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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 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 September 30, 2003 (unaudited) and December 31, 2002
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 (unaudited)............................................... 4
Consolidated Statement of Partners' Capital for the nine months ended
September 30, 2003 (unaudited)........................................................ 5
Consolidated Statements of Cash Flows for the nine months ended September 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......................................................................... 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 65
Item 4. Controls and Procedures................................................................ 65
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 66
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -----------
ASSETS:
Investments in real estate:
Land $ 315,479 $ 292,970
Building and improvements, net of accumulated depreciation of $734,370
and $655,168 at September 30, 2003 and December 31, 2002,
respectively 2,201,657 2,185,070
Furniture, fixtures and equipment, net of accumulated depreciation
of $69,487 and $58,468 at September 30, 2003 and December 31, 2002,
respectively 62,682 56,682
Land held for investment or development 470,813 447,778
Properties held for disposition, net 87,701 116,336
----------- -----------
Net investment in real estate $ 3,138,332 $ 3,098,836
Cash and cash equivalents $ 59,623 $ 75,418
Restricted cash and cash equivalents 106,675 105,786
Accounts receivable, net 39,878 41,999
Deferred rent receivable 62,474 60,973
Investments in unconsolidated companies 543,259 562,643
Notes receivable, net 108,971 115,494
Income tax asset-current and deferred, net 54,496 39,709
Other assets, net 180,025 184,251
----------- -----------
Total assets $ 4,293,733 $ 4,285,109
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 314,500 $ 164,000
Notes payable 2,261,969 2,218,910
Accounts payable, accrued expenses and other liabilities 346,042 373,020
----------- -----------
Total liabilities $ 2,922,511 $ 2,755,930
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 37,694 $ 43,972
----------- -----------
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference $25.00 per unit,
10,800,000 units issued and outstanding
at September 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 September 30, 2003 and December 31, 2002 81,923 81,923
Units of Partnership Interest, 58,459,035 and 58,484,396 issued
and outstanding at September 30, 2003 and December 31, 2002,
respectively:
General partner - outstanding 584,590 and 584,844 10,482 12,097
Limited partners - outstanding 57,874,445 and 57,899,552 1,010,455 1,170,279
Accumulated other comprehensive income (17,492) (27,252)
----------- -----------
Total partners' capital $ 1,333,528 $ 1,485,207
----------- -----------
Total liabilities and partners' capital $ 4,293,733 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE:
Office Property $ 127,044 $ 140,840 $ 375,996 $ 411,067
Resort/Hotel Property 54,769 56,110 170,122 148,157
Residential Development Property 29,808 41,832 119,380 168,372
--------- --------- --------- ---------
Total Property revenue 211,621 238,782 665,498 727,596
--------- --------- --------- ---------
EXPENSE:
Office Property real estate taxes 15,523 17,229 50,663 56,690
Office Property operating expenses 43,976 42,624 129,116 124,613
Resort/Hotel Property expense 44,926 44,599 137,325 110,701
Residential Development Property expense 29,723 39,306 110,483 152,983
--------- --------- --------- ---------
Total Property expense 134,148 143,758 427,587 444,987
--------- --------- --------- ---------
Income from Property Operations 77,473 95,024 237,911 282,609
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 11,334 5,452 12,961 5,528
Gain on joint venture of properties, net - 17,710 100 17,710
Interest and other income 1,319 3,579 4,172 18,487
Corporate general and administrative (7,926) (8,121) (20,526) (19,846)
Interest expense (43,044) (47,121) (129,298) (135,678)
Amortization of deferred financing costs (2,783) (2,701) (7,751) (7,722)
Depreciation and amortization (37,728) (36,726) (110,947) (101,914)
Impairment charges related to real estate assets - - (1,200) (1,000)
Other expenses (130) - (1,042) -
Equity in net income (loss) of unconsolidated companies:
Office Properties 5,475 874 8,797 3,655
Resort/Hotel Properties (89) (91) 2,036 (91)
Residential Development Properties 1,725 4,272 4,235 22,934
Temperature-Controlled Logistics Properties (949) (3,101) 152 (3,828)
Other (864) (755) (1,679) (5,281)
--------- --------- --------- ---------
Total Other Income (Expense) (73,660) (66,729) (239,990) (207,046)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES 3,813 28,295 (2,079) 75,563
Minority interests (298) (1,119) (722) (9,413)
Income tax benefit (provision) 4,940 2,534 10,545 6,543
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 8,455 29,710 7,744 72,693
Net (loss) income from discontinued operations (2,221) 1,703 1,273 5,115
(Loss) gain on real estate from discontinued operations (2,379) 1,632 (19,585) 5,683
Cumulative effect of a change in accounting principle - - - (10,327)
--------- --------- --------- ---------
NET INCOME (LOSS) 3,855 33,045 (10,568) 73,164
Series A Preferred Unit distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (3,028)
--------- --------- --------- ---------
NET (LOSS) INCOME AVAILABLE TO PARTNERS $ (2,720) $ 26,470 $ (30,293) $ 57,990
========= ========= ========= =========
BASIC EARNINGS PER UNIT DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.03 $ 0.36 $ (0.20) $ 0.88
Net (loss) income from discontinued operations (0.04) 0.03 0.02 0.08
(Loss) gain on real estate from discontinued operations (0.04) 0.03 (0.34) 0.09
Cumulative effect of a change in accounting principle - - - (0.16)
--------- --------- --------- ---------
Net (loss) income available to partners - basic $ (0.05) $ 0.42 $ (0.52) $ 0.89
========= ========= ========= =========
DILUTED EARNINGS PER UNIT DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.03 $ 0.36 $ (0.20) $ 0.87
Net (loss) income from discontinued operations (0.04) 0.03 0.02 0.08
(Loss) gain on real estate from discontinued operations (0.04) 0.03 (0.34) 0.09
Cumulative effect of a change in accounting principle - - - (0.16)
--------- --------- --------- ---------
Net (loss) income available to partners - diluted $ (0.05) $ 0.42 $ (0.52) $ 0.88
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)
Preferred General Limited Accumulated 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 - 1 145 - 146
Distributions - (1,313) (129,979) - (131,292)
Net (Loss) Income - (303) (29,990) - (30,293)
Unrealized Gain on Marketable Securities - - - 3,761 3,761
Unrealized Net Gain on Cash Flow Hedges - - - 5,999 5,999
----------- ----------- ----------- ----------- -----------
PARTNERS' CAPITAL, September 30, 2003 $ 330,083 $ 10,482 $ 1,010,455 $ (17,492) $ 1,333,528
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (10,568) $ 73,164
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 118,698 109,636
Residential Development cost of sales 66,658 114,039
Residential Development capital expenditures (98,506) (65,958)
Discontinued operations - loss (gain) on real estate, net of minority 19,585 (5,683)
interests
Discontinued operations - depreciation and minority interests 6,751 6,810
Impairment charges related to real estate assets 1,200 1,000
Income from investment in land sales, net (12,961) (5,528)
Gain on joint venture of properties, net (100) (17,710)
Minority interests 722 9,413
Cumulative effect of a change in accounting principle - 10,327
Non-cash compensation - -
Distributions received in excess of earnings from unconsolidated
companies:
Office Properties 239 -
Resort/Hotel Properties - 416
Temperature-Controlled Logistics Properties - 7,828
Other 2,531 6,255
Equity in (earnings) loss net of distributions received from
unconsolidated companies:
Office Properties - (990)
Resort/Hotel Properties (2,036) -
Residential Development Properties (4,189) (9,642)
Temperature-Controlled Logistics Properties (152) -
Change in assets and liabilities, net of effects of consolidations and
acquisitions:
Restricted cash and cash equivalents 602 2,771
Accounts receivable 4,865 11,712
Deferred rent receivable (1,501) 4,508
Income tax asset - current and deferred (11,223) (15,339)
Other assets 4,573 8,511
Accounts payable, accrued expenses and other liabilities (31,735) (56,081)
--------- ---------
Net cash provided by operating activities $ 53,453 $ 189,459
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction $ 11,374 $ 38,226
Proceeds from property sales 16,030 76,582
Proceeds from joint venture transactions - 164,067
Acquisition of rental properties (14,802) (97,373)
Development of investment properties (3,612) (1,669)
Property improvements - Office Properties (11,342) (11,619)
Property improvements - Resort/Hotel Properties (7,097) (13,720)
Tenant improvement and leasing costs - Office Properties (51,114) (36,602)
Residential Development Properties Investments (28,696) (21,910)
(Increase) decrease in restricted cash and cash equivalents (835) 12,668
Return of investment in unconsolidated companies:
Office Properties 7,721 1,660
Residential Development Properties 227 10,011
Temperature-Controlled Logistics Properties 3,201 -
Other 5,428 -
Investment in unconsolidated companies:
Office Properties (85) -
Residential Development Properties (4,738) (27,732)
Temperature-Controlled Logistics Properties (897) (242)
Other (1,419) (425)
Decrease (increase) in notes receivable 19,098 (4,203)
--------- ---------
Net cash (used in) provided by investing activities $ (61,558) $ 87,719
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (2,603) $ (8,591)
Borrowings under Credit Facility 284,500 372,000
Payments under Credit Facility (134,000) (476,000)
Notes payable proceeds 100,435 375,000
Notes payable payments (97,164) (171,549)
Residential Development Properties notes payable borrowings 57,516 54,698
Residential Development Properties notes payable payments (56,042) (84,856)
Purchase of GMAC preferred interest - (218,423)
Capital distributions - joint venture partner (9,461) (4,451)
Capital distributions - joint venture preferred equity - (6,967)
Capital contributions to the Operating Partnership 146 2,106
Issuance of preferred units - Series A - 48,160
Issuance of preferred units - Series B - 81,923
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
Dividends and unitholder distributions (131,292) (177,183)
--------- ---------
Net cash used in financing activities $ (7,690) $(229,307)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (15,795) $ 47,871
CASH AND CASH EQUIVALENTS,
Beginning of period 75,418 31,644
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 59,623 $ 79,515
========= =========
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
September 30, 2003, the Company's approximately 84% limited partner interest has
been treated as equivalent, for purposes of this report, to 49,001,098 units and
the remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,873,347 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
September 30, 2003
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston
Center (three office properties and the Houston
Center Shops). 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 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.
Non wholly-owned assets, unconsolidated - Bank One
Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest),
Four Westlake Park (20% interest), Miami Center
(40% interest), 5 Houston Center (25% interest)
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 87 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.
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties). These
L.P. ("Funding III, properties are included in the Operating
IV and V")(1) Partnership's Office Segment. Renaissance Houston
Hotel is included in the Operating Partnership's
Resort/Hotel Segment.
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 - Four 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, Chancellor Park,
("Funding VIII") Frost Bank Plaza, Greenway I and IA (two office
properties), Greenway II, Johns Manville Plaza,
Palisades Central I, Palisades Central II,
Stemmons Place, Trammell Crow Center(2), 3333 Lee
Parkway, 1800 West Loop South, 5050 Quorum, 44
Cook and 55 Madison. These properties are included
in the 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. the Operating Partnership's Office Segment.
Crescent Colonnade, Wholly-owned asset - The BAC Colonnade Building
L.L.C. ("The Colonnade"), included in the Operating
Partnership's Office Segment.
Mira Vista Development Non wholly-owned asset, consolidated - Mira Vista
Corp. ("MVDC") (98% interest), included in the Operating
Partnership's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated - Falcon
Corp. ("HADC") Point (98% interest), Falcon Landing (98%
interest) and Spring Lakes (98% interest). These
properties are included in the Operating
Partnership's Residential Development Segment.
Desert Mountain Non wholly-owned asset, consolidated - Desert
Development Mountain (93% interest), included in the Operating
Corporation ("DMDC") Partnership's Residential Development Segment.
The Woodlands Land Non wholly-owned asset, unconsolidated - The
Company ("TWLC") Woodlands (42.5% interest) (3), included in the
Operating Partnership's Residential Development
Segment.
Crescent Resort Non wholly-owned assets, consolidated - Eagle
Development Inc. Ranch (60% interest), Main Street Junction (30%
("CRDI") 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), Delgany Lofts (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.
Non wholly-owned assets, unconsolidated - Blue
River Land Company, L.L.C. - Three Peaks (30%
interest), included in the Operating Partnership's
Residential Development Segment.
Crescent TRS Holdings Non wholly-owned assets, unconsolidated - two
Corp. quarries (56% interest). These properties are
included in the Operating Partnership's
Temperature-Controlled Logistics Segment.
- ------------------
(1) Funding III owns nine of the ten office properties in the Greenway Plaza
office portfolio and the Renaissance Houston Hotel; Funding IV owns the
central heated and chilled water plant building located at Greenway Plaza;
and Funding V owns 9 Greenway, the remaining office property in the
Greenway Plaza office portfolio.
(2) The 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.
(3) Distributions are made to partners based on specified payout percentages.
During the nine months ended September 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 8, "Investments in Unconsolidated Companies," for a table that
lists the Operating Partnership's ownership in significant unconsolidated joint
ventures and investments as of September 30, 2003.
See Note 9, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Operating Partnership and the Company,
all of which are consolidated 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 September 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 September 30,
2003:
- OFFICE SEGMENT consisted of 74 office properties, including three
retail properties (collectively referred to as the "Office
Properties"), located in 26 metropolitan submarkets in six states,
with an aggregate of approximately 29.7 million net rentable square
feet. 62 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 September 30, 2003, the
Temperature-Controlled Logistics Corporation directly or indirectly
owned 87 temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics Properties")
with an aggregate of approximately 440.7 million cubic feet (17.5
million square feet) of warehouse space. As of September 30, 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 income from
property operations, total other income and expenses, equity in net income
(loss) of unconsolidated companies and funds from operations for each of these
investment segments for the three and nine months ended September 30, 2003 and
2002, and total assets, consolidated property level financing, consolidated
other liabilities, and minority interests for each of these investment segments
at September 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 year 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 at the date of grant
be amortized ratably into expense over the appropriate vesting period. During
the nine months ended September 30, 2003, the Company
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and the Operating Partnership granted stock 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 nine
months ended September 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 ("the 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
(in thousands, except per unit amounts) 2003 2002 2003 2002
- --------------------------------------- --------- ---------- ---------- ----------
Net (loss) income available to partners,
as reported $ (2,720) $ 26,470 $ (30,293) $ 57,990
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (700) (1,011) (2,301) (3,087)
--------- ---------- ---------- ----------
Pro forma net (loss) income $ (3,420) $ 25,459 $ (32,594) $ 54,903
(Loss) earnings per unit:
Basic - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.89
Basic - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
Diluted - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.88
Diluted - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
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 Operating Partnership
adopted SFAS 149 effective July 1, 2003. The adoption of this Statement did not
have a material impact 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. Most provisions of this Statement were 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. On October 29, 2003, the FASB agreed to
defer indefinitely the application of the provisions of SFAS No. 150 to
noncontrolling interests in limited life subsidiaries.
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 11, "Commitments and Contingencies," for disclosure of the Operating
Partnership's guarantees at September 30, 2003. The Operating Partnership
adopted FIN 45 effective January 1, 2003.
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 previously
existing VIEs for financial periods ending after December 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 other entities such as VIEs. FIN 46 requires VIEs 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 VIEs were
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the VIE; and, (b) the enterprise's maximum
exposure to loss as a result of its involvement with the VIEs. 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
ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property as if it were vacant and available
to lease at the purchase date and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The contributory value of tenant improvements is
separately estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.
12
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term and any
renewal periods in the respective leases, but in no event does the amortization
period for the intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value and the customer relationship value would be charged to
expense.
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 nine
months ended September 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 SEPTEMBER 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 $ 8,455 58,460 $ 29,710 63,350
Series A Preferred Unit distributions (4,556) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
--------------------------------------- ---------------------------------
Net income available to partners $ 1,880 58,460 $ 0.03 $ 23,135 63,350 $ 0.36
before discontinued operations
Net (loss) income from discontinued
operations (2,221) (0.04) 1,703 0.03
(Loss) gain on real estate from
discontinued operations (2,379) (0.04) 1,632 0.03
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (2,720) 58,460 $ (0.05) $ 26,470 63,350 $ 0.42
======================================= =================================
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $ 8,455 58,460 $ 29,710 63,350
Series A Preferred Unit distributions (4,556) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
--------------------------------------- ----------------------------------
Effect of dilutive securities:
Additional units relating to
unit options 4 60
Net income available to partners
before discontinued operations $ 1,880 58,464 $ 0.03 $ 23,135 63,410 $ 0.36
Net (loss) income from discontinued
operations (2,221) (0.04) 1,703 0.03
(Loss) gain on real estate from
discontinued operations (2,379) (0.04) 1,632 0.03
---------------------------------------- ---------------------------------
Net (loss) income available to partners $ (2,720) 58,464 $ (0.05) $ 26,470 63,410 $ 0.42
======================================= =================================
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 7,744 58,468 $ 72,693 65,295
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
--------------------------------------- ---------------------------------
Net (loss) income available to
partners before discontinued
operations and cumulative
effect of a change in accounting
principle $ (11,981) 58,468 $ (0.20) $ 57,519 65,295 $ 0.88
Net income from discontinued operations 1,273 0.02 5,115 0.08
(Loss) gain on real estate from
discontinued operations (19,585) (0.34) 5,683 0.09
Cumulative effect of a change in
accounting principle - - (10,327) (0.16)
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (30,293) 58,468 $ (0.52) $ 57,990 65,295 $ 0.89
======================================= =================================
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 7,744 58,468 $ 72,693 65,295
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
--------------------------------------- ---------------------------------
Effect of dilutive securities:
Additional units relating to
unit options 2 257
Net (loss) income available to partners
before discontinued operations and
cumulative effect of a change in
accounting principle $ (11,981) 58,470 $ (0.20) $ 57,519 65,552 $ 0.87
Net income from discontinued operations 1,273 0.02 5,115 0.08
(Loss) gain on real estate from
discontinued operations (19,585) (0.34) 5,683 0.09
Cumulative effect of a change in
accounting principle - - (10,327) (0.16)
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (30,293) 58,470 $ (0.52) $ 57,990 65,552 $ 0.88
======================================= =================================
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the nine
months ended September 30, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(in thousands) 2003 2002
- ------------------------------------------------------------- --------- ---------
Interest paid on debt $ 110,670 $ 106,969
Interest capitalized - Office Properties - 118
Interest capitalized - Residential Development Properties 13,896 9,591
Additional interest paid in conjunction with cash flow hedges 15,472 18,028
--------- ---------
Total interest paid $ 140,038 $ 134,706
========= =========
Cash paid for income taxes $ 1,954 $ 10,200
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
Unrealized gain (loss) on marketable securities $ 3,761 $ (1,814)
Impairment charges related to real estate assets 20,374 5,902
Assumption of debt in conjunction with acquisition of an Office
Property 38,000 -
Unrealized net gain on cash flow hedges 5,999 3,083
Non-cash compensation 147 1,990
Financed sale of land parcel 11,800 7,520
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 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.
The Operating Partnership calculates FFO available to partners in the
same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Partners.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners an appropriate measure of performance for an
operating partnership of an equity REIT
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and FFO an appropriate measure of performance for its investment segments.
However, FFO available to partners and FFO should not be considered as
alternatives to net income determined in accordance with GAAP as an indication
of the Operating Partnership's operating performance.
The Operating Partnership's measures of FFO available to partners and
FFO may not be comparable to similarly titled measures of operating partnerships
of REITs (other than the Company) if those REITs apply the definition of FFO in
a different manner than the Operating Partnership.
Selected financial information related to each segment for the three
and nine months ended September 30, 2003 and 2002, and total assets,
consolidated property level financing, consolidated other liabilities, and
minority interests for each of the segments at September 30, 2003 and December
31, 2002, are presented below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ---------------------------- ----------- ------------ ------------ ----------- ----------- ---------
Property revenue $ 127,044 (1) $ 54,769 $ 29,808 $ - $ - $ 211,621
Property expense (59,499) (44,926) (29,723) - - (134,148)
----------- ----------- ------------ ----------- ----------- ---------
Income from property
operations $ 67,545 $ 9,843 $ 85 $ - $ - $ 77,473
=========== =========== ============ =========== =========== =========
Other income $ - $ - $ - - $ 12,653 $ 12,653
Other expense - - - $ - (91,611) (91,611)
----------- ----------- ------------ ----------- ----------- ---------
Total other income
(expense) $ - $ - $ - $ - $ (78,958) (2) $ (78,958)
=========== =========== ============ =========== =========== =========
Equity in net income (loss)
of unconsolidated
companies $ 5,475 $ (89) $ 1,725 $ (949) $ (864) $ 5,298
=========== =========== ============ =========== =========== =========
Funds from operations
before impairment charges
related to real estate
assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (48,834) $ 43,463 (5)
----------- ----------- ------------ ----------- ----------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (2,356) $ (2,356)
----------- ----------- ------------ ----------- ----------- ---------
Funds from operations after
impairment charges
related to real estate
assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (51,190) $ 41,107 (5 )
=========== =========== ============ =========== =========== =========
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------------------------ --------- ------------ ------------ ----------- ------------ ---------
Property revenue $ 140,840 (1) $ 56,110 $ 41,832 $ - $ - $ 238,782
Property expense (59,853) (44,599) (39,306) - - (143,758)
--------- ------------ ----------- ----------- ----------- ---------
Income from property operations $ 80,987 $ 11,511 $ 2,526 $ - $ - $ 95,024
========= ============ =========== =========== ============ =========
Other income $ - $ - $ - $ - $ 26,741 $ 26,741
Other expense - - - - (94,669) (94,669)
--------- ------------ ----------- ----------- ----------- ---------
Total other income (expense) $ - $ - $ - $ - $ (67,928) (2) $ (67,928)
========= ============ =========== =========== ============ =========
Equity in net income (loss)
of unconsolidated
companies $ 874 $ (91) $ 4,272 $ (3,101) $ (755) $ 1,199
========= ============ =========== =========== ============ =========
Funds from operations
before and after
impairment charges related
to real estate assets $ 88,045 $ 13,593 $ 4,319 $ 3,675 $ (57,815) $ 51,817 (5)
========= ============ =========== =========== ============ =========
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------------
RESIDENTIAL TEMPERATURE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ---------------------------- --------- ------------ ------------ ------------ ----------- ---------
Property revenue $ 375,996 (1) $ 170,122 $ 119,380 $ - $ - $ 665,498
Property expense (179,779) (137,325) (110,483) - - (427,587)
--------- ----------- ------------ ------------ ---------- ---------
Income from property $ 196,217 $ 32,797 $ 8,897 $ - $ - 237,911
========= =========== ============ ============ ========== =========
Other income $ - $ - $ - $ - $ 17,233 $ 17,233
Other expense - - - - (270,764) (270,764)
--------- ----------- ------------ ------------ ---------- ---------
Total other
income (expense) $ - $ - $ - $ - $ (253,531) (2) $(253,531)
========= =========== ============ ============ ========== =========
Equity in net income (loss)
of unconsolidated
companies $ 8,797 $ 2,036 $ 4,235 $ 152 $ (1,679) $ 13,541
========= =========== ============ ============ ========== =========
Funds from operations
before impairment charges
related to real estate
assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (164,323) $ 121,321 (5)
--------- ----------- ------------ ------------ ---------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (20,374) $ (20,374)
--------- ----------- ------------ ------------ ---------- ---------
Funds from operations after
impairment charges
related to real estate
assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (184,697) $ 100,947 (5)
========= =========== ============ ============ ========== =========
SELECTED FINANCIAL INFORMATION: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------------
RESIDENTIAL TEMPERATURE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------------------------ ---------- ------------ ------------ ----------- ----------- ---------
Property revenue $ 411,067 (1) $ 148,157 $ 168,372 $ - $ - $ 727,596
Property expense $(181,303) (110,701) (152,983) - $ - (444,987)
---------- ---------- ------------ ----------- ----------- ---------
Income from property $ 229,764 $ 37,456 $ 15,389 $ - $ - $ 282,609
========== ========== ============ =========== =========== =========
Other income $ - $ - $ - $ - $ 41,725 $ 41,725
Other expense - - - - $ (266,160) (266,160)
---------- ---------- ------------ ----------- ----------- ---------
Total other
income (expense) $ - $ - $ - $ - $ (224,435)(2) $(224,435)
========== ========== ============ =========== =========== ---------
Equity in net income (loss) of
unconsolidated companies $ 3,655 $ (91) $ 22,934 $ (3,828) $ (5,281) $ 17,389
========== ========== ============ =========== =========== =========
Funds from operations before
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (163,065) $ 179,998 (5)
---------- ---------- ------------ ----------- ----------- ---------
Impairment charges related to
real estate assets $ - $ - $ - $ - $ (2,048) $ (2,048)
---------- ---------- ------------ ----------- ----------- ---------
Funds from operations after
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (165,113) $ 177,950 (5)
========== ========== ============ ========== =========== =========
- ----------------------
See footnotes to the following table.
17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- --------------------------------------- ------- ------------ ----------- ------------ --------- ----------
TOTAL ASSETS BY SEGMENT: (3)
Balance at September 30, 2003 $ 2,583 $ 492 801 $ 302 116 4,294
Balance at December 31, 2002 2,624 492 729 305 135 4,285
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at September 30, 2003 $(1,402) $ (132) (95) $ - (947) (4) $ (2,576)
Balance at December 31, 2002 (1,371) (130) (93) - (789) (4) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at September 30, 2003 (107) $ (40) $ (138) $ - (61) (346)
Balance at December 31, 2002 (135) (44) (125) - (69) (373)
MINORITY INTERESTS:
Balance at September 30, 2003 $ (8) $ (7) $ (23) $ - $ - $ (38)
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 $5.3 million and $3.0 million for the three
months ended September 30, 2003 and 2002, respectively and $8.3 million
and $4.8 million for the nine months ended September 30, 2003 and 2002,
respectively.
(2) For purposes of this Note, Corporate and Other includes income from
investment land sales, net, gain on joint venture of properties, net,
interest and other income, corporate 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 distributions, impairment
charges and other expenses.
(3) Total assets by segment is inclusive of investments in unconsolidated
companies, net of unconsolidated debt.
(4) Inclusive of Corporate bonds and credit facility.
(5) Total funds from operations represents funds from operations available to
partners. The following table presents a reconciliation of Consolidated
Funds from Operations Available to Partners to Net Income (Loss).
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS AVAILABLE TO PARTNERS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(in thousands) 2003 2002 2003 2002
- ---------------------------------------- -------- -------- -------- --------
Consolidated Funds From Operations
Available to Partners After Impairment
Charges Related to Real Estate Assets $ 41,107 $ 51,817 $100,947 $177,950
Impairment charges related to real
estate assets 2,356 - 20,374 2,048
-------- -------- -------- --------
Consolidated Funds from Operations 43,463 51,817 121,321 179,998
-------- -------- -------- --------
Adjustments to reconcile Consolidated
Funds from
Operations Available to Partners
Before Impairment Charges Related to
Real Estate Assets to Net Income
(Loss):
Depreciation and amortization of
real estate assets (39,617) (36,419) (109,017) (102,088)
(Loss) gain on property sales, net (14) 19,646 (719) 25,311
Impairment charges related to real
estate assets (2,356) - (20,374) (2,048)
Cumulative effect of a change in - - - (10,327)
accounting principle
Adjustment for investments in
unconsolidated companies:
Office Properties 1,613 (1,946) (3,805) (5,997)
Resort/Hotel Properties (394) (370) (1,143) (370)
Residential Development
Properties (8) 615 (235) (2,339)
Temperature-Controlled (5,147) (6,777) (16,143) (18,278)
Logistics Properties
Other (260) (96) (178) (5,872)
Series A Preferred unit
distributions 4,556 4,556 13,668 12,146
Series B Preferred unit
distributions 2,019 2,019 6,057 3,028
-------- -------- -------- --------
Net Income (Loss) $ 3,855 $ 33,045 $(10,568) $ 73,164
======== ======== ======== ========
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
On August 26, 2003, the Operating Partnership acquired The Colonnade,
an 11-story, 216,000 square foot Class A office tower, located in the Coral
Gables submarket of Miami, Florida. The Operating Partnership acquired the
Office Property for approximately $51.4 million, funded by the Operating
Partnership's assumption of a $38 million loan from Bank of America and a draw
on the Operating Partnership's credit facility. The Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.
JOINT VENTURES
On October 8, 2003, the Operating Partnership entered into a joint
venture, Crescent One Briar Lake L.P., with affiliates of J.P. Morgan Fleming
Asset Management, Inc. The joint venture purchased One Briar Lake Plaza, located
in the Westchase submarket of Houston, Texas, for approximately $74.4 million.
The Property is a 20 story, 502,000 square foot Class A office building. The
affiliates of J.P. Morgan Fleming Asset Management, Inc. own a 70% interest, and
the Operating Partnership owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $24.4 million, of which the
Operating Partnership's portion was $7.3 million. The Operating Partnership's
equity contribution and an additional working capital contribution of $0.5
million were funded primarily through a draw under the Operating Partnership's
credit facility. The remainder of the purchase price of the Property was funded
by a secured loan to the joint venture in the amount of $50.0 million. None of
the mortgage financing at the joint venture level is guaranteed by the Operating
Partnership. The Operating Partnership manages and leases the Office Property on
a fee basis. The Office Property is an unconsolidated investment and will be
included in the Operating Partnership's Office Segment.
RESIDENTIAL DEVELOPMENT PROPERTIES
On August 14, 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the purchase of a tract of undeveloped land in Eagle
County, Colorado for approximately $15.5 million, funded by a draw on the
Operating Partnership's credit facility.
5. 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 "Net (loss) income from discontinued operations, net of minority
interests," and gain or loss and impairments in the assets sold or held for sale
have been presented as "(Loss) gain on real estate from discontinued operations,
net of minority interests" in the accompanying Consolidated Statements of
Operations for the three and nine months ended September 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 September 30, 2003 and December 31, 2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of September 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 first quarter of 2003, the Operating Partnership recognized an
approximately $15.0 million impairment charge on the 1800 West Loop South Office
Property.
In addition, as of September 30, 2003, the Las Colinas Plaza retail
property, located in the Las Colinas submarket in Dallas, Texas, the Liberty
Plaza Office Property located in the Far North Dallas submarket in Dallas,
Texas, the 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas and the four Woodlands Office Properties located in
The Woodlands submarket in Houston, Texas were held for sale.
BEHAVIORAL HEALTHCARE PROPERTIES
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a 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.
On July 10, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.3 million and recognized a minimal gain on the sale.
A $1.0 million impairment charge was recognized during the second quarter of
2003 related to this property.
As of September 30, 2003, the Operating Partnership owned four
behavioral healthcare properties. Impairment charges of approximately $2.4
million were recognized during the third quarter related to three of these four
remaining properties. Two of these properties were sold on October 15, 2003.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
(in thousands) SEPTEMBER 30, 2003(1) DECEMBER 31, 2002
- -------------------------------- --------------------- -----------------
Land $ 18,507 $ 24,151
Buildings and improvements 101,007 119,881
Furniture, fixture and equipment 548 1,713
Accumulated depreciation (32,361) (29,409)
-------------- ------------
Net investment in real estate $ 87,701 $ 116,336
============== ============
- -----------------------------
(1) Includes seven office properties, one retail property and four
behavioral healthcare properties.
The following tables present rental revenues, operating and other
expenses, depreciation and amortization, minority interests, net income, and
impairments for the nine months ended September 30, 2003 and 2002, for
properties included in discontinued operations as of September 30, 2003.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------
Total revenues 14,486 31,082
Operating and other expenses (6,811) (19,575)
Depreciation and amortization (6,402) (6,392)
------- --------
Net income from discontinued operations 1,273 5,115
======= ========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------
Loss on impairment of real estate (19,174) (1,449)
Realized (loss) gain on sale of properties (411) 7,132
------- --------
(Loss) gain on real estate from discontinued operations (19,585) 5,683
======= ========
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.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.
On June 27, 2003, the Operating Partnership sold approximately 3.5
acres of undeveloped land located in Houston, Texas. The sale 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. Due to a modification of the sales
agreement after June 30, 2003, the Operating Partnership recognized a net gain
on the sale of this land of approximately $8.9 million in the third quarter of
2003. This land was wholly-owned by the Operating Partnership.
On September 30, 2003, the Operating Partnership completed the sale of
approximately 3.1 acres of undeveloped land located in the Greenway Plaza office
complex of Houston, Texas. The sale generated net proceeds of approximately $5.3
million and a net gain of approximately $2.4 million. This land was wholly-owned
by the Operating Partnership.
7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 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 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 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 16, "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 $32.5 million of the total $115.1 million
of rent payable for the nine months ended September 30, 2003. The Operating
Partnership's share of the deferred rent was $13.0 million. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $13.0 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2003. As of September 30,
2003, the Temperature-Controlled Logistics Corporation's deferred rent and
valuation allowance from AmeriCold Logistics were $73.1 million and $66.8
million, respectively, of which the Operating Partnership's portions were $29.2
million and $26.7 million, respectively.
The Operating Partnership and Vornado Realty Trust, L.P. have engaged
underwriters to explore additional debt financing alternatives for the
Temperature-Controlled Logistics Corporation. It is anticipated that this
financing will be a non-
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recourse, secured term loan in an amount in excess of $200 million. If this
financing is obtained, the expected use of proceeds will allow the Operating
Partnership to make a reduction in its investment in this business and will
provide the business with additional financing for expansion.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of September 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.
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 second quarter of 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Operating
Partnership.
8. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Operating Partnership has investments of 20% to 50% in seven
unconsolidated joint ventures that own seven Office Properties. 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.
These investments are accounted for using the equity method of accounting.
22
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of September 30,
2003.
Operating Partnership's
OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2003
- --------------------------------------------------------- -------------------------------------- ---------------------------
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)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (6)(7)
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)
EW Deer Valley, L.L.C. Residential Development 41.7% (9)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0% (10)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (11)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (12)
CR License, L.L.C. Other 30.0% (13)
The Woodlands Operating Company, L.P. Other 42.5% (6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (14)
SunTx Fulcrum Fund, L.P. Other 28.1% (15)
G2 Opportunity Fund, L.P. Other 12.5% (16)
- ------------------------------
(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 nine months ended September 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 58.3% interest in EW Deer Valley, L.L.C. is owned by
parties unrelated to the Operating Partnership.
(10) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C. In October
2003, Manalapan entered into a contract to sell the Ritz Carlton Palm
Beach Resort/Hotel Property. The sale is anticipated to close November
2003. The Operating Partnership's equity interest in Manalapan is 50%.
(11) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(12) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C.
is owned by Vornado Realty Trust, L.P.
(13) 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.
(14) 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.
(15) 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's 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 September 30, 2003 was $6.9 million.
(16) 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 15, "Related Party Transactions," for information regarding the
ownership interests of trust managers and officers of the Company and
the General Partner in GMSP.
23
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September
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 September 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 September 30, 2003 financial statements.
The unconsolidated entities that are included under the headings on the
following tables are summarized below.
Balance Sheets as of September 30, 2003:
- WLDC;
- Other Residential Development - This includes the
Blue River Land Company, L.L.C. and EW Deer Valley,
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 nine months ended September
30, 2003:
- WLDC;
- Other Residential Development - This includes the
operating results for Blue River Land Company, L.L.C.
and EW Deer Valley, L.L.C.;
- Resort/Hotel - This includes the operating results
for Manalapan;
- 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. and Canyon Ranch Las Vegas, L.L.C. and G2.
24
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary Statements of Operations for the nine months ended September 30, 2002:
- WLDC - This includes WLDC's operating results for the
period February 15 through September 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
September 30, 2002, and the operating results of MVDC
and HADC;
- 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 for the period August 21
through September 30, 2002, Houston PT Four Westlake
Park Office Limited Partnership, Austin PT BK One
Tower Office Limited Partnership, Crescent 5 Houston
Center, L.P., Woodlands CPC and Crescent Miami
Center, L.L.C. for the period September 25 through
September 30, 2002; and
- Other - This includes the operating results for DBL,
CR License, L.L.C., The Woodlands Operating Company
and Canyon Ranch Las Vegas, L.L.C.
BALANCE SHEETS:
AS OF SEPTEMBER 30, 2003
---------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- --------------------------- -------------- ------------ ---------- ------------ ----------- -------- ----------
Real estate, net $ 391,960 $ 58,177 $ 80,079 $1,195,932 $ 808,111
Cash 12,685 1,837 4,636 41,532 36,470
Other assets 51,395 1,147 3,978 99,047 54,850
------------- ----------- ---------- ---------- ----------
Total assets $ 456,040 $ 61,161 $ 88,693 $1,336,511 $ 899,431
============= =========== ========== ========== ==========
Notes payable $ 288,280 $ 7,650 $ 52,300 $ 563,263 $ 523,778
Notes payable to the
Operating
Partnership 11,538 -- -- -- --
Other liabilities 61,538 4,966 5,376 10,778 37,848
Equity 94,684 48,545 31,017 762,470 337,805
------------- ----------- ---------- ---------- ----------
Total liabilities and
equity $ 456,040 $ 61,161 $ 88,693 $1,336,511 $ 899,431
============= =========== ========== ========== ==========
Operating Partnership's
share of unconsolidated
debt $ 122,519 $ 3,825 $ 26,150 $ 225,305 $ 182,317 $ -- $ 560,116
============= =========== ========== ========== ========== ======== ==========
Operating Partnership's
investments in
unconsolidated companies $ 38,309 $ 30,609 $ 15,508 $ 302,392 $ 125,655 $ 30,786 $ 543,259
============= =========== ========== ========== ========== ======== ==========
BALANCE SHEETS:
AS OF DECEMBER 31, 2002
---------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- ---------------------------- ------------- ----------- ---------- ---------- ----------- -------- ----------
Real estate, net $ 388,587 $ 68,235 $ 81,510 $1,238,810 $ 845,019
Cash 15,289 7,112 3,022 13,213 43,296
Other assets 46,934 3,303 4,415 88,327 35,609
------------- ----------- ---------- ---------- -----------
Total assets $ 450,810 $ 78,650 $ 88,947 $1,340,350 $ 923,924
============= =========== ========== ========== ===========
Notes payable $ 284,547 $ -- $ 56,000 $ 574,931 $ 507,679
Notes payable to the
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
unconsolidated companies $ 33,960 $ 39,187 $ 13,473 $ 304,545 $ 133,530 $ 37,948 $ 562,643
============= =========== ========== ========== =========== ======== ==========
25
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- ---------------------------- ------------- ----------- ---------- ---------- ----------- -------- ----------
Total revenues $ 82,644 $ 397 $ 31,495 $ 90,722 $ 107,601
------------- ----------- ---------- ---------- -----------
Expenses:
Operating expense 63,950 319 22,794 18,322 (1) 41,934
Interest expense 5,174 - 2,405 30,853 20,486
Depreciation and
amortization 5,235 - 2,205 43,963 24,326
Tax expense - - 25 642 -
Other (income) expense - - - (2,031) -
------------- ----------- ---------- ---------- -----------
Total expenses $ 74,359 $ 319 $ 27,429 $ 91,749 $ 86,746
------------- ----------- ---------- ---------- -----------
Gain on sale of properties - - - 1,452 -
------------- ----------- ---------- ---------- -----------
Net income $ 8,285 $ 78 $ 4,066 $ 425 (1) $ 20,855
============= =========== ========== ========== ===========
Operating Partnership's
equity in net income
(loss) of
unconsolidated companies $ 4,350 $ (115) $ 2,036 $ 152 $ 8,797 $ (1,679) $ 13,541
============= =========== ========== ========== =========== ======== ==========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- ------------------------------ ------------- ------------ ----------- ------------- ----------- -------- ----------
Total revenues $ 98,128 $ 82,944 $ 26,599 $ 81,762 $ 70,250
------------- ----------- ---------- ---------- -----------
Expenses:
Operating expense 54,919 76,798 22,534 12,492 (1) 32,082
Interest expense 3,578 399 4,080 32,324 13,584
Depreciation and
amortization 2,591 1,268 2,667 44,140 16,733
Tax expense 406 (78) - - -
Other (income) expense - - - 2,377 -
------------- ----------- ---------- ---------- -----------
Total expenses $ 61,494 $ 78,387 $ 29,281 $ 91,333 $ 62,399
------------- ----------- ---------- ---------- -----------
Net income $ 36,634 $ 4,557 $ (2,682) $ (9,571)(1)(2) $ 7,851
============= =========== ========== ========== ===========
Operating Partnership's
equity in net income
(loss) of
unconsolidated companies $ 19,018 $ 3,916 $ (91) $ (3,828) $ 3,655 $ (5,281) $ 17,389
============= =========== ========== ========== =========== ======== ==========
- ----------------------------------
(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.
26
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 September 30, 2003 are
shown below.
Operating
BALANCE Partnership's SHARE
OUTSTANDING AT OF BALANCE AT INTEREST RATE AT
DESCRIPTION SEPT. 30,2003 SEPT. 30, 2003 SEPT. 30, 2003
- --------------------------------------------- ------------- -------------- --------------
TEMPERATURE CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40%
Operating Partnership
Goldman Sachs Notes (1) $ 499,199 $ 199,679 6.89%
Various Capital Leases 36,641 14,657 4.84 to 13.63%
Various Mortgage Notes 27,423 10,969 7.00 to 12.88%
----------- ----------
$ 563,263 $ 225,305
----------- ----------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating $ 131,147 $ 65,574 5.47%
Partnership (2)(3)(4)(5)
Crescent 5 Houston Center L.P. - 25% Operating 90,000 22,500 5.00%
Partnership (6)
Crescent Miami Center, L.L.C. - 40% Operating 81,000 32,400 5.04%
Partnership
Houston PT Four Westlake Park Office Limited
Partnership - 20% Operating Partnership 48,250 9,650 7.13%
Crescent Five Post Oak Park, L.P. - 30% 45,000 13,500 4.82%
Operating Partnership
Austin PT Bank One Tower Office Limited
Partnership - 20% Operating Partnership 37,527 7,505 7.13%
Houston PT Three Westlake Park Office Limited
Partnership - 20% Operating Partnership 33,000 6,600 5.61%
The Woodlands Commercial Properties Co. - 42.5%
Operating Partnership
Fleet National Bank credit facility (7) 55,000 23,375 4.13%
Fleet National Bank (3)(8) 2,854 1,213 3.13%
----------- ----------
$ 523,778 $ 182,317
----------- ----------
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5%
Operating Partnership
Fleet National Bank credit facility (7) $ 230,000 $ 97,750 4.13%
Fleet National Bank (9) 37,587 15,974 4.10%
Fleet National Bank (3)(8) 5,854 2,488 3.13%
Various Mortgage Notes 14,839 6,307 3.50 to 6.25%
Blue River Land Company, L.L.C. - 50% Operating 7,650 3,825 4.14%
Partnership(10)
----------- ----------
$ 295,930 $ 126,344
----------- ----------
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50%
Operation Partnership
Corus Bank (3)(11) 52,300 26,150 5.11%
----------- ----------
TOTAL UNCONSOLIDATED DEBT $ 1,435,271 $ 560,116
=========== ==========
FIXED RATE/WEIGHTED AVERAGE 6.72%
VARIABLE RATE/WEIGHTED AVERAGE 4.59%
-------------
TOTAL WEIGHTED AVERAGE 5.82% (12)
-------------
FIXED/VARIABLE
DESCRIPTION MATURITY DATE SECURED/UNSECURED
- --------------------------------------------- ------------- -----------------
TEMPERATURE CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40%
Operating Partnership
Goldman Sachs Notes (1) 5/11/2023 Fixed/Secured
Various Capital Leases 6/1/2006 to 4/1/2017 Fixed/Secured
Various Mortgage Notes 12/1/2003 to 4/1/2009 Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating 12/1/2004 Variable/Secured
Partnership (2)(3)(4)(5)
Crescent 5 Houston Center L.P. - 25% Operating 10/1/2008 Fixed/Secured
Partnership (6)
Crescent Miami Center, L.L.C. - 40% Operating 9/25/2007 Fixed/Secured
Partnership
Houston PT Four Westlake Park Office Limited
Partnership - 20% Operating Partnership 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% 1/1/2008 Fixed/Secured
Operating Partnership
Austin PT Bank One Tower Office Limited
Partnership - 20% Operating Partnership 8/1/2006 Fixed/Secured
Houston PT Three Westlake Park Office Limited
Partnership - 20% Operating Partnership 9/1/2007 Fixed/Secured
The Woodlands Commercial Properties Co. - 42.5%
Operating Partnership
Fleet National Bank credit facility (7) 11/27/2005 Variable/Secured
Fleet National Bank (3)(8) 10/31/2003 Variable/Secured
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5%
Operating Partnership
Fleet National Bank credit facility (7) 11/27/2005 Variable/Secured
Fleet National Bank (9) 12/31/2005 Variable/Secured
Fleet National Bank (3)(8) 10/31/2003 Variable/Secured
Various Mortgage Notes 7/1/2005 to 12/31/2008 Fixed/Secured
Blue River Land Company, L.L.C. - 50% Operating 6/30/2004 Variable/Secured
Partnership(10)
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Operating
Partnership
Corus Bank (3)(11) 10/21/2005 Variable/Secured
TOTAL UNCONSOLIDATED DEBT
FIXED RATE/WEIGHTED AVERAGE 14.1 years
VARIABLE RATE/WEIGHTED AVERAGE 1.9 years
----------------------
TOTAL WEIGHTED AVERAGE 8.9 years
----------------------
- --------------------------------
(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: $82.5 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: $24.3 million at variable interest rate, LIBOR + 650
basis points with a LIBOR floor of 2.50%. Mezzanine Note -
$19.4 million at variable interest rate, LIBOR + 890 basis
points with a LIBOR floor of 3.0%. An interest-rate cap
agreement which limits interest rate exposure to a maximum
LIBOR of 4.52% is in place 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 separate letter of credit to guarantee the
repayment of up to $4.3 million each of the Main Street
Partners, L.P. loan.
(5) Under the terms of this loan, the Property must maintain
certain coverage ratios in order for the Partnership to
distribute cash. As of September 30, 2003, the Property income
was not sufficient to provide the minimum coverage. While this
situation does not constitute a default under the loan, the
Partnership will not be permitted to distribute cash during
the period of non-compliance.
(6) The construction loan for 5 Houston Center was refinanced and
converted to a mortgage loan on September 8, 2003.
(7) Woodlands CPC and WLDC entered into two $50 million interest
rate swap agreements, which limit interest rate exposure on
the combined notional amount of $100 million to a LIBOR rate
of 1.735% plus 300 basis points spread over LIBOR.
(8) 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% plus
200 basis points spread over LIBOR.
(9) 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% plus 275 basis points spread
over LIBOR.
(10) 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 September 30, 2003 and the amount guaranteed
was $5.4 million.
(11) The Operating Partnership and its joint venture partner each
obtained a separate letter of credit to guarantee repayment of
up to $3.0 million each of this facility.
(12) 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 5.87%.
27
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows, as of September 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 OF WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE DEBT(1) AVERAGE RATE MATURITY
- ------------------- ---------- ------------- ------------ ----------------
Fixed Rate Debt $ 323,767 57.8% 6.72% 14.1 years
Variable Rate Debt 236,349 42.2 4.59 1.9 years
---------- ----- ---- -----------
Total Debt $ 560,116 100.0% 5.82% 8.9 years
========== ===== ==== ===========
- ----------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $42.5 million of hedged variable rate debt, are
65% and 35%, respectively.
Listed below is the Operating Partnership's share of aggregate
principal payments, by year, required as of September 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)
- ---------------- ----------
2003 $ 12,027
2004 86,910
2005 162,286
2006 23,977
2007 48,384
Thereafter 226,532
---------
$ 560,116
=========
- -----------------------
(1) These amounts do not reflect the effect of extension options.
28
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Operating Partnership's debt
financing at September 30, 2003:
September 30, 2003
------------------
(in thousands)
Secured Debt
Fleet Fund I and II Term Loan(1) due May 2005, bears interest at LIBOR plus 325 basis points
(at September 30, 2003, the interest rate was 4.38%), with a four-year interest-only term, secured
by equity interests in Funding I and II Properties..................................................... $ 275,000
AEGON Partnership Note(2) 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..... 261,412
LaSalle Note I(3) due August 2027, bears interest at 7.83% with monthly principal and interest
payments based on a 25-year amortization schedule through maturity in August 2027, secured by the
Funding I Properties................................................................................... 235,829
Deutsche Bank-CMBS Loan(4) due May 2004, bears interest at the 30-day LIBOR rate plus 234 basis points
(at September 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(5) bears interest at 8.31% with monthly principal and interest payments based
on a 25-year amortization schedule through maturity in October 2016, secured by the Houston Center
mixed-use Office Property Complex...................................................................... 192,395
LaSalle Note II(6) bears interest at 7.79% with an initial seven-year interest-only term (through
March 2003), followed by monthly principal and interest payments based on a 25-year amortization
schedule through maturity in March 2028, secured by the Funding II Properties.......................... 160,072
Cigna Note(7) due June 2010, bears interest at 5.22% with an interest-only term, secured by the 707
17th Street Office Property............................................................................ 70,000
National Bank of Arizona Revolving Line of Credit(8) with maturities ranging from November 2004 to
December 2005, bears interest ranging from 4.00% to 5.00%, secured by certain DMDC assets.............. 49,191
Bank of America Note(9) due May 2013, bears interest at 5.53% with an initial 2.5-year interest-only
term (through November 2005), followed by monthly principal and interest payments based on a
30-year amortization schedule, secured by The Colonnade Office Property................................ 38,000
Metropolitan Life Note V(10) 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............................................................................................... 37,667
Northwestern Life Note(11) 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(12) due April 2009, bears interest at 8.20% with an initial five-year
interest-only term (through November 2006), followed by monthly principal and interest payments based
on a 25-year amortization schedule, secured by the Avallon IV Office Property.......................... 8,500
Nomura Funding VI Note(13) 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... 7,898
29
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
------------------
(in thousands)
Secured Debt (Continued)
Mitchell Mortgage Note due December 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 September 30, 2003, the interest
rate was 5.62%), with an initial interest only term until the Net Operating Income Hurdle Date (14),
followed by monthly principal and interest payments 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 September 30, 2003, with maturities ranging between October 2003 and September 2008,
secured by various CRDI and MVDC projects(15)........................................................... 45,827
Unsecured Debt
2009(16) 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(16) Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due
September 2007......................................................................................... 250,000
Credit Facility(17) interest only due May 2004, bears interest at LIBOR plus 187.5 basis points
(at September 30, 2003, the interest rate was 3.00%), with a one-year extension option................. 314,500
JP Morgan Loan Sales Facility(18), bears interest at the federal funds rate plus 150 basis points
(at September 30, 2003, the interest rate was 2.50%)................................................... 7,000
-----------
Total Notes Payable $ 2,576,469
===========
- -------------------------
(1) In October 2003, the Operating Partnership received approval from the
lending group to modify key financial and other covenants in the Fleet I
and II Term Loan. In connection with these modifications, the Operating
Partnership agreed to increase the interest rate on this loan to LIBOR plus
350 basis points.
(2) The outstanding balance of this note at maturity will be approximately
$224.1 million.
(3) 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.
(4) 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 September 30,
2003, the interest rate was 5.147%), and (ii) 600 basis points for the
Mezzanine note (at September 30, 2003, the interest rate was 9.5%). The
blended rate at September 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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 September 30,
2003, the interest rate was 4.0%). The warehouse facility bears interest at
prime plus 100 basis points (at September 30, 2003, the interest rate was
5.0%) and is limited to $10.0 million. The short-term facility bears
interest at prime plus 50 basis points (at September 30, 2003, the interest
rate was 4.5%) and is limited to $1.8 million. The blended rate at
September 30, 2003 for the vertical facility and club loan, the warehouse
facility and the short-term facility was 4.2%.
(9) The outstanding principal balance of this loan at maturity will be
approximately $33.4 million.
(10) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.
(11) The Operating Partnership has extended the loan maturity to November 2008
with Northwestern Mutual. The new loan has an interest rate of 4.94%.
(12) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.
(13) In July 2010, 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 (July 2010) by making a final payment of approximately
$6.1 million.
30
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) 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.
(15) In June 2003, CRDI entered into an interest rate cap agreement with Bank of
America 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.
The agreement limits the interest rate exposure on the notional amount to a
maximum prime rate, as defined in the agreement, of 4.1%.
(16) The Notes were issued in offerings registered with the Securities and
Exchange Commission.
(17) 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 September 30, 2003,
the maximum borrowing capacity under the credit facility was $383.6
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. In October 2003,
the Operating Partnership received approval from the lending group to
modify key financial and other covenants in the Credit Facility. In
connection with these modifications, the Operating Partnership agreed to
increase the interest rate on this facility to LIBOR plus 212.5 basis
points.
(18) 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 $1,677,547 65.1% 7.95% 10.6 years
Variable Rate Debt 898,922 34.9 4.09 1.0 years
---------- ----- ---- ----------
Total Debt $2,576,469 100.0% 6.65%(2) 6.9 years
========== ===== ==== ==========
- ------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
85% and 15%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 6.73%.
Listed below are the aggregate principal payments by year required as
of September 30, 2003 under indebtedness of the Operating Partnership. Scheduled
principal installments and amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT LINE
(in thousands) DEBT DEBT OF CREDIT TOTAL(1)
- ----------------------- ---------- ---------- ------------------- -----------
2003 $ 17,643 $ 7,000 $ - $ 24,643
2004 285,554 - 314,500 600,054
2005 381,903 - - 381,903
2006 18,920 - - 18,920
2007 26,892 250,000 - 276,892
Thereafter 899,057 375,000 - 1,274,057
---------- ---------- --------- -----------
$1,629,969 $ 632,000 $ 314,500 $ 2,576,469
========== ========== ========= ===========
- ----------------------------
(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 $24.6 million of 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 or additional debt facilities.
The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. 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, an acceleration
of payment on the loan in default or, for the Operating Partnership's
31
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
secured debt, foreclosure on the Property securing the debt. 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 September 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
expiration of that period. During the nine months ended September 30, 2003,
there were no circumstances that required prepayment 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
and the Company were formed primarily for the purpose of obtaining secured and
unsecured debt or joint venture financings. These entities, all of which are
consolidated 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), The BAC - Colonnade (CEI
Colonnade Holdings, LLC), and Crescent Finance Company.
10. 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 September 30, 2003, the Operating
Partnership had four 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 nine months ended September
30, 2003, and additional interest expense and unrealized gains (losses) recorded
in Accumulated Other Comprehensive Income ("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- ---------------- ---------- -------- --------- ----------- ---------------- ----------------
(in thousands)
- ----------------
9/01/99 $ 200,000 9/02/03 6.18% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (3,346) 4,179 3,738
2/15/03 100,000 2/15/06 3.26% (3,280) 1,286 (752)
2/15/03 100,000 2/15/06 3.25% (3,273) 1,285 (754)
9/02/03 200,000 9/01/06 3.72% (9,094) 419 (3,976)
-------- -------- ---------
$(18,993) $ 14,779 $ 5,819
======== ======== =========
The Operating Partnership has designated its four 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
32
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.
The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest during the nine months ended
September 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 nine months ended September 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% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
--------- --------- ---------
$ - $ 163 $ 180
========= ========= =========
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America 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. The agreement limits the interest rate on the notional amount to a maximum
prime rate, as defined in the agreement, of 4.1%.
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.
11. 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 September 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
OUTSTANDING AT MAXIMUM GUARANTEED
SEPTEMBER 30, 2003 AMOUNT
-------------------- -------------------
DEBTOR (in thousands)
- ------
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 15,197 $ 15,197
Blue River Land Company, L.L.C.(2) (3) 5,355 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit (2) (5) 3,000 3,000
------------ -----------
Total Guarantees $ 27,802 $ 28,747
============ ===========
- ------------------------------
(1) 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.
(2) See Note 8, "Investments in Unconsolidated Companies - Unconsolidated Debt
Analysis," for a description of the terms of this debt.
(3) 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 September 30, 2003 and the amount guaranteed was $5.4
million.
33
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) 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.
(5) 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
On September 23, 2003, the Operating Partnership entered into a one
year option agreement for the future sale of approximately 1.5 acres of
undeveloped investment land located in Houston, Texas for approximately $7.8
million. The Operating Partnership received $0.01 million of consideration in
September 2003. The option agreement may be extended up to four years on a
yearly basis at the option of the prospective purchaser for additional
consideration.
See Note 16, "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 its results of operations when
resolved.
12. 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
September 30, 2003 and December 31, 2002:
2003 2002
--------- ---------
(in thousands)
Development joint venture partners - Residential Development Segment $ 22,822 $ 24,937
Joint venture partners - Office Segment 7,466 11,202
Joint venture partners - Resort/Hotel Segment 7,406 7,833
--------- ---------
$ 37,694 $ 43,972
========= =========
34
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the minority interests' share of net
income (loss) for the nine months ended September 30, 2003 and 2002:
(in thousands) 2003 2002
- -------------- --------- ---------
Development joint venture partners - Residential Development Segment $ (1,628) $ (2,651)
Joint venture partners - Office Segment 383 (1,060)
Joint venture partners - Resort/Hotel Segment 523 22
Subsidiary preferred equity - (5,724)
--------- ---------
$ (722) $ (9,413)
========= =========
13. 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 nine months ended September 30, 2003, there were 4,995
units exchanged for 9,990 common shares of the Company.
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the nine months ended September 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
Units $ 0.75 $ 43,873 10/31/03 11/14/03 $ 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 A Preferred Units $ 0.422 $ 4,556 10/31/03 11/14/03 $ 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
Series B Preferred Units $ 0.594 $ 2,019 10/31/03 11/14/03 $ 2.3750
14. 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 nine months ended September 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 of the Company, which are subject
to federal and state income tax. For the nine months ended September 30, 2003
and 2002, the Operating Partnership's federal income tax benefit was $10.5
million and $6.5 million, respectively. The Operating Partnership's $10.5
million income tax benefit at September 30, 2003 consists primarily of $6.3
million for the Residential Development Segment and $3.7 million for the
Resort/Hotel Segment.
35
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Operating Partnership's total net tax asset of approximately $54.5
million at September 30, 2003 includes $32.5 million of net deferred tax assets.
SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. There was no change in the valuation allowance during the
nine months ended September 30, 2003.
15. 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 G2 general partner is entitled to an annual
asset management fee. The ownership structure of GMSP consists of an
approximately 86% limited partnership interest owned directly and indirectly by
Richard E. 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 September 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 nine months ended September 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 nine months ended September 30, 2003.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of September 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
or units of the Company pursuant to the exercise of vested stock and unit
options. Pursuant to the loan agreements, these loans may be repaid in full or
in part at any time without premium or penalty. Mr. Goff had a loan representing
$26.3 million of the $37.8 million total outstanding loans at September 30,
2003. Approximately $0.3 million of interest was outstanding related to these
loans as of September 30, 2003. No conditions exist at September 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.
36
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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 $3.0 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 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.
37
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
38
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............................................................ 40
Results of Operations
Three and nine months ended September 30, 2003 and 2002.......................... 41
Liquidity and Capital Resources
Cash Flows for the nine months ended September 30, 2003.......................... 48
Debt Financing........................................................................ 52
Recent Developments................................................................... 55
Unconsolidated Investments............................................................ 57
Significant Accounting Policies....................................................... 59
Funds from Operations Available to Partners........................................... 63
39
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 Operating Partnership's 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 Operating Partnership's ability to meet
financial and other covenants 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 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.
40
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's financial data as
a percentage of total revenue for the three and nine months ended September 30,
2003 and 2002, and the variance in dollars between the three and nine months
ended September 30, 2003 and 2002.
FINANCIAL DATA AS A FINANCIAL DATA AS A TOTAL VARIANCE IN
PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL DOLLARS BETWEEN
REVENUES FOR THE THREE REVENUES FOR THE NINE THE THREE MONTHS
MONTHS ENDED SEPT 30, MONTHS ENDED SEPT 30, ENDED SEPT 30,
---------------------- --------------------- -----------------
(IN MILLIONS)
2003 2002 2003 2002 2003 AND 2002
----- ---- ---- ---- -------------
REVENUE:
Office Property 60.0% 59.0% 56.5% 56.5% $ (13.8)
Resort/Hotel Property 25.9 23.5 25.6 20.4 (1.4)
Residential Development Property 14.1 17.5 17.9 23.1 (12.0)
----- ----- ----- ----- -------
TOTAL PROPERTY REVENUE 100.0% 100.0% 100.0% 100.0% (27.2)
----- ----- ----- ----- -------
EXPENSE:
Office Property real estate taxes 7.4% 7.2% 7.6% 7.8% (1.7)
Office Property operating expenses 20.8 17.8 19.4 17.1 1.4
Resort/Hotel Property expense 21.2 18.7 20.6 15.2 0.3
Residential Development Property expense 14.0 16.5 16.6 21.0 (9.6)
----- ----- ----- ----- -------
TOTAL PROPERTY EXPENSE 63.4% 60.2% 64.2% 61.1% (9.6)
----- ----- ----- ----- -------
INCOME FROM PROPERTY OPERATIONS 36.6% 39.8% 35.8% 38.9% (17.6)
----- ----- ----- ----- -------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 5.4% 2.3% 2.0% 0.7% 5.9
Gain on joint venture of properties, net 0.0 7.4 0.0 2.4 (17.7)
Interest and other income 0.6 1.5 0.6 2.5 (2.3)
Corporate general and administrative (3.8) (3.4) (3.1) (2.7) 0.2
Interest expense (20.3) (19.7) (19.4) (18.6) 4.1
Amortization of deferred financing costs (1.3) (1.1) (1.2) (1.1) (0.1)
Depreciation and amortization (17.8) (15.4) (16.7) (14.0) (1.0)
Impairment charges related to real estate assets 0.0 0.0 (0.2) (0.1) 0.0
Other expenses (0.1) 0.0 (0.2) 0.0 (0.1)
Equity in net income (loss) of unconsolidated companies:
Office Properties 2.6 0.4 1.3 0.5 4.6
Resort/Hotel Properties 0.0 (0.1) 0.3 0.0 0.0
Residential Development Properties 0.8 1.8 0.6 3.1 (2.6)
Temperature-Controlled Logistics Properties (0.5) (1.3) 0.0 (0.5) 2.2
Other (0.4) (0.3) (0.1) (0.7) (0.1)
----- ----- ----- ----- -------
TOTAL OTHER INCOME (EXPENSE) (34.8)% (27.9)% (36.1)% (28.5)% (6.9)
----- ----- ----- ----- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES 1.8% 11.9% (0.3)% 10.4 % (24.5)
Minority interests (0.1) (0.6) (0.1) (1.3) 0.8
Income tax benefit 2.3 1.1 1.6 0.9 2.4
----- ----- ----- ----- -------
INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 4.0% 12.4% 1.2% 10.0% (21.3)
Net income (loss) from discontinued operations (1.0) 0.7 0.2 0.7 (3.9)
(Loss) gain on real estate from discontinued operations (1.1) 0.7 (3.0) 0.8 (4.0)
Cumulative effect of a change in accounting principle 0.0 0.0 0.0 (1.4) 0.0
----- ----- ----- ----- -------
NET INCOME (LOSS) 1.9% 13.8% (1.6)% 10.1% (29.2)
Series A Preferred Unit distributions (2.2) (1.9) (2.1) (1.7) 0.0
Series B Preferred Unit distributions (1.0) (0.8) (0.9) (0.4) 0.0
----- ----- ----- ----- -------
NET (LOSS) INCOME AVAILABLE TO PARTNERS
(1.3)% 11.1% (4.6)% 8.0% $ (29.2)
===== ===== ===== ===== =======
TOTAL VARIANCE IN
DOLLARS BETWEEN
THE NINE MONTHS
ENDED SEPT 30,
-----------------
(IN MILLIONS)
2003 AND 2002
-------------
REVENUE:
Office Property $ (35.1)
Resort/Hotel Property 22.0
Residential Development Property (49.0)
-------
TOTAL PROPERTY REVENUE (62.1)
-------
EXPENSE:
Office Property real estate taxes (6.0)
Office Property operating expenses 4.5
Resort/Hotel Property expense 26.6
Residential Development Property expense (42.5)
-------
TOTAL PROPERTY EXPENSE (17.4)
-------
INCOME FROM PROPERTY OPERATIONS (44.7)
-------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 7.4
Gain on joint venture of properties, net (17.6)
Interest and other income (14.4)
Corporate general and administrative (0.7)
Interest expense 6.4
Amortization of deferred financing costs 0.0
Depreciation and amortization (9.0)
Impairment charges related to real estate assets (0.2)
Other expenses (1.0)
Equity in net income (loss) of unconsolidated companies:
Office Properties 5.1
Resort/Hotel Properties 2.1
Residential Development Properties (18.7)
Temperature-Controlled Logistics Properties 4.0
Other 3.6
-------
TOTAL OTHER INCOME (EXPENSE) (33.0)
-------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES (77.7)
Minority interests 8.7
Income tax benefit 4.0
-------
INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (65.0)
Net income (loss) from discontinued operations (3.7)
(Loss) gain on real estate from discontinued operations (25.3)
Cumulative effect of a change in accounting principle 10.3
-------
NET INCOME (LOSS) (83.7)
Series A Preferred Unit distributions (1.5)
Series B Preferred Unit distributions (3.1)
-------
NET (LOSS) INCOME AVAILABLE TO PARTNERS
$ (88.3)
=======
41
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2002
PROPERTY REVENUES
Total property revenues decreased $27.2 million, or 11.4%, to $211.6
million for the three months ended September 30, 2003, as compared to $238.8
million for the three months ended September 30, 2002. The primary components of
the decrease in total property revenues are discussed below.
- Office Property revenues decreased $13.8 million, or 9.8%, to $127.0
million, primarily due to:
- a decrease of $8.0 million from the 57 consolidated Office
Properties (excluding 2002 and 2003 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to a 5.4 percentage point decline in
occupancy (from 89.6% to 84.2%) resulting in decreases in both
rental revenue and operating expense recoveries;
- a decrease of $6.6 million resulting from the contribution of two
Office Properties to joint ventures in the third quarter 2002;
and
- a decrease of $5.0 million related to the insurance settlement in
2002 for tornado damage at the Carter Burgess Plaza Office
Property; partially offset by
- an increase of $2.7 million from the acquisition of the Johns
Manville Plaza Office Property in August 2002 and The Colonnade
Office Property in August 2003;
- an increase of $2.3 million in net lease termination fees to $5.3
million for third quarter 2003; and
- an increase of $1.1 million resulting from third party management
services and related direct expense reimbursements.
- Residential Development revenues decreased $12.0 million, or 28.7%, to
$29.8 million, primarily due to:
- a decrease of $17.6 million primarily due to the sale of 19 fewer
units at CRDI; partially offset by
- an increase of $3.5 million due to consolidation of MVDC and HADC
in 2003.
PROPERTY EXPENSES
Total property expenses decreased $9.6 million, or 6.7%, to $134.1
million for the three months ended September 30, 2003, as compared to $143.7
million for the three months ended September 30, 2002. The primary components of
the decrease in total property expenses are discussed below.
- Office Property expenses decreased $0.3 million, or 0.5%, to $59.5
million, primarily due to:
- a decrease of $2.6 million due to the contribution of two Office
Properties to joint ventures in 2002;
- a decrease of $0.7 million related to consulting fees incurred in
2002 on the 5 Houston Center development and a reduction in
nonrecurring legal fees for the Office Segment; and
- a decrease of $0.4 million of other expenses; partially offset by
- an increase of $1.3 million in operating expenses from the 57
consolidated Office Properties (excluding 2002 and 2003
acquisitions and properties held for sale) that the Operating
Partnership owned or had an interest in, due to:
- $2.5 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and
- $1.7 million increase in building repairs and
maintenance expense; partially offset by
- $1.2 million decrease in bad debt expense;
- $1.0 million decrease in property taxes and other taxes
and assessments; and
- $0.7 million decrease in other expenses;
- an increase of $1.1 million from the acquisition of Johns
Manville Plaza Office Property in August 2002 and The Colonnade
Office Property in August 2003; 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.
42
- Residential Development Property expenses decreased $9.6 million, or
24.4%, to $29.7 million, primarily due to:
- a decrease of $14.4 million primarily due to a reduction in cost
of sales related to the sale of 19 fewer units at CRDI; partially
offset by
- an increase of $2.6 million primarily due to increased cost of
sales from the consolidation of MVDC and HADC in 2003.
OTHER INCOME/EXPENSE
Total other income and expenses increased $6.9 million, or 10.3%, to
$73.6 million for the three months ended September 30, 2003, as compared to
$66.7 million for the three months ended September 30, 2002. The primary
components of the increase in total other expenses are discussed below.
OTHER INCOME
Other income decreased $10.0 million, or 35.8%, to $17.9 million for
the three months ended September 30, 2003, as compared to $27.9 million for the
three months ended September 30, 2002. The primary components of the decrease in
other income are discussed below.
- Gain on joint venture of properties, net decreased $17.7 million due to
a net gain of $17.7 million on the joint venture of three properties in
2002.
- Interest and other income decreased $2.3 million due to:
- a decrease in interest income of $1.8 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 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
- a decrease in interest income of $0.5 million as a result of the
payoff of two notes receivable, with an aggregate principal
balance of $19.9 million, in 2002.
- Equity in net income of unconsolidated companies increased $4.1
million, or 341.7%, to $5.3 million, primarily due to:
- an increase of $4.6 million in Office Properties equity in net
income primarily due to the gain on sale of three properties at
Woodlands CPC in 2003; and
- an increase of $2.2 million in Temperature-Controlled Logistics
Properties equity in income due to an increase in rental income
due to improved operations, a gain on the sale of one facility
and an improvement in interest expense and other income;
partially offset by
- a decrease of $2.5 million in Residential Development Properties
equity in net income due to a reduction in lot sales at the
Woodlands Land Development Company, L.P. and consolidation of the
operations of MVDC and HADC as a result of the Operating
Partnership's purchase, on January 2, 2003, of the remaining
economic interest in DBL, which owns a majority of the voting
stock in MVDC and HADC..
- Income from investment land sales, net increased $5.9 million, due to
the gain on sale of two parcels of land, located in Texas, in 2003
compared to the sale of one parcel of land, located in Arizona, in
2002.
OTHER EXPENSES
Other expenses decreased $3.1 million, or 3.3%, to $91.6 million for
the three months ended September 30, 2003, as compared to $94.7 million for the
three months ended September 30, 2002. The primary components of the decrease in
other expenses are discussed below.
- Interest expense decreased $4.1 million, or 8.7%, to $43.0 million due
to a decrease of 0.88% in the weighted average interest rate, partially
offset by an increase of $56.0 million in the weighted average debt
balance.
- Depreciation expense increased $1.0 million, or 2.7%, to $37.7 million
primarily due to an increase in Office Property depreciation expense
primarily attributable to an increase in lease commissions and building
improvements.
43
INCOME TAX BENEFIT
Income tax benefit increased $2.4 million, or 96.0%, to $4.9 million
primarily due to an increase of $2.7 million attributable to Residential
Development Property operations, partially offset by a decrease of $0.5 million
from Resort/Hotel Property operations.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $7.9 million, or 239.4%, to a loss of $4.6 million, primarily due to:
- a decrease of $3.9 million due to net operating losses in 2003
from seven office properties and one retail property held for
sale in 2003;
- a decrease of $2.4 million due to the impairment of three
behavioral healthcare properties in 2003; and
- a decrease of $1.6 million due to the gain on the sale of two
office properties in 2002.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
The following comparison of the results of operations for the nine
months ended September 30, 2003 and the nine months ended September 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 $62.1 million, or 8.5%, to $665.5
million for the nine months ended September 30, 2003, as compared to $727.6
million for the nine months ended September 30, 2002. The components of the
decrease in total property revenues are discussed below.
- Office Property revenues decreased $35.1 million, or 8.5%, to $376.0
million, due to:
- a decrease of $24.8 million from the 57 consolidated Office
Properties (excluding 2002 and 2003 acquisitions and properties
held for sale) that the Operating Partnership owned or had an
interest in, primarily due to a 5.3 percentage point decline in
occupancy (from 90.0% to 84.7%) resulting in decreases in both
rental revenue and operating expense recoveries, and decreases in
net parking revenues and charges for customary services;
- a decrease of $22.7 million resulting from the contribution of
two Office Properties to joint ventures in the third quarter
2002;
- a decrease of $5.0 million related to the Carter Burgess Plaza
Office Property due to the insurance settlement in 2002 for
tornado damage; and
- a decrease of $0.9 million in development revenue from the
construction of 5 Houston Center Office Property in 2002;
partially offset by
- an increase of $9.3 million from the acquisition of the Johns
Manville Plaza Office Property in August 2002 and The Colonnade
Office Property in August 2003;
- an increase of $3.8 million resulting from third party management
services and related direct expense reimbursements;
- an increase of $3.5 million in net lease termination fees to $8.3
million for 2003;
- an increase of $1.3 million resulting from deferred rent
recognition for a tenant in 2003; and
- an increase of $0.5 million in other revenues.
- Residential Development Property revenues decreased $49.0 million, or
29.1%, to $119.4 million, primarily due to a reduction in lot, unit and
acreage sales at Desert Mountain and CRDI.
44
- Resort/Hotel Property revenues increased $22.0 million, or 14.9%, to
$170.1 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).
PROPERTY EXPENSES
Total property expenses decreased $17.4 million, or 3.9%, to $427.6
million for the nine months ended September 30, 2003, as compared to $445.0
million for the nine months ended September 30, 2002. The components of the
decrease in total property expenses are discussed below.
- Office Property expenses decreased $1.5 million, or 0.8%, to $179.8
million, primarily due to:
- a decrease of $9.3 million due to the contribution of two Office
Properties to joint ventures in 2002; and
- a decrease of $1.3 million related to consulting fees incurred in
2002 on the 5 Houston Center Office Property development and a
reduction in nonrecurring legal fees for the Office Segment;
partially offset by
- an increase of $3.7 million from the acquisition of Johns
Manville Plaza in August 2002 and The Colonnade in August 2003;
- an increase of $3.2 million related 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 $1.4 million in operating expenses from the 57
consolidated Office Properties (excluding 2002 and 2003
acquisitions and properties held for sale) that the Operating
Partnership owned or had an interest in, due to:
- $7.8 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and
- $0.3 million increase in other expenses; partially
offset by
- $3.9 million decrease in property taxes;
- $1.6 million decrease in bad debt expense;
- $0.8 million decrease in building repairs, maintenance
and security expense; and
- $0.4 million decrease in management fee expenses; and
- an increase of $0.5 million in taxes/assessments related to
various land parcels.
- Resort/Hotel Property expenses increased $26.6 million, or 24.0%, to
$137.3 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 $42.5 million, or
27.8%, to $110.5 million, primarily due to a reduction in lot, unit and
acreage sales and related costs at Desert Mountain and CRDI.
OTHER INCOME/EXPENSE
Total other income and expenses increased $32.9 million, or 15.9%, to
$240.0 million for the nine months ended September 30, 2003, as compared to
$207.0 million for the nine months ended September 30, 2002. The primary
components of the increase in total other expenses are discussed below.
OTHER INCOME
Other income decreased $28.4 million, or 48.0%, to $30.8 million for
the nine months ended September 30, 2003, as compared to $59.2 million for the
nine months ended September 30, 2002. The primary components of the decrease in
other income are discussed below.
- Gain on joint venture of properties, net decreased $17.6 million
primarily due to a net gain of $17.7 million on the joint venture of
three properties in 2002.
- Equity in net income of unconsolidated companies decreased $3.9
million, or 22.4%, to $13.5 million, primarily due to:
- a decrease of $17.3 million in Residential Development Properties
equity in net income primarily 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;
and
45
- a decrease of $1.4 million in Residential Development Properties
equity in net income due to the consolidation of the operations
of MVDC and HADC as a result of the Operating Partnership's
purchase, on January 2, 2003, of the remaining economic interest
in DBL, which owns a majority of the voting stock in MVDC and
HADC; partially offset by
- an increase of $5.1 million in Office Properties equity in net
income primarily due to the gain on sale of three properties at
Woodlands CPC in 2003;
- an increase of $3.9 million in Temperature-Controlled Logistics
Properties equity in net income due to the loss on the sale of
one facility in 2002 and the gain on the sale of one facility in
2003, a decrease in interest expense, an increase in rental
income due to improved operations, an increase in other income
related to interest earned on deferred rent balance and reduced
general and administrative expenses;
- an increase of $3.6 million in other unconsolidated companies
primarily due to:
- the consolidation of DBL on January 2, 2003, which
incurred a $4.8 million loss which includes a $5.2
million impairment in 2002 for Class C-1 Notes issued
by Juniper CBO 1999-1 Ltd., partially offset by
earnings from G2 in 2002; and
- $0.9 million of equity earnings at DBL - ABC, Inc. in
2003; partially offset by
- equity losses of $1.8 million in 2003 resulting from
operations at the Woodlands Conference Center and
Country Club in 2003.
- an increase of $2.1 million in Resort/Hotel Properties 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 Ritz Carlton Palm Beach Hotel from 25% to 50%,
and the Operating Partnership's $1.9 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.
- Interest and other income decreased $14.3 million, or 77.3%, to $4.2
million, primarily attributable to:
- a decrease of $1.1 million due to the payoff of the
Temperature-Controlled Logistics Corporation's notes receivable
and a decrease of $0.8 million due to the payoff of the Manalapan
Hotel Partners' note receivable, both in 2002; and
- a decrease in interest income of $12.6 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.
- Income from investment land sales, net increased $7.4 million, due to
net income from the sales of three parcels of land, located in Texas,
in 2003 compared to the sale of one parcel of land, located in Arizona,
in 2002.
OTHER EXPENSES
Other expenses increased $4.6 million, or 1.7%, to $270.8 million for
the nine months ended September 30, 2003, as compared to $266.2 million for the
nine months ended September 30, 2002. The primary components of the increase in
other expenses are discussed below.
- Depreciation expense increased $9.0 million, or 8.8%, to $110.9
million, primarily due to:
- an increase of $5.0 million in Residential Development Property
and Resort/Hotel Property depreciation expense; and
- an increase of $3.8 million in Office Property depreciation
expense, attributable to:
- an increase of $6.9 million due to an increase in lease
commissions, building improvements and other leasing
costs; and
- an increase of $1.3 million from Johns Manville Office
Property acquired in August 2002; partially offset by
- a decrease of $4.4 million associated with the
contribution of two Office Properties to joint ventures
in 2002.
- Other expenses increased $1.0 million due to a loss from the sale of
marketable securities and franchise taxes related to the sale of a
property in 2002.
- Corporate, general and administrative expenses increased $0.7 million,
or 3.5%, to $20.5 million, primarily due to increased legal expenses,
shareholder services and consulting costs related to the Sarbanes-Oxley
Act.
- Interest expense decreased $6.4 million, or 4.7%, to $129.3 million due
to a decrease of 0.49% in the weighted average interest rate, partially
offset by an increase of $32.8 million in the weighted average debt
balance.
46
INCOME TAX BENEFIT
Income tax benefit increased $4.0 million, or 61.5%, to $10.5 million
primarily due to an increase of $9.7 million attributable to Residential
Development operations and an increase of $0.7 million attributable to
Hotel/Resort operations, partially offset by a $6.7 million deferred tax asset
recorded in 2002.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $29.0 million, or 268.5%, to a loss of $18.3 million, due to:
- a decrease of $15.0 million due to the impairment in 2003 on the
1800 West Loop South Office Property;
- a decrease of $7.8 million due to the gain on the sale of four
office properties in 2002;
- a decrease of $3.5 million due to the impairment of five
behavioral healthcare properties in 2003 and one in 2002;
- a decrease of $3.8 million due to net operating losses in 2003
from seven office properties and a retail property held for sale
in 2003; and
- a decrease of $0.3 million due to the loss on sales of three
behavioral healthcare properties in 2003; partially offset by
- an increase of $1.4 million due to the impairment in 2002 of two
transportation companies sold in 2002.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In conjunction with the implementation of SFAS No. 142, "Goodwill and
Other Intangible Assets," the Operating Partnership reported a cumulative effect
of a change in accounting principle for the nine months ended September 30,
2002, which resulted in a charge of $10.3 million. This charge is due to an
impairment (net of taxes) of the goodwill of the Temperature-Controlled
Logistics Corporation and CRDI.
RESORT/HOTEL PROPERTIES
The following provides a comparison of the results of operations of the
Resort/Hotel Properties for the nine months ended September 30, 2003 and 2002.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
(in thousands) 2003 2002 VARIANCE
- -------------- ------------- ------------- ----------
Lease revenues $ 3,662 $ 10,128
Operating revenues 166,460 138,029
Operating expenses (137,325) (110,701)
------------- ------------- ----------
Net Operating Income $ 32,797 $ 37,456 $ (4,659)
------------- ------------- ----------
The net operating income for the Resort/Hotel Properties decreased $4.7
million, or 12.5%, to $32.8 million, primarily due to an increase of $4.1
million in Resort/Hotel Property expenses, primarily consisting of insurance and
workers' compensation expenses. Resort net operating income as a percentage of
revenue decreased two percentage points from 19% to 17% and Business Class Hotel
net operating income as a percentage of revenue decreased one percentage point
from 23% to 22%.
RESIDENTIAL DEVELOPMENT PROPERTIES
The following provides a comparison of the results of operations of the
Residential Development Properties for the nine months ended September 30, 2003
and 2002.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
(in thousands) 2003 2002 VARIANCE
- -------------- ----------- ----------- ----------
Operating revenues $ 119,380 $ 168,372
Operating expenses (110,483) (152,983)
Depreciation and amortization (7,817) (4,885)
Equity in net income of unconsolidated
Companies 4,235 22,934
Income tax benefit (provision) 6,302 (3,411)
Minority interests (1,628) (2,651)
Discontinued operations - (1,539)
----------- ----------- ----------
Net Income $ 9,989 $ 25,837 $ (15,848)
----------- ----------- ----------
47
Net income for the Residential Development Properties decreased $15.8
million, or 61.2%, to $10.0 million, primarily due to:
- a decrease of approximately $11.3 million due to the sale of 20 fewer
lots and product mix at Desert Mountain, 175 fewer units and six fewer
equivalent time share units at CRD, and 73 fewer lots and 10 fewer
acres at 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 $0.8 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 SFAS No. 142.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE NINE
MONTHS ENDED SEPT 30,
(in millions) 2003
------------- ---------------------
Cash provided by Operating Activities $ 53.5
Cash used in Investing Activities (61.6)
Cash used in Financing Activities (7.7)
-------
Decrease in Cash and Cash Equivalents $ (15.8)
Cash and Cash Equivalents, Beginning of
Period 75.4
-------
Cash and Cash Equivalents, End of Period $ 59.6
=======
OPERATING ACTIVITIES
The Operating Partnership's cash provided by operating activities of
$53.5 million is attributable to Property operations.
INVESTING ACTIVITIES
The Operating Partnership's cash used in investing activities of $61.6
million is primarily attributable to:
- $51.1 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
- $28.7 million for Residential Development Property investments;
- $18.5 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;
- $14.8 million for the acquisition of rental properties;
- $4.8 million of additional investment in unconsolidated
Residential Development Properties;
- $3.6 million for development of investment properties;
- $1.4 million of additional investment in SunTx;
- $0.9 million of additional investment in Temperature-Controlled
Logistics Properties; and
- $0.8 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.
The cash used in investing activities is partially offset by:
- $19.1 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;
- $16.0 million of proceeds from property sales;
- $11.4 million in cash resulting from the consolidation of MVDC
and HADC;
- $7.7 million from return of investments in unconsolidated Office
Properties;
48
- $5.4 million from return of investments in SunTx;
- $3.2 million from return of investments in Temperature-Controlled
Logistics Properties; and
- $0.2 million from return of investments in unconsolidated
Residential Development Properties.
FINANCING ACTIVITIES
The Operating Partnership's cash used in financing activities of $7.7
million is primarily attributable to:
- $134.0 million of payments under the Operating Partnership's
credit facility, primarily from proceeds from the new Cigna note;
- $131.3 million of distributions to unitholders;
- $97.2 million of payments under other borrowings, partially
resulting from the payoff of the Cigna Note;
- $56.0 million of Residential Development Property note payments;
- $19.7 million of distributions to preferred unitholders;
- $9.5 million of net capital distributions to joint venture
partners; and
- $2.6 million of debt financing costs.
The cash used in financing activities is partially offset by:
- $284.5 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;
- $100.5 million of proceeds from other borrowings, primarily as a
result of the new Cigna note; and
- $57.5 million of proceeds from borrowings for construction costs
for infrastructure development on Residential Development
Properties.
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 September
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
9, "Notes Payable and Borrowings under Credit Facility," Note 8, "Investments in
Unconsolidated Companies," and Note 11, "Commitments and Contingencies" of Item
1, "Financial Statements."
TOTAL SHARE OF
OPERATING UNCONSOLIDATED
(in thousands) PARTNERSHIP DEBT (1) DEBT (2) TOTAL (3)
- -------------- -------------------- -------------- -----------
Fixed Rate Debt $ 1,677,547 $323,767 $ 2,001,314
Variable Rate Debt 898,922 236,349 1,135,271
----------- -------- -----------
Total Debt $ 2,576,469 $560,116 $ 3,136,585
=========== ======== ===========
- ---------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
85% and 15%, respectively.
(2) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $42.5 million of hedged variable rate debt, are
65% and 35%, respectively.
(3) Balance excludes hedges. The percentages for total consolidated and
unconsolidated fixed rate debt and variable rate debt, including the $542.5
million of hedged variable rate debt, are 81% and 19%, respectively.
49
Listed below are the aggregate principal payments by year required as
of September 30, 2003. Scheduled principal installments and amounts due at
maturity are included.
UNSECURED TOTAL
DEBT OPERATING SHARE OF
SECURED UNSECURED LINE OF PARTNERSHIP UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL
- --------------- ----------- ---------- ---------- ------------ -------------- -----------
2003 $ 17,643 $ 7,000 $ - $ 24,643 $ 12,027 $ 36,670
2004 285,554 - 314,500 600,054 86,910 686,964
2005 381,903 - - 381,903 162,286 544,189
2006 18,920 - - 18,920 23,977 42,897
2007 26,892 250,000 - 276,892 48,384 325,276
Thereafter 899,057 375,000 - 1,274,057 226,532 1,500,589
----------- -------- --------- ----------- --------- -----------
$ 1,629,969 $632,000 $ 314,500 $ 2,576,469 $ 560,116 $ 3,136,585
=========== ======== ========= =========== ========= ===========
CAPITAL EXPENDITURES
As of September 30, 2003, the Operating Partnership had unfunded
capital expenditures of approximately $56.4 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
September 30, 2003, and amounts remaining to be funded (future fundings
classified between short-term and long-term capital requirements):
CAPITAL EXPENDITURES
--------------------------------
TOTAL AMOUNT FUNDED AMOUNT SHORT-TERM
PROJECT AS OF SEPT REMAINING TO (NEXT 12 LONG-TERM
(in millions) PROJECT COST (1) 30, 2003 FUND MONTHS)(2) (12+ MONTHS)(2)
- ------------------------------------------ -------- ------------ ------------ ------------ ----------------
OFFICE SEGMENT
Acquired or Developed Properties(3) $ 2.2 $ (1.5) $ 0.7 $ 0.7 $ -
Houston Center Shops Redevelopment(4) 11.6 (2.7) 8.9 8.9 -
RESIDENTIAL DEVELOPMENT SEGMENT(5)
Tahoe Mountain Properties & Club 85.3 (78.9) 6.4 6.4 -
Desert Mountain Golf Course and
Water Supply Pipeline 55.9 (46.3) 9.6 9.6 -
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land -
Construction Loan(6) 3.2 - 3.2 1.6 1.6
OTHER
SunTx(7) 19.0 (6.9) 12.1 4.0 8.1
Crescent Spinco(8) 15.5 - 15.5 15.5 -
------- -------- ------- ------ ------
TOTAL $ 192.7 $ (136.3) $ 56.4 $ 46.7 $ 9.7
======= ======== ======= ====== ======
- ------------------------------
(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 committed to fund a construction loan to the
purchaser of the land which will be secured by 20 developed lots and a $0.6
million letter of credit.
(7) This commitment is related to the Operating Partnership's investment in a
private equity fund.
(8) 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.
LIQUIDITY OUTLOOK
The Operating Partnership expects to fund its short-term capital
requirements of approximately $46.7 million through a combination of
construction financing, net cash flow from operations, and borrowings under the
Operating
50
Partnership's credit facility or additional debt facilities. The Operating
Partnership plans to meet its maturing debt obligations, through September 30,
2004, of approximately $611.3 million, primarily through electing the extension
option on its Credit Facility, refinancing or electing the extension option on
the Deutsche Bank-CMBS loan, and extending the maturity date of the Northwestern
Life Note pursuant to the terms of an existing commitment.
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. The Operating Partnership expects to fund the remainder of
these short-term liquidity requirements with borrowings under the Operating
Partnership's credit facility and additional debt facilities, and proceeds from
the sale or joint venture of Properties.
The Operating Partnership's long-term liquidity requirements as of
September 30, 2003 consist primarily of debt maturities after September 30,
2004, which totaled approximately $2.0 billion. The Operating Partnership also
has $9.7 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 $53.9 million of
borrowing capacity available as of September 30, 2003;
- Additional proceeds from the refinancing of 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 the operating results of the Properties supporting the
Operating Partnership's Credit Facility to a level that would reduce
the availability under the Credit Facility;
- A reduction in the operating results of the Properties could limit the
Operating Partnership's ability to refinance existing secured and
unsecured debt;
- 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 under 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 or a decline in the
Operating Partnership's operating performance.
The Operating Partnership's portion of unconsolidated debt maturing
through September 30, 2004 is $30.3 million. The Operating Partnership's portion
of unconsolidated debt maturing after September 30, 2004 is $529.8 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.
51
DEBT FINANCING
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of September 30, 2003, are shown below:
BALANCE INTEREST
OUTSTANDING RATE AT
MAXIMUM AT SEPT 30, SEPT 30, MATURITY
DESCRIPTION(1) BORROWINGS 2003 2003 DATE
- ----------------------------------------- ----------- ----------- ------------- ----------------
(dollars in thousands)
SECURED FIXED RATE DEBT:
AEGON Partnership Note $ 261,412 $ 261,412 7.53 % July 2009
LaSalle Note I 235,829 235,829 7.83 August 2027
JP Morgan Mortgage Note 192,395 192,395 8.31 October 2016
LaSalle Note II 160,072 160,072 7.79 March 2028
Cigna Note 70,000 70,000 5.22 June 2010
Bank of America Note 38,000 38,000 5.53 May 2013
Metropolitan Life Note V 37,667 37,667 8.49 December 2005
Northwestern Life Note 26,000 26,000 7.66 January 2004
Woodmen of the World Note 8,500 8,500 8.20 April 2009
Nomura Funding VI Note 7,898 7,898 10.07 July 2020
Mitchell Mortgage Note 1,743 1,743 7.00 December 2003
Construction, Acquisition and other
obligations for various CRDI and
MVDC projects 13,031 13,031 2.90 to 11.25 Jan 04 to May 08
----------- ----------- -------------
Subtotal/Weighted Average $ 1,052,547 $ 1,052,547 7.59 %
----------- ----------- -------------
UNSECURED FIXED RATE DEBT:
The 2009 Notes $ 375,000 $ 375,000 9.25 % April 2009
The 2007 Notes 250,000 250,000 7.50 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 4.38 % May 2005
Deutsche Bank-CMBS Loan(2) 220,000 220,000 5.84 May 2004
National Bank of Arizona 51,825 49,191 4.00 to 5.00 Nov 04 to Dec 05
FHI Finance Loan 10,000 435 5.62 September 2009
Construction, Acquisition and other
obligations for various CRDI and
MVDC projects 74,862 32,796 4.00 to 5.00 Oct 03 to Sept 08
----------- ----------- -------------
Subtotal/Weighted Average $ 631,687 $ 577,422 4.87 %
----------- ----------- -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility(3) $ 383,570 $ 314,500 (4) 3.00 % May 2004
JP Morgan Loan Sales Facility(5) 50,000 7,000 2.50 -
----------- ----------- -------------
Subtotal/Weighted Average $ 433,570 $ 321,500 2.99 %
----------- ----------- -------------
TOTAL/WEIGHTED AVERAGE $ 2,742,804 $ 2,576,469 6.65 %(6)
=========== =========== =============
AVERAGE REMAINING TERM 6.9 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 9, "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 6.73%.
52
In April 2003, the Operating Partnership obtained 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 did not alter the Operating Partnership's borrowing
capacity, scheduled principal payments, interest rates, or maturity dates.
In October 2003, the Operating Partnership received approval from the
lending group for the Fleet Revolving Credit Facility and $275 million Fleet
Funding I and II Term Loan for less restrictive key financial and other
covenants in each facility. The Operating Partnership requested these
modifications due to the slowdown in the general business environment and its
impact on the Operating Partnership's core business cash flow. In exchange for
approving the modifications, the Operating Partnership agreed to an increase in
the interest rate spread over LIBOR by 25 basis points (approximately $1.6
million interest expense based on maximum borrowings) for both the Credit
Facility and the Term Loan.
The Operating Partnership is currently negotiating the terms of a $75
million secured loan with Fleet Bank. The loan is expected to have a term of 120
days and close prior to November 14, 2003. The Operating Partnership expects to
refinance the loan with a $75 million term loan secured by an Office Property.
As of September 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.
The Operating Partnership is generally obligated by its debt agreements
to comply with financial covenants, affirmative covenants and negative
covenants, or some combination of these types of covenants. 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, an acceleration
of payment on the loan in default or, for the Operating Partnership's secured
debt, foreclosure on the Property securing the debt, 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.
As a result, 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 nine months ended September 30, 2003,
there were no circumstances that required prepayment 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 September 30, 2003, the total debt of the unconsolidated joint
ventures and equity investments in which the company has ownership interests was
$1.4 billion, of which the Operating Partnership's share was $560.1 million. The
Operating Partnership had guaranteed $12.6 million of this debt as of September
30, 2003. Additional information relating to the Operating Partnership's
unconsolidated debt financing arrangements is contained in Note 8, "Investments
in Unconsolidated Companies," of Item 1, "Financial Statements."
Under the terms of the Main Street Partners, L.P., ("Main Street
Partners") loan agreement, the Bank One Center Office Property must maintain
certain coverage ratios in order for Main Street Partners to distribute cash. As
of September 30, 2003, the Property income was not sufficient to provide the
minimum required coverages. While this does not constitute a default under the
loan agreement, Main Street Partners will not be permitted to distribute cash
during the period during which minimum required coverages are not maintained.
53
GUARANTEE COMMITMENTS
The Operating Partnership's guarantees in place as of September 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
DEBTOR AT SEPT 30, 2003 AMOUNT
- ---------------------------------------------------------------- ----------------- ----------
(in thousands)
CRDI - Eagle Ranch Metropolitan District - Letter of Credit(1) $ 15,197 $ 15,197
Blue River Land Company, L.L.C.(2)(3) 5,355 6,300
Main Street Partners, L.P. - Letter of Credit (2)(4) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit (2)(5) 3,000 3,000
-------- --------
Total Guarantees $ 27,802 $ 28,747
======== ========
- ------------------------------
(1) 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.
(2) See Note 8, "Investments in Unconsolidated Companies - Unconsolidated
Debt Analysis," in Item 1, "Financial Statements," for a description of the
terms of this debt.
(3) 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 September 30, 2003 and the amount guaranteed was $5.4
million.
(4) 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.
(5) 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
On September 23, 2003, the Operating Partnership entered into a one
year option agreement for the future sale of approximately 1.5 acres of
undeveloped investment land located in Houston, Texas for approximately $7.8
million. The Operating Partnership received $0.01 million consideration in
September 2003. The option agreement may be extended up to four years on a
yearly basis at the option of the prospective purchaser for additional
consideration.
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 nine months ended September 30, 2003, such derivatives
were used to hedge the variable cash flows associated with existing variable
rate debt.
54
The following table shows information regarding the Operating
Partnership's cash flow hedge agreements during the nine months ended September
30, 2003, and additional interest expense and unrealized gains (losses) recorded
in Accumulated Other Comprehensive Income ("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL INTEREST UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE EXPENSE (LOSSES) IN OCI
- -------------- --------- -------- --------- ----------- ------------------- ---------------
(in thousands)
9/01/99 $ 200,000 9/02/03 6.18% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (3,346) 4,179 3,738
2/15/03 100,000 2/15/06 3.26% (3,280) 1,286 (752)
2/15/03 100,000 2/15/06 3.25% (3,273) 1,285 (754)
9/02/03 200,000 9/01/06 3.72% (9,094) 419 (3,976)
--------- -------- -------
$ (18,993) $ 14,779 $ 5,819
========= ======== =======
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 during the nine months ended
September 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 nine months ended September 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% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
--- ----- -----
$ - $ 163 $ 180
=== ===== =====
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America 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. The agreement limits the interest rate on the notional amount to a maximum
prime rate, as defined in the agreement, of 4.1%.
RECENT DEVELOPMENTS
ASSET ACQUISITIONS
OFFICE PROPERTIES
On August 26, 2003, the Operating Partnership acquired The Colonnade,
an 11-story, 216,000 square foot Class A office tower, located in the Coral
Gables submarket of Miami, Florida. The Operating Partnership acquired the
Office Property for approximately $51.4 million, funded by the Operating
Partnership's assumption of a $38 million loan from Bank of America and a draw
on the Operating Partnership's credit facility. The Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.
RESIDENTIAL DEVELOPMENT PROPERTIES
On August 14, 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the purchase of a tract of undeveloped land in Eagle
County, Colorado for approximately $15.5 million, funded by a draw on the
Operating Partnership's credit facility.
JOINT VENTURES
On October 8, 2003, the Operating Partnership entered into a joint
venture, Crescent One Briar Lake L.P., with affiliates of J.P. Morgan Fleming
Asset Management, Inc. The joint venture purchased One Briar Lake Plaza, located
in the
55
Westchase submarket of Houston, Texas, for approximately $74.4 million. The
Property is a 20 story, 502,000 square foot Class A office building. The
affiliates of J.P. Morgan Fleming Asset Management, Inc. own a 70% interest, and
the Operating Partnership owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $24.4 million, of which the
Operating Partnership's portion was $7.3 million. The Operating Partnership's
equity contribution and an additional working capital contribution of $0.5
million were funded primarily through a draw under the Operating Partnership's
credit facility. The remainder of the purchase price of the Property was funded
by a secured loan to the joint venture in the amount of $50.0 million. None of
the mortgage financing at the joint venture level is guaranteed by the Operating
Partnership. The Operating Partnership manages and leases the Office Property on
a fee basis. The Office Property is an unconsolidated investment and will be
included in the Operating Partnership's Office Segment.
ASSETS HELD FOR SALE AND ASSET DISPOSITIONS
OFFICE SEGMENT
As of September 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 first quarter of 2003, the Operating Partnership recognized an
approximately $15.0 million impairment charge, net of minority interests, on the
1800 West Loop South Office Property.
In addition, as of September 30, 2003, the Las Colinas Plaza retail
property, located in the Las Colinas submarket in Dallas, Texas, the Liberty
Plaza Office Property located in the Far North Dallas submarket in Dallas,
Texas, the 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas and the four Woodlands Office Properties located in
The Woodlands submarket in Houston, Texas were held for sale.
In October 2003, the Las Colinas Plaza and 1800 West Loop South Office
Properties were under contract for sale. The sales are anticipated to close in
December 2003.
RESORT/HOTEL SEGMENT
In October 2003, Manalapan entered into a contract to sell the Ritz
Carlton Palm Beach Resort/Hotel Property. The sale is anticipated to close in
November 2003. The Operating Partnership's equity interest in Manalapan is 50%.
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 a 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.
On July 10, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.3 million and recognized a minimal gain on the sale.
A $1.0 million impairment charge, was recognized during the second quarter of
2003 related to this property.
As of September 30, 2003, the Operating Partnership owned four
behavioral healthcare properties. Impairment charges of approximately $2.4
million, were recognized during the third quarter related to three of these four
remaining properties. Two of these properties were sold on October 15, 2003.
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.
56
On June 27, 2003, the Operating Partnership sold approximately 3.5
acres of undeveloped land located in Houston, Texas. The sale 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. Due to a modification of the sales
agreement after June 30, 2003, the Operating Partnership recognized a net gain
on the sale of this land of approximately $8.9 million in the third quarter of
2003. This land was wholly-owned by the Operating Partnership.
On September 30, 2003, the Operating Partnership completed the sale of
approximately 3.1 acres of undeveloped land located in the Greenway Plaza office
complex of Houston, Texas. The sale generated net proceeds of approximately $5.3
million and a net gain of approximately $2.4 million. This land was wholly-owned
by the Operating Partnership.
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 G2 general partner is entitled to an annual
asset management fee. The ownership structure of GMSP consists of an
approximately 86% limited partnership interest owned directly and indirectly by
Richard E. 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 September 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 nine months ended September 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 nine months ended September 30, 2003.
UNCONSOLIDATED INVESTMENTS
INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Operating Partnership has investments of 20% to 50% in seven
unconsolidated joint ventures that own seven Office Properties. 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.
These investments are accounted for using the equity method of accounting.
See "Recent Developments - Joint Ventures" for information regarding
an unconsolidated joint venture arrangement entered into subsequent to September
30, 2003.
57
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of September 30,
2003.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2003
- --------------------------------------------------------- -------------------------------------- ------------------------
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)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (6)(7)
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)
EW Deer Valley, L.L.C. Residential Development 41.7% (9)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0% (10)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (11)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (12)
CR License, L.L.C. Other 30.0% (13)
The Woodlands Operating Company, L.P. Other 42.5% (6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (14)
SunTx Fulcrum Fund, L.P. Other 28.1% (15)
G2 Opportunity Fund, L.P. Other 12.5% (16)
- ----------------------------
(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 nine months ended September 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 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Operating Partnership.
(10) The remaining 50% interest in Manalapan is owned by WB Palm Beach
Investors, L.L.C. In October 2003, Manalapan entered into a contract to
sell the Ritz Carlton Palm Beach Resort/Hotel Property. The sale is
anticipated to close in November 2003. The Operating Partnership's equity
interest in Manalapan is 50%.
(11) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(12) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(13) 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.
(14) 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.
(15) SunTx`s 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 September 30, 2003 was $6.9 million.
(16) 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 15, "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.
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of September 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 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.
58
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 16, "COPI," in 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 $32.5 million of the total $115.1 million
of rent payable for the nine months ended September 30, 2003. The Operating
Partnership's share of the deferred rent was $13.0 million. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $13.0 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2003. As of September 30,
2003, the Temperature-Controlled Logistics Corporation's deferred rent and
valuation allowance from AmeriCold Logistics were $73.1 million and $66.8
million, respectively, of which the Operating Partnership's portions were $29.2
million and $26.7 million, respectively.
The Operating Partnership and Vornado Realty Trust, L.P. have engaged
underwriters to explore additional debt financing alternatives for the
Temperature-Controlled Logistics Corporation. It is anticipated that this
financing will be a non-recourse, secured term loan in an amount in excess of
$200 million. If this financing is obtained, the expected use of proceeds will
allow the Operating Partnership to make a reduction in its investment in this
business and will provide the business with additional financing for expansion.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of September 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.
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 second quarter of 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 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
59
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),
- Allowance for doubtful accounts; and
- Allocation of Purchase Price of Acquired Operating Assets.
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.
60
ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property as if it were vacant and available
to lease at the purchase date and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The contributory value of tenant improvements is
separately estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term and any
renewal periods in the respective leases, but in no event does the amortization
period for the intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value and the customer relationship value would be charged to
expense.
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.
61
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 at the date of grant
be amortized ratably into expense over the appropriate vesting period. During
the nine months ended September 30, 2003, the Company and the Operating
Partnership granted stock 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 nine months ended September 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 ("the 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
(in thousands, except per unit amounts) 2003 2002 2003 2002
- --------------------------------------- ----------- ------------- ------------ -----------
Net (loss) income available to partners,
as reported $ (2,720) $ 26,470 $ (30,293) $ 57,990
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (700) (1,011) (2,301) (3,087)
--------- ---------- ----------- ----------
Pro forma net (loss) income $ (3,420) $ 25,459 $ (32,594) $ 54,903
(Loss) earnings per unit:
Basic - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.89
Basic - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
Diluted - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.88
Diluted - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
62
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 Operating Partnership
adopted SFAS 149 effective July 1, 2003. The adoption of this Statement did not
have a material impact 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. Most provisions of this Statement were 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. On October 29, 2003, the FASB agreed to
defer indefinitely the application of the provisions of SFAS No. 150 to
noncontrolling interests in limited life subsidiaries.
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 11, "Commitments and Contingencies" in Item 1, "Financial Statements," for
disclosure of the Operating Partnership's guarantees at September 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
for financial periods ending after December 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 VIE; 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.
FUNDS FROM OPERATIONS AVAILABLE TO PARTNERS
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.
63
The Operating Partnership calculates FFO available to partners in the
same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Partners.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO available to partners an appropriate measure of performance for an
operating partnership of an equity REIT and FFO an appropriate measure of
performance for its investment segments. However, FFO available to partners and
FFO should not be considered as alternatives to net income determined in
accordance with GAAP as an indication of the Operating Partnership's operating
performance.
The Operating Partnership has historically distributed an amount less
than FFO available to partners, primarily due to reserves required for capital
expenditures, including leasing costs. The aggregate cash distributions paid to
unitholders for the nine months ended September 30, 2003 and 2002 were $131.6
million, and $132.5 million, respectively. The Operating Partnership reported
FFO available to partners of $121.3 million and $180.0 million for the nine
months ended September 30, 2003 and 2002, respectively.
An increase or decrease in FFO available to partners 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 Operating Partnership must distribute 90% of its REIT taxable
income (as defined in the Code). Therefore, a significant increase in FFO
available to partners 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 available to partners 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 available to
partners 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.
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS AVAILABLE TO
PARTNERS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ---------- -----------
(in thousands)
Net income (loss) $ 3,855 $ 33,045 $ (10,568) $ 73,164
Adjustments to reconcile net income (loss)
to funds from operations available to partners:
Depreciation and amortization of real estate assets 39,617 36,419 109,017 102,088
Loss (gain) on property sales, net 14 (19,646) 719 (25,311)
Cumulative effect of a change in accounting principle - - - 10,327
Impairment charges related to real estate assets 2,356 - 20,374 2,048
Adjustment for investments in unconsolidated
companies:
Office Properties (1,613) 1,946 3,805 5,997
Resort/Hotel Properties 394 370 1,143 370
Residential Development Properties 8 (615) 235 2,339
Temperature-Controlled Logistics Properties 5,147 6,777 16,143 18,278
Other 260 96 178 5,872
Series A Preferred unit distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred unit distributions (2,019) (2,019) (6,057) (3,028)
------------ ------------ ---------- -----------
Funds from operations available to partners
before impairment charges related to real
estate assets 43,463 51,817 121,321 179,998
============ ============ ========== ===========
Impairment charges related to real estate assets (2,356) - (20,374) (2,048)
Funds from operations available to partners
after impairment charges related to real estate
assets $ 41,107 $ 51,817 $ 100,947 $ 177,950
============ ============ ========== ===========
Investment Segments:
Office Segment $ 73,855 $ 88,045 $ 216,126 $ 249,119
Resort/Hotel Segment 11,471 13,593 39,458 47,140
Residential Development Segment 2,773 4,319 13,766 32,354
Temperature-Controlled Logistics Segment 4,198 3,675 16,294 14,450
Other:
Corporate general and administrative (7,926) (8,121) (20,526) (19,846)
Corporate and other adjustments:
Interest expense (43,074) (47,149) (129,380) (135,871)
64
Series A Preferred unit distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred unit distributions (2,019) (2,019) (6,057) (3,028)
Other(1) 8,741 4,030 5,308 7,826
------------ ------------ ---------- -----------
Funds from operations available to partners
before impairment charges related to real
estate assets 43,463 51,817 121,321 179,998
============ ============ ========== ===========
Impairment charges related to real estate assets (2,356) - (20,374) (2,048)
Funds from operations available to partners
after impairment charges related to real estate
assets $ 41,107 $ 51,817 $ 100,947 $ 177,950
============ ============ ========== ===========
Basic weighted average units 58,460 63,350 58,468 65,295
============ ============ ========== ===========
Diluted weighted average units(2) 58,464 63,410 58,470 65,552
============ ============ ========== ===========
- -----------------------------------
(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, income from investment land sales,
net, and other expenses.
(2) See calculations for the amounts presented in the reconciliation following
this table.
The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
(units in thousands) 2003 2002 2003 2002
- --------------------- ------------ ------------ ---------- -----------
Basic weighted average units: 58,460 63,350 58,468 65,295
Add: Unit options 4 60 2 257
------ ------ ------ ------
Diluted weighted average units 58,464 63,410 58,470 65,552
====== ====== ====== ======
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 September 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 September 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 September 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.
65
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
66
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: November 10, 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: November 10, 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: November 10, 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: November 10, 2003 (Principal Financial and
Accounting Officer)
67
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, as amended (filed as Exhibit No. 10.01 to the
Quarterly Report on Form 10-Q for the quarter ended September
30, 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)