating activities of
$34.3 million is attributable to Property operations.
44
INVESTING ACTIVITIES
The Operating Partnership's cash used in investing activities of $15.0
million is primarily attributable to:
- $28.6 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
- $15.2 million for Residential Development Property
investments;
- $11.3 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;
- $3.3 million of additional investment in unconsolidated
companies, consisting primarily of investments in the
Residential Development Properties, Temperature-Controlled
Logistics Properties, and SunTx, a private equity fund;
- $2.7 million resulting from an increase in restricted cash,
due primarily to an increase in escrow deposits for capital
expenditures at the Operating Partnership's Office Properties;
- $2.0 million for the acquisition of rental properties; and
- $1.1 million for development of investment properties.
The cash used in investing activities is partially offset by:
- $20.5 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 and collections on developer financing notes at the
Residential Development Properties related to lot and unit
sales in 2002;
- $11.4 million in cash resulting from the consolidation of
entities;
- $6.4 million of proceeds from property sales;
- $5.4 million from return of investments in SunTx;
- $3.2 million from return of investments in
Temperature-Controlled Logistics Properties; and
- $2.3 million from return of investments in Office Properties.
FINANCING ACTIVITIES
The Operating Partnership's cash used in financing activities of $28.5
million is attributable to:
- $99.0 million of payments under the Operating Partnership's
credit facility, primarily from proceeds from the new Cigna
note;
- $92.4 million of payments under other borrowings, partially
resulting from the payoff of the Cigna Note;
- $87.1 million of distributions to unitholders;
- $47.8 million of Residential Development Property note
payments;
- $13.2 million of distributions to preferred unitholders;
- $7.8 million of net capital distributions to joint venture
partners; and
- $1.9 million of debt financing costs.
The cash used in financing activities is partially offset by:
- $187.0 million of proceeds from borrowings under the Operating
Partnership's credit facility, a portion of 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;
- $92.4 million of proceeds from other borrowings, primarily as
a result of the new Cigna note; and
- $41.3 million of proceeds from borrowings for construction
costs for infrastructure development on Residential
Development Properties.
45
LIQUIDITY REQUIREMENTS
DEBT FINANCING SUMMARY
The following tables show summary information about the Operating
Partnership's debt, including its share of unconsolidated debt, as of June 30,
2003. Additional information about the significant terms of the Operating
Partnership's debt financing arrangements, its unconsolidated debt, and the
Operating Partnership's guarantees of unconsolidated debt, is contained in Note
8, "Notes Payable and Borrowings under Credit Facility," Note 7, "Investments in
Real Estate Mortgages and Equity of Unconsolidated Companies," and Note 10,
"Commitments and Contingencies" of Item 1, "Financial Statements."
TOTAL SHARE OF
OPERATING UNCONSOLIDATED
(in thousands) PARTNERSHIP DEBT(1) DEBT TOTAL(2)
- ------------------ ------------------- --------------- ----------
Fixed Rate Debt $ 1,643,432 $ 306,366 $1,949,798
Variable Rate Debt 821,319 257,777 1,079,096
------------------- --------------- ----------
Total Debt $ 2,464,751 $ 564,143 $3,028,894
=================== =============== ==========
- --------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $508.3 million of hedged variable rate debt, are
87% and 13%, respectively.
(2) Balance excludes hedges. The percentages for total consolidated and
unconsolidated fixed rate debt and variable rate debt, including the $508.3
million of hedged variable rate debt, are 81% and 19%, respectively.
UNSECURED TOTAL
DEBT OPERATING SHARE OF
SECURED UNSECURED LINE OF PARTNERSHIP UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL
- ------------------ ------------ ------------ -------------- ---------------- -------------- ------------
2003 $ 21,707 $ - $ - $ 21,707 $ 17,432 $ 39,139
2004 283,799 - 252,000 535,799 103,277 639,076
2005 375,341 - - 375,341 167,084 542,425
2006 18,359 - - 18,359 23,977 42,336
2007 26,344 250,000 - 276,344 48,384 324,728
Thereafter 862,201 375,000 - 1,237,201 203,989 1,441,190
------------ ------------ -------------- ---------------- -------------- ------------
$ 1,587,751 $ 625,000 $ 252,000 $ 2,464,751 $ 564,143 $ 3,028,894
============ ============ ============== ================ ============== ============
46
CAPITAL EXPENDITURES
As of June 30, 2003, the Operating Partnership had unfunded capital
expenditures of approximately $79.5 million relating to capital investments that
are not in the ordinary course of operations of the Operating Partnership's
business segments. The table below specifies the Operating Partnership's
requirements for capital expenditures and its amounts funded as of June 30,
2003, and amounts remaining to be funded (future fundings classified between
short-term and long-term capital requirements):
CAPITAL EXPENDITURES
-------------------------------
(in millions) TOTAL AMOUNT FUNDED AMOUNT SHORT-TERM
PROJECT AS OF JUNE REMAINING TO (NEXT 12 LONG-TERM
PROJECT COST (1) 30, 2003 FUND MONTHS) (2) (12+ MONTHS)(2)
- ---------------------------------------------- --------- --------------- ------------ ------------ --------------
OFFICE SEGMENT
Acquired or Developed Properties (3) $ 2.3 $ (1.1) $ 1.2 $ 1.2 $ -
Houston Center Shops Redevelopment (4) 11.6 (1.3) 10.3 10.3 -
RESIDENTIAL DEVELOPMENT SEGMENT(5)
Tahoe Mountain Properties & Club 85.3 (75.4) 9.9 9.9 -
Desert Mountain Golf Course and
Water Supply Pipeline 53.8 (39.7) 14.1 14.1 -
CRDI - East West Resort Development IV, 12.1 - 12.1 12.1 -
L.P., L.L.L.P. (6)
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land -
Construction Loan(7) 3.2 - 3.2 1.6 1.6
Canyon Ranch - Lenox Aquatic Center 3.1 (2.6) 0.5 0.5 -
OTHER
SunTx (8) 19.0 (6.3) 12.7 4.0 8.7
Crescent Spinco (9) 15.5 - 15.5 15.5 -
--------- --------------- ----------- ------------ -----------
TOTAL $ 205.9 $ (126.4) $ 79.5 $ 69.2 $ 10.3
========= =============== ============ ============ ===========
- ---------------------------------------
(1) All amounts are approximate.
(2) Reflects the Operating Partnership's estimate of the breakdown between
short-term and long-term capital expenditures.
(3) The capital expenditures reflect the Operating Partnership's ownership
percentage in each Property, 25% for 5 Houston Center Office Property and
30% for Five Post Oak Park Office Property.
(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 Operating Partnership anticipates sales to occur over the next 18
months.
(6) The Operating Partnership has a purchase commitment of $12.1 million
related to a purchase agreement for a tract of land in Eagle County,
Colorado. The guaranteed amount of $12.1 million will be paid by the
Operating Partnership at closing of the transaction, which is anticipated
to occur in the third quarter of 2003.
(7) The Operating Partnership 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.
(8) This commitment is related to the Operating Partnership's investment in a
private equity fund.
(9) The Operating Partnership expects to form and capitalize Crescent Spinco,
which will be a separate entity to be owned by the Operating Partnership's
unitholders and the Company's shareholders, and to cause the new entity to
commit to acquire COPI's entire membership interest in AmeriCold Logistics.
In addition, the Operating Partnership has entered into a contract to
acquire an office property for approximately $52 million, consisting of $14
million in cash and assumption of a $38 million loan. The acquisition is
anticipated to close in the third quarter of 2003 and is subject to customary
closing conditions.
LIQUIDITY OUTLOOK
The Operating Partnership expects to fund its short-term capital
requirements of approximately $69.2 million through a combination of cash,
construction financing, net cash flow from operations, and borrowings under the
Operating Partnership's credit facility or the JP Morgan Facility. The Operating
Partnership plans to meet its maturing debt obligations, through June 30, 2004,
of approximately $540.5 million, primarily through refinancing of the Credit
Facility, refinancing or electing the extension option on the Deutsche Bank-CMBS
loan, and refinancing of the Northwestern Life Note.
The Operating Partnership 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
improvements and leasing costs), distributions to shareholders and unitholders,
and unfunded expenses related to the COPI bankruptcy, primarily through cash
flow provided by operating activities and return of capital from the Residential
Development Segment. To the extent that the Operating Partnership's cash flow
from operating activities and return of capital from the Residential Development
Segment are not sufficient to finance such short-term liquidity requirements,
the Operating Partnership expects to finance such requirements with
47
borrowings under the Operating Partnership's credit facility, the JP Morgan
Facility, or new debt facilities, and proceeds from the sale or joint venture of
Properties.
The Operating Partnership's long-term liquidity requirements as of June
30, 2003 consist primarily of debt maturities after June 30, 2004, which totaled
approximately $1.9 billion. The Operating Partnership also has $10.3 million of
long-term capital expenditure requirements. The Operating Partnership 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
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include:
- Additional proceeds from the Operating Partnership's Credit Facility
under which the Operating Partnership has up to $105.1 million of
borrowing capacity available as of June 30, 2003;
- Additional proceeds from the refinancing of the Operating Partnership's
Credit Facility and other existing secured and unsecured debt;
- Additional debt secured by existing underleveraged properties;
- Issuance of additional unsecured debt;
- Equity offerings including preferred and/or convertible securities; and
- Proceeds from joint ventures and Property sales.
The following factors could limit the Operating Partnership's ability
to utilize these financing alternatives:
- The reduction in net operating income of the Properties supporting the
Operating Partnership's Credit Facility to a level that would reduce
the availability under the Credit Facility;
- The Operating Partnership may be unable to obtain debt or equity
financing on favorable terms, or at all, as a result of the financial
condition of the Operating Partnership or market conditions at the time
the Operating Partnership seeks additional financing;
- Restrictions on the Operating Partnership'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
- The Operating Partnership may be unable to service additional or
replacement debt due to increases in interest rates and a decline in
the Operating Partnership's operating performance.
The Operating Partnership's portion of unconsolidated debt maturing
through June 30, 2004 is $47.6 million. The Operating Partnership's portion of
unconsolidated debt maturing after June 30, 2004 is $516.5 million.
Unconsolidated debt is the liability of the unconsolidated entity, is typically
secured by that entity's property, and is non-recourse to the Operating
Partnership except where a guarantee exists.
48
DEBT FINANCING
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of June 30, 2003, are shown below:
BALANCE INTEREST
OUTSTANDING AT RATE AT EXPECTED
MAXIMUM JUNE 30, JUNE 30, MATURITY PAYOFF
DESCRIPTION(1) BORROWINGS 2003 2003 DATE DATE
- ------------------------------------------- ------------ -------------- ----------- ------------------- ------------------
SECURED FIXED RATE DEBT: (dollars in thousands)
AEGON Partnership Note $ 262,699 $ 262,699 7.53% July 2009 July 2009
LaSalle Note I 236,554 236,554 7.83 August 2027 August 2007
JP Morgan Mortgage Note 193,457 193,457 8.31 October 2016 September 2006
LaSalle Note II 160,541 160,541 7.79 March 2028 March 2006
Cigna Note 70,000 70,000 5.22 June 2010 June 2010
Metropolitan Life Note V 37,823 37,823 8.49 December 2005 December 2005
Northwestern Life Note 26,000 26,000 7.66 January 2004 January 2004
Woodmen of the World Note 8,500 8,500 8.20 April 2009 April 2009
Nomura Funding VI Note 7,943 7,943 10.07 July 2020 July 2010
Mitchell Mortgage Note 1,743 1,743 7.00 September 2003 September 2003
Construction, Acquisition and other
obligations for various CRDI and MVDC
projects 13,172 13,172 2.90 to 11.25 August 03 to May 08 August 03 to May 08
------------ ----------- -------------
Subtotal/Weighted Average $ 1,018,432 $ 1,018,432 7.67%
------------ ----------- -------------
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 4.52% May 2005 May 2005
Deutsche Bank-CMBS Loan(2) 220,000 220,000 5.84 May 2004 May 2006
National Bank of Arizona 51,825 47,397 4.00 to 5.00 Nov 04 to Dec 05 Nov 04 to Dec 05
FHI Finance Loan 10,000 435 5.82 September 2009 September 2009
Construction, Acquisition and other
obligations
for various CRDI and MVDC
projects 82,138 26,487 3.84 to 5.25 July 03 to June 08 July 03 to June 08
------------ ----------- -------------
Subtotal/Weighted Average $ 638,963 $ 569,319 4.94%
------------ ----------- -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility(3) $ 372,284 $ 252,000(4) 3.17% May 2004 May 2005
JP Morgan Loan Sales Facility(5) 50,000 - - - -
------------ ----------- -------------
Subtotal/Weighted Average $ 422,284 $ 252,000 3.17%
------------ ----------- -------------
TOTAL/WEIGHTED AVERAGE $ 2,704,679 $ 2,464,751 6.82%(6)
============ =========== =============
AVERAGE REMAINING TERM 7.0 years 3.5 years
- --------------------------------------
(1) For more information regarding the terms of the Operating Partnership's
debt financing arrangements, including the amounts payable at maturity,
properties securing the Operating Partnership's secured debt and the method
of calculation of the interest rate for the Operating Partnership's
variable rate debt, see Note 8, "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) The outstanding balance excludes letters of credit issued under the credit
facility of $15.2 million.
(5) This is an uncommitted facility.
(6) The overall weighted average interest rate does not include the effect of
the Operating Partnership's cash flow hedge agreements. Including the
effect of these agreements, the overall weighted average interest rate
would have been 7.19%.
49
In April 2003, the Operating Partnership received modifications to
certain definitions relating to financial and other covenants in the $400
million Fleet Revolving Credit Facility and $275 million Fleet Fund I and II
Term Loan. The modifications do not alter the Operating Partnership's borrowing
capacity, scheduled principle payments, interest rates, or maturity dates.
As of June 30, 2003, no event of default had occurred, and the
Operating Partnership was in compliance with all of its financial covenants
related to its outstanding debt.
Failure to comply with covenants under the credit facility or other
debt instruments could result in an event of default under one or more of the
Operating Partnership's debt instruments. Any uncured or unwaived events of
default under the Operating Partnership's loans can trigger an increase in
interest rates or an acceleration of payment on the loan in default and could
cause the credit facility to become unavailable to the Operating Partnership. In
addition, an event of default by the Operating Partnership 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. Any uncured or unwaived event of default could have an
adverse effect on the Operating Partnership's business, financial condition, or
liquidity.
The Operating Partnership's debt facilities generally prohibit loan
prepayment for an initial period, allow prepayment with a penalty during a
following specified period and allow prepayment without penalty after the
expiration of that period. During the six months ended June 30, 2003, there were
no circumstances that required prepayment penalties or increased collateral
related to the Operating Partnership's existing debt.
The Operating Partnership's policy with regard to the incurrence and
maintenance of debt is based on a review and analysis of the following:
- investment opportunities for which capital is required and the
cost of debt in relation to such investment opportunities;
- the type of debt available (secured or unsecured; variable or
fixed);
- the effect of additional debt on existing covenant ratios;
- the maturity of the proposed debt in relation to maturities of
existing debt; and
- exposure to variable rate debt and alternatives such as
interest-rate swaps and cash flow hedges to reduce this exposure.
UNCONSOLIDATED DEBT ARRANGEMENTS
As of June 30, 2003, the total debt of the unconsolidated joint
ventures and equity investments in which the Operating Partnership has ownership
interests was $1.4 billion, of which the Operating Partnership's share was
$564.1 million. The Operating Partnership had guaranteed $78.1 million of this
debt as of June 30, 2003. Additional information relating to the Operating
Partnership's unconsolidated debt financing arrangements is contained in Note 7,
"Investments in Real Estate Mortgages and Equity of Unconsolidated Companies,"
of Item 1, "Financial Statements."
GUARANTEE COMMITMENTS
The Operating Partnership's guarantees in place as of June 30, 2003 are
listed in the table below. For the guarantees on indebtedness, no triggering
events or conditions are anticipated to occur that would require payment under
the guarantees and management believes the assets associated with the loans that
are guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Operating Partnership to provide
additional collateral to support the guarantees.
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING GUARANTEED
AT JUNE 30, 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) 5,355 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 $ 93,272 $111,247
======== ========
50
- ------------------------------
(1) See Note 7, "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 Operating Partnership provides a full guarantee 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 Operating Partnership 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, of which CRDI owns 88.3%, provides a
guarantee of 70% of the outstanding balance of up to a $9.0 million loan to
Blue River Land Company, L.L.C. There was approximately $7.7 million
outstanding at June 30, 2003 and the amount guaranteed was $5.4 million.
(5) The Operating Partnership and its joint venture partner each provide a $4.3
million letter of credit to guarantee repayment of up to $8.5 million of the
loan to Main Street Partners, L.P.
(6) The Operating Partnership and its joint venture partner each provide a $3.0
million letter of credit to guarantee repayment of up to $6.0 million of the
Manalapan debt with Corus Bank.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Operating Partnership'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 Operating Partnership's variable rate debt to fixed
rate debt and to manage its fixed to variable rate debt ratio. To accomplish
this objective, the Operating Partnership 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 six months ended June 30, 2003, such derivatives were
used to hedge the variable cash flows associated with existing variable rate
debt.
The following table shows information regarding the Operating
Partnership's cash flow hedge agreements during the six months ended June 30,
2003, and additional interest expense and unrealized gains (losses) recorded in
Accumulated Other Comprehensive Income ("OCI").
CHANGE IN
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(2) 6.18% $ (2,503) $ 4,851 $ 4,794
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (4,790) 2,734 2,294
2/15/03 100,000 2/15/06 3.26% (4,098) 741 (1,574)
2/15/03 100,000 2/15/06 3.25% (4,091) 740 (1,574)
9/02/03 200,000 9/01/06 3.72% (10,184) - (5,485)
------------- --------------- ---------------
$ (25,666) $ 10,114 $ (488)
============= =============== ===============
- -----------------------------------------------
(1) During 2002, the Operating Partnership 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 the Operating Partnership's cash flow hedges with
maturity dates of September 2, 2003 and February 3, 2003.
(2) In June 2003, the Operating Partnership terminated its $200 million interest
rate swap with Salomon Brothers prior to its September 2, 2003 stated
maturity by prepaying the interest that would have been due at maturity. The
remaining unrealized gains in OCI and the prepaid interest amounts will be
amortized through the September 2, 2003 maturity date.
CRDI, a consolidated subsidiary of the Operating Partnership, 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 June 30, 2003.
Unlike the additional interest on the Operating Partnership'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 six
months ended June 30, 2003.
ADDITIONAL CHANGE IN
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% $ 36 $ 33 $ 66
9/4/01 3,700 9/4/03 4.12% 28 26 50
--------- ----------- ---------
$ 64 $ 59 $ 116
========= =========== =========
51
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America for a loan with an initial notional amount of $0.8 million,
increasing monthly to up to $28.3 million in September 2004, based on the amount
of the loan. Under the agreement, in the event the prime rate, as defined in the
agreement, exceeds 4.1%, Bank of America will reimburse the interest paid in
excess of such rate.
RECENT DEVELOPMENTS
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of June 30, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale. During
the six months ended June 30, 2003, the Operating Partnership recognized an
approximately $15.0 million impairment charge on the 1800 West Loop South Office
Property.
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.0 million, consisting of $1.3 million in cash and a
$0.7 million note receivable. The Operating Partnership 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.
On May 2, 2003, the Operating Partnership sold one additional
behavioral healthcare property for $2.1 million. The Operating Partnership
recognized a loss on the sale of this property of approximately $0.1 million. A
$0.8 million impairment charge was recognized during the first quarter of 2003
related to this property.
The Operating Partnership also recognized a $1.0 million impairment
charge during the second quarter of 2003 on a behavioral healthcare property
held for sale and under contract for sale at June 30, 2003. This property was
sold on July 10, 2003.
As of June 30, 2003, the Operating Partnership owned five behavioral
healthcare properties.
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Operating Partnership completed the sale of
approximately one-half acre of undeveloped land located in Dallas, Texas. The
sale generated net proceeds and a net gain of approximately $0.3 million. This
land was wholly-owned by the Operating Partnership.
On May 15, 2003, the Operating Partnership completed the sale of
approximately 24.8 acres of undeveloped land located in Coppell, Texas. The sale
generated net proceeds of $3.0 million and a net gain of approximately $1.1
million. This land was wholly-owned by the Operating Partnership.
As of June 30, 2003, the Operating Partnership sold approximately 3.5
acres of undeveloped land located in Houston, Texas. Subsequent to the end of
the second quarter, the sale agreement was modified. Under the terms of the
modified sale agreement, the Operating Partnership generated proceeds of $2.1
million, net of closing costs, and a note receivable in the amount of $11.8
million, with annual installments of principal and interest payments beginning
June 27, 2004 through maturity on June 27, 2010. The principal payment amounts
are calculated based upon a 20-year amortization and the interest rate is 4% for
the first two years and thereafter the prime rate, as defined in the note,
through maturity. Based on the terms of the modified sale agreement, the
Operating Partnership will fully recognize a net gain of approximately $8.9
million in the third quarter of 2003. This land was wholly-owned by the
Operating Partnership.
52
RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC.
Since June 1999, the Operating Partnership 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. 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 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 C. Goff, Vice-Chairman of the Company's Board of Trust Managers
and Chief Executive Officer of the Company and sole director and Chief Executive
Officer of the General Partner. The remaining approximately 2% general
partnership interest is owned by parties unrelated to the Operating Partnership.
At June 30, 2003, DBL had an approximately $13.4 million investment in G2.
On January 2, 2003, the Operating Partnership purchased the remaining
2.56% economic interest, representing 100% of the voting stock, in DBL 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 Operating Partnership and is consolidated in the Residential
Development Segment as of and for the six months ended June 30, 2003. Also,
because DBL owns a majority of the voting stock in MVDC and HADC, the Operating
Partnership has consolidated these two Residential Development Corporations as
of and for the six months ended June 30, 2003.
UNCONSOLIDATED INVESTMENTS
INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
The Operating Partnership has investments of 20% to 50% in seven
unconsolidated joint ventures that own seven Office Properties. The Operating
Partnership does not have control of these joint ventures, and therefore, these
investments are accounted for using the equity method of accounting.
The Operating Partnership, through ownership interests of 50% or less,
or ownership of non-voting interests only, has other unconsolidated investments
which it does not control; these investments are accounted for using the equity
method of accounting.
53
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and equity investments as of June 30,
2003.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF JUNE 30, 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 L.P. 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 28.1% (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 L.P. is owned
by an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the WLDC, Woodlands CPC 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 six months ended June 30, 2003, the payout
percentage to the Operating Partnership was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Operating Partnership.
(9) The remaining 50% interest in 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 Operating
Partnership'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 Operating
Partnership's Resort/Hotel Properties.
(14) The SunTx Fulcrum Fund, L.P.'s ( "SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 71.9% of SunTx is owned by a group
of individuals unrelated to the Operating Partnership. The Operating
Partnership's ownership percentage will decline by the closing date of
SunTx as capital commitments from third parties are secured. The
Operating Partnership's projected ownership interest at the closing of
SunTx is approximately 7.5% based on SunTx manager's expectations for
the final SunTx capitalization. The Operating Partnership accounts for
its investment in SunTx under the cost method. The Operating
Partnership's investment at June 30, 2003 was $6.3 million.
(15) G2 was formed for the purpose of investing in commercial mortgage
backed securities and other commercial real estate investments. GMSP
and GMACCM each own 21.875% of G2, with the remaining 43.75% owned by
parties unrelated to the Operating Partnership. See Note 14, "Related
Party Transactions," in Item 1, "Financial Statements," for information
regarding the ownership interests of trust managers and officers of the
Company and the General Partner in GMSP.
54
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of June 30, 2003, the Operating Partnership 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 Operating Partnership has no economic interest in AmeriCold Logistics.
See Note 15, "COPI," of Item 1, "Financial Statements," 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 and the Operating Partnership's
unitholders.
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 $18.5 million of the total $76.4 million
of rent payable for the six months ended June 30, 2003. The Operating
Partnership's share of the deferred rent was $7.4 million. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $7.4 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the six months ended June 30, 2003. As of June 30, 2003, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $59.1 million and $52.8 million,
respectively, of which the Operating Partnership's portions were $23.6 million
and $21.1 million, respectively.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of June 30, 2003, the Operating Partnership held a 56% interest in
VCQ. The assets of VCQ include two quarries and the related land. The Operating
Partnership accounts for this investment as an unconsolidated equity investment
because the Operating Partnership 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 Operating Partnership 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 Operating Partnership's contribution, for the purchase of the trade
receivables. The receivables were collected during the three months ended June
30, 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Operating
Partnership.
SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The Operating Partnership'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 Operating Partnership 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 Operating Partnership evaluates its
assumptions and estimates on an ongoing basis. The Operating Partnership 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
55
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 Operating Partnership
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:
- Valuation for impairment of the Operating Partnership's assets and
investments,
- Relative Fair Value Method/Cost of Sales (Residential Development
entities),
- Capitalization of Interest (Residential Development entities), and
- 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 Operating Partnership 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 are less than the carrying value
of the Property. The Operating Partnership's estimates of cash flows of the
Properties require the Operating Partnership to make assumptions related to
future rental rates, occupancies, operating expenses, the ability of the
Operating Partnership's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Operating
Partnership's Properties. Any changes in estimated future cash flows due to
changes in the Operating Partnership'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 Operating Partnership 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 Operating
Partnership 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 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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership
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 Operating Partnership's accounts
receivable balance is reduced by an allowance for amounts that may become
uncollectible in the future. The Operating Partnership's receivable balance is
composed primarily of rents and operating cost recoveries due from its tenants.
The Operating Partnership 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 Operating Partnership's tenants, any
delinquency in payment, historical trends and current economic conditions. If
the assumptions regarding the collectibility of accounts receivable prove
incorrect, the Operating Partnership could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.
56
ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS NO. 145. In April 2002, the 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 Operating
Partnership 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 Operating Partnership'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 Operating Partnership 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 and unit options at
the date of grant be amortized ratably into expense over the appropriate vesting
period. During the six months ended June 30, 2003, the Company and the Operating
Partnership granted stock options and unit options and recognized compensation
expense that was not significant to results of operations. With respect to the
Company's stock options and the Operating Partnership's unit options which were
granted prior to 2003, the Operating Partnership accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25"). Under APB No. 25, compensation cost is
measured as the excess, if any, of the quoted market price of the Company's
common shares (doubled for unit options) at the date of grant over the exercise
price of the option granted. Compensation cost for stock options and unit
options, if any, is recognized ratably over the vesting period. During the six
months ended June 30, 2003, no compensation cost was recognized for grants of
stock options or unit options made prior to 2003 under the Company and the
Operating Partnership stock option and unit option plans because the Company's
and the Operating Partnership's policy is to grant stock options and unit
options with an exercise price equal to the quoted closing market price of the
Company's common shares (doubled for unit options) 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
Operating Partnership's net (loss) income and (loss) earnings per share would
have been reduced to the following pro forma amounts:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
(in thousands, except per unit amounts) 2003 2002 2003 2002
- ------------------------------------------- --------- --------- ---------- ---------
Net (loss) income available to partners, as
reported $ (5,947) $ 13,661 $ (27,572) $ 31,520
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards (765) (1,093) (1,602) (2,073)
-------- --------- --------- ---------
Pro forma net (loss) income $ (6,712) $ 12,568 $ (29,174) $ 29,447
(Loss) earnings per unit:
Basic - as reported $ (0.10) $ 0.21 $ (0.47) $ 0.47
Basic - pro forma $ (0.11) $ 0.19 $ (0.50) $ 0.44
Diluted - as reported $ (0.10) $ 0.21 $ (0.47) $ 0.47
Diluted - pro forma $ (0.11) $ 0.19 $ (0.50) $ 0.44
57
SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact, if any, on the Operating
Partnership's financial condition or its results of operations.
SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. The provisions of this Statement are to be applied to financial
instruments entered into or modified after May 31, 2003 and to existing
instruments as of the beginning of the first interim financial reporting period
after June 15, 2003. The adoption of this statement is not expected to have a
material impact, if any, on the Operating Partnership's financial condition or
its results of operations.
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 10, "Commitments and Contingencies" in Item 1, "Financial Statements," for
disclosure of the Operating Partnership's guarantees at June 30, 2003. The
Operating Partnership adopted FIN 45 effective January 1, 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 VIE's 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 Operating Partnership 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 Operating Partnership did not create
any VIEs subsequent to January 31, 2003.
58
FUNDS FROM OPERATIONS
FFO, as used in this document, means:
- Net Income (Loss) - determined in conformity with GAAP;
- excluding gains (losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- including depreciation and amortization of real estate assets;
and
- after adjusting for unconsolidated partnerships and joint
ventures.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO an appropriate measure of performance for an operating partnership
of 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 Operating Partnership's operating performance.
The Operating Partnership 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 unitholders for the six
months ended June 30, 2003 and 2002 were $87.7 million, and $99.5 million,
respectively. The Operating Partnership reported FFO of $77.9 million and $128.2
million for the six months ended June 30, 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 unitholders although not necessarily on a proportionate basis.
Accordingly, the Operating Partnership believes that to facilitate a
clear understanding of the consolidated historical operating results of the
Operating Partnership, FFO should be considered in conjunction with the
Operating Partnership's net income and cash flows reported in the consolidated
financial statements and notes to the consolidated financial statements.
However, the Operating Partnership's measure of FFO may not be comparable to
similarly titled measures of operating partnerships of REITs (other than the
Company) because these REITs may apply the definition of FFO in a different
manner than the Operating Partnership.
59
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Net income (loss) $ 628 $ 18,885 $ (14,422) $ 40,119
Adjustments to reconcile net income (loss)
to funds from operations:
Depreciation and amortization of real estate assets 33,099 33,529 69,400 65,669
Loss (gain) on property sales, net 61 (1,420) 287 (5,665)
Cumulative effect of a change in accounting principle - - - 10,327
Impairment and other charges related to
real estate assets and assets held for sale 990 - 18,018 2,048
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office Properties 3,013 1,889 5,835 4,051
Resort/Hotel Properties 355 - 749 -
Residential Development Properties (512) 2,051 227 2,954
Temperature-Controlled Logistics Properties 5,486 5,790 10,996 11,501
Other (104) 3,130 (82) 5,776
Series A Preferred unit distributions (4,556) (4,215) (9,112) (7,590)
Series B Preferred unit distributions (2,019) (1,009) (4,038) (1,009)
---------- --------- --------- ---------
Funds from operations $ 36,441 $ 58,630 $ 77,858 $ 128,181
========== ========= ========= =========
Investment Segments:
Office Segment $ 70,011 $ 80,502 $ 142,271 $ 161,074
Resort/Hotel Segment 12,356 12,637 27,987 33,547
Residential Development Segment 5,705 12,474 10,993 28,035
Temperature-Controlled Logistics Segment 5,079 5,374 12,096 10,775
Other:
Corporate general and administrative (6,185) (5,333) (12,600) (11,725)
Corporate and other adjustments:
Interest expense (43,073) (46,450) (86,306) (88,722)
Series A Preferred unit distributions (4,556) (4,215) (9,112) (7,590)
Series B Preferred unit distributions (2,019) (1,009) (4,038) (1,009)
Other(1) (877) 4,650 (3,433) 3,796
---------- --------- --------- ---------
Funds from operations $ 36,441 $ 58,630 $ 77,858 $ 128,181
========== ========= ========= =========
Basic weighted average units 58,460 66,277 58,472 66,290
========== ========= ========= =========
Diluted weighted average units(2) 58,466 66,889 58,476 66,709
========== ========= ========= =========
- -------------------------------
(1) 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.
(2) See calculations for the amounts presented in the reconciliation
following this table.
60
The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
(units in thousands) 2003 2002 2003 2002
-------------------- -------- -------- -------- --------
Basic weighted average units 58,460 66,277 58,472 66,290
Add Unit options 6 612 4 419
------ ------ ------ ------
Diluted weighted average units 58,466 66,889 58,476 66,709
====== ====== ====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the Operating Partnership's market risk occurred
from December 31, 2002 through June 30, 2003. Information regarding the
Operating Partnership's market risk at December 31, 2002 is contained in Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," in the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Operating Partnership and Crescent Finance Company maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Operating Partnership's and Crescent Finance
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 Operating Partnership's
and Crescent Finance Company's management, including the Chief Executive Officer
and the Chief Financial and Accounting Officer of the General Partner and
Crescent Finance Company, as appropriate, to allow timely decisions regarding
required disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e) 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.
As of June 30, 2003, the Operating Partnership and Crescent Finance
Company carried out an evaluation, under the supervision and with the
participation of the Operating Partnership's and Crescent Finance Company's
management, including the Chief Executive Officer and the Chief Financial and
Accounting Officer of the General Partner and Crescent Finance Company, of the
effectiveness of the design and operation of the Operating Partnership's and
Crescent Finance Company's disclosure controls and procedures. Based on the
foregoing, the Chief Executive Officer and the Chief Financial and Accounting
Officer of the General Partner and Crescent Finance Company concluded that the
Operating Partnership's and Crescent Finance Company's disclosure controls and
procedures were effective.
During the three months ended June 30, 2003, there was no change in the
Operating Partnership's and Crescent Finance Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Operating Partnership's and Crescent Finance Company's
internal control over financial reporting.
PART II
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
None.
61
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 LIMITED PARTNERSHIP
(Registrant)
By: Crescent Real Estate Equities, Ltd.
Its General Partner
By /s/ John C. Goff
--------------------------------------------------
John C. Goff
Date: August 12, 2003 Sole Director and Chief Executive Officer
By /s/ Jerry R. Crenshaw, Jr
--------------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief Financial
Officer
Date: August 12, 2003 (Principal Financial and Accounting Officer)
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 FINANCE COMPANY
(Registrant)
By /s/ John C. Goff
--------------------------------------------------
John C. Goff
Date: August 12, 2003 Sole Director and Chief Executive Officer
By /s/ Jerry R. Crenshaw, Jr
--------------------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief Financial
Officer
Date: August 12, 2003 (Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.01 Third Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated as of
January 2, 2003 (filed as Exhibit No. 10.01 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 of
Crescent Real Estate Equities Company (the "Company") and
incorporated herein by reference)
3.02 Certificate of Incorporation of Crescent Finance Company
(filed as Exhibit No. 3.02 to the Registration Statement on
Form S-4 (File No. 333-89194) of the Registrants (the "Form
S-4") and incorporated herein by reference)
3.03 Bylaws of Crescent Finance Company (filed as Exhibit No. 3.03
to the Form S-4 and incorporated herein by reference)
4.01 Restated Declaration of Trust of Crescent Real Estate Equities
Company, as amended (filed as Exhibit No. 3.01 to the
Company's Current Report on Form 8-K filed April 25, 2002 and
incorporated herein by reference)
4.02 Second amended and Restated Bylaws of Crescent Real Estate
Equities Company (filed as Exhibit No. 3.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 and incorporated herein by reference)
*4 Pursuant to Regulation S-K Item 601 (b) (4) (iii), the
Registrants by this filing agree, upon request, to furnish to
the Securities and Exchange Commission a copy of instruments
defining the rights of holders of long-term debt of the
Registrants
12.01 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges (filed herewith)
31.01 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a - 14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.01 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)