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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. 333-42293
333-89194-01
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY*
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2531304
DELAWARE 42-1536518
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES X NO _____
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003
(unaudited).................................................................................. 3
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003 (unaudited).......................................................... 4
Consolidated Statement of Partners' Capital for the three months ended
March 31, 2004 (unaudited)................................................................... 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited)......................................................................... 6
Notes to Consolidated Financial Statements................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................. 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 55
Item 4. Controls and Procedures....................................................................... 55
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 56
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
ASSETS:
Investments in real estate:
Land $ 256,011 $ 235,608
Land improvements, net of accumulated depreciation of $20,177 and $19,256 at
March 31, 2004 and December 31, 2003, respectively 108,842 105,232
Building and improvements, net of accumulated depreciation of $620,750 and
$596,535 at March 31, 2004 and December 31, 2003, respectively 2,377,770 2,187,368
Furniture, fixtures and equipment, net of accumulated depreciation of $48,097
and $44,074 at March 31, 2004 and December 31, 2003, respectively 50,375 51,160
Land held for investment or development 465,502 450,279
Properties held for disposition, net 95,947 127,915
----------- -----------
Net investment in real estate 3,354,447 3,157,562
Cash and cash equivalents 61,277 74.885
Restricted cash and cash equivalents 69,495 217,329
Defeasance investments 177,552 9,620
Accounts receivable, net 48,936 40,455
Deferred rent receivable 66,053 62,184
Investments in unconsolidated companies 358,106 443,974
Notes receivable, net 74,242 78,453
Income tax asset-current and deferred 21,324 17,506
Other assets, net 235,986 203,650
----------- -----------
Total assets $ 4,467,418 $ 4,305,618
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 169,000 $ 239,000
Notes payable 2,601,593 2,319,699
Accounts payable, accrued expenses and other liabilities 313,651 360,520
Current income tax payable -- 7,995
----------- -----------
Total liabilities 3,084,244 2,927,214
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 44,916 $ 47,123
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference $25.00 per unit, 14,200,000 and 10,800,000 units issued and
outstanding, at March 31, 2004 and December 31, 2003, respectively $ 319,166 $ 248,160
Series B Cumulative Preferred Units,
liquidation preference $25.00 per unit, 3,400,000 units issued and outstanding, at
March 31, 2004 and December 31, 2003 81,923 81,923
Units of Partnership Interest, 58,516,868 and 58,510,500 issued and outstanding, at
March 31, 2004 and December 31, 2003, respectively:
General partner - outstanding 585,169 and 585,105 9,784 10,424
Limited partners - outstanding 57,931,699 and 57,925,395 941,308 1,004,603
Accumulated other comprehensive income (13,923) (13,829)
----------- -----------
Total partners' capital $ 1,338,258 $ 1,331,281
----------- -----------
Total liabilities and partners' capital $ 4,467,418 $ 4,305,618
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2004 2003
--------- ---------
REVENUE:
Office Property $ 123,450 $ 120,715
Resort/Hotel Property 61,396 63,721
Residential Development Property 47,688 43,721
--------- ---------
Total Property revenue $ 232,534 $ 228,157
--------- ---------
EXPENSE:
Office Property real estate taxes $ 17,071 $ 17,102
Office Property operating expenses 41,864 40,530
Resort/Hotel Property expense 49,343 49,740
Residential Development Property expense 40,562 41,430
--------- ---------
Total Property expense $ 148,840 $ 148,802
--------- ---------
Income from Property Operations $ 83,694 $ 79,355
--------- ---------
OTHER INCOME (EXPENSE):
Gain on joint venture of properties, net $ - $ 100
Interest and other income 2,764 1,455
Corporate general and administrative (6,917) (6,090)
Interest expense (45,008) (43,208)
Amortization of deferred financing costs (3,714) (2,424)
Extinguishment of debt (1,939) -
Depreciation and amortization (40,987) (36,597)
Impairment charges related to real estate assets - (1,200)
Other expenses (55) (127)
Equity in net income (loss) of unconsolidated companies:
Office Properties 942 1,458
Resort/Hotel Properties (231) 743
Residential Development Properties 87 970
Temperature-Controlled Logistics Properties (901) 1,507
Other (67) (1,029)
--------- ---------
Total other income (expense) $ (96,026) $ (84,442)
--------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES $ (12,332) $ (5,087)
Minority interests 84 1,210
Income tax benefit 1,613 2,528
--------- ---------
LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (10,635) $ (1,349)
Income from discontinued operations 704 2,466
Impairment charges related to real estate assets from discontinued operations (2,351) (15,828)
Loss on real estate from discontinued operations (55) (339)
Cumulative effect of a change in accounting principle (428) -
--------- ---------
NET LOSS $ (12,765) $ (15,050)
Series A Preferred Unit distributions (5,751) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
--------- ---------
NET LOSS AVAILABLE TO PARTNERS $ (20,535) $ (21,625)
========= =========
BASIC EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.31) $ (0.13)
Income from discontinued operations 0.01 0.04
Impairment charges related to real estate assets from discontinued operations (0.04) (0.27)
Loss on real estate from discontinued operations - (0.01)
Cumulative effect of a change in accounting principle (0.01) -
--------- ---------
Net loss available to partners - basic $ (0.35) $ (0.37)
========= =========
DILUTED EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.31) $ (0.13)
Income from discontinued operations 0.01 0.04
Impairment charges related to real estate assets from discontinued operations (0.04) (0.27)
Loss on real estate from discontinued operations - (0.01)
Cumulative effect of a change in accounting principle (0.01) -
--------- ---------
Net loss available to partners - diluted $ (0.35) $ (0.37)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)
PREFERRED GENERAL LIMITED ACCUMULATED
PARTNERS' PARTNERS' PARTNERS' COMPREHENSIVE PARTNERS'
CAPITAL CAPITAL CAPITAL INCOME CAPITAL
--------- --------- ---------- ------------- ----------
PARTNERS' CAPITAL, December 31, 2003 $ 330,083 $ 10,424 $1,004,603 $ (13,829) $1,331,281
Issuance of Preferred Units A 71,006 - - - 71,006
Contributions, net - 2 228 - 230
Distributions - (440) (43,516) - (43,956)
Amortization of Deferred Compensation on Restricted Shares 3 323 - 326
Net Loss - (205) (20,330) - (20,535)
Unrealized Gain on Marketable Securities - - - 903 903
Unrealized Net Loss on Cash Flow Hedges - - - (997) (997)
--------- --------- ---------- ------------- ----------
PARTNERS' CAPITAL, March 31, 2004 $ 401,089 $ 9,784 $ 941,308 $ (13,923) $1,338,258
========= ========= ========= ============= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,765) $ (15,050)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 44,701 39,021
Residential Development cost of sales 17,169 13,591
Residential Development capital expenditures (24,139) (16,664)
Impairment charges related to real estate assets from discontinued operations 2,351 15,828
Loss on real estate from discontinued operations 55 339
Discontinued operations - depreciation and minority interests 506 2,726
Extinguishment of debt 1,939 -
Impairment charges related to real estate assets - 1,200
Gain on joint venture of properties, net - (100)
Minority interests (84) (1,210)
Cumulative effect of a change in accounting principle 428 -
Non-cash compensation 265 62
Equity in (earnings) loss from unconsolidated companies:
Office Properties (942) (1,458)
Resort/Hotel Properties 231 (743)
Residential Development Properties (87) (970)
Temperature-Controlled Logistics Properties 901 (1,507)
Other 67 1,029
Distributions received from unconsolidated companies:
Office Properties 758 565
Residential Development Properties - 35
Other 284 -
Change in assets and liabilities, net of consolidations and acquisitions:
Restricted cash and cash equivalents 47,977 19,204
Accounts receivable (5,772) 1,087
Deferred rent receivable (3,897) (817)
Income tax asset - current and deferred, net (12,087) (2,578)
Other assets (7,895) 1,645
Accounts payable, accrued expenses and other liabilities (50,703) (70,452)
--------- ---------
Net cash used in operating activities $ (739) $ (15,217)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated entities $ 334 $ 11,374
Proceeds from property sales 30,659 1,116
Acquisition of investment properties (146,100) (2,000)
Development of investment properties (1,201) (522)
Property improvements - Office Properties (1,852) (2,211)
Property improvements - Resort/Hotel Properties (8,454) (2,404)
Tenant improvement and leasing costs - Office Properties (24,192) (12,456)
Residential Development Properties Investments (5,804) (7,064)
Decrease (increase) in restricted cash and cash equivalents 101,371 (1,341)
Defeasance investments (167,932) -
Return of investment in unconsolidated companies:
Office Properties 340 287
Resort/Hotel Properties 612 -
Temperature-Controlled Logistics Properties 90,000 -
Other 39 4,651
Investment in unconsolidated companies:
Office Properties (12) (52)
Resort/Hotel Properties - (2)
Residential Development Properties (621) (1,038)
Temperature-Controlled Logistics Properties (2,403) (828)
(Increase) decrease in notes receivable (152) 16,743
--------- ---------
Net cash (used in) provided by investing activities $(135,368) $ 4,253
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (4,343) $ (68)
Borrowings under Credit Facility 141,500 136,000
Payments under Credit Facility (211,500) (15,000)
Notes payable proceeds 280,035 10,000
Notes payable payments (108,958) (66,750)
Residential Development Properties notes payable borrowings 15,939 17,529
Residential Development Properties notes payable payments (7,429) (20,724)
Capital distributions - joint venture partner (2,562) (5,471)
Capital contributions - joint venture partner 508 132
Capital contributions to the Operating Partnership 206 (10)
Issuance of preferred units - Series A 71,006 -
Series A Preferred Unit distributions (5,991) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
Distributions from the Operating Partnership (43,893) (43,135)
--------- ---------
Net cash provided by financing activities $ 122,499 $ 5,928
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS $ (13,608) $ (5,036)
CASH AND CASH EQUIVALENTS,
Beginning of period 74,885 75,418
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 61,277 $ 70,382
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company" or "Crescent Equities"), through the Company's
ownership of all of the outstanding stock of Crescent Real Estate Equities,
Ltd., a Delaware corporation ("the General Partner"), which owns a 1% general
partner interest in the Operating Partnership. In addition, the Company owns an
approximately 84% limited partner interest in the Operating Partnership, with
the remaining approximately 15% limited partner interest held by other limited
partners.
All of the limited partners of the Operating Partnership, other than the
Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of March
31, 2004, the Company's approximately 84% limited partner interest has been
treated as equivalent, for purposes of this report, to 49,067,388 units and the
remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,864,311 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,169 units.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.
The following are the consolidated subsidiaries of the Operating
Partnership that owned or had an interest in real estate assets as of March 31,
2004: 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 Operating Partnership'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 Operating Partnership and the Company,
all of which are consolidated in the Operating Partnership's or the Company's
financial statements and were formed primarily for the purpose of obtaining
secured debt or joint venture financing.
SEGMENTS
The assets and operations of the Operating Partnership were divided into
four investment segments at March 31, 2004, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Operating Partnership owned in whole or in part
the following real estate assets (the "Properties") as of March 31, 2004:
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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.
- 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.
- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership'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").
- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the Operating
Partnership's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
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 Operating Partnership accounts
for its interests in the Temperature-Controlled Logistics
Partnership and in the Vornado Crescent Carthage and KC Quarry
L.L.C. as unconsolidated equity 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 Operating Partnership'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.
8
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Operating Partnership's significant accounting
policies contained in the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 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 Operating
Partnership'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 Operating Partnership has
consolidated GDW LLC, a subsidiary of DMDC, as of December 31, 2003 and Elijah
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 Operating Partnership'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. (the "Canyon Ranch
Entities") are VIEs under FIN 46, the Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership'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 Operating
Partnership 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 Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
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
Operating Partnership controls the properties, retains all of the economic
benefits and risks associated with these properties and indemnifies the third
party intermediary and, therefore, the Operating Partnership is fully
consolidating these properties. On the expiration of the 180-day period, the
Operating Partnership will take legal ownership of the properties.
SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION. Effective January 1, 2003, the Operating
Partnership 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 and the Operating
Partnership granted stock and unit options and the Operating Partnership
recognized compensation expense that was not significant to its results of
operations. With respect to the Company's stock options and the Operating
Partnership's unit options which were granted prior to 2003, the Operating
Partnership accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25"). 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 Operating Partnership's
net loss and loss per unit would have been reduced to the following pro forma
amounts:
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
(in thousands, except per unit amounts) 2004 2003
- ------------------------------------------------------------------------------ -------- --------
Net loss available to partners, as reported $(20,535) $(21,625)
Add: Stock-based employee compensation expense included in reported net income 350 1
Deduct: total stock-based employee compensation expense determined under fair
value based method for all awards (950) (843)
-------- --------
Pro forma net loss $(21,135) $(22,467)
(Loss) earnings per unit:
Basic/Diluted - as reported $ (0.35) $ (0.37)
Basic/Diluted - pro forma $ (0.36) $ (0.38)
MARKETABLE SECURITIES. The Operating Partnership 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.
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 Operating Partnership's marketable securities.
AS OF MARCH 31, 2004 AS OF DECEMBER 31, 2003
--------------------------------- ----------------------------------
(in thousands) FAIR UNREALIZED FAIR UNREALIZED
TYPE OF SECURITY COST VALUE GAIN/(LOSS) COST VALUE GAIN/(LOSS)
--------- ---------- ---------- ---------- ---------- ----------
Held to maturity(1) $ 177,552 $ 177,827 $ 275 $ 9,620 $ 9,621 $ 1
Available for sale(2) 5,883 6,046 163 2,278 2,278 -
--------- ---------- --------- ---------- ---------- --------
Total $ 183,435 $ 183,873 $ 438 $ 11,898 $ 11,899 $ 1
========= ========== ========= ========== ========== ========
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- --------------------------
(in thousands) REALIZED CHANGE REALIZED CHANGE
TYPE OF SECURITY GAIN IN OCI GAIN IN OCI
-------- ------ -------- ------
Held to maturity(1) $ - $ N/A $ - $ N/A
Available for sale(2) - 163 - (79)
-------- ------ -------- ------
Total $ - $ 163 $ - $ (79)
======== ====== ======== ======
- --------------------
(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) Available for sale securities consist of marketable securities which the
Operating Partnership 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.
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 partners by the
weighted average number of units outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue units were exercised or converted into units, where such
exercise or conversion would result in a lower EPS amount. The Operating
Partnership presents both basic and diluted earnings per unit.
The following tables present reconciliations for the three months ended
March 31, 2004 and 2003 of basic and diluted earnings per unit from "Loss before
discontinued operations and cumulative effect of a change in accounting
principle" to "Net loss available to partners." The table also includes weighted
average units on a basic and diluted basis.
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
2004 2003
------------------------------- ------------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units(1) Amount (Loss) Units(1) Amount
- ----------------------------------------------------- ------- --------- -------- -------- --------- --------
BASIC/DILUTED EPS -
Loss before discontinued operations and
cumulative effect of a change in accounting
principle $(10,635) 58,363 $ (1,349) 58,485
Series A Preferred Unit distributions (5,751) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
------------------------------- ----------------------------
Net loss available to partners
before discontinued operations and cumulative
effect of a change in accounting principle $(18,405) 58,363 (0.31) $ (7,924) 58,485 (0.13)
Income from discontinued operations 704 0.01 2,466 0.04
Impairment charges related to real estate assets from
discontinued operations, (2,351) (0.04) (15,828) (0.27)
Loss on real estate from discontinued operations (55) - (339) (0.01)
Cumulative effect of a change in accounting principle (428) (0.01) - -
------------------------------- ----------------------------
Net loss available to partners $(20,535) 58,363 (0.35) $(21,625) 58,485 (0.37)
=============================== ============================
(1) Anti-dilutive units not included are 277 and 2 for the three months ended
March 31, 2004 and 2003, respectively.
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2004 2003
- ------------------------------------------------------------- --------- --------
(in thousands)
Interest paid on debt $ 36,946 $ 34,661
Interest capitalized - Resort/Hotel 75 -
Interest capitalized - Residential Development 3,829 4,239
Additional interest paid in conjunction with cash flow hedges 3,816 5,590
--------- --------
Total interest paid $ 44,666 $ 44,490
========= ========
Cash paid for income taxes $ 9,950 $ 223
========= ========
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:
Assumption of debt in conjunction with acquisitions of Office Properties and undeveloped land $ 102,307 $ -
Amortization of debt premium 418 -
Non-cash compensation 319 -
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC, HADC, AND 2004
CONSOLIDATION OF ELIJAH:
Net investment in real estate $ - $ (9,692)
Accounts receivable, net (848) (3,057)
Investments in unconsolidated companies (2,478) 13,552
Notes receivable, net 4,363 (25)
Income tax asset - current and deferred, net (274) (3,564)
Other assets, net - (820)
Notes payable - 312
Accounts payable, accrued expenses and other liabilities - 12,696
Minority interest - consolidated real estate partnerships (140) 1,972
Other comprehensive income, net of tax 139 -
Cumulative effect of a change in accounting principle (428) -
--------- --------
Increase in cash $ 334 $ 11,374
========= ========
3. SEGMENT REPORTING
For purposes of segment reporting as defined in SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the Operating
Partnership currently has four major investment segments based on property type:
the Office Segment; the Resort/Hotel Segment; the Residential Development
Segment; and the Temperature-Controlled Logistics Segment. Management utilizes
this segment structure for making operating decisions and assessing performance.
The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, as used in this document, is based on
the definition adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and means:
- Net Income (Loss) - determined in accordance with GAAP;
- excluding gains (losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint
ventures.
The Operating Partnership calculates FFO-diluted in the same manner,
except that Net Income (Loss) is replaced by Net Income (Loss) Available to
Partners.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Operating Partnership
considers FFO-diluted and FFO appropriate measures of performance for an
operating partnership of an equity REIT
12
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Operating Partnership's operating performance.
The Operating Partnership's measures of FFO-diluted and FFO may not be
comparable to similarly titled measures of REITs (other than the Company) if
those REITs apply the definition of FFO in a different manner than the Operating
Partnership.
Selected financial information related to each segment for the three
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:
FOR THE THREE MONTHS ENDED MARCH 31, 2004
------------------------------------------
RESIDENTIAL
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2)
- -------------------------------------------------------- ---------- ------------ -----------
Total Property revenue $ 123,450 $ 61,396 $ 47,688
Total Property expense 58,935 49,343 40,562
---------- ------------ -----------
Income from Property Operations $ 64,515 $ 12,053 $ 7,126
Total other income (expense) (29,402) (6,849) (3,050)
Minority interests and income taxes (432) 1,466 1,236
Discontinued operations - income, loss on real estate
and impairment charges related to real estate assets (1,402) - 38
Cumulative effect of a change in accounting principle - - -
---------- ------------ -----------
Net income (loss) $ 33,279 $ 6,670 $ 5,350
---------- ------------ -----------
Depreciation and amortization of real estate assets $ 30,223 $ 6,360 $ 1,401
(Gain) loss on property sales, net (289) - -
Impairment charges related to real estate assets 2,351 - -
Adjustments for investment in unconsolidated companies 2,408 - (577)
Series A Preferred unit distributions - - -
Series B Preferred unit distributions - - -
---------- ------------ -----------
Adjustments to reconcile net income (loss) to funds from
operations-diluted $ 34,693 $ 6,360 $ 824
---------- ------------ -----------
Funds from operations before impairment charges related
to real estate assets-diluted $ 67,972 $ 13,030 $ 6,174
Impairment charges related to real estate assets (2,351) - -
---------- ------------ -----------
Funds from operations impairment charges related
to real estate assets-diluted $ 65,621 $ 13,030 $ 6,174
========== ============ ===========
FOR THE THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------
TEMPERATURE-
CONTROLLED
SELECTED FINANCIAL INFORMATION: LOGISTICS CORPORATE
(in thousands) SEGMENT AND OTHER TOTAL
- -------------------------------------------------------- ------------ --------- --------
Total Property revenue $ - $ - $232,534
Total Property expense - - 148,840
------------ --------- --------
Income from Property Operations $ - $ - $ 83,694
Total other income (expense) (901) (55,824) (3) (96,026)
Minority interests and income taxes - (573) 1,697
Discontinued operations - income, loss on real estate
and impairment charges related to real estate assets - (338) (1,702)
Cumulative effect of a change in accounting principle - (428) (428)
------------ --------- --------
Net income (loss) $ (901) $ (57,163) $(12,765)
------------ --------- --------
Depreciation and amortization of real estate assets $ - $ 57 $ 38,041
(Gain) loss on property sales, net - 345 56
Impairment charges related to real estate assets - - 2,351
Adjustments for investment in unconsolidated companies 5,795 - 7,626
Series A Preferred unit distributions - (5,751) (5,751)
Series B Preferred unit distributions - (2,019) (2,019)
------------ --------- --------
Adjustments to reconcile net income (loss) to funds from
operations-diluted $ 5,795 $ (7,368) $ 40,304
------------ --------- --------
Funds from operations before impairment charges related
to real estate assets-diluted $ 4,894 $ (64,531) $ 27,539
Impairment charges related to real estate assets - - (2,351)
------------ --------- --------
Funds from operations after impairment charges related
to real estate assets-diluted $ 4,894 $ (64,531) $ 25,188
============ ========= ========
See footnotes to the following table.
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------
RESIDENTIAL
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2)
- ---------------------------------------------- ---------- ------------ -----------
Total Property revenue $ 120,715 $ 63,721 $ 43,721
Total Property expense 57,632 49,740 41,430
---------- ------------ -----------
Income from Property Operations $ 63,083 $ 13,981 $ 2,291
Total other income (expense) (25,398) (5,250) (1,674)
Minority interests and income taxes (154) 762 2,794
Discontinued operations -income, loss on real
estate and impairment charges related to
real estate assets (12,793) - 20
---------- ------------ -----------
Net income (loss) $ 24,738 $ 9,493 $ 3,431
---------- ------------ -----------
Depreciation and amortization of real estate
assets $ 29,439 $ 5,744 $ 1,118
(Gain) loss on property sales, net (64) - -
Impairment charges related to real estate
assets 15,000 - -
Adjustments for investment in unconsolidated
companies 2,822 394 739
Series A Preferred unit distributions - - -
Series B Preferred unit distributions - - -
---------- ------------ -----------
Adjustments to reconcile net income (loss) to
funds from operations-diluted $ 47,197 $ 6,138 $ 1,857
---------- ------------ -----------
Funds from operations before impairment
charges related to real estate
assets-diluted $ 71,935 $ 15,631 $ 5,288
Impairment charges related to real estate
assets (15,000) - -
---------- ------------ -----------
Funds from operations after impairment
charges related to real estate
assets-diluted $ 56,935 $ 15,631 $ 5,288
========== ============ ==========
FOR THE THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------
TEMPERATURE-
CONTROLLED
SELECTED FINANCIAL INFORMATION: LOGISTICS CORPORATE
(in thousands) SEGMENT AND OTHER(3) TOTAL
- ---------------------------------------------- ------------ --------- -----------
Total Property revenue $ - $ - $ 228,157
Total Property expense - - 148,802
------------ --------- -----------
Income from Property Operations $ - $ - $ 79,355
Total other income (expense) 1,507 (53,627)(3) (84,442)
Minority interests and income taxes - 336 3,738
Discontinued operations -income, loss on real
estate and impairment charges related to
real estate assets - (928) (13,701)
------------ --------- -----------
Net income (loss) $ 1,507 $ (54,219) $ (15,050)
------------ --------- -----------
Depreciation and amortization of real estate
assets $ - $ - $ 36,301
(Gain) loss on property sales, net - 290 226
Impairment charges related to real estate
assets - 2,028 17,028
Adjustments for investment in unconsolidated
companies 5,510 22 9,487
Series A Preferred unit distributions - (4,556) (4,556)
Series B Preferred unit distributions - (2,019) (2,019)
------------ --------- -----------
Adjustments to reconcile net income (loss) to
funds from operations-diluted $ 5,510 $ (4,235) $ 56,467
------------ --------- -----------
Funds from operations before impairment
charges related to real estate
assets-diluted $ 7,017 $ (58,454) $ 41,417
Impairment charges related to real estate
assets - (2,028) (17,028)
------------ --------- -----------
Funds from operations after impairment
charges related to real estate
assets-diluted $ 7,017 $ (60,482) $ 24,389
============ ========= ===========
See footnotes to the following table.
TEMPERATURE-
RESORT/ RESIDENTIAL CONTROLLED CORPORATE
OFFICE HOTEL DEVELOPMENT LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT SEGMENT(2)(4) SEGMENT OTHER TOTAL
- -------------------------------------- ---------- ---------- ---------- ------------ ------------ ----------
TOTAL ASSETS BY SEGMENT: (5)
Balance at March 31, 2004 $ 2,663 $ 495 $ 757 $ 212 $ 340 (6) $ 4,467
Balance at December 31, 2003 2,502 468 707 300 329 4,306
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at March 31, 2004 (1,513) (133) (96) - (1,029)(7) (2,771)
Balance at December 31, 2003 (1,459) (138) (88) - (874)(7) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at March 31, 2004 (76) (44) (143) - (51) (314)
Balance at December 31, 2003 (119) (27) (109) - (114) (369)
MINORITY INTERESTS:
Balance at March 31, 2004 (9) (6) (30) - - (45)
Balance at December 31, 2003 (9) (7) (31) - - (47)
- --------------------
(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 Operating Partnership 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 Operating Partnership'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.
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
During January and February 2004, in accordance with the original purchase
contract, the Operating Partnership 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 Operating Partnership acquired a 67% interest. The
remaining four Office Properties are wholly-owned by the Operating Partnership.
The Operating Partnership acquired these five Office Properties and seven retail
parcels for approximately $175.3 million, funded by the Operating Partnership's
assumption of approximately $85.4 million in mortgage loans and by a portion of
the proceeds from the sale of the Operating Partnership's interests in The
Woodlands on December 31, 2003. The Operating Partnership 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 Operating
Partnership's Office Segment.
On March 31, 2004, the Operating Partnership acquired Dupont Centre, a
250,000 square foot Class A office property, located in the John Wayne Airport
submarket of Irvine, California. The Operating Partnership acquired the Office
Property for approximately $54.3 million, funded by a draw on the Operating
Partnership's credit facility. This Office Property is wholly-owned and included
in the Operating Partnership's Office Segment.
UNDEVELOPED LAND
On March 1, 2004, in accordance with the agreement to acquire the Hughes
Center Properties, the Operating Partnership 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 Operating Partnership'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," gain or loss
on the assets sold or held for sale have been presented as "Loss on real estate
from discontinued operations" and impairments on the assets sold or held for
sale have been presented as "Impairment charges related to real estate assets
from discontinued operations" 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 Operating Partnership 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. The Operating Partnership previously recorded an impairment charge of
approximately $16.4 million, during the year ended December 31, 2003. The
proceeds from the sale were used primarily to pay down the Operating
Partnership's credit facility. This property was wholly-owned.
On March 31, 2004, the Operating Partnership 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.
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSETS HELD FOR SALE
OFFICE SEGMENT
The following Office Properties are classified as held for sale as of
March 31, 2004.
PROPERTY LOCATION
- ------------------ ----------------
Liberty Plaza(1) Dallas, Texas
12404 Park Central Dallas, Texas
3333 Lee Parkway Dallas, Texas
5050 Quorum(2) Dallas, Texas
Addison Tower(2) Dallas, Texas
Ptarmigan Place(2) Denver, Colorado
(1) This property was sold on April 13, 2004.
(2) The Operating Partnership has entered into contracts to sell these
properties. The sales are expected to close in the second quarter of 2004.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major asset classes of the properties
held for sale.
(in thousands) MARCH 31, 2004(1) DECEMBER 31, 2003(2)
- -------------- ----------------- --------------------
Land $ 10,320 $ 15,291
Buildings and improvements 105,873 138,017
Accumulated depreciation (23,558) (29,754)
Other assets, net 3,312 4,361
--------- ---------
Net investment in real estate $ 95,947 $ 127,915
========= =========
- --------------------
(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, 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.
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(in thousands) 2004 2003
- -------------- ------- --------
Total revenues $ 4,462 $ 9,367
Operating and other expenses (3,280) (4,271)
Depreciation and amortization (478) (2,630)
------- -------
Income from discontinued operations $ 704 $ 2,466
======= =======
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(in thousands) 2004 2003
- -------------- ------- --------
Impairment charges related to real estate assets from discontinued operations $(2,351) $(15,828)
======= ========
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(in thousands) 2004 2003
- -------------- ---- -----
Loss on sale of real estate from discontinued operations $(55) $(339)
==== =====
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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 Operating Partnership's share of the deferred rent was $4.3
million. The Operating Partnership 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 Operating Partnership'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 Operating Partnership.
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 Operating Partnership'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 Operating Partnership on
April 1, 2004.
17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of March 31, 2004.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF MARCH 31, 2004
- ---------------------------------------------------- -------------------------------------- -----------------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, L.L.C. Office (Miami Center - Miami) 40.0% (2)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (3)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0% (4)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (5)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (6)
Houston PT Three Westlake Office Limited Partnership Office (Three Westlake Park - Houston) 20.0% (6)
Houston PT Four Westlake Office Limited Partnership Office (Four Westlake Park-Houston) 20.0% (6)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (7)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (8)
Blue River Land Company, L.L.C. Other 50.0% (9)
Canyon Ranch Las Vegas, L.L.C. Other 50.0% (10)
EW Deer Valley, L.L.C. Other 41.7% (11)
CR License, L.L.C. Other 30.0% (12)
CR License II, L.L.C. Other 30.0% (13)
SunTx Fulcrum Fund, L.P. Other 23.5% (14)
SunTx Capital Partners, L.P. Other 14.4% (15)
G2 Opportunity Fund, L.P. ("G2") Other 12.5% (16)
- --------------------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.
(3) The remaining 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 Operating Partnership.
(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 Operating
Partnership's Resort/Hotel Properties and 15% is owned by the Operating
Partnership 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 Operating Partnership. 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership.
(15) The remaining 85.6% interest in SunTx Capital Partners, L.P. is owned by
parties unrelated to the Operating Partnership.
(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 Operating Partnership. 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 and sole director and Chief Executive
Officer of the General Partner. The remaining approximately 2% general
partnership interest is owned by unrelated parties.
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY FINANCIAL INFORMATION
The Operating Partnership reports its share of income and losses based on
its ownership interest in its respective equity investments, adjusted for any
preference payments. The unconsolidated entities that are included under the
headings on the following tables are summarized below.
Balance Sheets as of March 31, 2004:
- 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.;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
- 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:
- 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.;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
- 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:
- 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.;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
- 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:
- 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;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- 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.
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS:
AS OF MARCH 31, 2004
----------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
- ----------------------------------- -------- -------------- ------- --------
Real estate, net $750,874 $ 1,172,980
Cash 24,344 20,501
Other assets 53,830 110,677
-------- --------------
Total assets $829,048 $ 1,304,158
======== ==============
Notes payable $514,153 $ 785,861
Notes payable to the Operating
Partnership - -
Other liabilities 21,062 7,179
Equity 293,833 511,118
-------- --------------
Total liabilities and equity $829,048 $ 1,304,158
======== ==============
Operating Partnership's share of
unconsolidated debt $172,018 $ 314,344 $ 2,357 $488,719
======== ============== ======= ========
Operating Partnership's investments
in unconsolidated companies $102,555 $ 212,392 $43,159 $358,106
======== ============== ======= ========
BALANCE SHEETS:
AS OF DECEMBER 31, 2003
---------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
- ----------------------------------- -------- ------------- ------- --------
Real estate, net $754,882 $ 1,187,387
Cash 31,309 12,439
Other assets 51,219 88,668
-------- -------------
Total assets $837,410 $ 1,288,494
======== =============
Notes payable $515,047 $ 548,776
Notes payable to the Operating
Partnership - -
Other liabilities 29,746 11,084
Equity 292,617 728,634
-------- -------------
Total liabilities and equity $837,410 $ 1,288,494
======== =============
Operating Partnership's share of
unconsolidated debt $172,376 $ 219,511 $ 2,495 $394,382
======== ============= ======= ========
Operating Partnership's investments
in unconsolidated companies $102,519 $ 300,917 $40,538 $443,974
======== ============= ======= ========
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2004
---------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER(1) TOTAL
- ----------------------------------------------- ------- ------------ -------- -----
Total revenues $26,893 $ 30,433
Expenses:
Operating expense 11,247 6,072 (2)
Interest expense 6,305 12,512
Depreciation and amortization 5,551 14,610
Other (income) expense - (863)
------- ------------
Total expenses $23,103 $ 32,331
------- ------------
Net income, impairments and gain (loss) on real
estate from discontinued operations $ 3,790 $ (1,898) $ (52)
======= ============ ========
Operating Partnership's equity in net income
(loss) of unconsolidated companies $ 942 $ (901) $ (211) $(170)
======= ============ ======== =====
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER(1) TOTAL
- ----------------------------------------------- ------- ------------ -------- ------
Total revenues $34,373 $ 34,032
Expenses:
Operating expense 14,708 6,008 (2)
Interest expense 6,194 10,244
Depreciation and amortization 7,865 14,643
Other (income) expense - (615)
------- ------------
Total expenses $28,767 $ 30,280
------- ------------
Net income, impairments and gain (loss) on real
estate from discontinued operations $ 5,606 $ 3,752 $ 3,351
======= ============ ========
Operating Partnership's equity in net income
(loss) of unconsolidated companies $ 1,458 $ 1,507 $ 684 $3,649
======= ============ ======== ======
- --------------------
(1) The Operating Partnership 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).
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The following table shows, as of March 31, 2004, information about the
Operating Partnership's share of unconsolidated fixed and variable rate debt and
does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.
OPERATING
PARTNERSHIP
BALANCE SHARE OF INTEREST
OUTSTANDING AT BALANCE AT RATE AT FIXED/VARIABLE
MARCH 31, MARCH 31, MARCH 31, SECURED/
DESCRIPTION 2004 2004 2004 MATURITY DATE UNSECURED
- --------------------------------------------- -------------- ----------- -------------- -------------------- ----------------
(in thousands)
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40%
Operating Partnership
Goldman Sachs (1) $ 492,997 $ 197,199 6.89% 5/11/2023 Fixed/Secured
Morgan Stanley (2) 253,957 101,583 4.04% 4/9/2009 Variable/Secured
Various Capital Leases 35,857 14,342 4.84 to 13.63% 6/1/2006 to 4/1/2017 Fixed/Secured
Various Mortgage Notes 3,050 1,220 7.00 to 12.88% 4/1/2004 to 4/1/2009 Fixed/Secured
-------------- -----------
$ 785,861 $ 314,344
-------------- -----------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating
Partnership(3)(4) $ 129,961 $ 64,980 5.47% 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P. - 25%
Operating Partnership 90,000 22,500 5.00% 10/1/2008 Fixed/Secured
Crescent Miami Center, LLC - 40% Operating
Partnership 81,000 32,400 5.04% 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30%
Operating Partnership 50,000 15,000 5.40% 11/1/2010 Fixed/Secured
Houston PT Four Westlake Office Limited
Partnership - 20% Operating Partnership 47,921 9,584 7.13% 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30%
Operating Partnership 45,000 13,500 4.82% 1/1/2008 Fixed/Secured
Austin PT BK One Tower Office Limited
Partnership - 20% Operating Partnership 37,272 7,454 7.13% 8/1/2006 Fixed/Secured
Houston PT Three Westlake Office Limited
Partnership - 20% Operating Partnership 33,000 6,600 5.61% 9/1/2007 Fixed/Secured
-------------- -----------
$ 514,154 $ 172,018
-------------- -----------
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50%
Operating Partnership (5) $ 4,714 $ 2,357 4.10% 6/30/2004 Variable/Secured
-------------- -----------
TOTAL UNCONSOLIDATED DEBT $ 1,304,729 $ 488,719
============== ===========
FIXED RATE/WEIGHTED AVERAGE 6.63% 13.8 years
VARIABLE RATE/WEIGHTED AVERAGE 4.59% 3.3 years
-------------- --------------------
TOTAL WEIGHTED AVERAGE 5.93% 10.2 years
============== ====================
- --------------------
(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 Operating Partnership 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.
22
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Operating Partnership's debt financing
at March 31, 2004:
MARCH 31, 2004
-------------
(in thousands)
SECURED DEBT
Bank of America Fund XII Term Loan due January 2006, bears interest at LIBOR plus 225 basis points
(at March 31, 2004, the interest rate was 3.35%), with a two-year interest-only term and a one-year extension
option, secured by the Funding XII Properties................................................................... $ 275,000
AEGON Partnership Note due July 2009, bears interest at 7.53% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by the Funding III, IV and V Properties (Greenway Plaza)...... 258,765
LaSalle Note I(1) due August 2027, bears interest at 7.83% with monthly principal and interest payments
based on a 25-year amortization schedule through maturity in August 2027, secured by the Funding I
Properties...................................................................................................... 234,232
Deutsche Bank-CMBS Loan(2) due May 2004, bears interest at the 30-day LIBOR rate (with a floor of 3.50%) plus
234 basis points (at March 31, 2004, the interest rate was 5.84%), with a three-year interest-only term and
two one- year extension options, secured by the Funding X Properties and Spectrum Center........................ 220,000
JP Morgan Mortgage Note(3) bears interest at 8.31% with monthly principal and interest payments based on a
25-year amortization schedule through maturity in October 2016, secured by the Houston Center mixed-use
Office Property Complex ........................................................................................ 190,205
Fleet Fund I Term Loan due May 2005, bears interest at LIBOR plus 350 basis points (at March 31, 2004, the
interest rate was 4.63%), with a four-year interest-only term, secured by equity interests in Funding I......... 160,000
LaSalle Note II bears interest at 7.79% with monthly principal and interest payments based on a 25-year
amortization schedule through maturity in March 2006, secured by defeasance investments (4)..................... 159,037
Fleet Term Loan due February 2007, bears interest at LIBOR rate plus 450 basis points (at March 31, 2004, the
Interest rate was 5.59%) with an interest only term, secured by excess cash flow distributions from Funding
III, Funding IV and Funding V................................................................................... 75,000
Cigna Note due June 2010, bears interest at 5.22% with an interest-only term, secured by the 707 17th Street
Office Property and the Denver Marriott City Center............................................................. 70,000
Mass Mutual Note(5) due August 2006, bears interest at 7.75% with principal and interest payments based on a
25-year amortization schedule, secured by the 3800 Hughes Parkway Office Property............................... 38,700
National Bank of Arizona Revolving Line of Credit(6) with maturities ranging from November 2004 to December
2005, bears interest ranging from 4.00% to 5.00%, secured by certain DMDC assets................................ 36,668
Bank of America Note due May 2013, bears interest at 5.53% with an initial 2.5-year interest-only term
(through November 2005), followed by monthly principal and interest payments based on a 30-year amortization
schedule, secured by The Colonnade Office Property.............................................................. 38,000
Metropolitan Life Note V due December 2005, bears interest at 8.49% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the Datran Center Office Property................. 37,344
Allstate Note(5) due September 2010, bears interest at 6.65% with principal and interest payments based on a
25-year amortization schedule, secured by the 3993 Hughes Parkway Office Property............................... 26,058
23
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
-------------
(in thousands)
SECURED DEBT (CONTINUED)
Northwestern Life Note due November 2008, bears interest at 4.94% with an interest-only term, secured by the
301 Congress Avenue Office Property............................................................................. 26,000
Metropolitan Life Note VI(5) due October 2009, bears interest at 7.71% with principal and interest payments
based on a 25-year amortization schedule, secured by the 3960 Hughes Parkway Office Property.................... 24,629
Northwestern Life Note II(5) due July 2007, bears interest at 7.40% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the 3980 Howard Hughes Parkway Office Property.... 10,595
Woodmen of the World Note due April 2009, bears interest at 8.20% with an initial five-year interest-only
term (through November 2006), followed by monthly principal and interest payments based on a 25-year
amortization schedule, secured by the Avallon IV Office Property................................................ 8,500
FHI Finance Loan bears interest at LIBOR plus 450 basis points (at March 31, 2004, the interest rate was
5.60%), with an initial interest-only term until the Net Operating Income Hurdle Date(7), followed by monthly
principal and interest payments based on a 20-year amortization schedule through maturity in September 2009,
secured by the Sonoma Mission Inn & Spa......................................................................... 7,993
Nomura Funding VI Note(8) due July 2020 bears interest at 10.07% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by the Funding VI Property.................................... 7,806
The Rouse Company Note due December 2005 bears interest at prime rate plus 100 basis points (at March 31,
2004, the interest rate was 5.00%) with an interest-only term, secured by undeveloped land in Hughes Center..... 7,500
Wells Fargo note due June 2004, bears interest at LIBOR rate plus 200 basis points (at March 31, 2004, the
interest rate was 3.13%), with an interest-only term, secured by 3770 Howard Hughes Parkway Office Property..... 4,774
Construction, acquisition and other obligations, bearing fixed and variable interest rates ranging from 2.9%
to 10.50% at March 31, 2004, with maturities ranging between July 2004 and February 2009, secured by various
CRDI and MVDC projects(9)....................................................................................... 59,787
UNSECURED DEBT
2009 Notes bear interest at a fixed rate of 9.25% with a seven-year interest-only term, due April 2009 with a
call date of April 2006......................................................................................... 375,000
2007 Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due September 2007........ 250,000
Credit Facility(10) interest only due May 2005, bears interest at LIBOR plus 212.5 basis points (at March 31,
2004, the interest rate was 3.38%).............................................................................. 169,000
-------------
Total Notes Payable $ 2,770,593
=============
- --------------------
(1) In August 2007, the interest rate will increase, and the Operating
Partnership is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first
against principal and thereafter against accrued excess interest, as
defined. It is the Operating Partnership's intention to repay the note in
full at such time (August 2007) by making a final payment of approximately
$221.7 million.
(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 Operating Partnership's interests
in Funding X and Crescent Spectrum Center, L.P. and the Operating
Partnership'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 Operating Partnership
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 Operating Partnership's intention to repay
the note in full at such time (October 2006) by making a final payment of
approximately $177.8 million.
(4) In December 2003 and January 2004, the Operating Partnership 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.
24
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) The Operating Partnership 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.
(dollars in thousands)
Loan Premium Effective Rate
- ------------------------- -------- --------------
Mass Mutual Note $ 3,541 3.47%
Allstate Note 1,673 5.19%
Metropolitan Life Note VI 2,293 5.68%
Northwestern Life Note II 1,038 3.80%
--------
Total $ 8,545
========
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 Operating Partnership's joint venture partner, which owns a 19.9%
interest in the Sonoma Mission Inn & Spa, has a commitment to fund $10.0
million of future renovations at the Sonoma Mission Inn & Spa through a
mezzanine loan. The Net Operating Income Hurdle Date, as defined in the
loan agreement, is the date as of which the Sonoma Mission Inn & Spa has
achieved an aggregate Adjusted Net Operating Income, as defined in the
loan agreement, of $12 million for a period of 12 consecutive calendar
months.
(8) In July 2010, the interest rate will adjust based on current interest
rates at that time. It is the Operating Partnership's intention to repay
the note in full at such time (July 2010) by making a final payment of
approximately $6.1 million.
(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 Operating Partnership's credit facility of $7.6 million
which reduce the Operating Partnership's maximum borrowing capacity.
The following table shows information about the Operating Partnership's
consolidated fixed and variable rate debt and does not take into account any
extension options, hedging arrangements or the Operating Partnership's
anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT(1) RATE MATURITY (2)
- ------------------ ---------- ---------- -------- ----------------
Fixed Rate Debt $1,769,619 63.9% 7.88% 7.9 years
Variable Rate Debt 1,000,974 36.1 4.12 1.3 years
---------- ----- ---- ----------------
Total Debt $2,770,593 100.0% 6.61%(3) 4.9 years
========== ===== ==== ================
- --------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
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%.
25
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Listed below are the aggregate principal payments by year required as of
March 31, 2004 under indebtedness of the Operating Partnership. Scheduled
principal installments and amounts due at maturity are included and are based on
contractual maturities and do not include extension options.
SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL(1)
- ------------------- ---------- --------- -------------- --------------
2004 $ 274,484 $ - $ - $ 274,484
2005 274,103 - 169,000 443,103
2006 487,263 - - 487,263
2007 109,932 250,000 - 359,932
2008 47,321 - - 47,321
Thereafter 783,490 375,000 - 1,158,490
---------- --------- -------------- --------------
$1,976,593 $ 625,000 $ 169,000 $ 2,770,593
========== ========= ============== ==============
- --------------------
(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.
The Operating Partnership is generally obligated by its debt agreements to
comply with financial covenants, affirmative covenants and negative covenants,
or some combination of these types of covenants. Failure to comply with
covenants generally will result in an event of default under that debt
instrument. Any uncured or unwaived events of default under the Operating
Partnership's loans can trigger an increase in interest rates, an acceleration
of payment on the loan in default, and for the Operating Partnership's secured
debt, foreclosure on the Property securing the debt. In addition, a default by
the Operating Partnership or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in 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 Operating Partnership was in compliance
with all of covenants related to its outstanding debt. The Operating
Partnership'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 Operating Partnership's
existing debt.
DEFEASANCE OF LASALLE NOTE II
In January 2004, the Operating Partnership 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 Operating Partnership 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 Operating
Partnership 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 Operating Partnership 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 Operating Partnership and
the Company were formed primarily for the purpose of obtaining secured and
unsecured debt or joint venture financings. These entities, all of which are
consolidated by the Operating Partnership or the Company and are grouped based
on the Properties to which they relate, are: Funding I and Funding II Properties
(CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent Funding Interest,
LLC, CRE Management I Corp., CRE Management II Corp.); Funding III Properties
(CRE Management III Corp.); Funding IV Properties (CRE Management IV Corp.);
Funding V Properties (CRE Management V Corp.); Funding VI Properties (CRE
Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC); 707
17th Street (Crescent 707 17th Street, LLC); Funding X Properties (CREF X
Holdings
26
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
9. CASH FLOW HEDGES
The Operating Partnership uses derivative financial instruments to convert
a portion of its variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. As of March 31, 2004, the Operating Partnership had
four cash flow hedge agreements which are accounted for in conformity with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133."
The following table shows information regarding the Operating
Partnership's 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").
ADDITIONAL CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET INTEREST UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE EXPENSE (LOSSES) IN OCI
- -------------- -------- -------- --------- ---------- ---------- ----------------
(in thousands)
4/18/00 $100,000 4/18/04 6.76% $ (268) $ 1,429 $ 1,427
2/15/03 100,000 2/15/06 3.26% (2,840) 543 (495)
2/15/03 100,000 2/15/06 3.25% (2,836) 543 (495)
9/02/03 200,000 9/01/06 3.72% (8,155) 1,322 (1,558)
---------- ---------- -------
$ (14,099) $ 3,837 $(1,121)
========== ========== =======
In addition, two of the Operating Partnership's unconsolidated companies
have cash flow hedge agreements, of which the Operating Partnership's portion of
change in unrealized gains reflected in OCI was approximately $0.1 million for
the three months ended March 31, 2004.
The Operating Partnership has designated its four cash flow hedge
agreements as cash flow hedges of LIBOR-based monthly interest payments on a
designated pool of variable rate LIBOR indexed debt that re-prices closest to
the reset dates of each cash flow hedge agreement. 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 Operating Partnership 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 Operating Partnership 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 Operating
Partnership sold a LIBOR interest rate cap with the same terms. Since these
instruments do not reduce the Operating Partnership'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.
27
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
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
Operating Partnership'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 Operating Partnership to provide
additional collateral to support the guarantees. The Operating Partnership has
not recorded a liability associated with these guarantees as they were entered
into prior to the adoption of FIN 45.
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING AT GUARANTEED
DEBTOR MARCH 31, 2004 AMOUNT
-------------- ----------
(in thousands)
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 7,583 $ 7,583
Blue River Land Company, L.L.C.(2) (3) 3,300 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
------- ----------
Total Guarantees $15,133 $ 18,133
======= ==========
- --------------------
(1) The Operating Partnership 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 Operating Partnership and its joint venture partner each provide a
$4.3 million letter of credit to guarantee repayment of up to $8.5 million
of the loan to Main Street Partners, L.P.
COPI COMMITMENTS
See Note 15, "COPI," for a description of the Operating Partnership's
commitments related to the agreement with COPI, executed on February 14, 2002.
11. MINORITY INTEREST
Minority interest in real estate partnerships represents joint venture or
preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the Operating Partnership. Income in the real estate
partnerships is allocated to minority interest based on weighted average
percentage ownership during the year.
28
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the minority interest as of March 31, 2004
and December 31, 2003:
MARCH 31, DECEMBER 31,
(in thousands) 2004 2003
- -------------------------------------------------------------------- --------- ------------
Development joint venture partners - Residential Development Segment $ 29,678 $ 31,305
Joint venture partners - Office Segment 8,869 8,790
Joint venture partners - Resort/Hotel Segment 6,530 7,028
Other (161) -
--------- --------
$ 44,916 $ 47,123
========= ========
The following table summarizes the minority interests' share of net loss
for the three months ended March 31, 2004 and 2003:
MARCH 31, MARCH 31,
(in thousands) 2004 2003
- -------------------------------------------------------------------- --------- ---------
Development joint venture partners - Residential Development Segment $ (435) $ 880
Joint venture partners - Office Segment 2 (19)
Joint venture partners - Resort/Hotel Segment 497 349
Other 20 -
--------- --------
$ 84 $ 1,210
========= ========
12. PARTNERS' CAPITAL
Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the three months ended March 31, 2004, there were 9,036 units
exchanged for 18,072 common shares of the Company.
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the three months ended March 31,
2004 (dollars in thousands, except per unit amounts).
PER UNIT ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
- ------------------------ ------------ ------- -------- -------- ------------
Units (1) $ 0.75 $43,910 01/31/04 02/13/04 $ 3.00
Units (1) $ 0.75 $43,921 04/30/04 05/14/04 $ 3.00
Series A Preferred Units $ 0.422 $ 5,991 01/31/04 02/13/04 $ 1.6875
Series A Preferred Units $ 0.422 $ 5,991 04/30/04 05/14/04 $ 1.6875
Series B Preferred Units $ 0.594 $ 2,019 01/31/04 02/13/04 $ 2.3750
Series B Preferred Units $ 0.594 $ 2,019 04/30/04 05/14/04 $ 2.3750
(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
29
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts, other offering costs and distributions accrued on the units up to
the issuance date of approximately $71.0 million. The Operating Partnership used
the net proceeds to pay down the Operating Partnership'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 Operating
Partnership.
Income or losses of the Operating Partnership are allocated to the
partners for inclusion in their respective income tax calculations. Accordingly,
no provision or benefit for income taxes has been made other than for certain
consolidated subsidiaries. The Operating Partnership consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the three months ended March 31, 2004 and 2003, the Operating Partnership's
federal income tax benefit was $1.6 million and $2.5 million, respectively. The
Operating Partnership'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 Operating Partnership'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 Operating Partnership 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
Operating Partnership and the Company on a recourse basis pursuant to the
Company's and the Operating Partnership's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company and units of the Operating Partnership 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 Operating Partnership ceased offering to employees and trust managers the
option to obtain loans pursuant to the Company's and the Operating Partnership's
stock and unit incentive plans.
30
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER
On June 28, 2002, the Operating Partnership purchased the home of an
executive officer of the General Partner and the Company. In March 2004, the
Operating Partnership 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
Operating Partnership 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 Operating
Partnership.
15. COPI
On February 14, 2002, the Operating Partnership and COPI entered into an
agreement (the "Agreement") pursuant to which COPI and the Operating Partnership
are jointly seeking to have a pre-packaged bankruptcy plan for COPI approved by
the bankruptcy court. The Operating Partnership 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 Operating Partnership loaned
to COPI, or paid directly on COPI's behalf, approximately $13.0 million to fund
these costs, claims and expenses. The Operating Partnership also agreed to issue
common shares of the Company with a dollar value of approximately $2.2 million
to the COPI stockholders. In addition, the Operating Partnership 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 Operating Partnership 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.
MARCH 31, DECEMBER 31,
(in thousands) 2004 2003
- ------------------------------- --------- ------------
Land $ 101 $ 101
Buildings and improvements 119,906 119,922
Furniture, Fixtures & Equipment 19,269 18,664
Accumulated depreciation (37,730) (36,042)
Other assets, net 2,104 2,155
--------- --------
Net investment in real estate $ 103,650 $104,800
========= ========
ASSET DISPOSITIONS
On April 13, 2004, the Operating Partnership 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. The
Operating Partnership previously recorded an impairment charge of approximately
$4.3 million, during the year ended December 31, 2003. The proceeds from the
sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned.
31
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........................................................ 33
Overview.......................................................................... 34
Recent Developments............................................................... 35
Results of Operations
Three months ended March 31, 2004 and 2003.................................... 37
Liquidity and Capital Resources
Cash Flows for the three months ended March 31, 2004.......................... 40
Equity and Debt Financing......................................................... 45
Unconsolidated Investments........................................................ 49
Significant Accounting Policies................................................... 50
Funds from Operations Available to Partners....................................... 53
32
FORWARD-LOOKING STATEMENTS
You should read this section in conjunction with the consolidated interim
financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Operating Partnership's Form 10-K for the year ended December 31, 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 Operating Partnership believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Operating Partnership's actual results could differ materially
from those described in the forward-looking statements.
The following factors might cause such a difference:
- The Operating Partnership's ability, at its office properties, to timely
lease unoccupied square footage and timely re-lease occupied square
footage upon expiration on favorable terms, which continue to be
adversely affected by existing real estate conditions (including vacancy
rates in particular markets, decreased rental rates and competition from
other properties) or by general economic downturns;
- The continuation of relatively high vacancy rates and reduced rental
rates in the Operating Partnership's office portfolio as a result of
conditions within the Operating Partnership's principal markets;
- 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;
- Further deterioration in the resort/business-class hotel markets or in the
market for residential land or luxury residences, including single-family
homes, townhomes and condominiums, or in the economy generally;
- Financing risks, such as the Operating Partnership's ability to generate
revenue sufficient to service and repay existing or additional debt,
increases in debt service associated with increased debt and with variable
rate debt, the Operating Partnership's ability to meet financial and other
covenants and the Operating Partnership's ability to consummate financings
and refinancings on favorable terms and within any applicable time frames;
- The ability of the Operating Partnership to reinvest available funds at
anticipated returns and within anticipated time frames and the ability of
the Operating Partnership to consummate anticipated office acquisitions
and investment land and other dispositions on favorable terms and within
anticipated time frames;
- Further or continued adverse conditions in the temperature-controlled
logistics business (including both industry-specific conditions and a
general downturn in the economy) which may further jeopardize the ability
of the tenant to pay all current and deferred rent due;
- The inability of the Company to complete the distribution to its
unitholders and shareholders of the Company of the shares of a new entity
to purchase the AmeriCold Logistics tenant interest from COPI;
- The concentration of a significant percentage of the Operating
Partnership's assets in Texas;
- The existence of complex regulations relating to the Company's status as a
REIT, the effect of future changes in REIT requirements as a result of new
legislation and the adverse consequences of the failure to qualify as a
REIT; and
- Other risks detailed from time to time in the Operating Partnership's and
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 Operating Partnership is not obligated to
update these forward-looking statements to reflect any future events or
circumstances.
33
OVERVIEW
The Operating Partnership divides its assets and operations into four
investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics. The primary business of the Operating
Partnership 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.
2004 2003
--------- ---------
Economic Occupancy (at March 31 and December 31) 84.4%(1) 84.0%(1)
Leased Occupancy (at March 31 and December 31) 86.0%(2) 86.4%(2)
In-Place Weighted Average Full-Service Rental Rate (at March 31 and December 31) $23.20 $22.63
Tenant Improvement and Leasing Costs per Sq. Ft. per year (three months ended March 31) $ 2.93 $ 3.16
Average Lease Term (three months ended March 31) 6.8 years 7.0 years
Same-Store NOI (Decline) (three months ended March 31 ) (3.6%)(3) (10.1%)(4)
Same-Store Average Occupancy (three months ended March 31) 85.8%(5) 86.0%(5)
- ----------------------
(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 Operating Partnership 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 Operating Partnership'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 Operating Partnership's major tenants, in particular El Paso Energy
and its affiliates, which comprise 4.6% of the Operating Partnership's
annualized Office Segment revenues, would have a temporary adverse effect on the
Operating Partnership's financial condition and results of operations until the
Operating Partnership 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.
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
-------------------- ------------------- -------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
Upscale Business Class Hotels 67% 75% $ 116 $ 117 $ 77 $ 88
Luxury and Destination Fitness Resorts 69 71 553 534 371 370
Total/Weighted Average for Resort/Hotel Properties 68% 73% $ 282 $ 267 $ 189 $ 194
Decreases in occupancy at the Operating Partnership'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 Operating
Partnership'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
34
Operating Partnership 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.
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 Operating
Partnership's significant investments in this Segment as of March 31, 2004.
Desert Mountain
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
---------------- ----------------
Residential Lot Sales 16 13
Average Sales Price per Lot (1) $ 948,000 $ 695,000
- ----------------------
(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
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
---------------- ----------------
Residential Lot Sales 27 8
Residential Unit Sales 7 15
Residential Timeshare Units 1 2
Average Sales Price per Residential Lot $ 212,000 $ 30,000
Average Sales Price per Residential Unit $ 1,006,000 $ 1,038,000
Average Sales Price per Residential Equivalent Timeshare Unit $ 1,405,000 $ 1,367,000
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 Operating
Partnership completed the following significant transactions:
- Disposition of the Operating Partnership's interests in The Woodlands Land
Development Company, L.P., through which the Operating Partnership owned
its interest in The Woodlands Residential Development Property, in
Woodlands Office Equities - '95 Limited Partnership, through which the
Operating Partnership owned four office properties, in The Woodlands
Commercial Properties, L.P., and in The Woodlands Operating Company, L.P.
in December 2003;
- 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;
- Sale of an additional 3,400,000 of the Operating Partnership's Series A
Convertible Cumulative Preferred Units at $21.98 per unit, resulting in
proceeds to the Operating Partnership, net of placement fees and dividends
payable, of approximately $71.0 million in January 2004; and
- 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 Operating Partnership
in February 2004.
These transactions generated net cash proceeds to the Operating
Partnership, including expected refinancings, in excess of $260 million. The
Operating Partnership expects to reinvest these cash proceeds primarily in long
term investments throughout 2004. Additionally, the Operating Partnership
expects to continue to market for sale its remaining non-income producing land
valued in excess of $100 million. The Operating Partnership 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.
35
RECENT DEVELOPMENTS
ASSET ACQUISITIONS
OFFICE PROPERTIES
During January and February 2004, in accordance with the original purchase
contract, the Operating Partnership 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 Operating Partnership owns a 67% interest. The
remaining four Office Properties are wholly-owned by the Operating Partnership.
The Operating Partnership acquired these five Office Properties and seven retail
parcels for approximately $175.3 million, funded by the Operating Partnership's
assumption of approximately $85.4 million in mortgage loans and by a portion of
the proceeds from the sale of the Operating Partnership's interests in The
Woodlands on December 31, 2003.
On March 31, 2004, the Operating Partnership acquired Dupont Centre, a
250,000 square foot Class A office property, located in the John Wayne Airport
submarket of Irvine, California. The Operating Partnership acquired the Office
Property for approximately $54.3 million, funded by a draw on the Operating
Partnership's credit facility. This Office Property is wholly-owned and included
in the Operating Partnership's Office Segment.
UNDEVELOPED LAND
On March 1, 2004, in accordance with the agreement to acquire the Hughes
Center Properties, the Operating Partnership 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 Operating Partnership's credit facility.
ASSET DISPOSITIONS
On March 23, 2004, the Operating Partnership 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. The Operating Partnership previously recorded an impairment charge of
approximately $16.4 million during the year ended December 31, 2003. The
proceeds from the sale were used primarily to pay down the Operating
Partnership's credit facility. This property was wholly-owned.
On March 31, 2004, the Operating Partnership 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.
On April 13, 2004, the Operating Partnership 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. The
Operating Partnership previously recorded an impairment charge of approximately
$4.3 million during the year ended December 31, 2003. The proceeds from the sale
were used primarily to pay down the Operating Partnership's credit facility.
This property was wholly-owned.
36
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's variance in dollars
between the three months ended March 31, 2004 and 2003.
TOTAL VARIANCE IN
DOLLARS BETWEEN
THE THREE MONTHS
ENDED MARCH 31,
-----------------
(in millions)
2004 AND 2003
-----------------
REVENUE:
Office Property $ 2.7
Resort/Hotel Property (2.3)
Residential Development Property 4.0
-----------------
TOTAL PROPERTY REVENUE 4.4
-----------------
EXPENSE:
Office Property real estate taxes 0.0
Office Property operating expenses 1.3
Resort/Hotel Property expense (0.4)
Residential Development Property expense (0.9)
-----------------
TOTAL PROPERTY EXPENSE 0.0
-----------------
INCOME FROM PROPERTY OPERATIONS 4.4
-----------------
OTHER INCOME (EXPENSE):
Gain on joint venture of properties, net (0.1)
Interest and other income 1.3
Corporate general and administrative (0.9)
Interest expense (1.8)
Amortization of deferred financing costs (1.3)
Extinguishment of debt (1.9)
Depreciation and amortization (4.4)
Impairment charges related to real estate assets 1.2
Other expenses 0.1
Equity in net income (loss) of unconsolidated companies:
Office Properties (0.5)
Resort/Hotel Properties (1.0)
Residential Development Properties (0.9)
Temperature-Controlled Logistics Properties (2.4)
Other 1.0
-----------------
TOTAL OTHER INCOME (EXPENSE) (11.6)
-----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES (7.2)
Minority interests (1.1)
Income tax benefit (1.0)
-----------------
INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (9.3)
Income (loss) from discontinued operations (1.8)
Impairment charges related to real estate assets from discontinued operations 13.5
Loss (gain) on real estate from discontinued operations 0.3
Cumulative effect of a change in accounting principle (0.4)
-----------------
NET INCOME (LOSS) 2.3
Series A Preferred Unit distributions (1.2)
Series B Preferred Unit distributions -
-----------------
NET (LOSS) INCOME AVAILABLE TO PARTNERS $ 1.1
=================
37
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.
- Office Property revenues increased $2.7 million, or 2.2%, to $123.5
million, primarily due to:
- 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;
- an increase of $1.0 million primarily resulting from third
party management services and related direct expense
reimbursements; partially offset by
- a decrease of $5.9 million from the 54 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and
properties held for sale) that the Operating Partnership 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
- a decrease of $0.8 million in net lease termination fees.
- Residential Development Property revenues increased $4.0 million, or 9.2%,
to $47.7 million, primarily due to:
- an increase of $8.0 million primarily due to increased lot
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;
- an increase of $1.6 million in restaurant and golf revenues at
CRDI and DMDC; partially offset by
- a decrease of $5.3 million in CRDI revenues related to product
mix in lots and units available for sale in 2004 versus 2003.
- Resort/Hotel Property revenues decreased $2.3 million, or 3.6%, to $61.4
million, primarily due to:
- 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
- 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.
- Office Property expenses increased $1.3 million, or 2.3%, to $58.9
million, primarily due to:
- 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
- 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
- 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:
- $2.2 million decrease in building repairs and
maintenance; and
- $1.0 million decrease in property taxes and
insurance; partially offset by
- $1.3 million increase in utilities expense; and
- $0.5 million increase in nonrecoverable leasing
costs.
38
- Residential Development Property expenses decreased $0.9 million, or 2.2%,
to $40.6 million, primarily due to:
- 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
- an increase of $3.4 million in Desert Mountain Development
Corporation cost of sales due to increased lot sales compared
to 2003;
- an increase of $1.4 million in marketing expenses at certain
Crescent Resort Development, Inc. projects; and
- 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.
- 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.
- Equity in net income of unconsolidated companies decreased $3.8 million,
or 105.6%, to a $0.2 million loss, primarily due to;
- 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;
- a decrease of $1.0 million in Resort/Hotel Properties equity in net
income primarily due to net income recorded in 2003 for the
Operating Partnership's interest in the Ritz-Carlton Hotel Property
which was sold in November 2003; and
- a decrease of $0.9 million in Residential Development Properties
equity in net income primarily due to net income recorded in 2003
for the Operating Partnership's interests in the entities through
which the Operating Partnership 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.
- Depreciation expense increased $4.4 million, or 12.0%, to $41.0 million,
primarily due to:
- $3.2 million increase in Office Property depreciation expense,
primarily attributable to:
- $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
- $0.6 million due to an increase in building
improvements;
- $0.7 million increase in Resort/Hotel Property depreciation
expense; and
- $0.4 million increase in Residential Development Property
depreciation expense.
- 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.
- 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
39
interest rate (from 7.4% to 6.7%) primarily due to the refinancing and new
financings of fixed rate debt at lower 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%).
- 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.
- 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.
- 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 $12.0 million, or 87.6%, to a loss of $1.7 million, primarily due to:
- a decrease of $15.0 million due to the impairment of the 1800
West Loop South Office Property in 2003; partially offset by
- an increase of $1.8 million due to the reduction of net income
associated with properties held for sale in 2004 compared to
2003; and
- an increase of $1.6 million due to an aggregate $2.4 million
impairment on three office properties in 2004 compared to a
$0.8 million impairment on one behavioral healthcare property
in 2003.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE THREE
MONTHS ENDED
(in millions) MARCH 31, 2004
- ---------------------------------------------- --------------
Cash used in Operating Activities $ (0.7)
Cash used in Investing Activities (135.4)
Cash provided by Financing Activities 122.5
--------------
Decrease in Cash and Cash Equivalents $ (13.6)
Cash and Cash Equivalents, Beginning of Period 74.9
--------------
Cash and Cash Equivalents, End of Period $ 61.3
==============
OPERATING ACTIVITIES
The Operating Partnership's cash used in operating activities of
$0.7 million is attributable to Property operations.
INVESTING ACTIVITIES
The Operating Partnership's cash used in investing activities of $135.4
million is primarily attributable to:
- $167.9 million for investment in U.S. Treasuries and
government sponsored agency securities in connection with the
defeasance of LaSalle Note II;
- $146.1 million for the acquisition of investment properties,
primarily due to the acquisition of Hughes Center and Dupont
Centre Office Properties;
- $24.2 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
40
- $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;
- $5.8 million for development of amenities at the Residential
Development Properties;
- $2.4 million of additional investment in
Temperature-Controlled Logistics Properties;
- $1.2 million for development of investment properties;
- $0.6 million of additional investment in unconsolidated
Residential Development Properties; and
- $0.2 million resulting from a decrease in notes receivable.
The cash used in investing activities is partially offset by:
- $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;
- $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;
- $30.7 million of proceeds from property sales, primarily due
to the sale of the 1800 West Loop South Office Property;
- $0.6 million from return of investment in unconsolidated
Resort/Hotel Properties; and
- $0.3 million from return of investment in unconsolidated
Office Properties.
FINANCING ACTIVITIES
The Operating Partnership's cash provided by financing activities of
$122.5 million is primarily attributable to:
- $280.0 million of proceeds from other borrowings, primarily as
a result of the new Bank of America Fund XII Term Loan;
- $141.5 million of proceeds from borrowings under the Operating
Partnership's credit facility;
- $71.0 million of net proceeds from issuance of Series A
Preferred Units; and
- $15.9 million of proceeds from borrowings for construction
costs for infrastructure development at the Residential
Development Properties.
The cash provided by financing activities is partially offset by:
- $211.5 million of payments under the Operating Partnership's
credit facility;
- $109.0 million of payments under other borrowings, due
primarily to the pay down of the Fleet Fund I Term Loan;
- $43.9 million of distributions to unitholders;
- $8.0 million of distributions to preferred unitholders;
- $7.4 million of Residential Development Property note
payments;
- $4.3 million of debt financing costs; and
- $1.8 million of net capital distributions to joint venture
partners and the operating partner.
41
LIQUIDITY REQUIREMENTS
DEBT FINANCING SUMMARY
The following tables show summary information about the Operating
Partnership's debt, including its share of unconsolidated debt, as of March 31,
2004. Additional information about the significant terms of the Operating
Partnership'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."
TOTAL SHARE OF
OPERATING UNCONSOLIDATED
(in thousands) PARTNERSHIP DEBT DEBT TOTAL
- ------------------ ---------------- -------------- ------------
Fixed Rate Debt $ 1,769,619 $ 319,799 $ 2,089,418
Variable Rate Debt 1,000,974 168,920 1,169,894
------------ ------------ ------------
Total Debt $ 2,770,593 $ 488,719 $ 3,259,312
============ ============ ============
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.
UNSECURED TOTAL
DEBT OPERATING SHARE OF
SECURED UNSECURED LINE OF PARTNERSHIP UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL(1)
- -------------- ------------ ------------ ------------ ------------ -------------- ------------
2004 $ 274,484 $ - $ - $ 274,484 $ 74,602 $ 349,086
2005 274,103 - 169,000 443,103 8,544 451,647
2006 487,263 - - 487,263 25,311 512,574
2007 109,932 250,000 - 359,932 48,180 408,112
2008 47,321 - - 47,321 44,604 91,925
Thereafter 783,490 375,000 - 1,158,490 287,478 1,445,968
------------ ------------ ------------ ------------ -------------- ------------
$ 1,976,593 $ 625,000 $ 169,000 $ 2,770,593 $ 488,719 $ 3,259,312
============ ============ ============ ============ ============ ============
- ----------------------
(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.
42
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 Operating
Partnership'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 Operating Partnership to provide additional
collateral to support the guarantees. The Operating Partnership has not recorded
a liability associated with these guarantees as they were entered into prior to
the adoption of FIN 45.
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING GUARANTEED
AT MARCH 31, 2004 AMOUNT
----------------- ----------
DEBTOR (in thousands)
CRDI - Eagle Ranch Metropolitan District - Letter of Credit(1) $ 7,583 $ 7,583
Blue River Land Company, L.L.C.(2)(3) 3,300 6,300
Main Street Partners, L.P. - Letter of Credit(2)(4) 4,250 4,250
----------------- ----------
Total Guarantees $ 15,133 $ 18,133
================= ==========
- ----------------------
(1) The Operating Partnership 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 Operating Partnership and its joint venture partner each provide a
$4.3 million letter of credit to guarantee repayment of up to $8.5 million
of the loan to Main Street Partners, L.P.
CAPITAL EXPENDITURES
As of March 31, 2004, the Operating Partnership had unfunded capital
expenditures of approximately $44.2 million relating to capital investments that
are not in the ordinary course of operations of the Operating Partnership's
business segments. The table below specifies the Operating Partnership's
requirements for capital expenditures and its amounts funded as of March 31,
2004, and amounts remaining to be funded (future fundings classified between
short-term and long-term capital requirements):
CAPITAL EXPENDITURES
------------------------------
TOTAL AMOUNT AMOUNT SHORT-TERM
PROJECT FUNDED AS OF REMAINING (NEXT 12 LONG-TERM
(in millions) PROJECT COST (1) MARCH 31, 2004 TO FUND MONTHS)(2) (12+ MONTHS)(2)
- ------------------------------------------ ------------ -------------- ------------ ------------ ---------------
OFFICE SEGMENT
Acquired Properties(3) $ 2.8 $ (2.5) $ 0.3 $ 0.3 $ -
Houston Center Shops Redevelopment(4) 11.6 (8.5) 3.1 3.1 -
RESIDENTIAL DEVELOPMENT SEGMENT
Tahoe Mountain Club(5) 47.5 (33.4) 14.1 14.1 -
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land- -
Construction Loan(6) 2.4 (0.7) 1.7 1.2 0.5
Sonoma Mission Inn - Rooms remodel 11.7 (9.5) 2.2 2.2 -
OTHER
SunTx(7) 19.0 (11.7) 7.3 4.0 3.3
Crescent Spinco(8) 15.5 - 15.5 15.5 -
------------ ------------ ------------ ------------ ---------------
TOTAL $ 110.5 $ (66.3) $ 44.2 $ 40.4 $ 3.8
============ ============ ============ ============ ===============
- ----------------------
(1) All amounts are approximate.
(2) Reflects the Operating Partnership's estimate of the breakdown between
short-term and long-term capital expenditures.
(3) The capital expenditures reflect the Operating Partnership's ownership
percentage of 30% for Five Post Oak Park Office Property.
(4) Located within the Houston Center Office Property complex.
43
(5) As of March 31, 2004, the Operating Partnership 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
Operating Partnership is developing a swim and fitness facility, clubhouse,
and completing the golf course.
(6) The Operating Partnership 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 Operating Partnership'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 Operating Partnership expects to form and capitalize Crescent Spinco,
which will be a separate entity to be owned by the Company's shareholders
and the Operating Partnership's unitholders, and to cause the new entity to
commit to acquire COPI's entire membership interest in AmeriCold Logistics.
The Operating Partnership 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 Operating Partnership 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 Operating Partnership's credit
facility or additional debt facilities. As of March 31, 2004, the Operating
Partnership had maturing debt obligations of $285.1 million through March 31,
2005. The Operating Partnership 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 Operating Partnership 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 unitholders, and unfunded
expenses related to the COPI bankruptcy, primarily through cash flow provided by
operating activities. The Operating Partnership expects to fund the remainder of
these short-term liquidity requirements with borrowings under the Operating
Partnership'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.
The Operating Partnership'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 Operating Partnership also has $3.8
million of long-term capital expenditure requirements. The Operating Partnership
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
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include:
- Additional proceeds from the Operating Partnership's Credit Facility under
which the Operating Partnership had up to $223.4 million of borrowing
capacity available as of March 31, 2004;
- Additional proceeds from the refinancing of existing secured and unsecured
debt;
- Additional debt secured by existing underleveraged properties;
- Issuance of additional unsecured debt; and
- Equity offerings including preferred and/or convertible securities.
The following factors could limit the Operating Partnership's ability to
utilize these financing alternatives:
- The reduction in the operating results of the Properties supporting the
Operating Partnership's Credit Facility to a level that would reduce the
availability of funds under the Credit Facility;
- A reduction in the operating results of the Properties could limit the
Operating Partnership's ability to refinance existing secured and
unsecured debt, or extend maturity dates or could result in an uncured or
unwaived event of default;
- The Operating Partnership may be unable to obtain debt or equity financing
on favorable terms, or at all, as a result of the financial condition of
the Operating Partnership or market conditions at the time the Operating
Partnership seeks additional financing;
- Restrictions under the Operating Partnership's debt instruments or
outstanding equity may prohibit it from incurring debt or issuing equity
on terms available under then-prevailing market conditions or at all; and
44
- The Operating Partnership may be unable to service additional or
replacement debt due to increases in interest rates or a decline in the
Operating Partnership's operating performance.
The Operating Partnership's portion of unconsolidated debt maturing
through March 31, 2005 is $76.6 million. The Operating Partnership'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 Operating
Partnership 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.
In connection with the January 2004 Series A Preferred Offering, the
Operating Partnership issued additional Series A Preferred Units to the Company
in exchange for the contribution of the net proceeds, after underwriting
discounts, offering costs and distributions accrued on the units up to the
issuance date, of approximately $71.0 million. The Operating Partnership used
the net proceeds to pay down the Operating Partnership's credit facility.
45
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of March 31, 2004, are shown below:
BALANCE INTEREST
OUTSTANDING RATE AT
MAXIMUM AT MARCH 31, MARCH 31, MATURITY
DESCRIPTION(1) BORROWINGS 2004 2004 DATE
- ---------------------------------------------------------- ---------- ----------- -------------- -----------------
SECURED FIXED RATE DEBT: (dollars in thousands)
AEGON Partnership Note (Greenway Plaza) $ 258,765 $ 258,765 7.53 % July 2009
LaSalle Note I (Fund I) 234,232 234,232 7.83 August 2027
JP Morgan Mortgage Note (Houston Center) 190,205 190,205 8.31 October 2016
LaSalle Note II (Fund II Defeasance)(2) 159,037 159,037 7.79 March 2006
Cigna Note (707 17th Street/Denver Marriot) 70,000 70,000 5.22 June 2010
Mass Mutual Note (3800 Hughes)(3) 38,700 38,700 7.75 August 2006
Bank of America Note (Colonnade) 38,000 38,000 5.53 May 2013
Metropolitan Life Note V (Datran Center) 37,344 37,344 8.49 December 2005
Allstate Note (3993 Hughes)(3) 26,058 26,058 6.65 September 2010
Northwestern Life Note (301 Congress) 26,000 26,000 4.94 November 2008
Metropolitan Life Note VI (3960 Hughes)(3) 24,629 24,629 7.71 October 2009
Northwestern Life II (3980 Hughes)(3) 10,595 10,595 7.40 July 2007
Woodmen of the World Note (Avallon IV) 8,500 8,500 8.20 April 2009
Nomura Funding VI Note (Canyon Ranch - Lenox) 7,806 7,806 10.07 July 2020
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 14,748 14,748 2.90 to 10.50 July 04 to Feb 09
---------- ---------- -------------
Subtotal/Weighted Average $1,144,619 $1,144,619 7.51 %
---------- ---------- -------------
UNSECURED FIXED RATE DEBT:
The 2009 Notes $ 375,000 $ 375,000 9.25 % April 2009
The 2007 Notes 250,000 250,000 7.50 September 2007
---------- ---------- -------------
Subtotal/Weighted Average $ 625,000 $ 625,000 8.55 %
---------- ---------- -------------
SECURED VARIABLE RATE DEBT:
Bank of America Fund XII Term Loan (Fund XII)(4) $ 275,000 $ 275,000 3.35 % January 2006
Deutsche Bank-CMBS Loan (Fund X/Spectrum)(5) 220,000 220,000 5.84 May 2004
Fleet Fund I Term Loan (Fund I) 160,000 160,000 4.63 May 2005
Fleet Term Loan (Distributions from Fund III, IV and V) 75,000 75,000 5.59 February 2007
National Bank of Arizona (Desert Mountain) 41,094 36,668 4.00 to 5.00 Nov 04 to Dec 05
FHI Finance Loan (Sonoma Mission Inn) 10,000 7,993 5.60 September 2009
The Rouse Company (Hughes Center undeveloped land) 7,500 7,500 5.00 December 2005
Wells Fargo Bank (3770 Hughes) 4,774 4,774 3.13 June 2004
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 100,069 45,039 3.85 to 4.50 July 04 to Sep 08
---------- ---------- -------------
Subtotal/Weighted Average $ 893,437 $ 831,974 4.46 %
---------- ---------- -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility $ 400,000 $ 169,000(6) 3.38 % May 2005
---------- ---------- -------------
Subtotal/Weighted Average $ 400,000 $ 169,000 3.38 %
---------- ---------- -------------
TOTAL/WEIGHTED AVERAGE $3,063,056 $2,770,593 6.61 %(7)
========== ========== =============
AVERAGE REMAINING TERM 4.9 years
- ----------------------
(1) For more information regarding the terms of the Operating Partnership's debt
financing arrangements, including properties securing the Operating
Partnership's secured debt and the method of calculation of the interest
rate for the Operating Partnership's variable rate debt, see Note 8, "Notes
Payable and Borrowings under the Credit Facility," included in Item 1,
"Financial Statements."
(2) In December 2003, the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership's cash flow hedge agreements. Including the effect
of these agreements, the overall weighted average interest rate would have
been 6.70%.
46
The Operating Partnership is generally obligated by its debt agreements to
comply with financial covenants, affirmative covenants and negative covenants,
or some combination of these types of covenants. The financial covenants to
which the Operating Partnership is subject include, among others, leverage
ratios, debt service coverage ratios and limitations on total indebtedness. The
affirmative covenants to which the Operating Partnership is subject under its
debt agreements include, among others, provisions requiring the Operating
Partnership 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 Operating Partnership's debt agreements generally
restrict the Operating Partnership's ability to transfer or pledge assets or
incur additional debt at a subsidiary level, limit the Operating Partnership's
ability to engage in transactions with affiliates and place conditions on the
Operating Partnership'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 Operating Partnership's loans can trigger an increase in interest
rates, an acceleration of payment on the loan in default, and for the Operating
Partnership's secured debt, foreclosure on the Property securing the debt, and
could cause the credit facility to become unavailable to the Operating
Partnership. In addition, an event of default by the Operating Partnership or
any of its subsidiaries with respect to any indebtedness in excess of $5.0
million generally will result in an event of default under the Credit Facility,
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 Operating Partnership's business,
financial condition, or liquidity.
The Operating Partnership's debt facilities generally prohibit loan
prepayment for an initial period, allow prepayment with a penalty during a
following specified period and allow prepayment without penalty after the
expiration of that period. During the three months ended March 31, 2004, there
were no circumstances that required prepayment penalties or increased collateral
related to the Operating Partnership's existing debt.
DEFEASANCE OF LASALLE NOTE II
In January 2004, the Operating Partnership 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 Operating Partnership 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 La Salle 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 Operating
Partnership 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 Operating Partnership 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 Operating Partnership has ownership
interests was $1.3 billion, of which the Operating Partnership's share was
$488.7 million. The Operating Partnership had guaranteed $4.3 million of this
debt as of March 31, 2004. Additional information relating to the Operating
Partnership's unconsolidated debt financing arrangements is contained in Note 7,
"Investments in Unconsolidated Companies," of Item 1, "Financial Statements."
47
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Operating Partnership uses derivative financial instruments to convert
a portion of its variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. As of March 31, 2004, the Operating Partnership had
four cash flow hedge agreements which are accounted for in conformity with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133."
The following table shows information regarding the Operating
Partnership's cash flow hedge agreements during the three months ended March 31,
2004, and additional interest expense and unrealized gains (losses) recorded in
Accumulated Other Comprehensive Income ("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL INTEREST UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE EXPENSE (LOSSES) IN OCI
- -------------- -------- -------- --------- ----------- ------------------- ----------------
(in thousands)
4/18/00 $100,000 4/18/04 6.76% $ (268) $ 1,429 $ 1,427
2/15/03 100,000 2/15/06 3.26% (2,840) 543 (495)
2/15/03 100,000 2/15/06 3.25% (2,836) 543 (495)
9/02/03 200,000 9/01/06 3.72% (8,155) 1,322 (1,558)
----------- ------------------- ----------------
$ (14,099) $ 3,837 $ (1,121)
=========== =================== ================
In addition, two of the Operating Partnership's unconsolidated companies
have cash flow hedge agreements of which the Operating Partnership'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 Operating Partnership 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 Operating
Partnership sold a LIBOR interest rate cap with the same terms. Since these
instruments do not reduce the Operating Partnership'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.
48
UNCONSOLIDATED INVESTMENTS
INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of March 31, 2004.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF MARCH 31, 2004
- ---------------------------------------------------- -------------------------------------- -----------------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0%(1)
Crescent Miami Center, L.L.C. Office (Miami Center - Miami) 40.0%(2)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0%(3)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0%(4)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0%(5)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0%(6)
Houston PT Three Westlake Office Limited Partnership Office (Three Westlake Park - Houston) 20.0%(6)
Houston PT Four Westlake Office Limited Partnership Office (Four Westlake Park-Houston) 20.0%(6)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0%(7)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0%(8)
Blue River Land Company, L.L.C. Other 50.0%(9)
Canyon Ranch Las Vegas, L.L.C. Other 50.0%(10)
EW Deer Valley, L.L.C. Other 41.7%(11)
CR License, L.L.C. Other 30.0%(12)
CR License II, L.L.C. Other 30.0%(13)
SunTx Fulcrum Fund, L.P. Other 23.5%(14)
SunTx Capital Partners, L.P. Other 14.4%(15)
G2 Opportunity Fund, L.P. ("G2") Other 12.5%(16)
- ----------------------------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by Trizec
Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.
(3) The remaining 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 Operating Partnership.
(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 Operating
Partnership's Resort/Hotel Properties and 15% is owned by the Operating
Partnership 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 Operating Partnership. 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership.
(15) The remaining 81.9% interest in SunTx Capital Partners, L.P. is owned by
parties unrelated to the Operating Partnership.
(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 Operating Partnership. 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 and sole director and Chief Executive Officer of the
General Partner. The remaining approximately 2% general partnership
interest is owned by unrelated parties.
49
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 Operating Partnership's share of the deferred rent was $4.3
million. The Operating Partnership 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 Operating Partnership'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 Operating Partnership.
SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The Operating Partnership's discussion and analysis of financial condition
and results of operations is based on its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Operating Partnership to make estimates and judgments that affect
the reported amounts of assets, liabilities, and contingencies as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The Operating Partnership evaluates its
assumptions and estimates on an ongoing basis. The Operating Partnership bases
its estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying values of assets and liabilities
where that information is available from other sources. Certain estimates are
particularly sensitive due to their significance to the financial statements.
Actual results may differ significantly from management's estimates.
The Operating Partnership believes that the most significant accounting
policies that involve the use estimates and assumptions as to future
uncertainties and, therefore, may result in actual amounts that differ from
estimates are the following:
- Impairments,
- Acquisition of operating properties,
- Relative sales method and percentage of completion (Residential
Development entities),
- Gain recognition on sale of real estate assets, and
- Allowance for doubtful accounts.
IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with SFAS No. 144, the Operating Partnership records assets held for
sale at the lower of carrying value or sales price less costs to sell. For
assets classified as held and used, these assets are tested for recoverability
when events or changes in circumstances indicate that the estimated carrying
amount may not be recoverable. An impairment loss is recognized when expected
undiscounted future cash flows from a Property is less than the carrying value
of the Property. The Operating Partnership's estimates of cash flows of the
Properties requires the Operating Partnership to make assumptions related to
future rental rates, occupancies, operating expenses, the ability of the
Operating Partnership's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Operating
Partnership's Properties. Any changes in estimated future cash flows due to
changes in the Operating Partnership's plans or views of market and economic
conditions could result in recognition of additional impairment losses.
50
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 Operating Partnership considers the decline to be "other than temporary,"
the investment is written down to fair value and an impairment loss is
recognized. The evaluation of impairment for an investment would be based on a
number of factors, including financial condition and operating results for the
investment, inability to remain in compliance with provisions of any related
debt agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.
ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership allocates
the purchase price of acquired properties to tangible and identified intangible
assets acquired based on their fair values in accordance with SFAS No. 141,
"Business Combinations."
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based on
the sum of (i) the value of the property 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 Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired at
the property at acquisition based on current market conditions. These costs are
recorded based on the present value of the amortized in-place leasing costs on a
lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality, and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term 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 Operating
Partnership 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
51
Operating Partnership 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
generally determined as a specific percentage of the sales revenues recognized
for each Residential Development project. The percentages are based on total
estimated development costs and sales revenue for each Residential Development
project. These estimates are revised annually and are based on the then-current
development strategy and operating assumptions utilizing internally developed
projections for product type, revenue and related development costs. The cost of
sale for residential units (such as townhomes and condominiums) is determined
using the relative sales value method. If the residential unit has been sold
prior to the completion of infrastructure cost, and those uncompleted costs are
not significant in relation to total costs, the full accrual method is utilized.
Under this method, 100% of the revenue is recognized, and a commitment liability
is established to reflect the allocated estimated future costs to complete the
residential unit. If the Operating Partnership's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.
GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. The Operating Partnership
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
Operating Partnership 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 Operating
Partnership's receivables, if any, related to the sale are collectible and are
subject to subordination, and the degree of the Operating Partnership's
continuing involvement with the real estate asset after the sale. If full gain
recognition is not appropriate, the Operating Partnership accounts for the sale
under an appropriate deferral method.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Operating Partnership's accounts
receivable balance is reduced by an allowance for amounts that may become
uncollectible in the future. The Operating Partnership's receivable balance is
composed primarily of rents and operating cost recoveries due from its tenants.
The Operating Partnership also maintains an allowance for deferred rent
receivables which arise from the straight-lining of rents. The allowance for
doubtful accounts is reviewed at least quarterly for adequacy by reviewing such
factors as the credit quality of the Operating Partnership's tenants, any
delinquency in payment, historical trends and current economic conditions. If
the assumptions regarding the collectibility of accounts receivable prove
incorrect, the Operating Partnership could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.
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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership's unconsolidated joint
ventures, Main Street Partners, L.P., its investments the Canyon Ranch
Entities are VIEs under FIN 46, the Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership'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 Operating
Partnership 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 Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
within this period. During the 180-day period, which will end on June 28, 2004,
the third party
52
intermediary is the legal owner of the properties, although the Operating
Partnership controls the properties, retains all of the economic benefits and
risks associated with these properties and indemnifies the third party
intermediary and, therefore, the Operating Partnership is fully consolidating
these properties. On the expiration of the 180-day period, the Operating
Partnership will take legal ownership of the properties.
FUNDS FROM OPERATIONS
FFO, as used in this document, means:
- Net Income (Loss) - determined in accordance with GAAP;
- excluding gains (or losses) from sales of depreciable
operating property;
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint
ventures.
The Operating Partnership calculates FFO-diluted in the same manner,
except that Net Income (Loss) is replaced by Net Income (Loss) Available to
Partners.
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 Operating Partnership
considers FFO-diluted and FFO appropriate measures of performance for an
operating partnership of an equity REIT and for its investment segments.
However, FFO-diluted and FFO should not be considered alternatives to net income
determined in accordance with GAAP as an indication of the Operating
Partnership's operating performance.
The aggregate cash distributions paid to partners for the three months
ended March 31, 2004 and 2003 were each $43.9 million. The Operating Partnership
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 Operating Partnership 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 unitholders although not necessarily on a
proportionate basis.
Accordingly, the Operating Partnership believes that to facilitate a clear
understanding of the consolidated historical operating results of the Operating
Partnership, FFO-diluted should be considered in conjunction with the Operating
Partnership's net income and cash flows reported in the consolidated financial
statements and notes to the financial statements. However, the Operating
Partnership'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 Operating Partnership.
53
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------- --------------
Net loss $ (12,765) $ (15,050)
Adjustments to reconcile net loss to
funds from operations before impairment
charges related to real estate assets-diluted:
Depreciation and amortization of real estate assets 38,041 36,301
Loss on property sales, net 56 226
Impairment charges related to real estate assets and assets
held for sale 2,351 17,028
Adjustment for investments in unconsolidated companies:
Office Properties 2,408 2,822
Resort/Hotel Properties - 394
Residential Development Properties (577) 739
Temperature-Controlled Logistics Properties 5,795 5,510
Other - 22
Series A Preferred Unit distributions (5,751) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
-------------- --------------
Funds from operations before impairment charges related to
real estate assets-diluted $ 27,539 $ 41,417
Impairment charges related to real estate assets (2,351) (17,028)
-------------- --------------
Funds from operations after impairment charges related to
real estate assets-diluted $ 25,188 $ 24,389
============== ==============
Investment Segments:
Office Properties $ 67,972 $ 71,935
Resort/Hotel Properties 13,030 15,631
Residential Development Properties 6,174 5,288
Temperature-Controlled Logistics Properties 4,894 7,017
Other:
Corporate general and administrative (6,917) (6,090)
Interest expense (45,008) (43,233)
Series A Preferred Unit distributions (5,751) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
Other(1) (4,836) (2,556)
-------------- --------------
Funds from operations before impairment charges related to
real estate assets-diluted $ 27,539 $ 41,417
Impairment charges related to real estate assets (2,351) (17,028)
-------------- --------------
Funds from operations after impairment charges related to
real estate assets-diluted $ 25,188 $ 24,389
============== ==============
Basic weighted average units 58,363 58,485
Diluted weighted average units(2) 58,640 58,487
- ----------------------
(1) 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.
(2) See calculations for the amounts presented in the reconciliation following
this table.
54
The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:
FOR THE THREE MONTHS ENDED
MARCH 31,
(units in thousands) 2004 2003
- -------------------- -------------- --------------
Basic weighted average units: 58,363 58,485
Add: Unit options 277 2
------ ------
Diluted weighted average units 58,640 58,487
====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the Operating Partnership's market risk occurred
from December 31, 2003 through March 31, 2004. Information regarding the
Operating Partnership's market risk at December 31, 2003 is contained in Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," in the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Operating Partnership and Crescent Finance Company maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in the Operating Partnership's and Crescent Finance Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Operating Partnership's and
Crescent Finance Company's management, including the Chief Executive Officer and
Chief Financial Officer of the General Partner and Crescent Finance Company, as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of March 31, 2004, the Operating Partnership and Crescent Finance
Company carried out an evaluation, under the supervision and with the
participation of the Operating Partnership's and Crescent Finance Company's
management, including the Chief Executive Officer and Chief Financial Officer of
the General Partner and Crescent Finance Company, of the effectiveness of the
design and operation of the Operating Partnership's and Crescent Finance
Company's disclosure controls and procedures. Based on the foregoing, the Chief
Executive Officer and Chief Financial Officer of the General Partner and
Crescent Finance Company concluded that the Operating Partnership's and Crescent
Finance Company's disclosure controls and procedures were effective at the
reasonable assurance level.
During the three months ended March 31, 2004, there was no change in the
Operating Partnership's and Crescent Finance Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Operating Partnership's and Crescent Finance Company's
internal control over financial reporting.
55
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
(b) Reports on Form 8-K
Form 8-K dated December 31, 2003, and filed January 14, 2004 for the
purpose of reporting, under Item 2 - Acquisition or Disposition of Assets,
the Operating Partnership's disposition of its interests in the Woodlands,
Texas and including unaudited pro forma consolidated financial statements
of the Operating Partnership.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Registrant)
By: Crescent Real Estate Equities, Ltd.
Its General Partner
By /s/ John C. Goff
-----------------------------------------
John C. Goff
Date: May 6, 2004 Sole Director 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)
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 FINANCE COMPANY
(Registrant)
By /s/ John C. Goff
-----------------------------------------
John C. Goff
Date: May 6, 2004 Sole Director 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)
57
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.01 Third Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated as of
January 2, 2003, as amended (filed as Exhibit No. 10.01 to the
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 of Crescent Real Estate Equities Company (the "Company") and
incorporated herein by reference)
3.02 Certificate of Incorporation of Crescent Finance Company (filed
as Exhibit No. 3.02 to the Registration Statement on Form S-4
(File No. 333-89194) of the Registrants (the "Form S-4") and
incorporated herein by reference)
3.03 Bylaws of Crescent Finance Company (filed as Exhibit No. 3.03 to
the Form S-4 and incorporated herein by reference)
4.01 Restated Declaration of Trust of Crescent Real Estate Equities
Company, as amended (filed as Exhibit No. 3.01 to the Company's
Current Report on Form 8-K filed April 25, 2002 and incorporated
herein by reference)
4.02 Second Amended and Restated Bylaws of Crescent Real Estate
Equities Company (filed as Exhibit No. 3.02 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
and incorporated herein by reference)
*4 Pursuant to Regulation S-K Item 601 (b) (4) (iii), the
Registrants by this filing agree, upon request, to furnish to the
Securities and Exchange Commission a copy of instruments defining
the rights of holders of long-term debt of the Registrants
12.01 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges (filed herewith)
31.01 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a - 14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.01 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
58