CRESCENT REAL ESTATE EQUITIES CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED March 31, 2004
COMMISSION FILE NO. 1-13038

CRESCENT REAL ESTATE EQUITIES COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)

TEXAS 52-1862813
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)

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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).

YES X NO
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Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of April 30, 2004.

Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 14,200,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,393,143

CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these
consolidated financial statements.

3

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these
consolidated financial statements.

4

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)

The accompanying notes are an integral part of these
consolidated financial statements.

5

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

The accompanying notes are an integral part of these
consolidated financial statements.

6

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.

The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas real estate investment trust, and all of its direct
and indirect subsidiaries.

The direct and indirect subsidiaries of Crescent Equities at March 31,
2004 included:

o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP

The "Operating Partnership."

o CRESCENT REAL ESTATE EQUITIES, LTD.

The "General Partner" of the Operating Partnership.

o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE GENERAL
PARTNER

Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.

The following are the consolidated subsidiaries of the Company that
owned or had an interest in real estate assets as of March 31, 2004: Operating
Partnership; Crescent Real Estate Funding I, L.P. ("Funding I"); Crescent Real
Estate Funding III, IV, and V, L.P. ("Funding III, IV, and V"); Crescent Real
Estate Funding VI, L.P. ("Funding VI"); Crescent Real Estate Funding VIII, L.P.
("Funding VIII"); Crescent Real Estate Funding X, L.P. ("Funding X"); Crescent
Real Estate Funding XII, L.P. ("Funding XII"); Crescent 707 17th Street, L.L.C.;
Crescent Spectrum Center, L.P.; Crescent Colonnade, L.L.C.; Mira Vista
Development Corp. ("MVDC"); Houston Area Development Corp. ("HADC"); Desert
Mountain Development Corporation ("DMDC"); Crescent Resort Development Inc.
("CRDI"); Crescent TRS Holdings Corp.

See Note 7, "Investments in Unconsolidated Companies," for a table that
lists the Company's ownership in significant unconsolidated joint ventures and
investments as of March 31, 2004.

See Note 8, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.

SEGMENTS

The assets and operations of the Company were divided into four
investment segments at March 31, 2004, as follows:

o Office Segment;

o Resort/Hotel Segment;

o Residential Development Segment; and

o Temperature-Controlled Logistics Segment.

Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of March 31, 2004:

o OFFICE SEGMENT consisted of 77 office properties (collectively
referred to as the "Office Properties"), located in 28
metropolitan submarkets in seven states, with an aggregate of
approximately 30.7 million net rentable square feet. Sixty seven
of the Office Properties are wholly-owned and ten are owned
through joint ventures, two of which are consolidated and eight
of which are unconsolidated.

o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 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 and one is owned through a joint venture that is
consolidated.

7

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of common stock representing interests of 98% to 100%
in four residential development corporations (collectively
referred to as the "Residential Development Corporations"), which
in turn, through partnership arrangements, owned in whole or in
part 25 upscale residential development properties (collectively
referred to as the "Residential Development Properties").

o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
non-controlling interest in the Vornado Crescent Carthage and KC
Quarry L.L.C. ("VCQ"). The Temperature-Controlled Logistics
Partnership owns all of the common stock, representing
substantially all of the economic interest, of AmeriCold
Realty Trust (the "Temperature-Controlled Logistics
Corporation"), a REIT. As of March 31, 2004, 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 March 31, 2004,
the Vornado Crescent Carthage and KC Quarry, L.L.C. owned two
quarries and the related land. The Company 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 entities.

See Note 3, "Segment Reporting," for a table showing selected financial
information for each of these investment segments for the three months ended
March 31, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at March 31, 2004 and December 31, 2003.

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
("GAAP") for interim financial information, as well as in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
information and footnotes required by GAAP for complete financial statements are
not included. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements are included. Operating results for
interim periods reflected do not necessarily indicate the results that may be
expected for a full fiscal year. You should read these financial statements in
conjunction with the financial statements and the accompanying notes included in
the Company's Form 10-K for the year ended December 31, 2003.

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 Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

ADOPTION OF NEW ACCOUNTING STANDARDS

FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), as amended, 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 March 15, 2004, except for
Special Purpose Entities which had to be consolidated by December 31, 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
expected losses of the VIE's activities or entitled to receive a majority of the
entity's expected residual returns or both.

The adoption of FIN 46 did not have a material impact to the Company's
financial condition or results of operations. Due to the adoption of this
Interpretation and management's assumptions in application of the guidelines
stated in the Interpretation, the Company has consolidated GDW LLC, a subsidiary
of DMDC, as of December 31, 2003 and Elijah

8

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fulcrum Fund Partners, L.P. ("Elijah") as of January 1, 2004. Elijah is a
limited partnership whose purpose is to invest in the SunTx Fulcrum Fund, L.P.
SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of acquisitions
that offer the potential for substantial capital appreciation. While it was
determined that one of the Company's unconsolidated joint ventures, Main Street
Partners, L.P., and its investments in Canyon Ranch Las Vegas, L.L.C., CR
License, L.L.C. and CR License II, L.L.C. ("Canyon Ranch Entities") are VIEs
under FIN 46, the Company is not the primary beneficiary and is not required to
consolidate these entities under other GAAP. The Company's maximum exposure to
loss is limited to its equity investment of approximately $53.3 million in Main
Street Partners, L.P. and $5.1 million in the Canyon Ranch Entities at March 31,
2004.

Further, in connection with the Hughes Center acquisition, the Company
entered into an exchange agreement with a third party intermediary for six of
the Office Properties and the nine retail parcels. This agreement is for a
maximum term of 180 days and allows the Company to pursue favorable tax
treatment on other properties sold by the Company within this period. During the
180-day period, which will end on June 28, 2004, the third party intermediary is
the legal owner of the properties, although the Company controls the properties,
retains all of the economic benefits and risks associated with these properties
and indemnifies the third party intermediary and, therefore, the Company is
fully consolidating these properties. On the expiration of the 180-day period,
the Company will take legal ownership of the properties.

SIGNIFICANT ACCOUNTING POLICIES

STOCK-BASED COMPENSATION. Effective January 1, 2003, the Company
adopted the fair value expense recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," on a prospective basis as permitted
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which requires that the fair value of stock options at the date of
grant be amortized ratably into expense over the appropriate vesting period.
During the three months ended March 31, 2004, the Company granted stock options
and recognized compensation expense that was not significant to its results of
operations. With respect to the Company's stock options which were granted prior
to 2003, the Company accounted for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25"). Had compensation cost been determined based on the fair value at the
grant dates for awards under the Plans consistent with SFAS No. 123, the
Company's net loss and loss per share would have been reduced to the following
pro forma amounts:

MARKETABLE SECURITIES. The Company has classified and recorded its
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Realized gains or losses on the sale
of securities are recorded based on average cost. When a decline in the fair
value of marketable securities is determined to be other-than-temporary, the
cost basis is written down to fair value and the amount of the write-down is
included in earnings for the applicable period. A decline in the fair value of a
marketable security is deemed other-than-temporary if its cost basis has
exceeded its fair value for a period of six to nine months. Investments in
securities of non-publicly traded companies are reported at cost, as they are
not considered marketable under SFAS No. 115, and total $6.0 million and $6.1
million at March 31, 2004 and December 31, 2003, respectively.

9

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the carrying value, fair value and
unrealized gains and losses in Accumulated Other Comprehensive Income ("OCI") as
of March 31, 2004 and December 31, 2003 and the realized gains, unrecognized
holding losses and change in OCI for the three months ended March 31, 2004 and
2003 for the Company's marketable securities.

- ----------

(1) Held to maturity securities are carried at unamortized cost and consist of
U.S. Treasury and government sponsored agency securities purchased for the
sole purpose of funding debt service payments on the LaSalle Note II. See
Note 8, "Notes Payable and Borrowings Under Credit Facility," for additional
information on the defeasance of LaSalle Note II.

(2) Trading securities consist of marketable securities purchased in connection
with the Company's dividend incentive unit program. These securities are
marked to market value on a monthly basis with the change in fair value
recognized in earnings.

(3) Available for sale securities consist of marketable securities which the
Company intends to hold for an indefinite period of time. These securities
are marked to market value on a monthly basis with the corresponding
unrealized gain or loss recorded in OCI.

EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.

Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.

The following tables present reconciliations for the three months ended
March 31, 2004 and 2003 of basic and diluted earnings per share from "Loss
before discontinued operations and cumulative effect of a change in accounting
principle" to "Net loss available to common shareholders." The table also
includes weighted average shares on a basic and diluted basis.

(1) Anti-dilutive shares not included are 554 and 4 for the three months ended
March 31, 2004 and 2003, respectively.

10

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This table presents supplemental cash flow disclosures for the three
months ended March 31, 2004 and 2003.

SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS

3. SEGMENT REPORTING

For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company currently has four major investment segments based on property type: the
Office Segment; the Resort/Hotel Segment; the Residential Development Segment;
and the Temperature-Controlled Logistics Segment. Management utilizes this
segment structure for making operating decisions and assessing performance.

The Company uses 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:

o Net Income (Loss) - determined in accordance with GAAP;

o excluding gains (losses) from sales of depreciable operating
property;

o excluding extraordinary items (as defined by GAAP);

o plus depreciation and amortization of real estate assets; and

o after adjustments for unconsolidated partnerships and joint
ventures.

The Company calculates FFO - diluted in the same
manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available
to Common Shareholders and the Company includes the effect of operating
partnership unitholder minority interests.

11

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Company considers FFO -
diluted and FFO appropriate measures of performance for an equity REIT and for
its investment segments. However, FFO - diluted and FFO should not be considered
as alternatives to net income determined in accordance with GAAP as an
indication of the Company's operating performance.

The Company's measures of FFO - diluted and FFO may not be comparable
to similarly titled measures of other REITs if those REITs apply the definition
of FFO in a different manner than the Company.

Selected financial information related to each segment for the three
months ended March 31, 2004 and 2003, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of the segments at March 31, 2004 and December 31, 2003, are presented below:

See footnotes to the following table.

12

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

See footnotes to the following table.

- ----------

(1) The property revenue includes lease termination fees (net of the write-off
of deferred rent receivables) of approximately $1.3 million and $2.0
million for the three months ended March 31, 2004 and 2003, respectively.

(2) The Company sold its interest in The Woodlands Land Development Company,
L.P. on December 31, 2003.

(3) For purposes of this Note, Corporate and Other includes the total of:
interest and other income, corporate general and administrative expense,
interest expense, amortization of deferred financing costs, extinguishment
of debt, other expenses, and equity in net income of unconsolidated
companies-other.

(4) The Company's net book value for the Residential Segment includes total
assets, consolidated property level financing, consolidated other
liabilities and minority interest totaling $488 million at March 31, 2004.
The primary components of net book value are $319 million for CRDI,
consisting of Tahoe Mountain Resort properties of $171 million, Denver
development properties of $60 million and Colorado Mountain development
properties of $88 million , $138 million for Desert Mountain and $31
million for other land development properties.

(5) Total assets by segment are inclusive of investments in unconsolidated
companies.

(6) Includes non-income producing land held for investment or development of
$80.8 million and U.S. Treasury and government sponsored agency securities
of $177.6 million.

(7) Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
Loan and Funding II defeasance.

13

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ASSET ACQUISITIONS

OFFICE PROPERTIES

During January and February 2004, in accordance with the original
purchase contract, the Company acquired an additional five Class A Office
Properties and seven retail parcels located within Hughes Center in Las Vegas,
Nevada from the Rouse Company. One of these Office Properties is owned through a
joint venture in which the Company acquired a 67% interest. The remaining four
Office Properties are wholly-owned by the Company. The Company acquired these
five Office Properties and seven retail parcels for approximately $175.3
million, funded by the Company's assumption of approximately $85.4 million in
mortgage loans and by a portion of the proceeds from the sale of the Company's
interests in The Woodlands on December 31, 2003. The Company recorded the loans
assumed at their fair value of approximately $93.2 million, which includes $7.8
million of premium. The five Office properties are included in the Company's
Office Segment.

On March 31, 2004, the Company acquired Dupont Centre, a 250,000 square
foot Class A office property, located in the John Wayne Airport submarket of
Irvine, California. The Company acquired the Office Property for approximately
$54.3 million, funded by a draw on the Company's credit facility. This Office
Property is wholly-owned and included in the Company's Office Segment.

UNDEVELOPED LAND

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Company completed the purchase of two tracts of
undeveloped land in Hughes Center from the Rouse Company for $10.0 million. The
purchase was funded by a $7.5 million loan from the Rouse Company and a draw on
the Company's credit facility.

5. DISCONTINUED OPERATIONS

In accordance with SFAS No. 144,"Accounting for the Impairment or
Disposal of Long-Lived Assets," the results of operations of the assets sold or
held for sale have been presented as "Income from discontinued operations, net
of minority interests," gain or loss on the assets sold or held for sale have
been presented as "Loss on real estate from discontinued operations, net of
minority interests" and impairments on the assets sold or held for sale have
been presented as "Impairment charges related to real estate assets from
discontinued operations, net of minority interests" in the accompanying
Consolidated Statements of Operations for the three months ended March 31, 2004
and 2003. The carrying value of the assets held for sale has been reflected as
"Properties held for disposition, net" in the accompanying Consolidated Balance
Sheets as of March 31, 2004 and December 31, 2003.

ASSETS SOLD

On March 23, 2004, the Company completed the sale of the 1800 West Loop
South Office Property in Houston, Texas. The sale generated net proceeds of
approximately $28.2 million and a net gain of approximately $0.2 million, net of
minority interests. The Company previously recorded an impairment charge of
approximately $13.9 million, net of minority interest, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Company's credit facility. This property was wholly-owned.

On March 31, 2004, the Company sold its last remaining behavioral
healthcare property. The sale generated net proceeds of approximately $2.0
million and a net loss of approximately $0.3 million, net of minority interests.

ASSETS HELD FOR SALE

OFFICE SEGMENT

The following Office Properties are classified as held for sale as of
March 31, 2004.

- ----------

(1) This property was sold on April 13, 2004.

(2) The Company has entered into contracts to sell these properties. The sales
are expected to close in the second quarter of 2004.

14

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF ASSETS HELD FOR SALE

The following table indicates the major asset classes of the properties
held for sale.

- ----------

(1) Includes six Office Properties and other assets.

(2) Includes seven Office Properties, one behavioral healthcare property and
other assets.

The following tables present total revenues, operating and other expenses,
depreciation and amortization, unitholder minority interests, impairments of
real estate assets and realized loss on sale of properties for the three months
ended March 31, 2004 and 2003, for properties included in discontinued
operations.

15

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES

AmeriCold Logistics, a limited liability company owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"), 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 March
2, 2004, the Temperature-Controlled Logistics Corporation and AmeriCold
Logistics amended the leases to further extend the deferred rent period to
December 31, 2005, from December 31, 2004. The parties previously extended the
deferred rent period to December 31, 2004 from December 31, 2003, on March 7,
2003.

Under terms of the leases, AmeriCold Logistics elected to defer $10.8
million of the total $38.9 million of rent payable for the three months ended
March 31, 2004. The Company's share of the deferred rent was $4.3 million. The
Company recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $4.3 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the three months ended March 31, 2004. As of March 31, 2004, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $93.2 million and $85.1 million,
respectively, of which the Company's portions were $37.3 million and $34.0
million, respectively.

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs and the
repayment of approximately $12.9 million in existing mortgages. On February 6,
2004, the Temperature-Controlled Logistics Corporation distributed cash of
approximately $90.0 million to the Company.

VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.

On January 20, 2004, VCQ purchased $6.1 million of trade receivables
from Americold Logistics at a 2% discount. VCQ used cash from a $6.0 million
contribution from its owners, of which approximately $2.4 million represented
the Company's contribution for the purchase of the trade receivables. The
receivables were collected during the first quarter of 2004. On March 29, 2004,
VCQ purchased an additional $4.1 million of receivables from AmeriCold Logistics
at a 2% discount. VCQ used cash from collection of the trade receivables
previously purchased. The remaining $2.0 million was distributed to its owners,
of which $0.8 million was received by the Company on April 1, 2004.

16

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVESTMENTS IN UNCONSOLIDATED COMPANIES

The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of March 31, 2004.

- ----------

(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 70% interest in Crescent Five Post Oak Park, L.P. is owned
by an affiliate of General Electric Pension Fund Trust.

(4) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JP Morgan Fleming Asset Management, Inc.

(5) 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.

(6) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Office Limited Partnership
and Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund Trust.

(7) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.

(8) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.

(9) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.

(10) Of the remaining 50% interest in Canyon Ranch Las Vegas, L.L.C., 35% is
owned by an affiliate of the management company of two of the Company's
Resort/Hotel Properties and 15% is owned by the Company through its
investment in CR License II, L.L.C.

(11) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Company. EW Deer Valley, L.L.C. was formed to acquire,
hold and dispose of its 3.3% ownership interest in Empire Mountain
Village, L.L.C.

(12) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Company's Resort/Hotel Properties.

(13) The remaining 70% interest in CR License II, L.L.C is owned by an
affiliate of the management company of two of the Company's Resort/Hotel
Properties.

(14) SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of
acquisitions that offer the potential for substantial capital
appreciation. Of the remaining 76.5% of SunTx Fulcrum Fund, L.P., 37.1% is
owned by SunTx Capital Partners, L.P. and the remaining 39.4% is owned by
a group of individuals unrelated to the Company.

(15) The remaining 85.6% interest in SunTx Capital Partners, L.P. is owned by
parties unrelated to the Company.

(16) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. The remaining
87.5% interest in G2 is owned by Goff-Moore Strategic Partners, L.P.
("GMSPLP") and by parties unrelated to the Company. G2 is managed and
controlled by an entity that is owned equally by GMSPLP and GMAC
Commercial Mortgage Corporation ("GMACCM"). The ownership structure of
GMSLP 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. The remaining approximately 2% general
partnership interest is owned by unrelated parties.

17

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY FINANCIAL INFORMATION

The Company reports its share of income and losses based on its ownership
interest in its respective equity investments, adjusted for any preference
payments. The unconsolidated entities that are included under the headings on
the following tables are summarized below.

Balance Sheets as of March 31, 2004:

o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake 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 Crescent One BriarLake
Plaza, L.P.;

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and

o Other - This includes Manalapan Hotel Partners, L.L.C., Blue River
Land Company, L.L.C., EW Deer Valley, L.L.C., CR License, L.L.C., CR
License II, L.L.C., Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P., SunTx Capital Partners, L.P. and G2.

Balance Sheets as of December 31, 2003:

o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake 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 Crescent One BriarLake
Plaza, L.P.;

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and

o Other - This includes Manalapan Hotel Partners, L.L.C., Blue River
Land Company, L.L.C., EW Deer Valley, L.L.C., CR License, L.L.C., CR
License II, L.L.C., Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P. and G2.

Summary Statements of Operations for the three months ended March 31,
2004:

o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake 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 Crescent One BriarLake
Plaza, L.P.;

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and

o Other - This includes the Blue River Land Company, L.L.C., EW Deer
Valley, L.L.C., CR License, L.L.C., CR License II, L.L.C., Canyon
Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P., SunTx Capital
Partners, L.P. and G2.

Summary Statements of Operations for the three months ended March 31,
2003:

o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake 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;

o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;

o Other - This includes Manalapan Hotel Partners, L.L.C., the
Woodlands Land Development Company, L.P., Blue River Land Company,
L.L.C., CR License, L.L.C., CR License II, L.L.C., the Woodlands
Operating Company and Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P. and G2.

18

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEETS:

BALANCE SHEETS:

19

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY STATEMENTS OF OPERATIONS:

- ----------

(1) The Company sold its interest in The Woodlands Land Development Company,
L.P. on December 31, 2003.

(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).

20

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNCONSOLIDATED DEBT ANALYSIS

The following table shows, as of March 31, 2004, information about the
Company's share of unconsolidated fixed and variable rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.

- ---------

(1) URS Real Estate, L.P. and AmeriCold Real Estate, L.P., subsidiaries of the
Temperature-Controlled Logistics Corporation, expect to repay this note on
the Optional Prepayment Date of April 11, 2008. The overall weighted
average maturity would be 3.98 years based on this date.

(2) On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a mortgage financing with Morgan Stanley Mortgage Capital, Inc.,
secured by twenty-one of its owned and seven of its leased properties. The
loan bears interest at LIBOR + 295 basis points (with a LIBOR floor of 1.5%
with respect to $54.4 million of the loan) and requires principal payments
of $5.0 million annually.

(3) Senior Note - Note A: $81.8 million at variable interest rate, LIBOR + 189
basis points, $4.8 million at variable interest rate, LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.1 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.3 million at variable interest rate, LIBOR + 890 basis
points with a LIBOR floor of 3.0%. Interest-rate cap agreement maximum
LIBOR of 4.52% on all notes. All notes amortized based on a 25-year
schedule.

(4) The Company and its joint venture partner obtained separate Letters
of Credit to guarantee the repayment of up to $4.3 million each of
principal of the Main Street Partners, L.P. loan.

(5) 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 an
unconditional 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 $4.7 million outstanding at March 31, 2004 and the guarantee
was $3.3 million.

21

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY

The following is a summary of the Company's debt financing at March
31, 2004:

SECURED DEBT

22

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- ----------

(1) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal and
thereafter against accrued excess interest, as defined. It is the Company's
intention to repay the note in full at such time (August 2007) by making a
final payment of approximately $221.7 million.

(2) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine note.
The notes are due May 2004, and bear interest at the 30-day LIBOR rate plus
a spread of (i) 164.7 basis points for the CMBS note (at March 31, 2004,
the interest rate was 5.15%), and (ii) 600 basis points for the Mezzanine
note (at March 31, 2004, the interest rate was 9.50%). The Fleet-Mezzanine
note is secured by the Company's interests in Funding X and Crescent
Spectrum Center, L.P. and the Company's interest in each of their general
partners. The blended rate at March 31, 2004 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. In April 2004, the Company
elected to exercise a one-year extension option.

(3) In October 2006, the interest rate will adjust based on current interest
rates at that time. It is the Company's intention to repay the note in full
at such time (October 2006) by making a final payment of approximately
$177.8 million.

(4) In December 2003 and January 2004, the Company purchased a total of $179.6
million in U.S. Treasuries and government sponsored agency securities
("Defeasance Investments") to substitute as collateral for this loan. The
cash flow from the defeasance investments (principal and interest) will
match the total debt service payments of this loan.

23

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) The Company assumed these loans in connection with the Hughes Center
acquisitions. The following table lists the premium associated with the
assumption of above market interest rate debt which is included in the
balance outstanding at March 31, 2004 and the effective interest rate of
the debt including the premium.

The $8.5 million was recorded as an increase in the carrying amount of the
underlying debt and is being amortized as a reduction of interest expense
through maturity of the underlying debt.

(6) This facility is a $41.1 million line of credit secured by certain DMDC
land and asset improvements ("revolving credit facility"), notes receivable
("warehouse facility") and additional land ("short-term facility"). The
line restricts the revolving credit facility to a maximum outstanding
amount of $28.0 million and is subject to certain borrowing base
limitations and bears interest at prime (at March 31, 2004, the interest
rate was 4.00%). The warehouse facility bears interest at prime plus 100
basis points (at March 31, 2004, the interest rate was 5.0%) and is limited
to $10.0 million. The short-term facility bears interest from prime plus 50
basis points to prime plus 100 basis points (at March 31, 2004, the
interest rates were 4.50% to 5.00%) and is limited to $3.1 million. The
blended rate at March 31, 2004, for the revolving credit facility, the
warehouse facility and the short-term facility was 4.30%.

(7) The Company'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.

(8) In July 2010, the interest rate will adjust based on current interest rates
at that time. It is the Company's intention to repay the note in full at
such time (July 2010) by making a final payment of approximately $6.1
million.

(9) Includes $14.8 million of fixed rate debt ranging from 2.9% to 10.5% and
$45.0 million of variable rate debt ranging from 3.9% to 4.5%.

(10) The $400.0 million Credit Facility with Fleet is an unsecured revolving
line of credit to Funding VIII and guaranteed by the Operating Partnership.
Availability under the line of credit is subject to certain covenants
including limitations on total leverage, fixed charge ratio, debt service
coverage, minimum tangible net worth, and specific mix of office and hotel
assets and average occupancy of Office Properties. At March 31, 2004, the
maximum borrowing capacity under the credit facility was $400.0 million.
The outstanding balance excludes letters of credit issued under the
Company's credit facility of $7.6 million which reduce the Company's
maximum borrowing capacity.

The following table shows information about the Company's consolidated
fixed and variable rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated payoff dates.

- ---------

(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
82% and 18%, respectively.

(2) Excludes effect of extension options on Bank of America Fund XII Term Loan
and Deutsche Bank-CMBS loan and expected early payment of LaSalle Note I,
JP Morgan Mortgage Note, or the Nomura Funding VI Note.

(3) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 6.70%.

Listed below are the aggregate principal payments by year required as
of March 31, 2004 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included and are based on
contractual maturities and do not include extension options.

- ---------

(1) Excludes effect of extension options on Bank of America Fund XII Term Loan
and Deutsche Bank-CMBS loan and expected early payment of LaSalle Note I,
JP Morgan Mortgage Note, or the Nomura Funding VI Note.

24

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company 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
generally will result in an event of default under that debt instrument. Any
uncured or unwaived events of default under the Company's loans can trigger an
increase in interest rates, an acceleration of payment on the loan in default,
and for the Company's secured debt, foreclosure on the Property securing the
debt. In addition, a default by the Company or any of its subsidiaries with
respect to any indebtedness in excess of $5.0 million generally will result in a
default under the Credit Facility, 2007 bonds, 2009 bonds, the Bank of America
Fund XII Term Loan, the Fleet Fund I Term Loan and the Fleet Term Loan after the
notice and cure periods for the other indebtedness have passed. As of March 31,
2004, no event of default had occurred, and the Company was in compliance with
all of covenants related to its outstanding debt. The Company's debt facilities
generally prohibit loan pre-payment for an initial period, allow pre-payment
with a penalty during a following specified period and allow pre-payment without
penalty after the expiration of that period. During the three months ended March
31, 2004, there were no circumstances that required prepayment or increased
collateral related to the Company's existing debt.

DEFEASANCE OF LASALLE NOTE II

In January 2004, the Company released the remaining properties in
Funding II by reducing the Fleet Fund I and II Term Loan by $104.2 million and
purchasing an additional $170.0 million of U.S. Treasury and government
sponsored agency securities with an initial weighted average yield of 1.76%. The
Company placed those securities into a collateral account for the sole purpose
of funding payments of principal and interest on the remainder of the LaSalle
Note II. The cash flow from the securities is structured to match the cash flow
(principal and interest payments) required under the LaSalle Note II. The
retirement of the Fleet loan and the purchase of the defeasance securities were
funded through the $275 million Bank of America Fund XII Term Loan. The
collateral for the Bank of America loan is 10 of the 11 properties previously in
the Funding II collateral pool, which are now held in Funding XII. The Bank of
America loan is structured to allow the Company the flexibility to sell, joint
venture or long-term finance these 10 assets over the next 36 months. The final
Funding II property, Liberty Plaza, was moved to the Operating Partnership and
subsequently sold in April 2004.

ADDITIONAL DEBT FINANCING

In April 2004, the Company entered into an agreement with Metropolitan
Life Insurance Company for a $35.5 million loan secured by the Dupont Centre
Office Property. The loan bears interest at a fixed rate of 4.31% with interest
only payments until the loan matures in April 2011.

In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate, are: Funding I and Funding
II Properties (CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent
Funding Interest, LLC, CRE Management I Corp., CRE Management II Corp.); Funding
III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management
IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VI Properties
(CRE Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC);
707 17th Street (Crescent 707 17th Street, 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.

25

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. CASH FLOW HEDGES

The Company uses derivative financial instruments to convert a portion
of its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of March 31, 2004, the Company 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 Company's interest
rate swaps designated as cash flow hedges during the three months ended March
31, 2004, and additional interest expense and unrealized gains (losses) recorded
in Accumulated Other Comprehensive Income ("OCI").

In addition, two of the Company's unconsolidated companies have cash
flow hedge agreements, of which the Company's portion of change in unrealized
gains reflected in OCI was approximately $0.1 million for the three months ended
March 31, 2004.

The Company 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. The cash flow hedges have been and are expected
to remain highly effective. Changes in the fair value of these highly effective
hedging instruments are recorded in Accumulated Other Comprehensive Income. The
effective portion that has been deferred in Accumulated Other Comprehensive
Income will be reclassified to earnings as interest expense when the hedged
items impact earnings. If a cash flow hedge falls outside 80%-125% effectiveness
for a quarter, all changes in the fair value of the cash flow hedge for the
quarter will be recognized in earnings during the current period. If it is
determined based on prospective testing that it is no longer likely a hedge will
be highly effective on a prospective basis, the hedge will no longer be
designated as a cash flow hedge in conformity with SFAS No. 133, as amended. The
Company had no ineffectiveness related to its cash flow hedges, resulting in no
earnings impact due to ineffectiveness for the three months ended March 31,
2004.

INTEREST RATE CAP

In March 2004, in connection with the Bank of America Fund XII Term
Loan, the Company entered into a LIBOR interest rate cap struck at 6.00% for a
notional amount of approximately $206.3 million through August 31, 2004, $137.5
million from September 1, 2004 through February 28, 2005, and $68.8 million from
March 1, 2005 through March 1, 2006. Simultaneously, the Company sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce the
Company's net interest rate risk exposure, they do not qualify as hedges and
changes to their respective fair values are charged to earnings as the changes
occur. As the significant terms of these arrangements are the same, the effects
of a revaluation of these instruments are expected to offset each other.

26

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. COMMITMENTS

GUARANTEE COMMITMENTS

The FASB issued Interpretation 45, "Guarantors' Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), requiring a guarantor to disclose its
guarantees. The Company's guarantees in place as of March 31, 2004 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 Company to provide additional
collateral to support the guarantees. The Company has not recorded a liability
associated with these guarantees as they were entered into prior to the adoption
of FIN 45.

- ----------

(1) The Company provides a $7.6 million letter of credit to support the payment
of interest and principal of the Eagle Ranch Metropolitan District Revenue
Development Bonds.

(2) See Note 7, "Investments in Unconsolidated Companies," 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 $4.7 million
outstanding at March 31, 2004 and the amount guaranteed was $3.3 million.

(4) The Company 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.

COPI COMMITMENTS

See Note 15, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.

11. MINORITY INTEREST

Minority interest in the Operating Partnership represents the
proportionate share of the equity in the Operating Partnership of limited
partners other than the Company. The ownership share of limited partners other
than the Company is evidenced by Operating Partnership units. The Operating
Partnership pays a regular quarterly distribution to the holders of Operating
Partnership units.

Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the three months ended March 31, 2004, there were 9,036 units
exchanged for 18,072 common shares of the Company.

Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Company holds a controlling interest in the real estate
partnerships and consolidates the real estate partnerships into the financial
statements of the Company. Income in the real estate partnerships is allocated
to minority interest based on weighted average percentage ownership during the
year.

27

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the minority interest as of March 31,
2004 and December 31, 2003:

The following table summarizes the minority interests' share of net
loss for the three months ended March 31, 2004 and 2003:

12. SHAREHOLDERS' EQUITY

DISTRIBUTIONS

The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the three
months ended March 31, 2004 (dollars in thousands, except per share amounts).

- ----------

(1) Represents one-half the amount of the distribution per unit because each
unit is exchangeable for two common shares.

SERIES A PREFERRED OFFERING

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders into common shares of the Company at a conversion price of $40.86
per common share (equivalent to a conversion rate of 0.6119 common shares per
Series A Preferred Share), subject to adjustment in certain circumstances. The
Series A Preferred Shares have no stated maturity and are not subject to sinking
fund or mandatory redemption. At any time, the Series A Preferred Shares may be
redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distributions. Dividends on the additional Series
A Preferred Shares are cumulative from November 16, 2003, and are

28

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

payable quarterly in arrears on the fifteenth of February, May, August and
November, commencing February 16, 2004. The annual fixed dividend on the Series
A Preferred Shares is $1.6875 per share.

Net proceeds to the Company from the January 2004 Series A Preferred
Offering were approximately $71.0 million after underwriting discounts, offering
costs and dividends accrued on the shares up to the issuance date. The Company
used the net proceeds to pay down the Company's credit facility.

13. INCOME TAXES

TAXABLE CONSOLIDATED ENTITIES

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the three months ended March 31, 2004, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.

The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code").
As a REIT, the Company generally will not be subject to federal corporate income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the federal level or in
most of the states in which it operates. The Company consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the three months ended March 31, 2004 and 2003, the Company's federal income
tax benefit was $1.6 million and $2.5 million, respectively. The Company's $1.6
million income tax benefit at March 31, 2004 consists primarily of $1.7 million
for the Residential Development Segment and $0.9 million for the Resort/Hotel
Segment partially offset by $0.4 million tax expense for the Office Segment and
$0.6 million expense for other taxable REIT subsidiaries.

The Company's total net tax asset of approximately $21.3 million at
March 31, 2004 includes $17.5 million of net deferred tax assets. SFAS No. 109,
"Accounting for Income Taxes," requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. There was no change in the valuation allowance during the three months
ended March 31, 2004.

14. RELATED PARTY TRANSACTIONS

LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS

As of March 31, 2004, the Company had approximately $38.0 million loan
balances outstanding, inclusive of current interest accrued of approximately
$0.2 million, to certain employees and trust managers of the Company on a
recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company pursuant to the exercise of vested stock and unit options.
Pursuant to the loan agreements, these loans bear interest at a rate of 2.52%
per year, payable quarterly, and mature on July 28, 2012 and may be repaid in
full or in part at any time without premium or penalty. Mr. Goff had a loan
representing $26.4 million of the $38.0 million total outstanding loans at March
31, 2004. No conditions exist at March 31, 2004 which would cause any of the
loans to be in default. Effective July 29, 2002, the Company ceased offering to
its employees and trust managers the option to obtain loans pursuant to the
Company's stock and unit incentive plans.

OTHER

On June 28, 2002, the Company purchased the home of an executive
officer of the Company. In March 2004, the Company entered into a contract to
sell the home for approximately $1.8 million and expects to close on the sale in
the second quarter of 2004. The Company previously recorded an impairment charge
of approximately $0.6 million, net of taxes, during the year ended December 31,
2003. The purchase was part of the officer's relocation agreement with the
Company.

29

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. COPI

On February 14, 2002, the Company and COPI entered into an agreement
(the "Agreement") pursuant to which COPI and the Company are jointly seeking to
have a pre-packaged bankruptcy plan for COPI approved by the bankruptcy court.
The Company agreed to fund certain of COPI's costs, claims and expenses relating
to the bankruptcy and related transactions. From February 14, 2002 through March
31, 2004, the Company loaned to COPI, or paid directly on COPI's behalf,
approximately $13.0 million to fund these costs, claims and expenses. The
Company also agreed to issue common shares with a dollar value of approximately
$2.2 million to the COPI stockholders. In addition, the Company 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.

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. 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.

16. SUBSEQUENT EVENTS

ASSETS HELD FOR SALE

Subsequent to March 31, 2004, one Office Property and two Resort/Hotel
Properties were classified as held for sale in accordance with SFAS No. 144 as a
result of management of the Company committing to a plan to sell these
Properties. The Properties, including the Albuquerque Plaza Office Property and
the Hyatt Regency Albuquerque Resort/Hotel Property located in Albuquerque, New
Mexico, and Denver Marriott City Center Resort/Hotel Property located in Denver,
Colorado, are currently being marketed for sale and are anticipated to be sold
during 2004. The following table indicates the carrying values at March 31, 2004
and December 31, 2003 of the major classes of assets of these Properties.

ASSET DISPOSITIONS

On April 13, 2004, the Company completed the sale of the Liberty Plaza
Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $10.8 million and a net loss of approximately $0.2 million, net of
minority interest. The Company previously recorded an impairment charge of
approximately $3.6 million, net of minority interest, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Company's credit facility. This property was wholly-owned.

30

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................................................ 32

Overview.................................................................. 33

Recent Developments....................................................... 35

Results of Operations
Three months ended March 31, 2004 and 2003........................... 36

Liquidity and Capital Resources
Cash Flows for the three months ended March 31, 2004................. 39

Equity and Debt Financing................................................. 43

Unconsolidated Investments................................................ 47

Significant Accounting Policies........................................... 48

Funds from Operations..................................................... 51

31

FORWARD-LOOKING STATEMENTS

You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2003. 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. These statements are generally
characterized by terms such as "believe," "expect," "anticipate" and "may."

Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those described in the
forward-looking statements.

The following factors might cause such a difference:

o The Company's ability, at its office properties, to timely
lease unoccupied square footage and timely re-lease occupied
square footage upon expiration on favorable terms, which
continue to be adversely affected by existing real estate
conditions (including vacancy rates in particular markets,
decreased rental rates and competition from other properties)
and may also be adversely affected by general economic
downturns;

o The continuation of relatively high vacancy rates and reduced
rental rates in the Company's office portfolio as a result of
conditions within the Company's principal markets;

o Adverse changes in the financial condition of existing
tenants, in particular El Paso Energy and its affiliates which
comprise 4.6% of the Company's annualized office revenues;

o Further deterioration in the resort/business-class hotel
markets or in the market for residential land or luxury
residences, including single-family homes, townhomes and
condominiums, or in the economy generally;

o Financing risks, such as the Company'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 Company's ability to meet
financial and other covenants and the Company's ability to
consummate financings and refinancings on favorable terms and
within any applicable time frames;

o The ability of the Company to reinvest available funds at
anticipated returns and within anticipated time frames and the
ability of the Company to consummate anticipated office
acquisitions and investment land and other dispositions on
favorable terms and within anticipated time frames;

o Further or continued adverse conditions in the
temperature-controlled logistics business (including both
industry-specific conditions and a general downturn in the
economy) which may further jeopardize the ability of the
tenant to pay all current and deferred rent due;

o The inability of the Company to complete the distribution to
its shareholders of the shares of a new entity to purchase the
AmeriCold Logistics tenant interest from COPI;

o The concentration of a significant percentage of the Company's
assets in Texas;

o The existence of complex regulations relating to the Company's
status as a REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse
consequences of the failure to qualify as a REIT; and

o Other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.

Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company is not obligated to update these
forward-looking statements to reflect any future events or circumstances.

32

OVERVIEW

The Company is a REIT with assets and operations divided into four
investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics. The primary business of the Company is its
Office Segment, which consisted of 77 Office Properties as of March 31, 2004.

OFFICE SEGMENT

The following table shows the performance factors used by management to
assess the operating performance of the Office Segment.

- --------------
(1) Excluding held for sale properties, economic occupancy is 86.4%
and 86.1% at March 31, 2004 and December 31, 2003, respectively.

(2) Excluding held for sale properties, leased occupancy is 88.0% and
88.5% at March 31, 2004 and December 31, 2003, respectively.

(3) Same-store NOI (net operating income) represents office property net
income excluding depreciation, amortization, interest expense and
non-recurring items such as lease termination fees for Office
Properties, excluding properties held for sale, owned for the entirety
of the comparable periods.

(4) Includes held for sale properties.

(5) Excludes held for sale properties.

The Company continues to expect that 2004 will be a year of
stabilization in the Office Segment rather than meaningful growth, with
projected average and year end occupancy remaining relatively flat compared to
2003. Tenant improvement and leasing costs in 2004 are expected to be in line
with 2003. Same-store NOI is expected to decline by 3% to 6% in 2004, which is a
lower rate of decline than that experienced in 2003.

The Company's tenant base continues to be diversified, with the top
five tenants accounting for approximately 11% of total Office Segment rental
revenues for the three months ended March 31, 2004. The loss of one or more of
the Company's major tenants, in particular El Paso Energy and its affiliates
which comprise 4.6% of the Company's annualized Office Segment revenues, would
have a temporary adverse effect on the Company's financial condition and results
of operations until the Company is able to re-lease the space previously leased
to these tenants.

RESORT/HOTEL SEGMENT

The following table shows the performance factors used by management to
assess the operating performance of the Resort/Hotel Segment.

Decreases in occupancy at the Company's upscale business class hotels
are primarily attributable to increased competition in the convention business
causing major cities to compete for conventions that have historically gone to
secondary markets. The occupancy decrease at the Company's luxury and
destination fitness resorts is partially driven by decreased occupancy at Sonoma
Mission Inn as a result of the renovation of 97 rooms which were taken out of
service in November 2003. Completion of the renovation is expected in the second
and third quarters of 2004. The Company anticipates minimal change in occupancy
and a modest increase in room rates in 2004 at the Resort/Hotel Properties as
the economy and the travel industry continue to recover.

33

RESIDENTIAL DEVELOPMENT SEGMENT

The following tables show the performance factors used by management to
assess the operating performance of the Residential Development Segment.
Information is provided for the Desert Mountain Residential Development Property
and the CRDI Residential Development Properties, which represent the Company's
significant investments in this Segment as of March 31, 2004.

Desert Mountain

- -----------------
(1) Includes equity golf membership

Desert Mountain is in the latter stages of development and has
primarily its premier lots remaining in inventory. A slight decline in lot
sales, combined with higher average sales prices in 2004 compared to 2003, is
expected to result in improved results in 2004.

CRDI

CRDI, which invests primarily in mountain resort residential real
estate in Colorado and California and residential real estate in downtown
Denver, Colorado, is highly dependent upon the national economy and customer
demand. In 2004, management expects that CRDI will be primarily affected by
product mix available at its Residential Development Properties as product
inventory is created in 2004 for delivery in 2005.

SIGNIFICANT TRANSACTIONS

During the first quarter of 2004 and December 2003, the Company
completed the following significant transactions:

o Disposition of the Company's interests in The Woodlands Land
Development Company, L.P., through which the Company owned its
interest in The Woodlands Residential Development Property, in
Woodlands Office Equities - `95 Limited Partnership, through
which the Company owned four office properties, in The
Woodlands Commercial Properties, L.P., and in The Woodlands
Operating Company, L.P. in December 2003;

o Acquisition of seven Office Properties and nine retail parcels
located in Hughes Center in Las Vegas, Nevada in December
2003, January and February 2004 and acquisition of Dupont
Centre in Irvine, California in March 2004;

o Sale of an additional 3,400,000 of the Company's Series A
Convertible Cumulative Preferred Shares at $21.98 per share,
resulting in proceeds to the Company, net of placement fees
and dividends payable, of approximately $71.0 million in
January 2004; and

o Completion of a $254.4 million mortgage financing by the
Temperature-Controlled Logistics Corporation and the resulting
cash distribution of approximately $90.0 million to the
Company in February 2004.

These transactions generated net cash proceeds to the Company,
including expected refinancings, in excess of $260 million. The Company expects
to reinvest these cash proceeds primarily in long term investments throughout
2004. Additionally, the Company expects to continue to market for sale its
remaining non-income producing land valued in excess of $100 million. The
Company also intends to continue to evaluate all assets in its portfolio in
light of changing real estate market valuations and other conditions and to
implement joint ventures for existing properties as appropriate in order to
capitalize on such valuations and conditions to raise additional capital,
retain interests in the properties, and earn management and leasing fees from
the ventures.

34

RECENT DEVELOPMENTS

ASSET ACQUISITIONS

OFFICE PROPERTIES

During January and February 2004, in accordance with the original
purchase contract, the Company acquired an additional five Class A Office
Properties and seven retail parcels located within Hughes Center in Las Vegas,
Nevada from the Rouse Company. One of these Office Properties is owned through a
joint venture in which the Company owns a 67% interest. The remaining four
Office Properties are wholly-owned by the Company. The Company acquired these
five Office Properties and seven retail parcels for approximately $175.3
million, funded by the Company's assumption of approximately $85.4 million in
mortgage loans and by a portion of the proceeds from the sale of the Company's
interests in The Woodlands on December 31, 2003.

On March 31, 2004, the Company acquired Dupont Centre, a 250,000 square
foot Class A office property, located in the John Wayne Airport submarket of
Irvine, California. The Company acquired the Office Property for approximately
$54.3 million, funded by a draw on the Company's credit facility. This Office
Property is wholly-owned and included in the Company's Office Segment.

UNDEVELOPED LAND

On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Company completed the purchase of two tracts of
undeveloped land in Hughes Center from the Rouse Company for $10.0 million. The
purchase was funded by a $7.5 million loan from the Rouse Company and a draw on
the Company's credit facility.

ASSET DISPOSITIONS

On March 23, 2004, the Company completed the sale of the 1800 West Loop
South Office Property in Houston, Texas. The sale generated net proceeds of
approximately $28.2 million and a net gain of approximately $0.2 million, net of
minority interests. The Company previously recorded an impairment charge of
approximately $13.9 million, net of minority interest, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Company's credit facility. This property was wholly-owned.

On March 31, 2004, the Company sold its last remaining behavioral
healthcare property. The sale generated net proceeds of approximately $2.0
million and a net loss of approximately $0.3 million, net of minority interests.

On April 13, 2004, the Company completed the sale of the Liberty Plaza
Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $10.8 million and a net loss of approximately $0.2 million, net of
minority interests. The Company previously recorded an impairment charge of
approximately $3.6 million, net of minority interest, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Company's credit facility. This property was wholly-owned.

35

RESULTS OF OPERATIONS

The following table shows the Company's variance in dollars between the
three months ended March 31, 2004 and 2003.

36

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE MONTHS ENDED
MARCH 31, 2003

PROPERTY REVENUES

Total property revenues increased $4.4 million, or 1.9%, to $232.5
million for the three months ended March 31, 2004, as compared to $228.1 million
for the three months ended March 31, 2003. The primary components of the
increase in total property revenues are discussed below.

o Office Property revenues increased $2.7 million, or 2.2%, to
$123.5 million, primarily due to:

o an increase of $8.8 million from the acquisitions of
The Colonnade in August 2003, the Hughes Center
Properties in December 2003, January and February
2004, and Dupont Centre in March 2004;

o an increase of $1.0 million primarily resulting from
third party management services and related direct
expense reimbursements; partially offset by

o a decrease of $5.9 million from the 54 consolidated
Office Properties (excluding 2003 and 2004
acquisitions and properties held for sale) that the
Company owned or had an interest in, primarily due to
a decrease in both rental revenue and operating
expense recoveries resulting from a 0.2 point decline
in same-store average occupancy (from 86.0% to
85.8%), base year rollover of significant tenants,
and a decline in net parking revenues; and

o a decrease of $0.8 million in net lease termination
fees.

o Residential Development Property revenues increased $4.0
million, or 9.2%, to $47.7 million, primarily due to:

o an increase of $8.0 million primarily due to
increased sales of 3 lots (from 13 to 16) and $0.2
million increased average sales price (from $0.7
million to $0.9 million) at DMDC;

o an increase of $1.6 million in restaurant and golf
revenues at CRDI and DMDC; partially offset by

o a decrease of $5.3 million in CRDI revenues related
to product mix in lots and units available for sale
in 2004 versus 2003.

o Resort/Hotel Property revenues decreased $2.3 million, or
3.6%, to $61.4 million, primarily due to:

o a decrease of $1.5 million from the Business Class
Hotels related to a 13% decrease in revenue per
available room (from $88 to $77), due primarily to an
8 percentage point decrease in occupancy (from 75% to
67%) and a 1% decrease in average daily rate (from
$117 to $116); and

o a decrease of $0.5 million from the Business Class
Hotels in revenues related to ancillary services,
including parking and telephone revenue.

PROPERTY EXPENSES

Total property expenses were $148.8 million for the three months ended
March 31, 2004 and March 31, 2003. The primary components of the variances in
property expenses are discussed below.

o Office Property expenses increased $1.3 million, or 2.3%, to
$58.9 million, primarily due to:

o an increase of $2.7 million from the acquisition of
The Colonnade in August 2003, the Hughes Center
Properties in December 2003, January and February
2004 and Dupont Centre in March 2004; and

o an increase of $0.2 million related to the cost of
providing third party management services to joint
venture properties, which is offset by increased
third party fee income and direct expense
reimbursements; partially offset by

o a decrease of $1.1 million from the 54 consolidated
Office Properties (excluding 2003 and 2004
acquisitions and properties held for sale) that the
company owned or had an interest in, primarily due
to:

o $2.2 million decrease in building repairs
and maintenance; and

o $1.0 million decrease in property taxes and
insurance; partially offset by

o $1.3 million increase in utilities expense;
and

o $0.5 million increase in nonrecoverable
leasing costs.

37

o Residential Development Property expenses decreased $0.9
million, or 2.2%, to $40.6 million, primarily due to:

o a decrease of $6.1 million primarily due to a
reduction in cost of sales related to product mix in
lots and units available for sale in 2004 versus 2003
at Crescent Resort Development, Inc.; partially
offset by

o an increase of $3.4 million in Desert Mountain
Development Corporation cost of sales due to
increased lot sales compared to 2003;

o an increase of $1.4 million in marketing expenses at
certain Crescent Resort Development, Inc. projects;
and

o an increase of $0.8 million in club operating
expenses at Crescent Resort Development, Inc.

OTHER INCOME/EXPENSE

Total other expenses increased $11.6 million, or 13.7%, to $96.0
million for the three months ended March 31, 2004, compared to $84.4 million for
the three months ended March 31, 2003. The primary components of the increase in
total other expenses are discussed below.

OTHER INCOME

Other income decreased $2.6 million, or 50.0%, to $2.6 million for the
three months ended March 31, 2004, as compared to $5.2 million for the three
months ended March 31, 2003. The primary components of the decrease in other
income are discussed below.

o Interest and other income increased $1.3 million primarily due
to $0.8 million of interest on U.S. Treasury and government
sponsored agency securities purchased in December 2003 and
January 2004 related to debt defeasance and $0.2 million of
dividends received on other marketable securities.

o Equity in net income of unconsolidated companies decreased
$3.8 million, or 105.6%, to a $0.2 million loss, primarily due
to:

o a decrease of $2.4 million in Temperature-Controlled
Logistics Properties equity in net income primarily
due to a decrease in rental revenues net of deferred
rent and an increase in interest expense primarily
attributable to the $254.4 million financing with
Morgan Stanley Mortgage Capital, Inc.;

o a decrease of $1.0 million in Resort/Hotel Properties
equity in net income primarily due to net income
recorded in 2003 for the Company's interest in the
Ritz-Carlton Hotel Property which was sold in
November 2003; and

o a decrease of $0.9 million in Residential Development
Properties equity in net income primarily due to net
income recorded in 2003 for the Company's interests
in the entities through which the Company held its
interests in The Woodlands, which were sold in
December 2003.

OTHER EXPENSES

Other expenses increased $9.0 million, or 10.0%, to $98.6 million for
the three months ended March 31, 2004, as compared to $89.6 million for the
three months ended March 31, 2003. The primary components of the decrease in
other expenses are discussed below.

o Depreciation expense increased $4.4 million, or 12.0%, to
$41.0 million, primarily due to:

o $3.2 million increase in Office Property depreciation
expense, primarily attributable to:

o $2.6 million from the acquisitions of The
Colonnade in August 2003 and the Hughes
Center Properties in December 2003 and
January and February 2004; and

o $0.6 million due to an increase in building
improvements;

o $0.7 million increase in Resort/Hotel Property
depreciation expense; and

o $0.4 million increase in Residential Development
Property depreciation expense.

o Extinguishment of debt increased $1.9 million due to the write
off of deferred financing costs associated with reduction of
the Fleet Fund I and II Term Loan funded by a portion of the
proceeds from the $275 million secured loan with Bank of
America and Deutsche Bank in January 2004.

o Interest expense increased $1.8 million, or 4.2%, to $45.0
million due to an increase of approximately $401 million in
the weighted average debt balance, partially offset by a 74
percentage point decrease in the weighted average interest
rate (from 7.4% to 6.7%) primarily due to the refinancing and
new financings of fixed rate debt at lower

38

interest rates and the termination of $400 million in cash
flow hedges, which were replaced with $400 million of cash
flow hedges resulting in a 3.1 percentage point reduction in
strike prices (from 6.6% to 3.5%).

o Amortization of deferred financing costs increased $1.3
million, or 54.2%, to $3.7 million primarily due to the
addition of $6.2 million in deferred financing costs related
to debt restructuring and refinancing associated with the $275
million secured loan with Bank of America and Deutsche Bank in
January 2004.

o Corporate general and administrative expense increased $0.8
million, or 13.6%, to $6.9 million primarily due to salary
merit increases, cost increases of employee benefits and
restricted stock compensation recorded in 2004.

o Impairment charges decreased $1.2 million primarily due to
$1.2 million impairment of the North Dallas Athletic Club in
the first quarter 2003.

DISCONTINUED OPERATIONS

Loss from discontinued operations on assets sold and held for sale
decreased $10.1 million, or 87.8%, to a loss of $1.4 million, primarily due to:

o a decrease of $12.7 million, net of minority
interest, due to the impairment of the 1800 West Loop
South Office Property in 2003; partially offset by

o an increase of $1.5 million, net of minority
interest, due to the reduction of net income
associated with properties held for sale in 2004
compared to 2003; and

o an increase of $1.3 million, net of minority
interest, due to an aggregate $2.0 million
impairment on three office properties in 2004
compared to a $0.7 million impairment on one
behavioral healthcare property in 2003.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

OPERATING ACTIVITIES

The Company's cash used in operating activities of $0.6 million is
attributable to Property operations.

INVESTING ACTIVITIES

The Company's cash used in investing activities of $135.4 million is
primarily attributable to:

o $167.9 million for investment in U.S. Treasuries and
government sponsored agency securities in connection
with the defeasance of LaSalle Note II;

o $146.1 million for the acquisition of investment
properties, primarily due to the acquisition of
Hughes Center and Dupont Centre Office Properties;

o $24.2 million for revenue and non-revenue enhancing
tenant improvement and leasing costs for Office
Properties;

39

o $10.3 million for property improvements for rental
properties, primarily attributable to non-recoverable
building improvements for the Office Properties and
replacement of furniture, fixtures and equipment for
the Resort/Hotel Properties;

o $5.8 million for development of amenities at the
Residential Development Properties;

o $2.4 million of additional investment in
Temperature-Controlled Logistics Properties;

o $1.2 million for development of investment
properties;

o $0.6 million of additional investment in
unconsolidated Residential Development Properties;
and

o $0.2 million resulting from a decrease in notes
receivable.

The cash used in investing activities is partially offset by:

o $101.4 million decrease in restricted cash, due
primarily to decreased escrow deposits for the
purchase of the Hughes Center Office Properties in
January and February 2004;

o $90.0 million from return of investment in
Temperature-Controlled Logistics Properties due to
the $254.4 million of additional financing at the
Temperature-Controlled Logistics Corporation;

o $30.7 million of proceeds from property sales,
primarily due to the sale of the 1800 West Loop South
Office Property;

o $0.6 million from return of investment in
unconsolidated Resort/Hotel Properties; and

o $0.3 million from return of investment in
unconsolidated Office Properties.

FINANCING ACTIVITIES

The Company's cash provided by financing activities of $122.4 million
is primarily attributable to:

o $280.0 million of proceeds from other borrowings,
primarily as a result of the new Bank of America Fund
XII Term Loan;

o $141.5 million of proceeds from borrowings under the
Company's credit facility;

o $71.0 million of net proceeds from issuance of Series
A Preferred Shares;

o $15.9 million of proceeds from borrowings for
construction costs for infrastructure development at
the Residential Development Properties; and

o $0.2 million of net proceeds from the exercise of
options.

The cash provided by financing activities is partially offset
by:

o $211.5 million of payments under the Company's credit
facility;

o $109.0 million of payments under other borrowings,
due primarily to the pay down of the Fleet Fund I
Term Loan;

o $43.9 million of distributions to common shareholders
and unitholders;

o $8.0 million of distributions to preferred
shareholders;

o $7.4 million of Residential Development Property note
payments;

o $4.3 million of debt financing costs; and

o $2.1 million of net capital distributions to joint
venture partners.

LIQUIDITY REQUIREMENTS

DEBT FINANCING SUMMARY

The following tables show summary information about the Company's debt,
including its share of unconsolidated debt, as of March 31, 2004. Additional
information about the significant terms of the Company's debt financing
arrangements and its unconsolidated debt is contained in Note 8, "Notes Payable
and Borrowings under Credit Facility" and Note 7, "Investments in Unconsolidated
Companies," of Item 1, "Financial Statements."

40

Listed below are the aggregate principal payments by year required as
of March 31, 2004. Scheduled principal installments and amounts due at maturity
are included.

- -------------------
(1) Excludes effect of extension options on Bank of America Fund XII Term
Loan and Deutsche Bank-CMBS loan and expected early payment of LaSalle
Note I, JP Morgan Mortgage Note, or the Nomura Funding VI Note.

OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS

The FASB issued Interpretation 45, "Guarantors' Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," requiring a guarantor to disclose its guarantees. The
Company's guarantees in place as of March 31, 2004 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 Company to provide additional collateral to
support the guarantees. The Company has not recorded a liability associated with
these guarantees as they were entered into prior to the adoption of FIN 45.

- -------------------
(1) The Company provides a $7.6 million letter of credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan
District Revenue Development Bonds.

(2) See Note 7, "Investments in Unconsolidated Companies," 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 $4.7
million outstanding at March 31, 2004 and the amount guaranteed was
$3.3 million.

(4) The Company 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.

41

CAPITAL EXPENDITURES

As of March 31, 2004, the Company had unfunded capital expenditures of
approximately $44.2 million relating to capital investments that are not in the
ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures and its
amounts funded as of March 31, 2004, and amounts remaining to be funded (future
fundings classified between short-term and long-term capital requirements):

- ------------------
(1) All amounts are approximate.

(2) Reflects the Company's estimate of the breakdown between
short-term and long-term capital expenditures.

(3) The capital expenditures reflect the Company's ownership
percentage of 30% for Five Post Oak Park Office Property.

(4) Located within the Houston Center Office Property complex.

(5) As of March 31, 2004, the Company had invested $33.4 million
in Tahoe Mountain Club, which includes the acquisition of land
and development of a golf course and retail amenities. During
2004, the Company is developing a swim and fitness facility,
clubhouse, and completing the golf course.

(6) The Company has a $2.4 million construction loan with the
purchaser of the land, which will be secured by 9 developed
lots and a $0.4 million letter of credit.

(7) This commitment is related to the Company's investment in a
private equity fund and its general partner. The commitment is
based on cash contributions and distributions and does not
consider equity gains or losses.

(8) The Company expects to form and capitalize Crescent Spinco,
which will be a separate entity to be owned by the Company's
shareholders and unitholders, and to cause the new entity to
commit to acquire COPI's entire membership interest in
AmeriCold Logistics.

The Company has also entered into agreements with Ritz-Carlton Hotel
Company, L.L.C. to develop the first Ritz-Carlton hotel and condominium project
in Dallas, Texas with development to commence upon reaching an acceptable level
of pre-sales for the residences. The development plans include a Ritz-Carlton
with approximately 216 hotel rooms and 70 residences. Construction on the
development is anticipated to begin in the first quarter of 2005.

LIQUIDITY OUTLOOK

The Company expects to fund its short-term capital requirements of
approximately $40.4 million through a combination of net cash flow from
operations and borrowings under the Company's credit facility or additional debt
facilities. As of March 31, 2004, the Company had maturing debt obligations of
$285.1 million through March 31, 2005. The Company plans to meet these maturing
obligations through electing the extension option on the Deutsche Bank-CMBS loan
and cash flow from operations of the Residential Development Properties.

The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, principal and
interest payment 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. The Company expects to fund the remainder
of these short-term liquidity requirements with borrowings under the Company's
credit facility, return of capital from Residential Development Properties,
proceeds from the sale of non-core investments or the joint venture of
Properties, and borrowings under additional debt facilities.

42

The Company's long-term liquidity requirements as of March 31, 2004,
consist primarily of debt maturities after March 31, 2005, which totaled
approximately $2.5 billion. The Company also has $3.8 million of long-term
capital expenditure requirements. The Company expects to meet these long-term
liquidity requirements primarily through refinancing maturing debt with
long-term secured and unsecured debt and through other debt and equity financing
alternatives as well as cash proceeds received from the sale or joint venture of
Properties.

Debt and equity financing alternatives currently available to the
Company to satisfy its liquidity requirements and commitments for material
capital expenditures include:

o Additional proceeds from the Company's Credit Facility under
which the Company had up to $223.4 million of borrowing
capacity available as of March 31, 2004;

o Additional proceeds from the refinancing of existing secured
and unsecured debt;

o Additional debt secured by existing underleveraged properties;

o Issuance of additional unsecured debt; and

o Equity offerings including preferred and/or convertible
securities.

The following factors could limit the Company's ability to
utilize these financing alternatives:

o The reduction in the operating results of the Properties
supporting the Company's Credit Facility to a level that would
reduce the availability of funds under the Credit Facility;

o A reduction in the operating results of the Properties could
limit the Company's ability to refinance existing secured and
unsecured debt, or extend maturity dates or could result in an
uncured or unwaived event of default;

o The Company may be unable to obtain debt or equity financing
on favorable terms, or at all, as a result of the financial
condition of the Company or market conditions at the time the
Company seeks additional financing;

o Restrictions under the Company's debt instruments or
outstanding equity may prohibit it from incurring debt or
issuing equity on terms available under then-prevailing market
conditions or at all; and

o The Company may be unable to service additional or replacement
debt due to increases in interest rates or a decline in the
Company's operating performance.

The Company's portion of unconsolidated debt maturing through March 31,
2005 is $76.6 million. The Company's portion of unconsolidated debt maturing
after March 31, 2005 is $412.1 million. Unconsolidated debt is the liability of
the unconsolidated entity, is typically secured by that entity's property, and
is non-recourse to the Company except where a guarantee exists.

EQUITY AND DEBT FINANCING

SERIES A PREFERRED OFFERING

On January 15, 2004, the Company completed an offering (the "January
2004 Series A Preferred Offering") of an additional 3,400,000 Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares") at a
$21.98 per share price and with a liquidation preference of $25.00 per share for
aggregate total offering proceeds of approximately $74.7 million. The Series A
Preferred Shares are convertible at any time, in whole or in part, at the option
of the holders, into common shares of the Company at a conversion price of
$40.86 per common share (equivalent to a conversion rate of 0.6119 common shares
per Series A Preferred Share), subject to adjustment in certain circumstances.
The Series A Preferred Shares have no stated maturity and are not subject to
sinking fund or mandatory redemption. At any time, the Series A Preferred Shares
may be redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distributions. Dividends on the additional Series
A Preferred Shares are cumulative from November 16, 2003, and are payable
quarterly in arrears on the fifteenth of February, May, August and November,
commencing February 16, 2004. The annual fixed dividend on the Series A
Preferred Shares is $1.6875 per share.

Net proceeds to the Company from the January 2004 Series A Preferred
Offering were approximately $71.0 million after underwriting discounts, offering
costs and dividends accrued on the shares up to the issuance date. The Company
used the net proceeds to pay down the Company's credit facility.

43

DEBT FINANCING ARRANGEMENTS

The significant terms of the Company's primary debt financing
arrangements existing as of March 31, 2004, are shown below:

- -----------------
(1) For more information regarding the terms of the Company's debt
financing arrangements, including properties securing the Company's
secured debt and the method of calculation of the interest rate for the
Company's variable rate debt, see Note 8, "Notes Payable and Borrowings
under the Credit Facility," included in Item 1, "Financial Statements."

(2) In December 2003, the Company defeased approximately $8.7 million of
this loan to release one of the Funding II Properties securing the loan
by purchasing $9.6 million in U.S. Treasuries and government sponsored
agency securities to substitute as collateral. On January 15, 2004, the
Company defeased approximately $150.7 million to release the remainder
of the Funding II properties by purchasing $170.0 million in U.S.
Treasuries and government sponsored agency securities. The earnings and
principal maturity from these investments will pay the principal and
interest associated with the LaSalle Note II.

(3) Includes a portion of total premiums of $8.5 million reflecting market
value of debt acquired with purchase of Hughes Center portfolio.

(4) This loan has one one-year extension option.

(5) On April 9, 2004, the Company elected the extension option on this
facility to extend the maturity to May 2005. The facility has one
remaining extension option.

(6) The outstanding balance excludes letters of credit issued under the
credit facility of $7.6 million.

(7) The overall weighted average interest rate does not include the effect
of the Company's cash flow hedge agreements. Including the effect of
these agreements, the overall weighted average interest rate would have
been 6.70%.

44

The Company 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. The financial covenants to which the
Company is subject include, among others, leverage ratios, debt service coverage
ratios and limitations on total indebtedness. The affirmative covenants to which
the Company is subject under its debt agreements include, among others,
provisions requiring the Company to comply with all laws relating to operation
of any Properties securing the debt, maintain those Properties in good repair
and working order, maintain adequate insurance and provide timely financial
information. The negative covenants under the Company's debt agreements
generally restrict the Company's ability to transfer or pledge assets or incur
additional debt at a subsidiary level, limit the Company's ability to engage in
transactions with affiliates and place conditions on the Company's or a
subsidiary's ability to make distributions.

Failure to comply with covenants generally will result in an event of
default under that debt instrument. Any uncured or unwaived events of default
under the Company's loans can trigger an increase in interest rates, an
acceleration of payment on the loan in default, and for the Company's secured
debt, foreclosure on the Property securing the debt, and could cause the credit
facility to become unavailable to the Company. In addition, an event of default
by the Company or any of its subsidiaries with respect to any indebtedness in
excess of $5.0 million generally will result in an event of default under the
Credit Facility, 2007 bonds, 2009 bonds, Bank of America Fund XII Term Loan, the
Fleet Fund I Term Loan and the Fleet 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 Company's business,
financial condition, or liquidity.

The Company'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 three months ended March 31, 2004, there were no circumstances that
required prepayment penalties or increased collateral related to the Company's
existing debt.

DEFEASANCE OF LASALLE NOTE II

In January 2004, the Company released the remaining properties in
Funding II by reducing the Fleet Fund I and II Term Loan by $104.2 million and
purchasing an additional $170.0 million of U.S. Treasury and government
sponsored agency securities with an initial weighted average yield of 1.76%. The
Company placed those securities into a collateral account for the sole purpose
of funding payments of principal and interest on the remainder of the LaSalle
Note II. The cash flow from the securities is structured to match the cash flow
(principal and interest payments) required under the LaSalle Note II. The
retirement of the Fleet loan and the purchase of the defeasance securities were
funded through the $275 million Bank of America Fund XII Term Loan. The
collateral for the Bank of America loan is 10 of the 11 properties previously in
the Funding II collateral pool, which are now held in Funding XII. The Bank of
America loan is structured to allow the Company the flexibility to sell, joint
venture or long-term finance these 10 assets over the next 36 months. The final
Funding II property, Liberty Plaza, was moved to the Operating Partnership and
subsequently sold in April 2004.

ADDITIONAL DEBT FINANCING

In April 2004, the Company entered into an agreement with Metropolitan
Life Insurance Company for a $35.5 million loan secured by the Dupont Centre
Office Property. The loan bears interest at a fixed rate of 4.31% with interest
only payments until the loan matures in April 2011.

UNCONSOLIDATED DEBT ARRANGEMENTS

As of March 31, 2004, the total debt of the unconsolidated joint
ventures and equity investments in which the Company has ownership interests was
$1.3 billion, of which the Company's share was $488.7 million. The Company had
guaranteed $4.3 million of this debt as of March 31, 2004. Additional
information relating to the Company's unconsolidated debt financing arrangements
is contained in Note 7, "Investments in Unconsolidated Companies," of Item 1,
"Financial Statements."

45

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivative financial instruments to convert a portion
of its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of March 31, 2004, the Company 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 Company's cash flow
hedge agreements during the three months ended March 31, 2004, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").

In addition, two of the Company's unconsolidated companies have cash
flow hedge agreements of which the Company's portion of change in unrealized
gains reflected in OCI was approximately $0.1 million for the three months
ended March 31, 2004.

INTEREST RATE CAP

In March 2004, in connection with the Bank of America Fund XII Term
Loan, the Company entered into a LIBOR interest rate cap struck at 6.00% for a
notional amount of approximately $206.3 million through August 31, 2004, $137.5
million from September 1, 2004 through February 28, 2005, and $68.8 million from
March 1, 2005 through March 1, 2006. Simultaneously, the Company sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce the
Company's net interest rate risk exposure, they do not qualify as hedges and
changes to their respective fair values are charged to earnings as the changes
occur. As the significant terms of these arrangements are the same, the effects
of a revaluation of these instruments are expected to offset each other.

46

UNCONSOLIDATED INVESTMENTS

INVESTMENTS IN UNCONSOLIDATED COMPANIES

The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of March 31, 2004.

- ---------------------

(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 70% interest in Crescent Five Post Oak Park,
L.P. is owned by an affiliate of General Electric Pension Fund
Trust.

(4) The remaining 70% interest in Crescent One BriarLake Plaza,
L.P. is owned by affiliates of JP Morgan Fleming Asset
Management, Inc.

(5) 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.

(6) The remaining 80% interest in each of Austin PT BK One Tower
Office Limited Partnership, Houston PT Three Westlake Office
Limited Partnership and Houston PT Four Westlake Office
Limited Partnership is owned by an affiliate of General
Electric Pension Fund Trust.

(7) The remaining 44% in Vornado Crescent Carthage and KC Quarry,
L.L.C. is owned by Vornado Realty Trust, L.P.

(8) The remaining 60% interest in Vornado Crescent Portland
Partnership is owned by Vornado Realty Trust, L.P.

(9) The remaining 50% interest in Blue River Land Company, L.L.C.
is owned by parties unrelated to the Company.

(10) Of the remaining 50% interest in Canyon Ranch Las Vegas,
L.L.C., 35% is owned by an affiliate of the management company
of two of the Company's Resort/Hotel Properties and 15% is
owned by the Company through its investments in CR License II,
L.L.C.

(11) The remaining 58.3% interest in EW Deer Valley, L.L.C. is
owned by parties unrelated to the Company. EW Deer Valley,
L.L.C. was formed to acquire, hold and dispose of its 3.3%
ownership interest in Empire Mountain Village, L.L.C.

(12) The remaining 70% interest in CR License, L.L.C. is owned by
an affiliate of the management company of two of the Company's
Resort/Hotel Properties.

(13) The remaining 70% interest in CR License II, L.L.C. is owned
by an affiliate of the management company of two of the
Company's ResortHotel Properties.

(14) SunTx Fulcrum Fund, L.P.'s objective is to invest in a
portfolio of acquisitions that offer the potential for
substantial capital appreciation. Of the remaining 76.5% of
SunTx Fulcrum Fund, 37.1% is owned by SunTx Capital Partners,
L.P. and the remaining 39.4% is owned by a group of
individuals unrelated to the Company.

(15) The remaining 85.6% interest in SunTx Capital Partners, L.P.
is owned by parties unrelated to the Company.

(16) G2 was formed for the purpose of investing in commercial
mortgage backed securities and other commercial real estate
investments. The remaining 87.5% interest in G2 is owned by
Goff-Moore Strategic Partners, L.P. ("GMSPLP") and by parties
unrelated to the Company. G2 is managed and controlled by an
entity that is owned equally by GMSPLP and GMAC Commercial
Mortgage Corporation ("GMACCM"). The ownership structure of
GMSLP 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. The
remaining approximately 2% general partnership interest is
owned by unrelated parties.

47

TEMPERATURE-CONTROLLED LOGISTICS SEGMENT

AmeriCold Logistics, a limited liability company owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"), 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 March
2, 2004, the Temperature-Controlled Logistics Corporation and AmeriCold
Logistics amended the leases to further extend the deferred rent period to
December 31, 2005, from December 31, 2004. The parties previously extended the
deferred rent period to December 31, 2004 from December 31, 2003, on March 7,
2003.

Under terms of the leases, AmeriCold Logistics elected to defer $10.8
million of the total $38.9 million of rent payable for the three months ended
March 31, 2004. The Company's share of the deferred rent was $4.3 million. The
Company recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $4.3 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the three months ended March 31, 2004. As of March 31, 2004, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $93.2 million and $85.1 million,
respectively, of which the Company's portions were $37.3 million and $34.0
million, respectively.

On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs and the
repayment of approximately $12.9 million in existing mortgages. On February 6,
2004, the Temperature-Controlled Logistics Corporation distributed cash of
approximately $90.0 million to the Company.

SIGNIFICANT ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, and contingencies as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company evaluates its assumptions and estimates on an
ongoing basis. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities where that information is available
from other sources. Certain estimates are particularly sensitive due to their
significance to the financial statements. Actual results may differ
significantly from management's estimates.

The Company believes that the most significant accounting policies that
involve the use estimates and assumptions as to future uncertainties and,
therefore, may result in actual amounts that differ from estimates are the
following:

o Impairments,

o Acquisition of operating properties,

o Relative sales method and percentage of completion
(Residential Development entities),

o Gain recognition on sale of real estate assets, and

o Allowance for doubtful accounts.

IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with SFAS No. 144, the Company records assets held for sale at the
lower of carrying value or sales price less costs to sell. For assets classified
as held and used, these assets are tested for recoverability when events or
changes in circumstances indicate that the estimated carrying amount may not be
recoverable. An impairment loss is recognized when expected undiscounted future
cash flows from a Property is less than the carrying value of the Property. The
Company's estimates of cash flows of the Properties requires the Company to make
assumptions related to future rental rates, occupancies, operating expenses, the
ability of the Company's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Company's Properties.
Any changes in estimated future cash flows due to changes in the Company's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.

48

If events or circumstances indicate that the fair value of an
investment accounted for using the equity method has declined below its carrying
value and the Company considers the decline to be "other than temporary," the
investment is written down to fair value and an impairment loss is recognized.
The evaluation of impairment for an investment would be based on a number of
factors, including financial condition and operating results for the investment,
inability to remain in compliance with provisions of any related debt
agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.

ACQUISITION OF OPERATING PROPERTIES. The Company 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 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 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 Company 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 Company's overall relationship with that respective customer.
Characteristics considered by management in allocating these values include the
nature and extent of the Company'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 of the respective leases and
projected renewal periods, 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 and above-market and
below-market in-place lease values would be charged to expense.

RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company uses
the accrual method to recognize earnings from the sale of Residential
Development Properties when a third-party buyer had made an adequate cash down
payment and has attained the attributes of ownership. If a sale does not qualify
for the accrual method of recognition, deferral methods are used as appropriate
including the percentage-of-completion method. In certain cases, when the
Company receives an inadequate cash down payment and takes a promissory note for
the balance of the sales price, revenue recognition is deferred until such time
as sufficient cash is received to meet minimum down payment requirements. The
cost of residential property sold is defined based on the type of product being
purchased. The cost of sales for residential lots is

49

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 Company's estimates of costs or the percentage of
completion is incorrect, it could result in either an increase or decrease in
cost of sales expense or revenue recognized and therefore, an increase or
decrease in net income.

GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Company performs
evaluations of each real estate sale to determine if full gain recognition is
appropriate in accordance with SFAS No. 66, "Accounting for Sales of Real
Estate." The application of SFAS No. 66 can be complex and requires the Company
to make assumptions including an assessment of whether the risks and rewards of
ownership have been transferred, the extent of the purchaser's investment in the
property being sold, whether the Company's receivables, if any, related to the
sale are collectible and are subject to subordination, and the degree of the
Company's continuing involvement with the real estate asset after the sale. If
full gain recognition is not appropriate, the Company accounts for the sale
under an appropriate deferral method.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable
balance is reduced by an allowance for amounts that may become uncollectible in
the future. The Company's receivable balance is composed primarily of rents and
operating cost recoveries due from its tenants. The Company also maintains an
allowance for deferred rent receivables which arise from the straight-lining of
rents. The allowance for doubtful accounts is reviewed at least quarterly for
adequacy by reviewing such factors as the credit quality of the Company's
tenants, any delinquency in payment, historical trends and current economic
conditions. If the assumptions regarding the collectibility of accounts
receivable prove incorrect, the Company could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.

ADOPTION OF NEW ACCOUNTING STANDARDS

FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), as amended, 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 March 15, 2004, except for
Special Purpose Entities which had to be consolidated by December 31, 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
expected losses of the VIE's activities or entitled to receive a majority of the
entity's expected residual returns or both.

The adoption of FIN 46 did not have a material impact on the Company's
financial condition or results of operations. Due to the adoption of this
Interpretation and management's assumptions in application of the guidelines
stated in the Interpretation, the Company has consolidated GDW LLC, a subsidiary
of DMDC, as of December 31, 2003 and Elijah Fulcrum Fund Partners, L.P. as of
January 1, 2004. Elijah is a limited partnership whose purpose is to invest in
the SunTX Fulcrum Fund, L.P. SunTX Fulcrum Fund, L.P.'s objective is to invest
in a portfolio of acquisitions that offer the potential for substantial capital
appreciation. While it was determined that one of the Company's unconsolidated
joint ventures, Main Street Partners, L.P., and its investments in the Canyon
Ranch Entities are VIEs under FIN 46, the Company is not the primary beneficiary
and is not required to consolidate these entities under other GAAP. The
Company's maximum exposure to loss is limited to its equity investment of
approximately $53.3 million in Main Street Partners, L.P. and $5.1 million in
the Canyon Ranch Entities at March 31, 2004.

Further, in connection with the Hughes Center acquisition, the Company
entered into an exchange agreement with a third party intermediary for six of
the Office Properties and the nine retail parcels. This agreement is for a
maximum term of 180 days and allows the Company to pursue favorable tax
treatment on other properties sold by the Company within this period. During the
180-day period, which will end on June 28, 2004, the third party intermediary is
the legal owner of the properties, although the Company controls the properties,
retains all of the economic benefits and risks associated with these properties
and indemnifies the third party intermediary and, therefore, the Company is
fully consolidating these properties. On the expiration of the 180-day period,
the Company will take legal ownership of the properties.

50

FUNDS FROM OPERATIONS

FFO, as used in this document, means:

o Net Income (Loss) - determined in accordance with
GAAP;

o excluding gains (or losses) from sales of depreciable
operating property;

o excluding extraordinary items (as defined by GAAP);

o plus depreciation and amortization of real estate
assets; and

o after adjustments for unconsolidated partnerships and
joint ventures.

The Company calculates FFO - diluted in the same manner, except that
Net Income (Loss) is replaced by Net Income (Loss) Available to Common
Shareholders and the Company includes the effect of operating partnership
unithholder minority interests.

The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO -
diluted and FFO appropriate measures of performance for its investment segments.
However, FFO - diluted and FFO should not be considered an alternative to net
income determined in accordance with GAAP as an indication of the Company's
operating performance.

The aggregate cash distributions paid to common shareholders and
unitholders for the three months ended March 31, 2004 and 2003 were each $43.9
million. The Company reported FFO before impairments charges related to real
estate assets - diluted of $27.5 million and $41.4 million, for the three months
ended March 31, 2004 and 2003, respectively. The Company reported FFO after
impairments charges related to real estate assets - diluted of $25.2 million and
$24.4 million, for the three months ended March 31, 2004 and 2003, respectively.

An increase or decrease in FFO - diluted does not necessarily result in
an increase or decrease in aggregate distributions because the Company's Board
of Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 90% of its REIT taxable income (as defined in the Code).
Therefore, a significant increase in FFO - diluted will generally require an
increase in distributions to shareholders and unitholders although not
necessarily on a proportionate basis.

Accordingly, the Company believes that to facilitate a clear
understanding of the consolidated historical operating results of the Company,
FFO - diluted should be considered in conjunction with the Company's net income
and cash flows reported in the consolidated financial statements and notes to
the financial statements. However, the Company's measure of FFO - diluted may
not be comparable to similarly titled measures of other REITs because these
REITs may apply the definition of FFO in a different manner than the Company.

51

CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)

- -----------------
(1) To calculate basic funds from operations available to common
shareholders, deduct unitholder minority interest.

(2) Includes interest and other income, income/loss from other
unconsolidated companies, other expenses, depreciation and amortization
of non-real estate assets and amortization of deferred financing costs.

(3) See calculations for the amounts presented in the reconciliation
following this table.

52

The following schedule reconciles the Company's basic weighted average
shares to the diluted weighted average shares/units presented above:

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes in the Company's market risk occurred from December
31, 2003 through March 31, 2004. Information regarding the Company's market risk
at December 31, 2003 is contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its Chief Financial Officer, 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 March 31, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the foregoing, the Company's Chief Executive Officer
and its Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective at the reasonable assurance level.

During the three months ended March 31, 2004, there was no change in
the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

53

PART II

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2004, the Company issued an
aggregate of 18,072 common shares to holders of Operating Partnership units in
exchange for 9,036 units. The issuances of common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). The Company has registered the resale
of such common shares under the Securities Act.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits required by this item are set forth on the Exhibit Index
attached hereto.

(b) Reports on Form 8-K

Form 8-K dated December 31, 2003, and filed January 8, 2004 for the
purpose of reporting, under Item 2 - Acquisition or Disposition of Assets, the
Company's disposition of its interests in the Woodlands, Texas and including
unaudited pro forma consolidated financial statements of the Company.

Form 8-K dated January 6, 2004, and filed January 8, 2004 under Item 5
- - Other Events, for the purpose of updating, in accordance with the requirements
of SFAS No. 144, the Company's audited consolidated financial statements and
related disclosures, as previously filed in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.

Form 8-K dated January 9, 2004, and filed January 9, 2004 under Item 5
- - Other Events, for the purpose of updating, in accordance with the requirements
of SFAS No. 144, the Company's unaudited consolidated financial statements and
related disclosures, as previously filed in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002.

Form 8-K dated January 9, 2004, and filed January 9, 2004 for the
purpose of (i) reporting under Item 5 - Other Events, that the Company had
entered into an underwriting agreement pursuant to which the underwriter agreed
to purchase 3,400,000 of the Company's 6 -3/4% Series A Convertible Cumulative
Preferred Shares, $.01 par value per share (the "Series A Preferred Shares") and
(ii) filing under Item 7 - Financial Statements, Pro Forma Financial Information
and Exhibits, certain exhibits relating to the offering of the Series A
Preferred Shares.

Form 8-K dated March 10, 2004, and filed March 17, 2004 under Item 5 -
Other Events, for the purpose of disclosing certain risk factors that may be
relevant to the Company's forward looking statements.

54

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)

By /s/ John C. Goff
-----------------------------------
John C. Goff
Date: May 6, 2004 Vice-Chairman of the Board and
Chief Executive Officer

By /s/ Jerry R. Crenshaw, Jr.
-----------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial Officer
Date: May 6, 2004 (Principal Financial and Accounting
Officer)

55

INDEX TO EXHIBITS