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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED September 30, 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 (I.R.S. Employer Identification
of incorporation or organization) Number)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
-----------------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 and 2003 (unaudited)............................................... 4
Consolidated Statement of Partners' Capital for the nine months ended
September 30, 2004 (unaudited)........................................................ 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 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......................................................................... 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 71
Item 4. Controls and Procedures............................................................... 71
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 76
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
ASSETS:
Investments in real estate:
Land $ 274,260 $ 237,058
Land improvements, net of accumulated depreciation of $22,937 and
$19,270 at September 30, 2004 and December 31, 2003, respectively 113,217 105,236
Building and improvements, net of accumulated depreciation of
$650,194 and $584,861 at September 30, 2004 and December 31, 2003,
respectively 2,377,177 2,135,338
Furniture, fixtures and equipment, net of accumulated depreciation
of $38,374 and $33,344 at September 30, 2004 and December 31, 2003,
respectively 41,313 43,227
Land held for investment or development 505,543 450,279
Properties held for disposition, net 78,067 186,135
----------- -----------
Net investment in real estate $ 3,389,577 $ 3,157,273
Cash and cash equivalents $ 61,076 $ 74,885
Restricted cash and cash equivalents 75,800 217,329
Defeasance investments 170,589 9,620
Accounts receivable, net 48,761 40,715
Deferred rent receivable 79,573 66,567
Investments in unconsolidated companies 356,950 440,594
Notes receivable, net 74,157 78,453
Income tax asset-current and deferred, net 31,138 17,506
Other assets, net 287,602 203,770
----------- -----------
Total assets $ 4,575,223 $ 4,306,712
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 307,500 $ 239,000
Notes payable 2,548,391 2,319,699
Accounts payable, accrued expenses and other liabilities 454,088 361,614
Current income tax payable - 7,995
----------- -----------
Total liabilities $ 3,309,979 $ 2,928,308
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 44,137 $ 47,123
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units, liquidation preference
of $25.00 per unit, 14,200,000 and 10,800,000 units issued and
outstanding at September 30, 2004 and December 31, 2003, respectively $ 319,166 $ 248,160
Series B Cumulative Preferred Units, liquidation preference of $25.00
per unit, 3,400,000 units issued and outstanding
at September 30, 2004 and December 31, 2003 81,923 81,923
Units of Partnership Interest, 58,526,287 and 58,510,501 issued
and outstanding at September 30, 2004 and December 31, 2003,
respectively:
General partner - outstanding 585,263 and 585,105 8,516 10,424
Limited partners - outstanding 57,941,024 and 57,925,396 815,688 1,004,603
Accumulated other comprehensive income (4,186) (13,829)
----------- -----------
Total partners' capital $ 1,221,107 $ 1,331,281
----------- -----------
Total liabilities and partners' capital $ 4,575,223 $ 4,306,712
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
--------- --------- --------- --------
REVENUE:
Office Property $ 128,331 $ 123,155 $ 384,564 $ 364,137
Resort/Hotel Property 46,986 42,319 137,241 132,873
Residential Development Property 60,595 34,936 163,875 140,631
--------- --------- --------- ---------
Total Property revenue $ 235,912 $ 200,410 $ 685,680 $ 637,641
--------- --------- --------- ---------
EXPENSE:
Office Property real estate taxes $ 15,719 $ 15,323 $ 49,719 $ 49,794
Office Property operating expenses 46,699 42,976 132,906 125,956
Resort/Hotel Property expense 39,479 35,397 115,382 108,706
Residential Development Property expense 54,480 34,975 146,803 131,977
--------- --------- --------- ---------
Total Property expense $ 156,377 $ 128,671 $ 444,810 $ 416,433
--------- --------- --------- ---------
Income from Property Operations $ 79,535 $ 71,739 $ 240,870 $ 221,208
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Income from investment land sales, net $ 7,583 $ 11,334 $ 8,532 $ 12,961
Gain on joint venture of properties, net - - - 100
Interest and other income 2,575 1,319 8,295 3,953
Corporate general and administrative (9,023) (7,356) (22,734) (18,968)
Interest expense (46,571) (43,044) (137,008) (129,298)
Amortization of deferred financing costs (3,453) (2,783) (10,243) (7,751)
Extinguishment of debt (155) - (3,082) -
Depreciation and amortization (45,715) (35,550) (127,702) (104,761)
Impairment charges related to real estate assets (4,094) - (4,094) (1,200)
Other expenses (88) (130) (236) (1,042)
Equity in net income (loss) of unconsolidated companies:
Office Properties 1,268 5,871 3,871 9,981
Resort/Hotel Properties 22 (89) (227) 2,036
Residential Development Properties (803) 1,725 (1,110) 4,235
Temperature-Controlled Logistics Properties (906) (949) (4,514) 152
Other 190 (864) (391) (1,679)
--------- --------- --------- ---------
Total Other Income (Expense) $ (99,170) $ (70,516) $(290,643) $(231,281)
--------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES $ (19,635) $ 1,223 $ (49,773) $ (10,073)
Minority interests (1,495) (294) (1,106) (739)
Income tax benefit 6,613 4,865 13,214 10,336
--------- --------- --------- ---------
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE $ (14,517) $ 5,794 $ (37,665) $ (476)
Income from discontinued operations 2,319 440 7,301 9,493
Impairment charges related to real estate assets from
discontinued operations (350) (2,356) (3,201) (19,174)
Loss on real estate from discontinued operations (38) (23) (2,537) (411)
Cumulative effect of a change in accounting principle - - (428) -
--------- --------- --------- ---------
NET (LOSS) INCOME $ (12,586) $ 3,855 $ (36,530) $ (10,568)
Series A Preferred Unit distributions (5,991) (4,556) (17,733) (13,668)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (6,057)
--------- --------- --------- ---------
NET LOSS AVAILABLE TO PARTNERS $ (20,596) $ (2,720) $ (60,320) $ (30,293)
========= ========= ========= =========
BASIC EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.39) $ (0.01) $ (1.05) $ (0.34)
Income from discontinued operations 0.04 - 0.12 0.16
Impairment charges related to real estate assets from
discontinued operations - (0.04) (0.05) (0.33)
Loss on real estate from discontinued operations - - (0.04) (0.01)
Cumulative effect of a change in accounting principle - - (0.01) -
--------- --------- --------- ---------
Net loss available to partners - basic $ (0.35) $ (0.05) $ (1.03) $ (0.52)
========= ========= ========= =========
DILUTED EARNINGS PER UNIT DATA:
Loss available to partners before discontinued operations and
cumulative effect of a change in accounting principle $ (0.39) $ (0.01) $ (1.05) $ (0.34)
Income from discontinued operations 0.04 - 0.12 0.16
Impairment charges related to real estate assets from
discontinued operations - (0.04) (0.05) (0.33)
Loss on real estate from discontinued operations - - (0.04) (0.01)
Cumulative effect of a change in accounting principle - - (0.01) -
--------- --------- --------- ---------
Net loss available to partners - diluted $ (0.35) $ (0.05) $ (1.03) $ (0.52)
========= ========= ========= =========
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 - 5 527 - 532
Distributions - (1,320) (130,693) - (132,013)
Amortization of Deferred Compensation on Restricted Shares - 10 968 - 978
Net Loss - (603) (59,717) - (60,320)
Unrealized Gain on Marketable Securities - - - 1,445 1,445
Unrealized Gain on Cash Flow Hedges - - - 8,198 8,198
---------- -------- ----------- --------- -----------
PARTNERS' CAPITAL, September 30, 2004 $ 401,089 $ 8,516 $ 815,688 $ (4,186) $ 1,221,107
========== ======== =========== ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (36,530) $ (10,568)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 137,945 112,512
Residential Development cost of sales 67,519 66,658
Residential Development capital expenditures (126,622) (98,506)
Impairment charges related to real estate assets from discontinued operations 3,201 19,174
Loss on real estate from discontinued operations 2,537 411
Discontinued operations - depreciation and minority interests 1,830 12,919
Extinguishment of debt 3,082 -
Impairment charges related to real estate assets 4,094 1,200
Income from investment in land sales, net (8,532) (12,961)
Gain on joint venture of properties, net - (100)
Minority interests 1,106 739
Cumulative effect of a change in accounting principle 428 -
Non-cash compensation 861 -
Equity in (earnings) loss from unconsolidated companies:
Office Properties (3,871) (9,981)
Resort/Hotel Properties 227 (2,036)
Residential Development Properties 1,110 (4,235)
Temperature-Controlled Logistics Properties 4,514 (152)
Other 391 1,679
Distributions received from unconsolidated companies:
Office Properties 4,465 10,220
Residential Development Properties - 46
Temperature-Controlled Logistics Properties 1,822 -
Other 938 852
Change in assets and liabilities, net of effects of consolidations,
acquisitions and dispositions:
Restricted cash and cash equivalents 52,695 602
Accounts receivable (6,893) 4,866
Deferred rent receivable (12,998) (1,501)
Income tax asset - current and deferred, net (22,223) (11,223)
Other assets (7,328) 7,536
Accounts payable, accrued expenses and other liabilities 11,391 (31,735)
--------- ---------
Net cash provided by operating activities $ 75,159 $ 56,416
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously unconsolidated companies $ 334 $ 11,374
Proceeds from property sales 113,871 16,030
Acquisition of investment properties (193,275) (14,802)
Development of investment properties (3,804) (3,612)
Property improvements - Office Properties (9,040) (11,342)
Property improvements - Resort/Hotel Properties (22,228) (7,097)
Tenant improvement and leasing costs - Office Properties (68,145) (51,114)
Residential Development Properties Investments (28,319) (28,696)
Decrease (increase) in restricted cash and cash equivalents 92,347 (835)
Purchases of defeasance investments and other securities (195,781) (2,963)
Proceeds from defeasance investment maturities 8,809 -
Return of investment in unconsolidated companies:
Office Properties 2,288 7,721
Resort/Hotel Properties 1,299 -
Residential Development Properties 14 227
Temperature-Controlled Logistics Properties 90,776 3,201
Other 204 5,428
Investment in unconsolidated companies:
Office Properties (10,086) (85)
Residential Development Properties (991) (4,738)
Temperature-Controlled Logistics Properties (2,404) (897)
Other (2,646) (1,419)
Decrease in notes receivable 4,810 19,098
--------- ---------
Net cash used in investing activities $(221,967) $ (64,521)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (8,218) $ (2,603)
Borrowings under Credit Facility 440,000 284,500
Payments under Credit Facility (371,500) (134,000)
Notes payable proceeds 454,623 100,435
Notes payable payments (386,590) (97,164)
Residential Development Properties notes payable borrowings 77,706 57,516
Residential Development Properties notes payable payments (62,462) (56,042)
Amortization of debt premiums (1,766) -
Obligation related to property financing transaction 79,920 -
Capital distributions - joint venture partner (6,331) (9,461)
Capital contributions - joint venture partner 2,101 -
Capital contributions to the Operating Partnership 362 146
Issuance of preferred units - Series A 71,006 -
Series A Preferred Unit distributions (17,972) (13,668)
Series B Preferred Unit distributions (6,057) (6,057)
Distribution from the Operating Partnership (131,823) (131,292)
--------- ---------
Net cash provided by (used in) financing activities $ 132,999 $ (7,690)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS $ (13,809) $ (15,795)
CASH AND CASH EQUIVALENTS,
Beginning of period 74,885 75,418
--------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 61,076 $ 59,623
========= =========
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
September 30, 2004, the Company's approximately 84% limited partner interest has
been treated as equivalent, for purposes of this report, to 49,077,135 units and
the remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,863,889 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 585,263 units.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.
The following table shows the consolidated subsidiaries of the Operating
Partnership that owned or had an interest in real estate assets and the real
estate assets that each subsidiary owned or had an interest in as of September
30, 2004.
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston Center
(three office properties and the Houston Center
Shops), and Dupont Centre. These properties
are included in the Operating Partnership's
Office Segment.
Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) and Fountain Place
(0.1% interest), included in the Operating
Partnership's Office Segment. Sonoma Mission Inn
(80.1% interest), included in the Operating
Partnership's Resort/Hotel Segment.
See Note 6, "Other Transactions," for a
description of the Fountain Place Office Property
transaction.
Non wholly-owned assets, unconsolidated - Bank
One Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest),
Four Westlake Park (20% interest), Miami Center
(40% interest), 5 Houston Center (25% interest),
BriarLake Plaza (30% interest) and Five Post Oak
Park (30% interest). These properties are
included in the Operating Partnership's Office
Segment. Temperature-Controlled Logistics
Properties (40% interest in 87 properties),
included in the Operating Partnership's
Temperature-Controlled Logistics Segment.
Hughes Center Entities(1) Wholly-owned assets - Hughes Center Properties
(seven office properties each in a separate
limited liability company). These properties are
included in the Operating Partnership's Office
Segment.
Non wholly-owned asset, consolidated - 3770
Hughes Parkway (67% interest), included in the
Operating Partnership's Office Segment.
Crescent Real Estate Funding Wholly-owned assets - The Aberdeen, The Avallon
I, L.P. ("Funding I") I, II & III, Carter Burgess Plaza, The Citadel,
The Crescent Atrium, The Crescent Office
Towers, Regency Plaza One, Waterside Commons
and 125 E. John Carpenter Freeway. These
properties are included in the Operating
Partnership's Office Segment.
Crescent Real Estate Funding Wholly-owned assets - Greenway Plaza Office
III, IV and V, L.P. Properties (ten Office Properties). These
("Funding III, IV and V")(2) properties are included in the Operating
Partnership's Office Segment. Renaissance Houston
Hotel is included in the Operating Partnership's
Resort/Hotel Segment.
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Funding Wholly-owned asset - Canyon Ranch - Lenox,
VI, L.P. ("Funding VI") included in the Operating Partnership's
Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - The Addison, Austin Centre,
VIII, L.P. ("Funding VIII") The Avallon V, Chancellor Park, 816 Congress,
Greenway I & IA (two office properties), Greenway
II, Johns Manville Plaza, Palisades Central I,
Palisades Central II, Stemmons Place, Trammell
Crow Center(3), 3333 Lee Parkway, 44 Cook and
55 Madison. These properties are included in the
Operating Partnership's Office Segment. The
Canyon Ranch - Tucson, Omni Austin Hotel, and
Ventana Inn & Spa, all of which are included in
the Operating Partnership's Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - Post Oak Central (three
X, L.P. ("Funding X") Office Properties). These properties are
included in the Operating Partnership's Office
Segment.
Crescent Real Estate Funding Wholly-owned assets - Albuquerque Plaza, Barton
XII, L.P. ("Funding XII") Oaks Plaza, Briargate Office and Research Center,
MacArthur Center I & II, Stanford Corporate
Center, and Two Renaissance Square. These
properties are included in the Operating
Partnership's Office Segment. The Hyatt Regency
Albuquerque and the Park Hyatt Beaver Creek
Resort & Spa. These properties are included in
the Operating Partnership's Resort/Hotel Segment.
Crescent 707 17th Street, Wholly-owned assets - 707 17th Street, included
L.L.C. in the Operating Partnership's Office Segment,
and The Denver Marriott City Center, included in
the Operating Partnership's Resort/Hotel Segment.
Crescent Alhambra, L.L.C. Wholly-owned asset - Alhambra Plaza (two Office
Properties), included in the Operating
Partnership's Office Segment.
Crescent Spectrum Center, L.P. Non wholly-owned asset, consolidated - Spectrum
Center (approximately 100% interest), included in
the Operating Partnership's Office Segment.
Crescent Colonnade, L.L.C. Wholly-owned asset - The BAC-Colonnade Building,
included in the Operating Partnership's Office
Segment.
Mira Vista Development Corp. Non wholly-owned asset, consolidated - Mira Vista
("MVDC") (98% interest), included in the Operating
Partnership's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated - Falcon
Corp. ("HADC") Point (98% interest) and Spring Lakes (98%
interest). These properties are included in the
Operating Partnership's Residential Development
Segment.
Desert Mountain Development Non wholly-owned assets, consolidated - Desert
Corporation ("DMDC") Mountain (93% interest), included in the
Operating Partnership's Residential Development
Segment.
Crescent Resort Development Non wholly-owned assets, consolidated -
Inc. ("CRDI") Brownstones (64% interest), Creekside at
Riverfront (64% interest), Cresta (60% interest),
Delgany (64% interest), Eagle Ranch (60%
interest), Gray's Crossing (71% interest),
Horizon Pass (64% interest), Hummingbird (64%
interest), Main Street Station (30% interest),
Northstar (57% interest), Old Greenwood (71%
interest), Park Place at Riverfront (64%
interest), Park Tower at Riverfront (64%
interest), Riverbend (60% interest), Riverfront
Park (64% interest). These properties are
included in the Operating Partnership's
Residential Development Segment.
Non wholly-owned assets, unconsolidated - Blue
River Land Company, L.L.C. - Three Peaks (30%
interest) and EW Deer Valley, L.L.C. (42%
interest), included in the Operating
Partnership's Residential Development Segment.
Crescent TRS Holdings Corp. Non wholly-owned assets, unconsolidated - two
quarries (56% interest). These properties are
included in the Operating Partnership's
Temperature-Controlled Logistics Segment.
- ---------------
(1) In addition, the Operating Partnership owns nine retail parcels
located in Hughes Center.
(2) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.
(3) The Operating Partnership owns the economic interest in Trammell
Crow Center through its ownership of fee simple title to the
Property (subject to a ground lease and a leasehold estate regarding
the building) and two mortgage notes encumbering the leasehold
interests in the land and the building.
See Note 8, "Investments in Unconsolidated Companies," for a table that
lists the Operating Partnership's ownership in significant unconsolidated joint
ventures and investments as of September 30, 2004.
See Note 9, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Operating Partnership and the Company,
all of which are consolidated 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.
8
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Operating Partnership were divided into
four investment segments at September 30, 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 September 30, 2004:
- OFFICE SEGMENT consisted of 75 office properties (collectively
referred to as the "Office Properties"), located in 27 metropolitan
submarkets in seven states, with an aggregate of approximately 29.9
million net rentable square feet. Sixty-five 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 28 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
September 30, 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 September 30, 2004, VCQ owned two quarries and the related land.
The Operating Partnership accounts for its interests in the
Temperature-Controlled Logistics Partnership and in VCQ 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 and nine months
ended September 30, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at September 30, 2004 and December 31, 2003.
See Note 17, "Subsequent Events," for a discussion of (i) the Operating
Partnership's joint venture transaction related to three of its office
properties, (ii) the sale of one of its business-class hotel properties and
(iii) the restructuring of the Operating Partnership's investment in the
Temperature-Controlled Logistics Segment.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and nine-
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
month periods ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
The consolidated balance sheet at December 31, 2003 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
You should read these consolidated financial statements in conjunction
with the consolidated financial statements and footnotes thereto in the
Operating Partnership's annual report on Form 10-K for the year ended December
31, 2003.
Certain amounts in prior period financial statements have been
reclassified to conform to current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the 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 STANDARD
EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by the
FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Operating Partnership adopted EITF 03-1 effective July 1, 2004 and it had no
impact on the Operating Partnership's financial condition or its results of
operations.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the FASB
approved the issuance of Interpretation 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." In December 2003, the FASB issued FIN 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"), which amended FIN 46.
Under FIN 46R, 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 46R 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 46R 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. ("Canyon Ranch
Entities") are VIEs under FIN 46R, the Operating Partnership is not the primary
beneficiary and is not required to consolidate these entities under other GAAP.
The Operating Partnership's
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maximum exposure to loss is limited to its equity investment of approximately
$57.7 million in Main Street Partners, L.P. and $5.1 million in the Canyon Ranch
Entities at September 30, 2004.
During 2004, the Operating Partnership entered into three separate
exchange agreements with a third party intermediary. The first exchange
agreement included two parcels of undeveloped land, the second exchange
agreement included the 3930 Hughes Parkway Office Property, and the third
exchange agreement included The Alhambra Office Property. The agreements were
for a maximum term of 180 days and allow the Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
within this period. During the 180-day periods, which ended or will end on
August 28, 2004, November 6, 2004, and February 2, 2005, respectively, 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 fully consolidates these
properties. The Operating Partnership took or will take legal ownership of the
properties no later than on the expiration of the respective 180-day period.
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 nine months ended September 30, 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:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
(in thousands, except per unit amounts) 2004 2003 2004 2003
---- ---- ---- ----
Net loss available to partners, as reported $ (20,596) $ (2,720) $ (60,320) $ (30,293)
Add: Stock-based and unit-based employee
compensation expense included in reported
net income 355 15 1,056 21
Deduct: total stock-based and unit-based
employee compensation expense determined
under fair value based method for all
awards (924) (698) (2,798) (2,111)
--------- -------- --------- ---------
Pro forma net loss $ (21,165) $ (3,403) $ (62,062) $ (32,383)
Loss per unit:
Basic/Diluted - as reported $ (0.35) $ (0.05) $ (1.03) $ (0.52)
Basic/Diluted - pro forma $ (0.36) $ (0.06) $ (1.06) $ (0.55)
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 specific identification. 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.
Investments in securities with no readily determinable market value are reported
at cost, as they are not considered marketable under SFAS No. 115, and total
$5.5 million at September 30, 2004 and December 31, 2003.
The following tables present the cost, fair value and unrealized gains and
losses as of September 30, 2004 and December 31, 2003 and the realized gains and
change in Accumulated Other Comprehensive Income ("OCI") for the nine months
ended September 30, 2004 and 2003 for the Operating Partnership's marketable
securities.
AS OF SEPTEMBER 30, 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) $ 170,589 $ 169,042 $ (1,547) $ 9,620 $ 9,621 $ 1
Available for sale (2) 24,204 24,908 705 2,278 2,278 -
--------- --------- ---------- -------- -------- ----------
Total $ 194,793 $ 193,950 $ (842) $ 11,898 $ 11,899 $ 1
========= ========= ========== ======== ======== ==========
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
(in thousands)
REALIZED CHANGE REALIZED CHANGE
TYPE OF SECURITY GAIN/(LOSS) IN OCI GAIN/(LOSS) IN OCI
---------------- ----------- ------ ----------- ------
Held to maturity (1) $ - N/A $ - $ N/A
Available for sale (2) 6 705 (502) 514
--------- --------- ---------- --------
Total $ 6 $ 705 $ (502) $ 514
========= ========= ========== ========
- -------------
(1) Held to maturity securities are carried at amortized 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 9, "Notes Payable and Borrowings Under Credit Facility," for
additional information on the defeasance of the 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 consist of $18.3 million of bonds and $6.6 million of
preferred stock which are included in "Other assets, net" in the
accompanying Consolidated Balance Sheets and are marked to market value on
a monthly basis with the corresponding unrealized gain or loss recorded in
OCI.
In July 2004, Fresh Choice, Inc., in which the Operating Partnership owns
$5.5 million Series B Preferred shares reported at cost at September 30, 2004
and December 31, 2003, filed for protection under Chapter 11 of the U.S.
Bankruptcy Court in order to facilitate a reorganization and restructuring. At
September 5, 2004, the accrued liquidation preference on the Series B Preferred
shares was $9.3 million. Based on the Operating Partnership's evaluation of its
preferred interest in Fresh Choice, the Operating Partnership estimates the
value of its shares at a minimum to be equal to the investment balance of $5.5
million.
12
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 and nine months
ended September 30, 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, which for the
periods presented, are the same.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
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 $(14,517) 58,376 $ 5,794 58,460
Series A Preferred Unit distributions (5,991) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
-------- -------- ------- --------
Loss available to partners
before discontinued operations and cumulative
effect of a change in accounting principle $(22,527) 58,376 $ (0.39) $ (781) 58,460 $ (0.01)
Income from discontinued operations 2,319 0.04 440 -
Impairment charges related to real estate assets
from discontinued operations (350) - (2,356) (0.04)
Loss on real estate from discontinued operations (38) - (23) -
Cumulative effect of a change in accounting principle - - - -
-------- -------- -------- ------- -------- --------
Net loss available to partners $(20,596) 58,376 $ (0.35) $(2,720) 58,460 $ (0.05)
======== ======== ======== ======= ======== ========
- ---------------------------------------------
(1) Anti-dilutive units not included are 56 and 4 for the three months ended
September 30, 2004 and 2003, respectively.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
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 $(37,665) 58,371 $ (476) 58,468
Series A Preferred Unit distributions (17,733) (13,668)
Series B Preferred Unit distributions (6,057) (6,057)
-------- -------- ------- --------
Loss available to partners
before discontinued operations and cumulative
effect of a change in accounting principle $(61,455) 58,371 $ (1.05) $(20,201) 58,468 $ (0.34)
Income from discontinued operations 7,301 0.12 9,493 0.16
Impairment charges related to real estate assets
from discontinued operations, (3,201) (0.05) (19,174) (0.33)
Loss on real estate from discontinued operations (2,537) (0.04) (411) (0.01)
Cumulative effect of a change in accounting principle (428) (0.01) - -
-------- -------- -------- -------- -------- --------
Net loss available to partners $(60,320) 58,371 $ (1.03) $(30,293) 58,468 $ (0.52)
======== ======== ======== ======== ======== ========
- -------------------------------------------
(1) Anti-dilutive units not included are 85 and 2 for the nine months ended
September 30, 2004 and 2003, respectively.
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------
(in thousands) 2004 2003
- -------------- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on debt $ 121,622 $ 110,670
Interest capitalized - Resort/Hotel 278 -
Interest capitalized - Residential Development 11,090 13,896
Additional interest paid in conjunction with cash flow hedges 8,935 15,472
--------- ---------
Total interest paid $ 141,925 $ 140,038
========= =========
Cash paid for income taxes $ 8,406 $ 1,954
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:
Assumption of debt in conjunction with acquisitions of Office Properties $ 139,807 $ 38,000
Non-cash compensation 962 147
Financed sale of land parcel 4,878 11,800
Financed purchase of land parcel 7,500 -
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.
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Operating Partnership calculates FFO available to partners - 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 operating
partnership of an equity REIT to recognize that income-producing real estate
historically has not depreciated on the basis determined under GAAP. The
Operating Partnership considers FFO available to partners - diluted and FFO
appropriate measures of performance for an equity REIT and for its investment
segments. However, FFO available to partners - 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 available to partners -
diluted and FFO may not be comparable to similarly titled measures of operating
partnerships of REITs (other than the Company) if those REITs apply the
definition of FFO in a different manner than the Operating Partnership.
Selected financial information related to each segment for the three and
nine months ended September 30, 2004 and 2003, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at September 30, 2004 and December 31, 2003, are
presented below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------- ---------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- -------------- ---------- ------- ---------- ------- --------- -----
Total Property revenue $ 128,331 $ 46,986 $ 60,595 $ - $ - $ 235,912
Total Property expense 62,418 39,479 54,480 - - 156,377
--------- --------- --------- --------- ----------- ---------
Income from Property Operations $ 65,913 $ 7,507 $ 6,115 $ - $ - $ 79,535
Total other income (expense) (34,238) (5,993) (8,310) (906) (49,723)(3) (99,170)
Minority interests and income taxes (512) 2,454 3,469 - (293) 5,118
Discontinued operations - income, loss on real estate
and impairment charges related to real
estate assets (341) 2,642 103 - (473) 1,931
--------- --------- --------- --------- ----------- ---------
Net income (loss) $ 30,822 $ 6,610 $ 1,377 $ (906) $ (50,489) $ (12,586)
--------- --------- --------- --------- ----------- ---------
Depreciation and amortization of real estate assets $ 35,141 $ 5,662 $ 2,181 $ - $ - $ 42,984
(Gain) loss on property sales, net 164 - (126) - 155 193
Impairment charges related to real estate assets - - 2,497 - 350 2,847
Adjustments for investment in unconsolidated companies 2,283 - (2,150) 5,768 - 5,901
Series A Preferred unit distributions - - - - (5,991) (5,991)
Series B Preferred unit distributions - - - - (2,019) (2,019)
--------- --------- --------- --------- ----------- ---------
Adjustments to reconcile net income (loss) to funds
from operations - diluted $ 37,588 $ 5,662 $ 2,402 $ 5,768 $ (7,505) $ 43,915
--------- --------- --------- --------- ----------- ---------
Funds from operations available to partners before
impairment charges related to real estate
assets - diluted $ 68,410 $ 12,272 $ 3,779 $ 4,862 $ (57,994) $ 31,329
Impairment charges related to real estate assets - - (2,497) - (350) (2,847)
--------- --------- --------- --------- ----------- ---------
Funds from operations available to partners after
impairment charges related to real estate
assets - diluted $ 68,410 $ 12,272 $ 1,282 $ 4,862 $ (58,344) $ 28,482
========= ========= ========= ========= =========== =========
See footnotes to the following table.
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- -------------- ---------- ------- ---------- ------- --------- -----
Total Property revenue $ 123,155 $ 42,319 $ 34,936 $ - $ - $ 200,410
Total Property expense 58,299 35,397 34,975 - - 128,671
--------- --------- --------- --------- ---------- ---------
Income from Property Operations $ 64,856 $ 6,922 $ (39) $ - $ - $ 71,739
Total other income (expense) (21,254) (4,988) (670) (949) (42,655)(3) (70,516)
Minority interests and income taxes 7 1,481 2,347 - 736 4,571
Discontinued operations - income, loss on real
estate and impairment charges related to real
estate assets (1,177) 1,600 10 - (2,372) (1,939)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 42,432 $ 5,015 $ 1,648 $ (949) $ (44,291) $ 3,855
--------- --------- --------- --------- ---------- ---------
Depreciation and amortization of real estate assets $ 32,438 $ 6,062 $ 1,117 $ - $ - $ 39,617
(Gain) loss on property sales, net 28 - - - (14) 14
Impairment charges related to real estate assets - - - - 2,356 2,356
Adjustments for investment in unconsolidated companies (1,613) 394 8 5,147 260 4,196
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 $ 30,853 $ 6,456 $ 1,125 $ 5,147 $ (3,973) $ 39,608
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners before
impairment charges related to real estate
assets - diluted $ 73,285 $ 11,471 $ 2,773 $ 4,198 $ (48,264) $ 43,463
Impairment charges related to real estate assets - - - - (2,356) (2,356)
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners after
impairment charges related to real estate
assets - diluted $ 73,285 $ 11,471 $ 2,773 $ 4,198 $ (50,620) $ 41,107
========= ========= ========= ========= ========== =========
See footnotes to the following table.
SELECTED FINANCIAL INFORMATION: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- -------------- ---------- ------- ---------- ------- --------- -----
Total Property revenue $ 384,564 $ 137,241 $ 163,875 $ - $ - $ 685,680
Total Property expense 182,625 115,382 146,803 - - 444,810
--------- --------- --------- --------- ---------- ---------
Income from Property Operations $ 201,939 $ 21,859 $ 17,072 $ - $ - $ 240,870
Total other income (expense) (94,131) (16,738) (15,794) (4,514) (159,466)(3) (290,643)
Minority interests and income taxes (1,230) 6,531 8,308 - (1,501) 12,108
Discontinued operations - income, loss on real
estate and impairment charges related to real
estate assets (4,434) 6,611 149 - (763) 1,563
Cumulative effect of a change in accounting principle - - - - (428) (428)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 102,144 $ 18,263 $ 9,735 $ (4,514) $ (162,158) $ (36,530)
--------- --------- --------- --------- ---------- ---------
Depreciation and amortization of real estate assets $ 97,205 $ 17,030 $ 5,115 $ - $ 56 $ 119,406
(Gain) loss on property sales, net 2,319 - (127) - 491 2,683
Impairment charges related to real estate assets 2,852 - 2,497 - 350 5,699
Adjustments for investment in unconsolidated companies 7,188 - (2,099) 17,348 - 22,437
Series A Preferred unit distributions - - - - (17,733) (17,733)
Series B Preferred unit distributions - - - - (6,057) (6,057)
--------- --------- --------- --------- ---------- ---------
Adjustments to reconcile net income (loss) to funds
from operations available to partners - diluted $ 109,564 $ 17,030 $ 5,386 $ 17,348 $ (22,893) $ 126,435
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners before
impairment charges related to real estate
assets - diluted $ 211,708 $ 35,293 $ 15,121 $ 12,834 $ (185,051) $ 89,905
Impairment charges related to real estate assets (2,852) - (2,497) - (350) (5,699)
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners after
impairment charges related to real estate
assets - diluted $ 208,856 $ 35,293 $ 12,624 $ 12,834 $ (185,401) $ 84,206
========= ========= ========= ========= ========== =========
See footnotes to the following table.
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
---------- ------- ---------- ------- --------- -----
Total Property revenue $ 364,137 $ 132,873 $ 140,631 $ - $ - $ 637,641
Total Property expense 175,750 108,706 131,977 - - 416,433
--------- --------- --------- --------- ---------- ---------
Income from Property Operations $ 188,387 $ 24,167 $ 8,654 $ - $ - $ 221,208
Total other income (expense) (71,493) (12,187) (3,336) 151 (144,416)(3) (231,281)
Minority interests and income taxes (267) 4,031 4,671 - 1,162 9,597
Discontinued operations-income, loss on real
estate and impairment charges related to real
estate assets (10,340) 4,659 (1) - (4,410) (10,092)
--------- --------- --------- --------- ---------- ---------
Net income (loss) $ 106,287 $ 20,670 $ 9,988 $ 151 $ (147,664) $ (10,568)
--------- --------- --------- --------- ---------- ---------
Depreciation and amortization of real estate assets $ 87,829 $ 17,645 $ 3,543 $ - $ - $ 109,017
(Gain) loss on property sales, net 447 - - - 272 719
Impairment charges related to real estate assets 16,200 - - - 4,174 20,374
Adjustments for investment in unconsolidated companies 3,805 1,143 235 16,143 178 21,504
Series A Preferred unit distributions - - - - (13,668) (13,668)
Series B Preferred unit distributions - - - - (6,057) (6,057)
--------- --------- --------- --------- ---------- ---------
Adjustments to reconcile net income (loss) to funds
from operations - diluted $ 108,281 $ 18,788 $ 3,778 $ 16,143 $ (15,101) $ 131,889
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners before
impairment charges related to real estate
assets - diluted $ 214,568 $ 39,458 $ 13,766 $ 16,294 $ (162,765) $ 121,321
Impairment charges related to real estate assets (16,200) - - - (4,174) (20,374)
--------- --------- --------- --------- ---------- ---------
Funds from operations available to partners after
impairment charges related to real estate
assets - diluted $ 198,368 $ 39,458 $ 13,766 $ 16,294 $ (166,939) $ 100,947
========= ========= ========= ========= ========== =========
See footnotes to the following table.
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(IN MILLIONS) SEGMENT(1) SEGMENT SEGMENT(2)(4) SEGMENT AND OTHER TOTAL
---------- ------- ---------- ------- --------- -----
TOTAL ASSETS BY SEGMENT: (5) (6)
Balance at September 30, 2004 $ 2,692 $ 500 $ 834 $ 206 $ 343(7) $ 4,575
Balance at December 31, 2003 2,503 468 707 300 329 4,307
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at September 30, 2004 (1,437) (143) (103) - (1,173)(8) (2,856)
Balance at December 31, 2003 (1,459) (138) (88) - (874)(8) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at September 30, 2004 (188) (43) (178) - (45) (454)
Balance at December 31, 2003 (120) (27) (109) - (114) (370)
MINORITY INTERESTS:
Balance at September 30, 2004 (9) (6) (29) - - (44)
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 $5.0 million for the three months ended September 30,
2004 and 2003, respectively and $8.5 million and $7.9 million for
the nine months ended September 30, 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: income from investment land sales, net, 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
Development Segment includes total assets, consolidated property
level financing, consolidated other liabilities and minority
interest totaling $524 million at September 30, 2004. The primary
components of net book value are $361 million for CRDI, consisting
of Tahoe Mountain Resort properties of $215 million, Denver
development properties of $62 million and Colorado Mountain
development properties of $84 million, $135 million for Desert
Mountain and $28 million for other land development properties.
(5) Total assets by segment are inclusive of investments in
unconsolidated companies.
(6) Non-income producing land held for investment or development of
$82.2 million by segment is as follows: Corporate $75.3 million and
Resort/Hotel $6.9 million.
(7) Includes U.S. Treasury and government sponsored agency securities of
$170.6 million.
(8) Inclusive of Corporate bonds, credit facility, the $75 million Fleet
Term Loan, The Rouse Company Note, and Funding II defeased debt.
17
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 included $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 and subsequently placed a $35.5 million
non-recourse first mortgage loan on the property. This Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.
On May 10, 2004, the Operating Partnership completed the purchase of the
remaining Hughes Center Office Property in Las Vegas, Nevada for approximately
$18.3 million. The purchase was 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.
On August 6, 2004, the Operating Partnership acquired The Alhambra, two
Class A Office Properties, located in the Coral Gables submarket of Miami,
Florida. The Operating Partnership acquired the Office Properties for
approximately $72.3 million, funded by the Operating Partnership's assumption of
a $45.0 million loan from Wachovia Securities and a draw on the Operating
Partnership's credit facility. The Office Properties are wholly-owned and are
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 and nine months ended September 30, 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
September 30, 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
proceeds, net of selling costs, 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.
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2004, the Operating Partnership sold its last remaining
behavioral healthcare property. The sale generated proceeds, net of selling
costs, of approximately $2.0 million and a net loss of approximately $0.4
million. This property was wholly-owned.
On April 13, 2004, the Operating Partnership completed the sale of the
Liberty Plaza Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, 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.
On June 17, 2004, the Operating Partnership completed the sale of the
Ptarmigan Place Office Property in Denver, Colorado. The sale generated
proceeds, net of selling costs, of approximately $25.3 million and a net loss of
approximately $2.4 million. The Operating Partnership previously recorded an
impairment charge of approximately $0.6 million during the quarter ended March
31, 2004. In addition, the Operating Partnership completed the sale of
approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place. The
sale generated proceeds, net of selling costs, of approximately $2.9 million and
a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Operating Partnership's Bank of America Fund
XII Term Loan. The property and adjacent land were wholly-owned.
On June 29, 2004, the Operating Partnership completed the sale of the
Addison Tower Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.8 million and a net gain of approximately
$0.2 million. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.
On July 2, 2004, the Operating Partnership completed the sale of the 5050
Quorum Office Property in Dallas, Texas. The sale generated proceeds, net of
selling costs, of approximately $8.9 million and a loss of approximately $0.2
million. The Operating Partnership previously recorded an impairment charge of
approximately $1.0 million during the quarter ended March 31, 2004. The proceeds
from the sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned. The Operating Partnership continues to
provide management and leasing services for this property.
On July 29, 2004, the Operating Partnership completed the sale of the
12404 Park Central Office Property in Dallas, Texas. The sale generated
proceeds, net of selling costs, of approximately $9.3 million. The Operating
Partnership previously recorded impairment charges totaling approximately $4.6
million, $3.4 million during the year ended December 31, 2003, $0.7 million
during the quarter ended March 31, 2004 and $0.5 million during the quarter
ended June 30, 2004. The proceeds from the sale were used primarily to pay down
the Bank of America Fund XII Term Loan. This property was wholly-owned.
On September 14, 2004, the Operating Partnership completed the sale of
Breckenridge Commercial Retail Center in Breckenridge, Colorado. The sale
generated proceeds to the Operating Partnership, net of selling costs and
repayment of debt, of approximately $1.5 million, and a net gain of
approximately $0.1 million, net of minority interests and income tax. The
Operating Partnership previously recorded an impairment charge of approximately
$0.7 million, net of minority interests and income tax, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Operating Partnership's credit facility.
ASSETS HELD FOR SALE
The following Properties are classified as held for sale as of September
30, 2004.
PROPERTY LOCATION
-------- --------
Hyatt Regency Albuquerque(1) Albuquerque, New Mexico
Denver Marriott City Center Denver, Colorado
- --------------
(1) This property was sold in October 2004.
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFFICE SEGMENT
As of September 30, 2004, the Operating Partnership determined that
Albuquerque Plaza, in the CBD submarket in Albuquerque, New Mexico was no longer
held for sale due to the Office Property no longer being actively marketed for
sale as a result of changes in market conditions. The Property has been
reclassified from "Properties held for disposition, net" to "Land," "Building
and improvements, net of accumulated depreciation," and "Other assets, net" in
the accompanying Consolidated Balance Sheets with a net book value of $32.9
million at September 30, 2004. In addition, approximately $2.5 million has been
reclassified from "Income from discontinued operations" to "Office Property
revenue," "Interest and other income," "Office Property real estate taxes,"
"Office Property operating expenses" and "Depreciation and amortization" line
items in the accompanying Consolidated Statements of Operations for the nine
months ended September 30, 2004.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major asset classes of the properties
held for sale.
(in thousands) SEPTEMBER 30, 2004(1) DECEMBER 31, 2003(2)
- -------------- --------------------- --------------------
Land $ 375 $ 13,823
Buildings and improvements 85,900 201,784
Furniture, fixtures and equipment 20,892 18,822
Accumulated depreciation (29,131) (52,142)
Other assets, net 31 3,848
----------- ----------
Net investment in real estate $ 78,067 $ 186,135
=========== ==========
- -----------------------------
(1) Includes two Resort/Hotel Properties and other assets.
(2) Includes six Office Properties, two Resort/Hotel 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 nine months ended September 30, 2004 and
2003, for properties included in discontinued operations.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Total revenues $ 41,853 $ 62,139
Operating and other expenses (32,691) (40,059)
Depreciation and amortization (1,861) (12,587)
----------- -----------
Income from discontinued operations $ 7,301 $ 9,493
=========== ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Impairment charges related to real estate assets $ (3,201) $ (19,174)
========= ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(in thousands) 2004 2003
- -------------- ---- ----
Realized loss on sale of properties $ (2,537) $ (411)
========== ========
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER TRANSACTIONS
FOUNTAIN PLACE TRANSACTION
On June 28, 2004, the Operating Partnership completed a transaction
related to the Fountain Place Office Property with Crescent FP Investors, L.P.,
("FP Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Operating Partnership. In the transaction, the
Fountain Place Office Property was, for tax purposes, sold to FP Investors for
$168.2 million, including the assumption by FP Investors of a new $90.0 million
loan from Lehman Capital. The Operating Partnership received net proceeds of
approximately $78.2 million. This transaction resulted in the completion of a
reverse Section 1031 like-kind exchange associated with the Operating
Partnership's prior purchase of a portion of the Hughes Center office portfolio.
Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Operating Partnership to purchase
Lehman's interest in FP Investors for an agreed upon fair value of $79.9 million
at any time until November 30, 2004. For GAAP purposes, under SFAS No. 66,
"Accounting for Sales of Real Estate," this unconditional right, or contingency,
results in the transaction requiring accounting associated with a financing
transaction. As a result, no gain has been recorded on the transaction and the
Operating Partnership's accompanying financial statements continue to include
the Office Property, related debt and operations until expiration of the
contingency. The Operating Partnership pays 99.9% of the distributable funds
from the Office Property to Lehman, which is recorded in the "Interest Expense"
line item in the Operating Partnership's Consolidated Statement of Operations.
The fair value of the contingency, $79.9 million, is included in the "Accounts
payable, accrued expenses and other liabilities" line item in the Operating
Partnership's Consolidated Balance Sheet at September 30, 2004.
Also on June 28, 2004, the Operating Partnership paid off the $220.0
million Deutsche Bank - CMBS loan with proceeds from the Fountain Place Office
Property transaction and a draw on the Operating Partnership's revolving credit
facility.
UNDEVELOPED LAND
On August 16, 2004, the Operating Partnership sold approximately 2.5 acres
of undeveloped land located in Houston, Texas. The sale generated proceeds, net
of selling costs, of approximately $6.4 million and a note receivable in the
amount of $5.6 million. The note provides for payments of principal of $0.5
million due in December 2004, annual installments of $1.0 million each due
beginning August 2005 through August 2008, and $1.1 million due at maturity in
August 2009 and does not bear interest. The Operating Partnership recognized a
net gain of approximately $7.6 million included in the "Income from investment
land sales, net" line item in the accompanying Consolidated Statements of
Operations. The proceeds were used to pay down the Operating Partnership's
credit facility.
RESIDENTIAL DEVELOPMENT
During the quarter ended September 30, 2004, the Sonoma Club was
demolished in order to begin construction on a new clubhouse. Accordingly, the
Operating Partnership recorded an impairment charge of approximately $2.5
million, net of income tax, included in the "Impairment charges related to real
estate assets" line item in the accompanying Consolidated Statements of
Operations.
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, AmeriCold Logistics, LLC was 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, AmeriCold
Logistics leased the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. The Operating Partnership has an indirect 40% ownership
interest in the Temperature-Controlled Logistics Corporation.. The Operating
Partnership has no interest in COPI or AmeriCold Logistics. 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 $40.0
million of the total $120.4 million of rent payable for the nine months ended
September 30, 2004. The Operating Partnership's share of the deferred rent was
$16.0 million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $16.0 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the nine months ended September
30, 2004. As of September 30, 2004, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $122.4 million and $114.4 million, respectively, of which the Operating
Partnership's portions were $49.0 million and $45.8 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.
For information regarding the purchase by the Temperature-Controlled
Logistics Corporation of all of the ownership interests in AmeriCold Logistics,
the termination of the three triple-net master leases, and the agreement to sell
an interest in the Temperature-Controlled Logistics Corporation to the Yucaipa
Companies, see Note 17, "Subsequent Events."
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. On July 2, 2004 and September 29, 2004, VCQ purchased an
additional $6.0 million and $5.6 million, respectively, of receivables from
AmeriCold Logistics at a 2% discount, using cash from collection of the trade
receivables previously purchased.
See Note 17 "Subsequent Events," for information regarding the purchase by
the Temperature-Controlled Logistics Corporation of all of the ownership
interests in VCQ.
22
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated joint ventures and investments as of September 30,
2004.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 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. Blue River
Land Company, L.L.C. was formed to acquire, develop and sell certain
real estate property in Summit County, Colorado.
(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. Canyon Ranch Las Vegas, L.L.C. operates a Canyon Ranch spa in
a hotel in Las Vegas.
(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. Empire Mountain Village,
L.L.C. was formed to acquire, develop and sell certain real estate
property at Deer Valley Ski Resort next to Park City, Utah.
(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. CR License, L.L.C. owns the
licensing agreement related to certain Canyon Ranch trade names and
trademarks.
(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. CR License II, L.L.C. and its
wholly-owned subsidiaries provide management and development
consulting services to a variety of entities in the hospitality,
real estate, and health and wellness industries.
(14) 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. SunTx
Fulcrum Fund, L.P.'s objective is to invest in a portfolio of
acquisitions that offer the potential for substantial capital
appreciation.
(15) SunTx Capital Partners, L.P. is the general Partner of the SunTx
Fulcrum Fund, L.P. 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 GMSPLP 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.
23
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY FINANCIAL INFORMATION
The Operating Partnership reports its share of income and losses based on
its ownership interest in its respective equity investments, adjusted for any
preference payments. The unconsolidated entities that are included under the
headings on the following tables are summarized below.
Balance Sheets as of September 30, 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 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 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 nine months ended September 30,
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 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 nine months ended September 30,
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 Commercial Properties Company, L.P.;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- The Woodlands Land Development Company, L.P.; and
- Other - This includes Manalapan Hotel Partners, L.L.C., 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.
24
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS:
AS OF SEPTEMBER 30, 2004
------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
- -------------- ------ --------- ----- -----
Real estate, net $ 742,629 $1,147,614
Cash 31,473 19,378
Other assets 63,230 114,121
---------- ----------
Total assets $ 837,332 $1,281,113
========== ==========
Notes payable $ 493,249 $ 773,292
Notes payable to the Operating Partnership - -
Other liabilities 44,448 7,014
Equity 299,635 500,807
---------- ----------
Total liabilities and equity $ 837,332 $1,281,113
========== ==========
Operating Partnership's share of unconsolidated
debt $ 161,748 $ 309,318 $ 1,402 $ 472,468
========== ========== ========== ==========
Operating Partnership's investments in
unconsolidated companies $ 107,671 $ 205,971 $ 43,308 $ 356,950
========== ========== ========== ==========
BALANCE SHEETS:
AS OF DECEMBER 30, 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 $ 99,139 $ 300,917 $ 40,538 $ 440,594
========== ========== ========== ==========
25
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
- -------------- ------ --------- ----- -----
Total revenues $ 97,178 $ 88,276
Expenses:
Operating expense 49,609 18,661 (2)
Interest expense 22,592 38,351
Depreciation and amortization 22,175 43,666
Taxes and other (income) expense 113 (3,377)
---------- ----------
Total expenses $ 94,489 $ 97,301
---------- ----------
Net income, impairments and gain (loss) on real
estate from discontinued operations $ 2,689 $ (9,025)
========== ==========
Operating Partnership's equity in net income
(loss) of unconsolidated companies $ 3,871 $ (4,514) $ (1,728) $ (2,371)
========== ========== ========== ==========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
THE WOODLANDS
LAND
TEMPERATURE- DEVELOPMENT
CONTROLLED COMPANY,
(in thousands) OFFICE LOGISTICS L.P.(1) OTHER TOTAL
- -------------- ------ --------- ------- ----- -----
Total revenues $ 107,601 $ 90,722 $ 82,644
Expenses:
Operating expense 41,934 18,322(2) 63,950
Interest expense 20,486 30,853 5,174
Depreciation and amortization 24,326 43,963 5,235
Taxes and other (income) expense - (1,389) -
---------- ---------- ----------
Total expenses $ 86,746 $ 91,749 $ 74,359
---------- ---------- ----------
Gain on sale of properties - 1,452 -
---------- ---------- ----------
Net income, impairments and gain (loss) on real
estate from discontinued operations $ 20,855 $ 425 $ 8,285
========== ========== ==========
Operating Partnership's equity in net income
(loss) of unconsolidated companies $ 9,981 $ 152 $ 4,350 $ 242 $ 14,725
========== ========== ========== ========== =========
- -----------
(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).
26
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The following table shows, as of September 30, 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
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 2004 2004 2004
- ----------- ---- ---- ----
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40% Operating
Partnership
Goldman Sachs (1) $ 486,770 $ 194,708 6.89%
Morgan Stanley (2) 251,457 100,583 4.71%
Various Capital Leases 35,015 14,007 4.84 to 13.63%
Bank of New York 50 20 12.88%
---------- ------------
773,292 309,318
---------- ------------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership (3)(4)(5) 109,662 54,831 4.76%
Crescent 5 Houston Center, L.P. - 25% Operating Partnership 90,000 22,500 5.00%
Crescent Miami Center, LLC - 40% Operating Partnership 81,000 32,400 5.04%
Crescent One BriarLake Plaza, L.P. - 30% Operating Partnership 50,000 15,000 5.40%
Houston PT Four Westlake Office Limited Partnership - 20%
Operating Partnership 47,580 9,516 7.13%
Crescent Five Post Oak Park, L.P. - 30% Operating Partnership 45,000 13,500 4.82%
Austin PT BK One Tower Office Limited Partnership - 20%
Operating Partnership 37,007 7,401 7.13%
Houston PT Three Westlake Office Limited Partnership - 20%
Operating Partnership 33,000 6,600 5.61%
---------- ------------
493,249 161,748
---------- ------------
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50% Operating Partnership (6) 2,804 1,402 4.84%
---------- ------------
---------- ------------
TOTAL UNCONSOLIDATED DEBT $1,269,345 $ 472,468
========== ============
FIXED RATE/WEIGHTED AVERAGE 6.62%
VARIABLE RATE/WEIGHTED AVERAGE 4.73%
----
TOTAL WEIGHTED AVERAGE 5.99%
====
DESCRIPTION FIXED/VARIABLE
MATURITY DATE SECURED/UNSECURED
------------- -----------------
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40% Operating
Partnership
Goldman Sachs (1) 5/11/2023 Fixed/Secured
Morgan Stanley (2) 4/9/2009 Variable/Secured
Various Capital Leases 6/1/2006 to 4/1/2017 Fixed/Secured
Bank of New York 5/1/2008 Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Operating Partnership (3)(4)(5) 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P. - 25% Operating Partnership 10/1/2008 Fixed/Secured
Crescent Miami Center, LLC - 40% Operating Partnership 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30% Operating Partnership 11/1/2010 Fixed/Secured
Houston PT Four Westlake Office Limited Partnership - 20%
Operating Partnership 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% Operating Partnership 1/1/2008 Fixed/Secured
Austin PT BK One Tower Office Limited Partnership - 20%
Operating Partnership 8/1/2006 Fixed/Secured
Houston PT Three Westlake Office Limited Partnership - 20%
Operating Partnership 9/1/2007 Fixed/Secured
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50% Operating Partnership (6) 12/31/2004 Variable/Secured
TOTAL UNCONSOLIDATED DEBT
FIXED RATE/WEIGHTED AVERAGE 13.3 years
VARIABLE RATE/WEIGHTED AVERAGE 3.0 years
--------------------
TOTAL WEIGHTED AVERAGE 9.9 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 3.6 years based on this date.
(2) 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. In connection with this loan, the
Temperature-Controlled Logistics Corporation entered into an interest-rate
cap agreement with a maximum LIBOR of 6.5% on the entire loan.
(3) Senior Note - Note A: $81.1 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: $23.8 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%. In
connection with this loan, the Operating Partnership entered into an
interest-rate cap agreement with a maximum LIBOR of 4.52% on all notes.
All notes are amortized based on a 25-year schedule. In August 2004, the
Operating Partnership contributed cash of approximately $9.6 million to
Main Street Partners, L.P. Main Street Partners, L.P. used this cash,
along with an equal cash contribution from the joint venture partner, to
pay off approximately $19.1 million of the Mezzanine Note with Deutsche
Bank due in December 2004. The Operating Partnership and the joint venture
partners have entered into an extension letter to extend the maturity to
December 1, 2005.
(4) The Operating Partnership and its joint venture partner each 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) This facility has two one-year extension options.
(6) 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 $2.8 million outstanding at September 30, 2004 and the
amount guaranteed was approximately $2.0 million.
27
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Operating Partnership's debt financing
at September 30, 2004:
SECURED DEBT
SEPTEMBER 30, 2004
------------------
(in thousands)
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).................................................................................................... $ 256,017
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, secured by the Funding I Properties.................... 232,673
Bank of America Fund XII Term Loan due January 2006, bears interest at LIBOR plus 225 basis points
(at September 30, 2004, the interest rate was 3.93%), with a two-year interest-only term and a
one-year extension option, secured by the Funding XII Properties.......................................... 226,035
JP Morgan Mortgage Note(2) 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 ................................................................. 187,922
Fleet Fund I Term Loan due May 2005, bears interest at LIBOR plus 350 basis points (at September 30,
2004, the interest rate was 5.15%), 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
(3)....................................................................................................... 158,030
Lehman Capital Note (4) due March 2005, bears interest at the 30-day LIBOR rate plus 150 basis
points (at September 30, 2004, the interest rate was 3.26%), with a nine-month interest-only term,
secured by the Fountain Place Office Property............................................................. 90,000
Fleet Term Loan due February 2007, bears interest at LIBOR rate plus 450 basis points (at September
30, 2004, the interest rate was 6.21%) 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
Wachovia Securities(5) due November 2005, bears interest at LIBOR plus 275 basis points (at
September 30, 2004, the interest rate was 4.51%) with an interest-only term, secured by the Alhambra
Office Property........................................................................................... 45,000
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
Mass Mutual Note(6) 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.............. 37,315
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.................................................................................................. 37,006
Metropolitan Life Note VII due May 2011, bears interest at 4.31% with monthly interest-only payments
based on a 25-year amortization schedule, secured by the Dupont Centre Office Property.................... 35,500
28
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
------------------
(in thousands)
SECURED DEBT (CONTINUED)
National Bank of Arizona Revolving Line of Credit(7) with maturities ranging from November 2004 to
December 2005, bears interest at prime rate plus 0 to 100 basis points (at September 30, 2004, the
interest rate was 4.75% to 5.75%), secured by certain DMDC assets......................................... 31,041
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
Allstate Note(6) 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.............. 25,687
JP Morgan Chase Note due September 2011, bears interest at 4.98% with an interest-only term, secured
by the 3773 Hughes Parkway Office Property................................................................ 24,755
Metropolitan Life Note VI(6) 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..... 24,142
JP Morgan Chase Note I due September 2011, bears interest at 4.98% with an interest-only term,
secured by the 3753 and 3763 Hughes Parkway Office Properties............................................. 14,350
Northwestern Life Note II(6) 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................................................................................... 10,310
FHI Finance Loan bears interest at LIBOR plus 450 basis points (at September 30, 2004, the interest
rate was 6.17%), with an initial interest-only term until the Net Operating Income Hurdle Date(8),
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 ...................................... 10,000
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
Texas Capital Bank(9) pre-construction line of credit due July 2006, bears interest at LIBOR plus
225 basis points (at September 30, 2004, the interest rate was 4.09%) with principal and interest
payments based on a 25-year amortization schedule, secured by land underlying development project......... 7,977
Nomura Funding VI Note(10) 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............ 7,709
The Rouse Company Note due December 2005 bears interest at prime rate plus 100 basis points (at
September 30, 2004, the interest rate was 5.75%) with an interest-only term, secured by undeveloped
land at Hughes Center..................................................................................... 7,500
Wells Fargo Note due November 2004, bears interest at LIBOR rate plus 200 basis points (at September
30, 2004, the interest rate was 3.88%) 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 10.5% at September 30, 2004, with maturities ranging between October 2004 and February
2009, secured by various CRDI and MVDC projects(11) ...................................................... 72,148
29
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
------------------
(in thousands)
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 (12) interest-only due May 2005, bears interest at LIBOR plus 212.5 basis points (at
September 30, 2004, the interest rate was 3.82%).......................................................... 307,500
------------
Total Notes Payable $ 2,855,891
============
- -----------------------
(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) 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.
(3) 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) match the total debt
service payments of this loan.
(4) The Operating Partnership's obligations under this loan were
transferred to FP Investors L.L.C. as part of the transaction in
connection with the Fountain Place Office Property. See Note 6,
"Other Transactions," for further information regarding this
transaction.
(5) Includes two notes from Wachovia Securities. The notes are due
November 2005, and bear interest at the LIBOR rate plus a spread of
(i) 100.5 basis points for a $31 million Wachovia note (at September
30, 2004, the interest rate was 2.765%), and (ii) 661.0 basis points
for a $14 million Wachovia note (at September 30, 2004, the interest
rate was 8.37%). Both notes are secured by The Alhambra Office
Property. The blended rate at September 30, 2004 for both notes was
4.51%. In October 2004, the Operating Partnership refinanced this
loan with a $50.0 million loan from Morgan Stanley for a 7-year
interest-only term at a fixed rate of 5.06%.
(6) The Operating Partnership assumed these loans in connection with the
Hughes Center acquisitions. The following table lists the
unamortized premium associated with the assumption of above market
interest rate debt which is included in the balance outstanding at
September 30, 2004 and the effective interest rate of the debt
including the premium.
(dollars in thousands)
Loan Unamortized Premium Effective Rate
- ------------------------- ------------------- --------------
Mass Mutual Note $ 2,648 3.47%
Allstate Note 1,522 5.19%
Metropolitan Life Note VI 2,032 5.68%
Northwestern Life Note II 872 3.80%
--------
Total $ 7,074
========
The premium 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.
(7) This facility is a $35.6 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 $24.0 million and is
subject to certain borrowing base limitations and bears interest at
prime (at September 30, 2004, the interest rate was 4.75%). The
warehouse facility bears interest at prime plus 100 basis points (at
September 30, 2004, the interest rate was 5.75%) 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 September
30, 2004, the interest rates were 5.25% to 5.75%) and is limited to
$1.6 million. The blended rate at September 30, 2004, for the
revolving credit facility, the warehouse facility and the short-term
facility was 5.06%.
(8) The Operating Partnership's joint venture partner, which owns a
19.9% interest in the Sonoma Mission Inn & Spa, had funded $10.0
million of 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.
(9) This facility is a $10.5 million pre-construction development line
of credit secured by land underlying the development project located
in Dallas, Texas.
(10) 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.
(11) Includes $4.3 million of fixed rate debt ranging from 2.9% to 10.5%
and $67.8 million of variable rate debt ranging from 3.87% to 5.75%.
(12) The $400.0 million Credit Facility with Fleet is an unsecured
revolving line of credit to Funding VIII and guaranteed by the
Operating Partnership. Availability under the line of credit is
subject to certain covenants including limitations on total
leverage, fixed charge ratio, debt service coverage, minimum
tangible net worth, and specific mix of office and hotel assets and
average occupancy of Office Properties. At September 30, 2004, the
maximum borrowing capacity under the credit facility was $399
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.
30
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 28, 2004, the Operating Partnership paid off the $220.0 million
Deutsche Bank-CMBS loan with proceeds from the Fountain Place transaction and a
draw on the Operating Partnership's credit facility. See Note 6, "Other
Transactions," for additional information regarding the Fountain Place
transaction. The loan was secured by the Funding X Properties and Spectrum
Center. In July 2004, the Operating Partnership unwound the $220.0 million
interest rate cap with JP Morgan Chase that corresponded to this loan.
The following table shows information about the Operating Partnership's
consolidated fixed and variable rate debt and does not include 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 (1)
- -------------- ---------- ---------- -------- ----------------
Fixed Rate Debt $1,823,238 64% 7.76% 7.4 years
Variable Rate Debt(2) 1,032,653 36 4.30 1.1 years
---------- ---- ---- ---
Total Debt $2,855,891 100% 6.52%(3) 4.8 years
========== ==== ==== ===
(1) Based on contractual maturity and does not include an extension option on
Bank of America Fund XII term loan or expected early payment of LaSalle
Note I, J.P. Morgan Mortgage Note, or the Nomura Funding VI Note.
(2) Balance excludes hedges. The percentages for fixed and variable rate debt,
including the $428 million of hedged variable rate debt, are 79% and 21%,
respectively.
(3) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 6.78%.
Listed below are the aggregate principal payments by year required as of
September 30, 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 $ 21,274 $ - $ - $ 21,274
2005 422,277 - 307,500 729,777
2006 460,288 - - 460,288
2007 112,193 250,000 - 362,193
2008 47,321 - - 47,321
Thereafter 860,038 375,000 - 1,235,038
---------- -------- ---------- ----------
$1,923,391 $625,000 $ 307,500 $2,855,891
========== ======== ========== ==========
- -----------------------
(1) Based on contractual maturity and does not include extension option on
Bank of America Fund XII term loan or expected early payment of LaSalle
Note I, J.P. 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 Notes, 2009 Notes, 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 September 30, 2004,
no event of default had occurred, and the Operating Partnership was in
compliance with all 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 nine months ended September 30, 2004, there were no circumstances that
required prepayment or increased collateral related to the Operating
Partnership's existing debt.
31
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was 10 of the 11
properties previously in the Funding II collateral pool. 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.
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 Properties (CREM
Holdings, LLC, Crescent Capital Funding, LLC, Crescent Funding Interest, LLC,
CRE Management I Corp.); Funding III Properties (CRE Management III Corp.);
Funding IV Properties (CRE Management IV Corp.); Funding V Properties (CRE
Management V Corp.); Funding VI Properties (CRE Management VI Corp.); Funding
VIII Properties (CRE Management VIII, LLC); 707 17th Street (Crescent 707 17th
Street, LLC); Funding X Properties (CREF X Holdings Management, LLC, CREF X
Holdings, L.P., CRE Management X, LLC); Funding XII Properties (CREF XII Parent
GP, LLC, CREF XII Parent L.P., CREF XII Holding GP, LLC, CREF Holdings, L.P.,
CRE Management XII, LLC); Spectrum Center (Spectrum Mortgage Associates, L.P.,
CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management, LLC),
The BAC-Colonnade (CEI Colonnade Holdings, LLC), and Crescent Finance Company.
10. CASH FLOW HEDGES
The Operating Partnership uses derivative financial instruments to convert
a portion of its variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. As of September 30, 2004, the Operating Partnership
had three 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 hedge agreements
during the nine months ended September 30, 2004, and additional interest expense
and unrealized gains (losses) recorded in Accumulated Other Comprehensive Income
("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- -------------- -------- -------- --------- ----------- ---------------- ----------------
(in thousands)
4/18/00 $100,000 4/18/04 6.76% $ - $1,712 $1,695
2/15/03 100,000 2/15/06 3.26% (931) 1,531 1,415
2/15/03 100,000 2/15/06 3.25% (927) 1,529 1,413
9/02/03 200,000 9/01/06 3.72% (3,475) 3,786 3,122
------- ------ ------
$(5,333) 8,558 $7,645
======= ====== ======
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 $0.6 million for
the nine months ended September 30, 2004.
The Operating Partnership has designated its 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 OCI. The effective portion that has been
deferred in OCI will be reclassified to earnings as interest expense when the
hedged items impact earnings. If a cash flow hedge falls
32
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
nine months ended September 30, 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.
11. COMMITMENTS AND CONTINGENCIES
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 September 30, 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
recorded a liability, in an amount not significant to its operations, for
guarantees entered into upon following the adoption of FIN 45.
GUARANTEED AMOUNT MAXIMUM
OUTSTANDING AT GUARANTEED
SEPTEMBER 30, 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) 1,963 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
Sovereign Bank (5) 3,654 3,654
-------- -------
Total Guarantees $ 17,450 $21,787
======== =======
- -----------
(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 8, "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 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 $2.8 million outstanding at September 30, 2004 and the
amount guaranteed was $2.0 million.
(4) The Operating Partnership and its joint venture partner each obtained
separate Letters of Credit to guarantee the repayment of up to $4.3
million each of the Main Street Partners, L.P. loan.
(5) The Operating Partnership provided guarantees for the repayment of up to
$3.7 million of loans to Sovereign Bank in the event a final certificate
of occupancy is not obtained for timeshare units sold at a residential
development project at an entity which is consolidated into CRDI. The
loans guaranteed represent third-party financing obtained by buyers of the
units.
33
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER COMMITMENTS
In 2003, the Operating Partnership entered into a one year option
agreement for the future sale of approximately 1.5 acres of undeveloped
investment land located in Houston, Texas, for approximately $7.8 million. The
Operating Partnership received $0.01 million of consideration in 2003. The
option agreement may be extended up to four years on a yearly basis at the
option of the prospective purchaser for additional consideration. In September
2004, the Operating Partnership received $0.01 million of consideration to
extend this option for an additional year.
See Note 16, "COPI," for a description of the Operating Partnership's
commitments related to the agreement with COPI, executed on February 14, 2002.
CONTINGENCIES
See Note 6, "Other Transactions," for information on the Operating
Partnership's $79.9 million contingent obligation included in the "Accounts
payable, accrued expenses and other liabilities" line item in the Operating
Partnership's Consolidated Balance Sheet at September 30, 2004, related to the
Fountain Place Office Property transaction.
The Operating Partnership has a contingent obligation of approximately
$1.0 million related to a construction warranty matter. The Operating
Partnership believes it is probable that a significant amount would be recovered
through reimbursements from third parties.
12. MINORITY INTEREST
Minority interest in real estate partnerships represents joint venture or
preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and consolidates the real estate partnerships into
the financial statements of the Operating Partnership. Income in the real estate
partnerships is allocated to minority interest based on weighted average
percentage ownership during the year.
The following table summarizes the minority interest as of September 30,
2004 and December 31, 2003:
SEPTEMBER 30, DECEMBER 31,
(in thousands) 2004 2003
- -------------- ------------ -----------
Development joint venture partners - Residential Development Segment $ 28,742 $31,305
Joint venture partners - Office Segment 8,775 8,790
Joint venture partners - Resort/Hotel Segment 6,805 7,028
Other (185) -
-------- -------
$ 44,137 $47,123
======== =======
The following table summarizes the minority interests' share of net
loss (income) for the nine months ended September 30, 2004 and 2003:
SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 2004 2003
- -------------- ------------ ------------
Development joint venture partners - Residential Development Segment $(2,086) $(1,630)
Joint venture partners - Office Segment 96 367
Joint venture partners - Resort/Hotel Segment 840 524
Other 44 -
------- -------
$(1,106) $ (739)
======= =======
34
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PARTNERS' CAPITAL
Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the nine months ended September 30, 2004, there were 9,458
units exchanged for 18,916 common shares of the Company.
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
unitholders and preferred unitholders during the nine months ended September 30,
2004 (dollars in thousands, except per unit amounts).
PER UNIT ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
- ------------------------ ------------ ------- -------- -------- ------------
Units $ 0.75 $43,910 01/31/04 02/13/04 $ 3.00
Units $ 0.75 $43,921 04/30/04 05/14/04 $ 3.00
Units $ 0.75 $43,892 07/30/04 08/13/04 $ 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 A Preferred Units $ 0.422 $ 5,991 07/30/04 08/13/04 $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
Series B Preferred Units $ 0.594 $ 2,019 07/30/04 08/13/04 $2.3750
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 dividends 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.
14. INCOME TAXES
TAXABLE CONSOLIDATED ENTITIES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the nine months ended September 30, 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 of the Operating Partnership for inclusion in their respective income
tax calculations. Accordingly, no provision or benefit for income taxes has been
made other than for certain consolidated subsidiaries. The Operating Partnership
consolidates certain taxable REIT subsidiaries, which are
35
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject to federal and state income tax. For the nine months ended September 30,
2004 and 2003, the Operating Partnership's federal income tax benefit from
continuing operations was $13.2 million and $10.3 million, respectively. The
Operating Partnership's $13.2 million income tax benefit at September 30, 2004
consists primarily of $10.4 million for the Residential Development Segment and
$5.7 million for the Resort/Hotel Segment partially offset by $1.3 million tax
expense for the Office Segment and $1.6 million expense for other taxable REIT
subsidiaries.
The Operating Partnership's total net tax asset of approximately $31.1
million at September 30, 2004 includes $17.7 million of net deferred tax assets.
SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. There was no change in the valuation allowance during the
nine months ended September 30, 2004.
15. RELATED PARTY TRANSACTIONS
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of September 30, 2004, the Operating Partnership had approximately
$38.0 million loan balances outstanding, inclusive of current interest accrued
of approximately $0.3 million, to certain employees and trust managers of the
Operating Partnership and the Company on a recourse basis pursuant to the
Operating Partnership's and the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company 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 September 30, 2004. No conditions exist at September
30, 2004 which would cause any of the loans to be in default. Effective July 29,
2002, the Operating Partnership ceased offering to its employees and trust
managers the option to obtain loans pursuant to the Company's and the Operating
Partnership's stock and unit incentive plans.
OTHER
On June 28, 2002, the Operating Partnership purchased the home of an
executive officer of the General Partner and the Company to facilitate the
hiring and relocation of this executive officer. The purchase price was
approximately $2.6 million, consistent with a third-party appraisal obtained by
the Operating Partnership. Shortly after the purchase of the home, certain
changes in the business environment in Houston resulted in a weakened housing
market. In May 2004, the Operating Partnership completed the sale of the home
for proceeds, net of selling costs, of approximately $1.8 million. 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.
16. COPI
On February 14, 2002, the Operating Partnership and COPI entered into an
agreement (the "Agreement") pursuant to which COPI and the Operating Partnership
agreed to jointly seek approval by the bankruptcy court of a pre-packaged
bankruptcy plan for COPI. 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 September 30, 2004, the Operating
Partnership loaned to COPI, or paid directly on COPI's behalf, approximately
$13.2 million to fund these costs, claims and expenses, $2.2 million of which
was funded in the nine months ended September 30, 2004. The Operating
Partnership also agreed that the Company would issue common shares of the
Company with a minimum 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. COPI
obtained the loan from Bank of America primarily to participate in investments
with the Operating Partnership. As a condition to making the loan, Bank of
America required Richard E. Rainwater, the Chairman of the Board of Trust
Managers of the Company, and John C. Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company and sole director and Chief
Executive Officer of the General Partner , to enter into a support agreement
with COPI and Bank of America, pursuant to which Messrs. Rainwater and Goff
agreed to make additional equity investments in COPI under certain
circumstances. COPI has agreed that it will use the proceeds of the sale of its
interest in AmeriCold Logistics to repay Bank of America in full.
36
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 10, 2003, COPI filed a plan under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Texas. On June 22, 2004, the bankruptcy court confirmed the bankruptcy plan,
as amended. Effectiveness of the pre-packaged bankruptcy plan for COPI is
contingent upon a number of conditions, including the sale of COPI's interest in
AmeriCold Logistics, the repayment of COPI's obligation to Bank of America prior
to November 22, 2004 and the issuance by the Operating Partnership of common
shares of the Company to the COPI stockholders.
On November 4, 2004, COPI sold its interest in AmeriCold Logistics for
approximately $19.1 million. In accordance with the confirmed bankruptcy plan,
COPI used approximately $15.4 million of the proceeds to repay the loan from
Bank of America, including accrued interest. In addition, in accordance with the
bankruptcy plan, COPI used approximately $4.5 million of the proceeds to satisfy
a portion of its debt obligations to the Operating Partnership. Since the
Operating Partnership wrote off these debt obligations in 2001, the $4.5 million
will be included in "Interest and Other Income" in the Operating Partnership's
Consolidated Statement of Operations for the year ended December 31, 2004.
17. SUBSEQUENT EVENTS
JOINT VENTURES
On November 5, 2004, the Operating Partnership entered into a joint
venture with affiliates of J.P. Morgan Fleming Asset Management, Inc. ("JPM") in
connection with which JPM will purchase a 60% interest in three Office
Properties, The Crescent, Houston Center and Post Oak Central, based on a
valuation of $898.5 million. The Operating Partnership initially will hold the
remaining 40% interest and anticipates a gain on the transaction.
Under this joint venture, the Operating Partnership will continue to
manage and lease the Office Properties on a fee basis. The Operating Partnership
anticipates the joint venture will be accounted for under the equity method.
TEMPERATURE-CONTROLLED LOGISTICS
On November 4, 2004, the Temperature-Controlled Logistics Corporation
purchased 100% of the ownership interests in its tenant, AmeriCold Logistics,
for approximately $47.7 million. In connection with this transaction, the three
triple-net master leases between the Temperature-Controlled Logistics
Corporation and AmeriCold Logistics were terminated and all deferred rent was
cancelled.
On November 4, 2004, the Temperature-Controlled Logistics Corporation also
purchased 100% of the ownership interests in VCQ for approximately $24.8
million. The Temperature-Controlled Logistics Corporation used cash
contributions from its owners, of which the Operating Partnership's 40% portion
was approximately $9.9 million, to fund the purchase. As a result of its 56%
ownership interests in VCQ, the Operating Partnership received proceeds from the
sale of VCQ of approximately $13.2 million.
37
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, on November 4, 2004, the Temperature-Controlled Logistics
Partnership, through which the Operating Partnership owns its 40% interest in
the Temperature-Controlled Logistics Corporation, entered into an agreement to
sell a 20.7% interest in the Temperature-Controlled Logistics Corporation to the
Yucaipa Companies for $145.0 million. In addition, Yucaipa will assist in the
management of the Temperature-Controlled Logistics Corporation and may earn a
promote of up to 20% of the increase in value through December 31, 2007. The
promote is limited to 10% of the Temperature-Controlled Logistics Partnership's
remaining common shares in the Temperature-Controlled Logistics Corporation.
Immediately following this transaction, the Temperature-Controlled Logistics
Partnership will dissolve and, after the payment of all of its liabilities,
distribute its remaining assets to its partners. The assets to be distributed to
the Operating Partnership consist of common shares representing an approximately
31.7% interest in the Temperature-Controlled Logistics Corporation and cash of
approximately $34.6 million. In addition, the partners have reached an
agreement to resolve the preferential allocation.
ASSET ACQUISITIONS
On October 21, 2004, the Operating Partnership entered into a partnership
agreement with affiliates of JPI Multi-family Investments L.P. to develop a
single multi-family luxury apartment project in Dedham, Massachusetts. The
Operating Partnership funded $13.3 million or 100% of the equity, and received a
limited partnership interest which earns a preferred return and a profit split
above the preferred return hurdle. The Operating Partnership will consolidate
the partnership, Jefferson Station, L.P., in accordance with FIN 46 guidance, as
it was determined to be a VIE of which the Operating Partnership is the primary
beneficiary.
ASSET DISPOSITIONS
On October 19, 2004, the Operating Partnership completed the sale of the
Hyatt Regency Hotel in Albuquerque, New Mexico. The sale generated proceeds, net
of selling costs, of approximately $32.5 million and a net gain of approximately
$3.9 million. This property was wholly-owned. The proceeds were used to pay down
$26.0 million of the Operating Partnership's Bank of America Fund XII Term Loan
and the remainder was used to pay down the Operating Partnership's credit
facility.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements............................................................ 40
Overview.............................................................................. 41
Recent Developments................................................................... 44
Results of Operations
Three and nine months ended September 30, 2004 and 2003.......................... 48
Liquidity and Capital Resources
Cash Flows for the nine months ended September 30, 2004.......................... 55
Equity and Debt Financing............................................................. 60
Unconsolidated Investments............................................................ 64
Significant Accounting Policies....................................................... 65
Funds from Operations................................................................. 69
39
FORWARD-LOOKING STATEMENTS
You should read this section in conjunction with the consolidated interim
financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Operating Partnership's Form 10-K for the year ended December 31, 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) and may also be adversely affected 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 provide 4.5% of the
Operating Partnership's annualized office revenues;
- Further deterioration in the resort/business-class hotel markets or in the
economy generally;
- Further deterioration in the market or in the economy generally and
increases in construction cost associated with development for residential
land or luxury residences, including single-family homes, townhomes and
condominiums;
- 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 dispose of its investment
land, and other non-core assets, on favorable terms and within anticipated
time frames;
- The ability of the Operating Partnership to reinvest available funds at
anticipated returns and consummate anticipated office acquisitions on
favorable terms and within anticipated timeframes;
- The ability of the Operating Partnership to close and consummate its
significant pending transactions on the terms and in the timeframes
anticipated by management;
- The concentration of a significant percentage of the Operating
Partnership's assets in Texas;
- The existence of complex regulations relating to the Company's status as a
REIT, the effect of future changes in REIT requirements as a result of new
legislation and the adverse consequences of the failure to qualify as a
REIT; and
- Other risks detailed from time to time in the Operating Partnership's
filings with the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Operating Partnership is not obligated to
update these forward-looking statements to reflect any future events or
circumstances.
40
OVERVIEW
The Operating Partnership's assets and operations are divided 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 75 Office Properties and
represented 67% of gross assets as of September 30, 2004.
Capital flows in the real estate industry have changed significantly over
the last few years. Institutions as well as other investors, principally U.S.
pension funds, have increased their allocation to real estate and it appears
that this will continue for the foreseeable future. This inflow of capital has
created a uniquely attractive environment for the sale of assets as well as
joint ventures. Likewise, the acquisition environment is highly competitive,
making it more difficult to provide attractive returns on equity that are
comparable to those achieved in acquisitions made during the 1990's.
The Operating Partnership has adapted its strategy to align itself with
institutional partners, with the goal of transitioning towards being a real
estate investment management company. Rather than competing with the substantial
inflow of capital into the acquisition market, the Operating Partnership is
focusing on acquiring assets jointly with these institutional investors, moving
existing assets into joint-venture arrangements with these investors, and
capitalizing on its award-winning platform in office management and its leasing
expertise to continue to provide these services, for a fee, for the properties
in the ventures. Where possible, the Operating Partnership will strive to
negotiate performance based incentives that allow for additional equity to be
earned if return targets are exceeded.
Consistent with this strategy, the Operating Partnership continually
evaluates its existing portfolio for potential joint-venture opportunities. In
the near term, the Operating Partnership could more than double its existing
level of joint ventures to over $2 billion by contributing existing assets to
ventures. Recently, the Operating Partnership announced significant joint
venture transactions involving five of its landmark Properties. The Operating
Partnership anticipates that these transactions, to be completed in two phases
with institutional partners, will be finalized in the fourth quarter of 2004. As
with previous ventures, the Operating Partnership would be a minority partner
but would continue to provide leasing and management services to the ventures.
In addition, the Operating Partnership has sold $140 million in 2004 and expects
to sell an additional $135 million in non-core assets in the near term,
including land holdings that are currently not contributing to the Operating
Partnership's earnings. Also included in these sales are two business class
hotels, one of which was sold in October 2004 at an attractive gain and the
remaining hotel, which the Operating Partnership believes it can sell at an
attractive gain, and at the same time further simplify its business model. As
these ventures and sales are completed, the Operating Partnership will redeploy
proceeds into future acquisitions of traditional core assets, pay down and
defease certain consolidated debt and obligations, repurchase common shares of
the Company consistent with the requirements of its existing debt, and allocate
capital to select operating partners.
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 September 30 and December 31) 86.4%(1) 84.0%(1)
Leased Occupancy (at September 30 and December 31) 88.8%(2) 86.4%(2)
In-Place Weighted Average Full-Service Rental Rate (at September 30 and December 31) $ 22.73 $ 22.63
Tenant Improvement and Leasing Costs per Sq. Ft. per year (three months ended September 30) $ 2.97 $ 3.16
Tenant Improvement and Leasing Costs per Sq. Ft. per year (nine months ended September 30) $ 3.03 $ 3.21
Average Lease Term (three months ended September 30) 8.6 years 8.0 years
Average Lease Term (nine months ended September 30) 7.5 years 7.4 years
Same-Store NOI(3) (Decline) (three months ended September 30) (3.8)% (14.4)%
Same-Store NOI(3) (Decline) (nine months ended September 30) (3.3)% (12.5)%
Same-Store Average Occupancy (three months ended September 30) 85.9% 84.2%
Same-Store Average Occupancy (nine months ended September 30) 85.8% 84.7%
- -----------------------
(1) Economic occupancy reflects the occupancy of all tenants paying rent.
(2) Leased occupancy reflects the amount of contractually obligated space,
whether or not commencement has occurred.
(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
owned for the entirety of the comparable periods.
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.
41
RESORTS
The following table shows the performance factors used by management to
assess the operating performance of the Resort Properties.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
---------------- ----------------- -----------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Luxury and Destination Fitness Resorts 80% 76% $436 $406 $332 $300
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
---------------- ----------------- -----------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Luxury and Destination Fitness Resorts 71% 72% $490 $460 $334 $320
The occupancy decrease at the Operating Partnership's luxury and
destination fitness resorts for the nine months ended September 30, 2004, as
compared to the same period in 2003 is partially driven by a seven percentage
point decrease in occupancy at Sonoma Mission Inn (from 66% to 59%) as a result
of the renovation of 97 rooms which were taken out of service in November 2003.
Renovation was completed in the second quarter of 2004 and the 97 rooms were put
back into service. In addition, occupancy decreased thirteen percentage points
(from 77% in the third quarter 2003 to 64% in the third quarter 2004) at Ventana
Inn as a result of the renovation of 13 suites which were taken out of service
in April 2004.
The luxury and destination fitness resorts occupancy, average daily rate,
and revenue per available room increases in the third quarter 2004 compared to
third quarter 2003 were driven primarily by increases at Canyon Ranch Tucson and
Canyon Ranch Lenox at which occupancy increased seven percentage points (from
77% to 84%), average daily rate increased 6% (from $620 to $658), and revenue
per available room increased 12% (from $448 to $503) as a result of expanded
medical service offerings.
The Operating Partnership anticipates a minimal change in occupancy and a
modest increase in revenue per available room in 2004 at the Resort Properties
as the economy and the travel industry continue to recover, offset by the
financial impact of Sonoma Mission Inn and Ventana Inn renovations in 2004.
42
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 September 30, 2004.
Desert Mountain
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2004 2003
-------- --------
Residential Lot Sales 5 10
Average Sales Price per Lot (1) $923,000 $457,000
- ---------------
(1) Includes equity golf membership
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
2004 2003
-------- --------
Residential Lot Sales 44 34
Average Sales Price per Lot (1) $807,000 $611,000
- ---------------
(1) Includes equity golf membership
Desert Mountain is in the latter stages of development and has primarily
its premier lots remaining in inventory. An increase 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 SEPTEMBER 30,
---------------------------------------
2004 2003
--------------- ---------------
Residential Lot Sales 31 36
Residential Unit Sales 9 10
Residential Timeshare Units 3.9 0.6
Average Sales Price per Residential Lot $ 200,000 $ 60,000
Average Sales Price per Residential Unit $ 1,901,000 $ 1,240,000
Average Sales Price per Residential Equivalent Timeshare Unit $ 2,262,000 $ 1,762,000
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
2004 2003
---------- ----------
Residential Lot Sales 150 62
Residential Unit Sales 20 50
Residential Timeshare Units 7.32 3.7
Average Sales Price per Residential Lot $ 137,000 $ 53,000
Average Sales Price per Residential Unit $1,413,000 $1,180,000
Average Sales Price per Residential Equivalent Timeshare Unit $2,151,000 $1,432,000
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
developed in 2004 for delivery in 2005.
LIQUIDITY
The Operating Partnership's primary sources of liquidity are cash flow
from operations, its credit facility, return of capital from the Residential
Development Segment, and proceeds from asset sales and joint ventures. The
Operating Partnership believes cash flows from operations will be sufficient to
offset normal operating expenses, as well as capital requirements (including
property improvements, tenant improvements and leasing commissions) in 2004. The
cash flow from the Residential Development segment is cyclical in nature and
primarily realized in the last quarter of each year. The Operating Partnership
expects to meet any interim shortfalls in operating cash flow caused by this
cyclicality through working capital draws under the credit facility. As of
September 30, 2004, the Operating Partnership had $83.9 million in borrowing
capacity remaining under its credit facility. However, net cash flows from
operations are not anticipated to fully cover the projected distributions on the
Operating Partnership's units. The Operating Partnership expects to use cash
from operations as well as return of capital from the Residential Development
Segment, estimated at
43
approximately $85 million for 2004, proceeds from asset sales and joint ventures
and business initiatives including investment land sales and other income to
cover the shortfall.
Through the sale of the Woodlands in December 2003, the issuance of
preferred shares and additional financing of Temperature-Controlled Logistics
this year, and additional leverage on Hughes Center assets, the Operating
Partnership has in excess of $200 million in liquidity to make new investments
throughout 2004, of which $90.5 million has been invested through September 30,
2004 and $64.6 million has been used to pay down debt until reinvestment
opportunities arise. Additionally, the Operating Partnership continues to
execute on its capital recycling program and has sold six office properties and
one business class hotel generating proceeds, net of selling costs, of $126.7
million which were used to pay down a portion of the Bank of America Fund XII
Term Loan and to reduce the amount outstanding under the credit facility.
RECENT DEVELOPMENTS
JOINT VENTURES
On November 5, 2004, the Operating Partnership entered into a joint
venture with affiliates of J.P. Morgan Fleming Asset Management, Inc. ("JPM") in
connection with which JPM will purchase a 60% interest in three Office
Properties, The Crescent, Houston Center and Post Oak Central based on a
valuation of $898.5 million. The Operating Partnership initially will hold the
remaining 40% interest and is currently in negotiations with another
institutional investor for a transaction that would reduce its interest to 24%.
In addition, the Operating Partnership is in final negotiations with JPM to form
a second joint venture in which JPM will purchase a 76% interest in two Office
Properties, Trammell Crow Center and Fountain Place. The Operating Partnership
anticipates a gain on these transactions.
Under both joint ventures, the Operating Partnership will continue to
manage and lease the Office Properties on a fee basis. The Operating Partnership
anticipates the joint ventures will be accounted for under the equity method.
TEMPERATURE-CONTROLLED LOGISTICS
On November 4, 2004, the Temperature-Controlled Logistics Corporation
purchased 100% of the ownership interests in its tenant, AmeriCold Logistics,
for approximately $47.7 million. In connection with this transaction, the three
triple-net master leases between the Temperature-Controlled Logistics
Corporation and AmeriCold Logistics were terminated and all deferred rent was
cancelled.
On November 4, 2004, the Temperature-Controlled Logistics Corporation also
purchased 100% of the ownership interests in VCQ for approximately $24.8
million. The Temperature-Controlled Logistics Corporation used cash
contributions from its owners, of which the Operating Partnership's 40% portion
was approximately $9.9 million, to fund the purchase. As a result of its 56%
ownership interests in VCQ, the Operating Partnership received proceeds from the
sale of VCQ of approximately $13.2 million.
In addition, on November 4, 2004, the Temperature-Controlled Logistics
Partnership, through which the Operating Partnership owns its 40% interest in
the Temperature-Controlled Logistics Corporation, entered into an agreement to
sell a 20.7% interest in the Temperature-Controlled Logistics Corporation to the
Yucaipa Companies for $145.0 million. In addition, Yucaipa will assist in the
management of the Temperature-Controlled Logistics Corporation and may earn a
promote of up to 20% of the increase in value through December 31, 2007. The
promote is limited to 10% of the Temperature-Controlled Logistics Partnership's
remaining common shares in the Temperature-Controlled Logistics Corporation.
Immediately following this transaction, the Temperature-Controlled Logistics
Partnership will dissolve and, after the payment of all of its liabilities,
distribute its remaining assets to its partners. The assets to be
44
distributed to the Operating Partnership consist of common shares, representing
an approximately 31.7% interest in the Temperature-Controlled Logistics
Corporation and cash of approximately $34.6 million. In addition, the partners
have reached an agreement to resolve the preferential allocation.
ASSET ACQUISITIONS
OFFICE
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 included $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 and subsequently placed a $35.5 million
non-recourse first mortgage loan on the property. This Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.
On May 10, 2004, the Operating Partnership completed the purchase of the
remaining Hughes Center Office Property in Las Vegas, Nevada for approximately
$18.3 million. The purchase was 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.
On August 6, 2004, the Operating Partnership acquired The Alhambra, two
Class A Office Properties, located in the Coral Gables submarket of Miami,
Florida. The Operating Partnership acquired the Office Properties for
approximately $72.3 million, funded by the Operating Partnership's assumption of
a $45.0 million loan from Wachovia Securities and a draw on the Operating
Partnership's credit facility. The Office Properties are wholly-owned and are
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.
RESIDENTIAL DEVELOPMENT
On October 21, 2004, the Operating Partnership entered into a partnership
agreement with affiliates of JPI Multi-family Investments, L.P. to develop a
single multi-family luxury apartment project in Dedham, Massachusetts. The
Operating Partnership funded $13.3 million or 100% of the equity and received a
limited partnership interest which earns a preferred return and profit split
above the preferred return hurdle. The Operating Partnership will
consolidate the partnership, Jefferson Station, L.P., under FIN 46 guidance, as
it was determined to be a VIE of which the Operating Partnership is the primary
beneficiary.
ASSET DISPOSITIONS
OFFICE
On March 23, 2004, the Operating Partnership completed the sale of the
1800 West Loop South Office Property in Houston, Texas. The sale generated
proceeds, net of selling costs, 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.
45
On March 31, 2004, the Operating Partnership sold its last remaining
behavioral healthcare property. The sale generated proceeds, net of selling
costs, of approximately $2.0 million and a net loss of approximately $0.4
million. This property was wholly-owned.
On April 13, 2004, the Operating Partnership completed the sale of the
Liberty Plaza Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, 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.
On June 17, 2004, the Operating Partnership completed the sale of the
Ptarmigan Place Office Property in Denver, Colorado. The sale generated
proceeds, net of selling costs, of approximately $25.3 million and a net loss of
approximately $2.4 million. The Operating Partnership previously recorded an
impairment charge of approximately $0.6 million, during the quarter ended March
31, 2004. In addition, the Operating Partnership completed the sale of
approximately 3.0 acres of undeveloped land adjacent to Ptarmigan Place. The
sale generated proceeds, net of selling costs, of approximately $2.9 million and
a net gain of approximately $0.9 million. The proceeds from these sales were
used to pay down a portion of the Operating Partnership's Bank of America Fund
XII Term Loan. The property and adjacent land were wholly-owned.
On June 29, 2004, the Operating Partnership completed the sale of the
Addison Tower Office Property in Dallas, Texas. The sale generated proceeds, net
of selling costs, of approximately $8.8 million and a net gain of approximately
$0.2 million. The proceeds from the sale were used primarily to pay down the
Operating Partnership's credit facility. This property was wholly-owned.
On July 2, 2004, the Operating Partnership completed the sale of the 5050
Quorum Office Property in Dallas, Texas. The sale generated proceeds, net of
selling costs, of approximately $8.9 million and a loss of approximately $0.2
million. The Operating Partnership previously recorded an impairment charge of
approximately $1.0 million during the quarter ended March 31, 2004. The proceeds
from the sale were used primarily to pay down the Operating Partnership's credit
facility. This property was wholly-owned. The Operating Partnership continues to
provide management and leasing services for this property.
On July 29, 2004, the Operating Partnership completed the sale of the
12404 Park Central Office Property in Dallas, Texas. The sale generated
proceeds, net of selling costs, of approximately $9.3 million. The Operating
Partnership previously recorded impairment charges totaling approximately $4.6
million, $3.4 million during the year ended December 31, 2003, $0.7 million
during the quarter ended March 31, 2004 and $0.5 million during the quarter
ended June 30, 2004. The proceeds from the sale were used primarily to pay down
the Bank of America Fund XII Term Loan. This property was wholly-owned.
UNDEVELOPED LAND
On August 16, 2004, the Operating Partnership sold approximately 2.5 acres
of undeveloped land located in Houston, Texas. The sale generated proceeds, net
of selling costs, of approximately $6.4 million and a note receivable in the
amount of $5.6 million. The note provides for payments of principal of $0.5
million due in December 2004, annual installments of $1.0 million each due
beginning August 2005 through August 2008, and $1.1 million due at maturity in
August 2009 and does not bear interest. The Operating Partnership recognized a
net gain of approximately $7.6 million included in the "Income from investment
land sales, net" line item in the accompanying Consolidated Statements of
Operations. The proceeds were used to pay down the Operating Partnership's
credit facility.
RESORT/HOTEL
On October 19, 2004, the Operating Partnership completed the sale of the
Hyatt Regency Hotel in Albuquerque, New Mexico. The sale generated proceeds, net
of selling costs, of approximately $32.5 million and a net gain of approximately
$3.9 million. This property was wholly-owned. The proceeds were used to pay down
$26.0 million of the Operating Partnership's Bank of America Fund XII Term Loan
and the remainder was used to pay down the Operating Partnership's credit
facility.
RESIDENTIAL DEVELOPMENT
On September 14, 2004, the Operating Partnership completed the sale of
Breckenridge Commercial Retail Center in Breckenridge, Colorado. The sale
generated proceeds to the Operating Partnership, net of selling costs and
repayment of debt, of approximately $1.5 million, and a net gain of
approximately $0.1 million, net of minority interests and income tax.
46
The Operating Partnership previously recorded an impairment charge of
approximately $0.7 million, net of minority interests and income tax, during the
year ended December 31, 2003. The proceeds from the sale were used primarily to
pay down the Operating Partnership's credit facility.
OTHER TRANSACTIONS
FOUNTAIN PLACE TRANSACTION
On June 28, 2004, the Operating Partnership completed a transaction
related to the Fountain Place Office Property with Crescent FP Investors, L.P.,
("FP Investors"), a limited partnership that is owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (the affiliate is referred to as
"Lehman"), and 0.1% by the Operating Partnership. In the transaction, the
Fountain Place Office Property was, for tax purposes, sold to FP Investors for
$168.2 million, including the assumption by FP Investors of a new $90.0 million
loan from Lehman Capital. The Operating Partnership received net proceeds of
approximately $78.2 million. This transaction resulted in the completion of a
reverse Section 1031 like-kind exchange associated with the Operating
Partnership's prior purchase of a portion of the Hughes Center office portfolio.
Included in the terms of this transaction is a provision which provides
Lehman the unconditional right to require the Operating Partnership to purchase
Lehman's interest in FP Investors for an agreed upon fair value of $79.9 million
at any time until November 30, 2004. For GAAP purposes, under SFAS No. 66,
"Accounting for Sales of Real Estate," this unconditional right, or contingency,
results in the transaction requiring accounting associated with a financing
transaction. As a result, no gain has been recorded on the transaction and the
Operating Partnership's accompanying financial statements continue to include
the Office Property, related debt and operations until expiration of the
contingency. The Operating Partnership pays 99.9% of the distributable funds
from the Office Property to Lehman which is recorded in the "Interest Expense"
line item in the Operating Partnership's Consolidated Statement of Operations.
The fair value of the contingency, $79.9 million, is included in the "Accounts
payable, accrued expenses and other liabilities" line item in the Operating
Partnership's Consolidated Balance Sheet at September 30, 2004.
Also on June 28, 2004, the Operating Partnership paid off the $220.0
million Deutsche Bank - CMBS loan with proceeds from the Fountain Place Office
Property transaction and a draw on the Operating Partnership's revolving credit
facility.
See "Recent Developments" for a description of the joint venture
transaction involving this Office Property. As a result of this transaction,
Lehman's unconditional right to require the Company to repurchase Lehman's
interests in FP Investors will be terminated.
47
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's variance in
dollars between the three and nine months ended September 30, 2004 and 2003.
TOTAL VARIANCE IN TOTAL VARIANCE IN
DOLLARS BETWEEN DOLLARS BETWEEN
THE THREE MONTHS THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(in millions) 2004 AND 2003 2004 AND 2003
- ------------- ------------- -------------
REVENUE:
Office Property $ 5.2 $ 20.4
Resort/Hotel Property 4.7 4.4
Residential Development Property 25.6 23.2
------------ ------------
TOTAL PROPERTY REVENUE $ 35.5 $ 48.0
------------ ------------
EXPENSE:
Office Property real estate taxes $ 0.4 $ (0.1)
Office Property operating expenses 3.7 6.9
Resort/Hotel Property expense 4.1 6.7
Residential Development Property expense 19.5 14.8
------------ ------------
TOTAL PROPERTY EXPENSE 27.7 28.3
------------ ------------
INCOME FROM PROPERTY OPERATIONS $ 7.8 $ 19.7
------------ ------------
OTHER INCOME (EXPENSE):
Income from investment land sales, net $ (3.8) (4.4)
Gain on joint venture of properties, net - $ (0.1)
Interest and other income 1.3 4.3
Corporate general and administrative (1.7) (3.8)
Interest expense (3.5) (7.7)
Amortization of deferred financing costs (0.7) (2.5)
Extinguishment of debt (0.2) (3.1)
Depreciation and amortization (10.1) (22.9)
Impairment charges related to real estate assets (4.1) (2.9)
Other expenses - 0.8
Equity in net income (loss) of unconsolidated companies:
Office Properties (4.6) (6.1)
Resort/Hotel Properties 0.1 (2.3)
Residential Development Properties (2.5) (5.3)
Temperature-Controlled Logistics Properties - (4.7)
Other 1.1 1.3
------------ ------------
TOTAL OTHER INCOME (EXPENSE) $ (28.7) $ (59.4)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND
INCOME TAXES $ (20.9) $ (39.7)
Minority interests (1.2) (0.4)
Income tax benefit 1.7 2.9
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE $ (20.4) $ (37.2)
Income from discontinued operations, 1.9 (2.2)
Impairment charges related to real estate assets from discontinued operations 2.0 16.0
Loss on real estate from discontinued operations - (2.1)
Cumulative effect of a change in accounting principle - (0.4)
------------ ------------
NET (LOSS) INCOME $ (16.5) $ (25.9)
Series A Preferred Unit distributions (1.4) (4.1)
Series B Preferred Unit distributions - -
------------ ------------
NET LOSS AVAILABLE TO PARTNERS $ (17.9) $ (30.0)
============ ============
48
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
PROPERTY REVENUES
Total property revenues increased $35.5 million, or 17.7%, to $235.9
million for the three months ended September 30, 2004, as compared to $200.4
million for the three months ended September 30, 2003. The primary components of
the increase in total property revenues are discussed below.
- Office Property revenues increased $5.2 million, or 4.2%, to $128.3
million, primarily due to:
- an increase of $13.9 million from the acquisitions of The Colonnade
in August 2003, the Hughes Center Properties in December 2003
through May 2004, the Dupont Centre in March 2004 and The Alhambra
in August 2004; and
- an increase of $0.6 million primarily resulting from third party
management and leasing services and related direct expense
reimbursements; partially offset by
- a decrease of $5.8 million from the 55 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and dispositions)
that the Operating Partnership owned or had an interest in,
primarily due to a decrease in full service weighted average rental
rates, a decrease in recoveries due to expense reductions, and a
decline in net parking revenue, partially offset by a 0.2 percentage
point increase in same-store average occupancy (from 85.7% to
85.9%); and
- a decrease of $3.7 million in net lease termination fees (from $5.0
million to $1.3 million).
- Resort/Hotel Property revenues increased $4.7 million, or 11.1%, to $47.0
million, primarily due to:
- an increase of $3.0 million at the Destination Fitness Resorts
related to a 12.3% increase in revenue per available room (from $448
to $503) as a result of a 6.1% increase in average daily rate (from
$620 to $658) and a 7 percentage point increase in occupancy (from
77% to 84%); and
- an increase of $1.7 million at the Resort Properties related to a
6.2% increase in revenue per available room (room $177 to $188) as a
result of a 6.0% increase in average daily rate (from $234 to $248)
and a $1.1 million increase in food and beverage revenue.
- Residential Development Property revenues increased $25.6 million, or
73.1%, to $60.6 million, primarily due to:
- an increase of $21.5 million in CRDI cost of sales related to
product mix in lots and units available for sale in 2004 versus
2003, primarily at the Old Greenwood project in Tahoe, California
and the Horizon Pass project in Bachelor Gulch, Colorado which had
sales in 2004, but none in the three months ended September 30, 2003
as the projects were not available for sale, partially offset by the
One Vendue project in Charleston, South Carolina which had sales in
2003, but none in 2004 as the project sold out in 2003;
- an increase of $2.7 million in other revenue at DMDC due to a
settlement for reimbursement of construction remediation costs;
- an increase of $1.7 million in club revenue at CRDI primarily due to
the addition of a restaurant, and the full impact in 2004 of the
sale of Tahoe Club memberships at the Tahoe Mountain Resorts
Property, which began selling memberships in mid-2003; and
- an increase of $0.5 million in club revenue primarily due to
increased membership levels at DMDC and CRDI; partially offset by
- a decrease of $0.7 million in real estate sales primarily due to
decreased home sales at DMDC.
PROPERTY EXPENSES
Total property expenses increased $27.7 million, or 21.5%, to $156.4
million for the three months ended September 30, 2004, as compared to $128.7
million for the three months ended September 30, 2003. The primary components of
the variances in property expenses are discussed below.
- Office Property expenses increased $4.1 million, or 7.0%, to $62.4
million, primarily due to:
- an increase of $5.0 million from the acquisition of The Colonnade in
August 2003, the Hughes Center Properties in December 2003 through
May 2004, the Dupont Centre in March 2004 and The Alhambra in August
2004; and
- an increase of $0.8 million related to the cost of providing third
party management and leasing services; partially offset by
49
- a decrease of $1.7 million from the 55 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and dispositions)
that the Operating Partnership owned or had an interest in,
primarily due to:
- $2.0 million decrease in building repairs and maintenance;
- $1.2 million decrease in property taxes and insurance; and
- $0.4 million decrease in utilities expense; partially offset
by
- $1.4 million increase in administrative expenses.
- Resort/Hotel Property expenses increased $4.1 million, or 11.6%, to $39.5
million, due to:
- an increase of $2.3 million in operating expenses and general and
administrative costs at the Destination Fitness Resorts primarily
related to increased employee health insurance costs and increased
average occupancy of 7 percentage points (from 77% to 84%); and
- an increase of $1.7 million in operating expenses at the Resort
Properties related to food, beverage and marketing costs.
- Residential Development Property expenses increased $19.5 million, or
55.7%, to $54.5 million, primarily due to:
- an increase of $15.6 million in CRDI cost of sales related to
product mix in lots and units available for sale in 2004 versus
2003, primarily at the Old Greenwood project in Tahoe, California
and the Horizon Pass project in Bachelor Gulch, Colorado which had
sales in 2004, but none in the three months ended September 30, 2003
as the projects were not available for sale, partially offset by the
One Vendue project in Charleston, South Carolina which had sales in
2003, but none in 2004 as the project sold out in 2003,;
- an increase of $3.4 million in club operating expenses due to
increased membership levels, a restaurant addition at CRDI and the
golf course addition at DMDC; and
- an increase of $0.5 million in expenses related to marketing efforts
at the Ritz-Carlton condominium residence project.
OTHER INCOME/EXPENSE
Total other expenses increased $28.7 million, or 40.7%, to $99.2 million
for the three months ended September 30, 2004, compared to $70.5 million for the
three months ended September 30, 2003. The primary components of the increase in
total other expenses are discussed below.
OTHER INCOME
Other income decreased $8.4 million, or 46.2%, to $9.8 million for the
three months ended September 30, 2004, as compared to $18.2 million for the
three months ended September 30, 2003. The primary components of the decrease in
other income are discussed below.
- Equity in net income of unconsolidated companies decreased $5.9 million,
or 105.4%, to a $0.3 million loss, primarily due to:
- a decrease of $6.1 million in Office, Residential Development and
Other 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;
- Income from investment land sales, net decreased $3.8 million due to the
gain on sale of two parcels of undeveloped investment land in Texas in
2003, offset by the gain on sale of two parcels of undeveloped investment
land in Texas, in 2004.
- Interest and other income increased $1.3 million primarily due to $0.7
million of interest on U.S. Treasury and government sponsored agency
securities purchased in December 2003 and January 2004 related to debt
defeasance, $0.4 million of dividends received on other marketable
securities and a $0.3 million increase in interest on certain notes
resulting from note amendments in December 2003.
50
OTHER EXPENSES
Other expenses increased $20.3 million, or 22.9%, to $108.9 million for
the three months ended September 30, 2004, as compared to $88.6 million for the
three months ended September 30, 2003. The primary components of the increase in
other expenses are discussed below.
- Depreciation expense increased $10.1 million, or 28.4 %, to $45.7 million,
primarily due to:
- $8.3 million increase in Office Property depreciation expense,
attributable to:
- $6.4 million from the acquisitions of The Colonnade in August
2003 and the Hughes Center Properties in December 2003 through
May 2004, the Dupont Centre in March 2004 and The Alhambra in
August 2004; and
- $1.9 million due to an increase in leasehold improvements,
lease commissions, building improvements, and accelerated
depreciation of leasehold improvements and lease commissions
upon lease terminations;
- $1.1 million increase in Resort/Hotel Property depreciation expense;
and
- $1.0 million increase in Residential Development Property
depreciation expense.
- Impairment charges increased $4.1 million due to the impairment related to
the demolition of the old clubhouse at the Sonoma Club in the third
quarter 2004 in order to construct a new clubhouse.
- Interest expense increased $3.5 million, or 8.1%, to $46.5 million
primarily due to the Fountain Place Office Property transaction.
- Corporate general and administrative expense increased $1.7 million, or
23.3%, to $9.0 million primarily due to salary merit increases, cost
increases of employee benefits, restricted stock compensation recorded in
2004, and Sarbanes-Oxley related costs.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
increased $3.9 million, or 205.3%, to $1.9 million, primarily due to:
- an increase of $2.4 million due to impairments recorded in 2003 on
behavioral healthcare properties; and
- an increase of $1.8 million due to the increase in net income associated
with properties held for sale in 2004 compared to 2003.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
PROPERTY REVENUES
Total property revenues increased $48.0 million, or 7.5%, to $685.6
million for the nine months ended September 30, 2004, as compared to $637.6
million for the nine months ended September 30, 2003. The primary components of
the increase in total property revenues are discussed below.
- Office Property revenues increased $20.4 million, or 5.6 %, to $384.6
million, primarily due to:
- an increase of $34.7 million from the acquisitions of The Colonnade
in August 2003, the Hughes Center Properties in December 2003
through May 2004, the Dupont Centre in March 2004 and The Alhambra
in August 2004;
- an increase of $2.0 million primarily resulting from third party
management and leasing services and related direct expense
reimbursements; and
- an increase of $0.6 million in net lease termination fees (from $7.9
million to $8.5 million); partially offset by
- a decrease of $15.8 million from the 55 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and dispositions)
that the Operating Partnership owned or had an interest in,
primarily due to a decrease in full service weighted average rental
rates, a decrease in recoveries due to expense reductions, and a
decline in net parking revenues, partially offset by a 0.2
percentage point increase in same-store average occupancy (from
85.6% to 85.8%); and
- a decrease of $1.1 million due to nonrecurring revenue earned in
2003.
51
- Resort/Hotel Property revenues increased $4.4 million, or 3.3%, to $137.2
million, primarily due to:
- an increase of $6.3 million at the Destination Fitness Resorts
related to a 9.1% increase in revenue per available room (from $481
to $525) as a result of a 7.2% increase in average daily rate (from
$642 to $688) and a 3 percentage point increase in occupancy (from
79% to 82%); partially offset by
- a decrease of $1.1 million at the Resort Properties related to 5.9%
decrease in revenue per available room (room $185 to $174) as a
result of a 4 percentage point decrease in occupancy (from 65% to
61%); and
- a decrease of $0.8 million at the Business Class Hotel Properties
related to a 6.5% decrease in revenue per available room (from $77
to $72) as a result of a 3 percentage point decrease in occupancy
(from 69% to 66%).
- Residential Development Property revenues increased $23.2 million, or
16.5%, to $163.9 million, primarily due to:
- an increase of $17.0 million primarily due to increased sales of 10
lots (from 34 to 44) at DMDC;
- an increase of $3.0 million in club revenue at CRDI primarily due to
the addition of a restaurant and the full impact in 2004 of the sale
of Tahoe Club memberships at the Tahoe Mountain Resorts Property,
which began selling memberships in mid-2003;
- an increase of $2.7 million in club revenue at DMDC primarily due to
increased membership levels DMDC and CRDI; and
- an increase of $2.7 million in other revenue at DMDC due to a
settlement for reimbursement of construction remediation costs;
partially offset by
- a decrease of $1.2 million in CRDI cost of sales related to product
mix in lots and units available for sale in 2004 versus 2003,
primarily at the One Vendue project in Charleston, South Carolina
which had sales in 2003, but none in 2004 as the project sold out in
2003, partially offset by the Old Greenwood project in Tahoe,
California and the Horizon Pass project in Bachelor Gulch, Colorado
which had sales in 2004, but none in the nine months ended September
30, 2003 as the projects were not available for sale; and
- a decrease of $1.2 million in other revenue due to interest income
recorded in 2003 on a note receivable from the Woodlands Land
Development Company, L.P., entity which was sold in December 2003.
PROPERTY EXPENSES
Total property expenses increased $28.3 million, or 6.8%, to $444.8
million for the nine months ended September 30, 2004, as compared to $416.5
million for the nine months ended September 30, 2003. The primary components of
the variances in property expenses are discussed below.
- Office Property expenses increased $6.8 million, or 3.9%, to $182.6
million, primarily due to:
- an increase of $11.6 million from the acquisition of The Colonnade
in August 2003, the Hughes Center Properties in December 2003
through May 2004, the Dupont Centre in March 2004, and The Alhambra
in August 2004; and
- an increase of $1.5 million related to the cost of providing third
party management and leasing services to joint venture properties;
partially offset by
- a decrease of $5.7 million from the 55 consolidated Office
Properties (excluding 2003 and 2004 acquisitions and dispositions)
that the Operating Partnership owned or had an interest in,
primarily due to:
- $4.2 million decrease in building repairs and maintenance;
- $4.2 million decrease in property taxes and insurance; and
- $0.6 million decrease in utilities; partially offset by
- $2.0 million increase in administrative expenses;
- Resort/Hotel Property expenses increased $6.7 million, or 6.2%, to $115.4
million, primarily due to:
- an increase of $5.8 million in operating expenses and general and
administrative costs at the Destination Fitness Resorts primarily
related to increased employee health insurance costs and increased
average occupancy of 3 percentage points (from 79% to 82%); and
- an increase of $1.1 million in resort property food and beverage
operating expense and marketing costs.
52
- Residential Development Property expenses increased $14.8 million, or
11.2%, to $146.8 million, primarily due to:
- an increase of $8.7 million in DMDC cost of sales due to increased
lot sales compared to 2003 (from 34 to 44);
- an increase of $6.9 million in club operating expenses due to
increased membership levels at CRDI and DMDC, a restaurant addition
at CRDI and the golf course addition at DMDC;
- an increase of $5.0 million in marketing expenses at certain CRDI
projects and the Ritz-Carlton condominium residence project; and
- an increase of $0.6 million in other expense categories; partially
offset by
- a decrease of $6.4 million in CRDI cost of sales related to product
mix in lots and units available for sale in 2004 versus 2003,
primarily at the One Vendue project in Charleston, South Carolina
which had sales in 2003, but none in 2004 as the project sold out in
2003, partially offset by the Old Greenwood project in Tahoe,
California and the Horizon Pass project in Bachelor Gulch, Colorado
which had sales in 2004, but none in the nine months ended September
30, 2003 as the projects were not available for sale.
OTHER INCOME/EXPENSE
Total other expenses increased $59.4 million, or 25.7%, to $290.6 million
for the nine months ended September 30, 2004, compared to $231.2 million for the
nine months ended September 30, 2003. The primary components of the increase in
total other expenses are discussed below.
OTHER INCOME
Other income decreased $17.3 million, or 54.6%, to $14.4 million for the
nine months ended September 30, 2004, as compared to $31.7 million for the nine
months ended September 30, 2003. The primary components of the decrease in other
income are discussed below.
- Equity in net income of unconsolidated companies decreased $17.1 million,
or 116.3%, to a $2.4 million loss, primarily due to:
- a decrease of $10.1 million equity in Office, Residential
Development and Other 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;
- a decrease of $4.7 million in Temperature-Controlled Logistics
Properties equity in net income primarily due to a decrease in
rental revenues net of deferred rent and an increase in interest
expense primarily attributable to the $254.4 million financing with
Morgan Stanley Mortgage Capital, Inc. in February 2004; and
- a decrease of $2.3 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 included a $1.1 million payment
which the Operating Partnership received from the operator of the
Resort/Hotel Property pursuant to the terms of the operating
agreement because the Property did not achieve the specified net
operating income level.
- Income from investment land sales, net decreased $4.4 million due to the
gains on sales of three parcels of undeveloped investment land in Texas in
2003, offset by the gains on sales of three parcels of undeveloped
investment land in Texas, in 2004.
- Interest and other income increased $4.3 million primarily due to $2.2
million of interest on U.S. Treasury and government sponsored agency
securities purchased in December 2003 and January 2004 related to debt
defeasance, $0.9 million of dividends received on other marketable
securities and a $0.8 million increase in interest on certain notes
resulting from note amendments in December 2003.
53
OTHER EXPENSES
Other expenses increased $42.1 million, or 16.0%, to $305.0 million for
the nine months ended September 30, 2004, as compared to $262.9 million for the
nine months ended September 30, 2003. The primary components of the increase in
other expenses are discussed below.
- Depreciation expense increased $22.9 million, or 21.9%, to $127.7 million,
primarily due to:
- $18.1 million increase in Office Property depreciation expense,
attributable to:
- $12.3 million from the acquisitions of The Colonnade in August
2003 and the Hughes Center Properties in December 2003 though
May 2004, the Dupont Centre in March 2004 and The Alhambra in
August 2004; and
- $5.8 million due to an increase in leasehold improvements,
lease commissions, building improvements, and accelerated
depreciation of leasehold improvements and lease commissions
upon lease terminations;
- $3.0 million increase in Residential Development Property
depreciation expense; and
- $2.3 million increase in Resort/Hotel Property depreciation expense.
- Interest expense increased $7.7 million, or 6.0%, to $137.0 million,
primarily due to:
- $3.7 million increase from an increase of approximately $312 million
in the weighted average debt balance, partially offset by a .58
percentage point decrease in the weighted average interest rate
(from 7.19% to 6.61%) primarily due to the refinancing and new
financings of fixed rate debt at lower interest rates and the
termination of a $400 million cash flow hedge, 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%); and
- $3.2 million increase related to the Fountain Place Office Property
transaction.
- Corporate general and administrative expense increased $3.8 million, or
20.1%, to $22.7 million primarily due to salary merit increases, cost
increases of employee benefits, restricted stock compensation recorded in
2004 and Sarbanes-Oxley related costs.
- Extinguishment of debt increased $3.1 million primarily due to the write
off of deferred financing costs associated with the following:
- reduction of the Fleet Fund I and II Term Loan in January 2004;
- the write off of deferred financing costs associated with reduction
of the Bank of America Fund XII Term Loan funded by proceeds from
the sale of Ptarmigan Place Office Property and adjacent land and
the 12404 Park Central Office Property; and
- the write off of deferred financing costs associated with the payoff
of the $220.0 million Deutsche Bank-CMBS Loan in June 2004 funded
with proceeds from the Fountain Place Office Property transaction
and a draw on the credit facility.
- Impairment charges increased $2.9 million primarily due to the $4.1
million impairment related to the demolition of the old clubhouse at the
Sonoma Club in the third quarter 2004 in order to construct a new
clubhouse, partially offset by a $1.2 million impairment of the North
Dallas Athletic Club in the first quarter 2003.
- Amortization of deferred financing costs increased $2.5 million, or 32.5%,
to $10.2 million primarily due to the addition of deferred financing costs
related to debt restructuring and refinancing associated with the $275.0
million secured loan with Bank of America and Deutsche Bank in January
2004.
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
increased $11.7 million, or 115.8% for the nine months ended September 20, 2004,
as compared to income of $1.6 million in 2003, primarily due to:
- an increase of $15.0 million due to the impairment of the 1800 West Loop
South Office Property in 2003; and
- an increase of $4.2 million impairments recorded in 2003 on the behavioral
healthcare properties; partially offset by
- a decrease of $2.8 million due to the impairment of three Office
Properties in 2004;
- a decrease of $2.2 million due to the reduction of net income associated
with properties held for sale in 2004 compared to 2003; and
- a decrease of $2.4 million due to an aggregate loss on six Office
Properties sold in 2004.
54
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(in millions) 2004
- ---------------------------------------- --------------------
Cash provided by Operating Activities $ 75.2
Cash used in Investing Activities (222.0)
Cash provided by Financing Activities 133.0
----------
Decrease in Cash and Cash Equivalents $ (13.8)
Cash and Cash Equivalents, Beginning of
Period 74.9
----------
Cash and Cash Equivalents, End of Period $ 61.1
==========
OPERATING ACTIVITIES
The Operating Partnership's cash provided by operating activities of $75.2
million is attributable to Property operations.
INVESTING ACTIVITIES
The Operating Partnership's cash used in investing activities of $222.0
million is primarily attributable to:
- $195.8 million purchase of U.S. Treasuries and government sponsored
agency securities in connection with the defeasance of LaSalle Note
II and other securities;
- $193.3 million for the acquisition of investment properties,
primarily due to the acquisition of Hughes Center, the Dupont Centre
and The Alhambra Office Properties;
- $68.1 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
- $31.3 million for property improvements for rental properties,
primarily attributable to non-recoverable building improvements for
the Office Properties, renovations at Sonoma Mission Inn and Ventana
Inn, and replacement of furniture, fixtures and equipment for the
Resort/Hotel Properties;
- $28.3 million for development of amenities at the Residential
Development Properties;
- $10.1 million of additional investment in unconsolidated Office
Properties primarily due to a $9.6 million contribution to Main
Street Partners L.P.;
- $3.8 million for development of investment properties;
- $2.6 million of additional investment in unconsolidated Other
companies;
- $2.4 million of additional investment in unconsolidated
Temperature-Controlled Logistics Properties; and
- $1.0 million of additional investment in unconsolidated Residential
Development Properties.
The cash used in investing activities is partially offset by:
- $113.9 million of proceeds from property sales, primarily due to the
sale of the 1800 West Loop South, Liberty Plaza, Ptarmigan Place,
Addison Tower, 5050 Quorum and 12404 Park Central Office Properties;
- $92.3 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;
- $90.8 million from return of investment in Temperature-Controlled
Logistics Properties due primarily to the $254.4 million of
additional financing at the Temperature-Controlled Logistics
Corporation;
- $8.8 million of proceeds from defeasance investment maturities;
- $4.8 million decrease in notes receivable;
- $2.3 million from return of investment in unconsolidated Office
Properties; and
- $1.3 million from return of investment in unconsolidated
Resort/Hotel Properties.
55
FINANCING ACTIVITIES
The Operating Partnership's cash provided by financing activities of
$133.0 million is primarily attributable to:
- $454.6 million of proceeds from other borrowings, primarily as a
result of the Bank of America Fund XII Term Loan secured by the Fund
XII Properties, the Lehman Capital Note secured by the Fountain
Place Office Property, the Metropolitan Life Note VII secured by the
Dupont Centre Office Property, and the new JP Morgan Chase Notes
secured by certain Hughes Center Properties;
- $440.0 million of proceeds from borrowings under the Operating
Partnership's credit facility;
- $79.9 million of proceeds from the Fountain Place Office Property
transaction;
- $77.7 million of proceeds from borrowings for construction costs for
infrastructure development at the Residential Development
Properties;
- $71.0 million of net proceeds from issuance of Series A Preferred
Units;
- $2.1 million of capital contributions from joint venture partners;
and
- $0.4 million of capital contributions to the Operating Partnership.
The cash provided by financing activities is partially offset by:
- $386.6 million of payments under other borrowings, due primarily to
the pay off of the Deutsche Bank-CMBS Loan, the pay down of the
Fleet Fund I Term Loan and the pay down of the Bank of America Fund
XII Term Loan;
- $371.5 million of payments under the Operating Partnership's credit
facility;
- $131.8 million of distributions to unitholders;
- $62.5 million of Residential Development Property note payments;
- $24.0 million of distributions to preferred unitholders;
- $8.2 million of debt financing costs primarily associated with the
$275 million Bank of America Fund XII Term Loan and the Lehman
Capital Note;
- $6.3 million of capital distributions to joint venture partners; and
- $1.8 million of amortization of debt premiums.
LIQUIDITY REQUIREMENTS
DEBT FINANCING SUMMARY
The following tables show summary information about the Operating
Partnership's debt, including its share of unconsolidated debt as of September
30, 2004. Additional information about the significant terms of the Operating
Partnership's debt financing arrangements and its unconsolidated debt is
contained in Note 9, "Notes Payable and Borrowings under Credit Facility" and
Note 8, "Investments in Unconsolidated Companies," of Item 1, "Financial
Statements."
AS OF SEPTEMBER 30, 2004
------------------------
TOTAL SHARE OF
OPERATING UNCONSOLIDATED
(in thousands) PARTNERSHIP DEBT DEBT TOTAL
- ------------------ ---------------- -------------- ----------
Fixed Rate Debt $1,823,238 $315,652 $2,138,890
Variable Rate Debt 1,032,653 156,816 1,189,469
---------- -------- ----------
Total Debt $2,855,891 $472,468 $3,328,359
========== ======== ==========
56
Listed below are the aggregate principal payments by year required as
of September 30, 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 $ 21,274 $ - $ - $ 21,274 $ 58,163 $ 79,437
2005 422,277 - 307,500 729,777 8,517 738,294
2006 460,288 - - 460,288 25,300 485,588
2007 112,193 250,000 - 362,193 48,169 410,362
2008 47,321 - - 47,321 44,841 92,162
Thereafter 860,038 375,000 - 1,235,038 287,478 1,522,516
---------- -------- ---------- ---------- ---------- ----------
$1,923,391 $625,000 $ 307,500 $2,855,891 $ 472,468 $3,328,359
========== ======== ========== ========== ========== ==========
- ----------------
(1) Based on contractual maturity and does not include extension option on Bank
of America Fund XII term loan or expected early payment of LaSalle Note I,
JP Morgan Mortgage Note, or the Nomura Funding VI Note.
OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS
The FASB issued Interpretation 45, "Guarantors' Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," requiring a guarantor to disclose its guarantees. The Operating
Partnership's guarantees in place as of September 30, 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
recorded a liability, in an amount not significant to its operations, for
guarantees entered into following the adoption of FIN 45.
GUARANTEED AMOUNT
OUTSTANDING AT MAXIMUM
SEPTEMBER 30, 2004 GUARANTEED 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) 1,963 6,300
Main Street Partners, L.P. - Letter of Credit (2) (4) 4,250 4,250
Sovereign Bank (5) 3,654 3,654
------- -------
Total Guarantees $17,450 $21,787
======= =======
- ----------------
(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 8, "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 $2.8
million outstanding at September 30, 2004 and the amount guaranteed was
$2.0 million.
(4) The Operating Partnership and its joint venture partner each provide
separate Letters of Credit to guarantee repayment of up to $4.3 million
each of the Main Street Partners, L.P. loan.
(5) The Operating Partnership provided guarantees for the repayment of up to
$3.7 million of loans from Sovereign Bank in the event a final
certificate of occupancy is not obtained for timeshare units sold at a
residential development project at an entity which is consolidated into
CRDI. The loans guaranteed represent third party financing obtained by
buyers of the units.
57
OTHER COMMITMENTS AND CONTINGENCIES
See "Recent Developments" in this Item 2, for information on the Operating
Partnership's $79.9 million contingent obligation related to the Fountain Place
Office Property transaction.
The Operating Partnership has a contingent obligation of approximately
$1.0 million related to a construction warranty matter. The Operating
Partnership believes it is probable that a significant amount would be recovered
through reimbursements from third parties.
CAPITAL EXPENDITURES
As of September 30, 2004, the Operating Partnership had unfunded capital
expenditures of approximately $26.1 million relating to capital investments that
are not in the ordinary course of operations of the Operating Partnership's
business segments. The table below specifies the Operating Partnership's
requirements for capital expenditures and its amounts funded as of September 30,
2004, and amounts remaining to be funded (future fundings classified between
short-term and long-term capital requirements):
CAPITAL EXPENDITURES
---------------------
AMOUNT
TOTAL FUNDED AS OF AMOUNT SHORT-TERM
PROJECT SEPTEMBER 30, REMAINING (NEXT 12 LONG-TERM
(in millions) PROJECT COST (1) 2004 TO FUND MONTHS)(2) (12+ MONTHS)(2)
- ----------------------------------------- -------- ------------ --------- ---------- --------------
OFFICE SEGMENT
Acquired Properties (3) $ 2.9 $ 2.7 $ 0.2 $ 0.2 $ -
Houston Center Shops Redevelopment (4) 11.6 10.9 0.7 0.7 -
RESIDENTIAL DEVELOPMENT SEGMENT
Tahoe Mountain Club (5) 54.3 50.6 3.7 3.7 -
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land
Construction Loan (6) 2.4 1.0 1.4 1.2 0.2
OTHER
SunTx(7) 19.0 14.3 4.7 1.7 3.0
Purchase of AmeriCold Logistics
(formerly "Crescent Spinco") (8) 15.4 - 15.4 15.4 -
------ ------ ------ ------ ------
TOTAL $105.6 $ 79.5 $ 26.1 $ 22.9 $ 3.2
====== ====== ====== ====== ======
- --------------
(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.
(5) As of September 30, 2004, the Operating Partnership had invested $50.6
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 nine 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) On November 4, 2004 COPI sold its interests in AmeriCold Logistics and
paid off the $15.4 million, inclusive of accrued interest, loan to Bank
of America. As a result, the Operating Partnership has no further
capital expenditure requirements with respect to the COPI bankruptcy.
In April 2004, the Operating Partnership 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 second quarter of
2005.
58
LIQUIDITY OUTLOOK
The Operating Partnership expects to fund its short-term capital
requirements of approximately $22.9 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 September 30, 2004, the Operating
Partnership had maturing debt obligations of $610.6 million through September
30, 2005, consisting primarily of its credit facility, Fleet Fund I Term Loan
and the Lehman Capital Note. The Operating Partnership plans to refinance the
credit facility and the Fleet Fund I Term Loan in 2004. The Lehman Capital Note
is also expected to be refinanced. The remaining maturities consist primarily of
normal principal amortization and will be met with cash flow from operations. In
addition, $26.0 million of debt relating to the Residential Developments is
maturing within the next 12 months and will be retired with the sales of the
corresponding land or units or will be refinanced.
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), and distributions to shareholders and
unitholders, 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, other business initiatives or the joint
venture of Properties, and borrowings under additional debt facilities.
The Operating Partnership's long-term liquidity requirements as of
September 30, 2004 consist primarily of $2.2 billion of debt maturing after
September 30, 2005. The Operating Partnership also has $3.2 million of long-term
capital expenditures requirements. The Operating Partnership anticipates meeting
these long-term maturity obligations 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 $83.9 million of borrowing
capacity available as of September 30, 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 or
joint ventures of existing properties.
- 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
- The Operating Partnership may be unable to service additional or
replacement debt due to increases in interest rates or a decline in the
Operating Partnership's operating performance.
The Operating Partnership's portion of unconsolidated debt maturing
through September 2005 is $64.5 million. The Operating Partnership's portion of
unconsolidated debt maturing after September 2005 is $408.0 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.
59
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 dividends 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.
SHARE REPURCHASE PROGRAM
The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500.0
million to $800.0 million the amount of outstanding common shares that can be
repurchased from time to time in the open market or through privately negotiated
transactions (the "Share Repurchase Program"). There were no share repurchases
under the program for the year ended December 31, 2003 or the nine months ended
September 30, 2004. As of September 30, 2004, the Company had repurchased
20,256,423 common shares under the Share Repurchase Program, at an aggregate
cost of approximately $386.9 million, resulting in an average repurchase price
of $19.10 per common share. The repurchase of common shares by the Company will
decrease the Company's limited partner interest in the Operating Partnership,
which will result in an increase in net income per unit.
60
Debt Financing Arrangements
The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of September 30, 2004, are shown below:
BALANCE INTEREST
OUTSTANDING AT RATE AT
MAXIMUM SEPTEMBER 30, SEPTEMBER 30, MATURITY
DESCRIPTION (1) BORROWINGS 2004 2004 DATE
- -------------------------------------------------------- ----------- -------------- ------------- ----------------
(dollars in thousands)
SECURED FIXED RATE DEBT:
AEGON Partnership Note (Greenway Plaza) $ 256,017 $ 256,017 7.53% July 2009
LaSalle Note I (Fund I) 232,673 232,673 7.83 August 2027
JP Morgan Mortgage Note (Houston Center) 187,922 187,922 8.31 October 2016
LaSalle Note II (Fund II Defeasance)(2) 158,030 158,030 7.79 March 2006
Cigna Note (707 17th Street/Denver Marriott) 70,000 70,000 5.22 June 2010
Bank of America Note (Colonnade) 38,000 38,000 5.53 May 2013
Mass Mutual Note (3800 Hughes)(3) 37,315 37,315 7.75 August 2006
Metropolitan Life Note V (Datran Center) 37,006 37,006 8.49 December 2005
Metropolitan Life Note VII (Dupont Centre) 35,500 35,500 4.31 May 2011
Northwestern Life Note (301 Congress) 26,000 26,000 4.94 November 2008
Allstate Note (3993 Hughes)(3) 25,687 25,687 6.65 September 2010
JP Morgan Chase (3773 Hughes) 24,755 24,755 4.98 September 2011
Metropolitan Life Note VI (3960 Hughes)(3) 24,142 24,142 7.71 October 2009
JP Morgan Chase I (3753/3763 Hughes) 14,350 14,350 4.98 September 2011
Northwestern Life II (3980 Hughes)(3) 10,310 10,310 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) 7,709 7,709 10.07 July 2020
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 4,322 4,322 2.90 to 10.50 Nov 04 to Feb 09
----------- ------------ -------------
Subtotal/Weighted Average $ 1,198,238 $ 1,198,238 7.35%
----------- ------------ -------------
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) $ 226,035 $ 226,035 3.93% January 2006
Fleet Fund I Term Loan (Fund I) 160,000 160,000 5.15 May 2005
Lehman Capital Note (Fountain Place) 90,000 90,000 3.26 March 2005
Fleet Term Loan (Distributions from Fund III, IV and V) 75,000 75,000 6.21 February 2007
Wachovia Securities (Alhambra)(5) 45,000 45,000 4.51 November 2005
National Bank of Arizona (Desert Mountain) 35,580 31,041 4.75 to 5.75 Nov 04 to Dec 05
FHI Finance Loan (Sonoma Mission Inn) 10,000 10,000 6.17 September 2009
Texas Capital Bank (Land) 10,500 7,977 4.09 July 2006
The Rouse Company (Hughes Center undeveloped land) 7,500 7,500 5.75 December 2005
Wells Fargo Bank (3770 Hughes) 4,774 4,774 3.88 November 2004
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 180,248 67,826 3.87 to 5.75 Oct 04 to Sep 08
----------- ------------ -------------
Subtotal/Weighted Average $ 844,637 $ 725,153 4.53%
----------- ------------ -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility $ 399,000 $ 307,500(6) 3.82% May 2005
----------- ------------ -------------
Subtotal/Weighted Average $ 399,000 $ 307,500 3.82%
----------- ------------ -------------
TOTAL/WEIGHTED AVERAGE $ 3,066,875 $ 2,855,891 6.52%(7)
=========== ============ =============
AVERAGE REMAINING TERM 4.8 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 9,
"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 $7.1 million reflecting market
value of debt acquired with purchase of Hughes Center portfolio.
(4) This loan has one one-year extension option.
61
(5) This includes two notes from Wachovia Securities. The notes are due
November 2004, and bear interest at the LIBOR rate plus a spread of (i)
100.5 basis points for the $31 million Wachovia note (at September 30,
2004, the interest rate was 2.765%), and (ii) 661.0 basis points for the
$14 million Wachovia note (at September 30, 2004, the interest rate was
8.37%). Both notes are secured by The Alhambra Office Property. The
blended rate at September 30, 2004 for the two notes was 4.51%. In October
2004, the Operating Partnership refinanced this loan with a $50 million
loan from Morgan Stanley for a 7-year interest only term at a fixed rate
of 5.06%.
(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 6.78%.
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 Notes, 2009 Notes, 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 nine months ended September 30, 2004,
there were no circumstances that required prepayment penalties or increased
collateral related to the Operating Partnership's existing debt.
On June 28, 2004, the Operating Partnership paid off the $220.0 million
Deutsche Bank-CMBS loan with proceeds from the Fountain Place transaction and a
draw on the Operating Partnership's credit facility. See "Recent Developments,"
in this Item 2, for additional information regarding the Fountain Place
transaction. The loan was secured by the Funding X Properties and Spectrum
Center. In July 2004, the Operating Partnership unwound the $220.0 million
interest rate cap with JP Morgan Chase that corresponded to this loan.
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 was 10 of the 11
properties previously in the Funding II collateral pool. 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.
62
UNCONSOLIDATED DEBT ARRANGEMENTS
As of September 30, 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
$472.5 million. The Operating Partnership had guaranteed $6.2 million of this
debt as of September 30, 2004. Additional information relating to the Operating
Partnership's unconsolidated debt financing arrangements is contained in Note 8,
"Investments in Unconsolidated Companies," of Item 1, "Financial Statements."
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 September 30, 2004, the Operating Partnership
had three 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 hedge agreements
during the nine months ended September 30, 2004, and additional interest expense
and unrealized gains (losses) recorded in Accumulated Other Comprehensive Income
("OCI").
EFFECTIVE DATE CHANGE IN
- -------------- NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
(in thousands) AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- -------------- --------- -------- --------- ----------- ---------------- ----------------
4/18/00 $100,000 4/18/04 6.76% $ - $ 1,712 $1,695
2/15/03 100,000 2/15/06 3.26% (931) 1,531 1,415
2/15/03 100,000 2/15/06 3.25% (927) 1,529 1,413
9/02/03 200,000 9/01/06 3.72% (3,475) 3,786 3,122
-------- ------- ------
$ (5,333) $ 8,558 $7,645
======== ======= ======
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 $0.6 million for
the nine months ended September 30, 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.
63
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 September 30,
2004.
OPERATING PARTNERSHIP'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 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. Blue River Land Company,
L.L.C. was formed to acquire, develop and sell certain real estate
property in Summit County, Colorado.
(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. Canyon Ranch
Las Vegas, L.L.C. operates a Canyon Ranch spa in a hotel in Las Vegas.
(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. Empire Mountain Village, L.L.C. was formed to
acquire, develop and sell certain real estate property at Deer Valley Ski
Resort next to Park City, Utah.
(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. CR License, L.L.C. owns the licensing agreement
related to certain Canyon Ranch trade names and trademarks.
(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. CR License II, L.L.C. and its wholly-owned
subsidiaries provide management and development consulting services to a
variety of entities in the hospitality, real estate, and health and
wellness industries.
(14) 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. SunTx Fulcrum Fund,
L.P.'s objective is to invest in a portfolio of acquisitions that offer
the potential for substantial capital appreciation.
(15) SunTx Capital Partners, L.P. is the general Partner of the SunTx Fulcrum
Fund, L.P. 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 GMSPLP 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.
64
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, AmeriCold Logistics, LLC was 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, AmeriCold
Logistics leased the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. The Operating Partnership has an indirect 40% ownership
interest in the Temperature-Controlled Logistics Corporation. The Operating
Partnership has no interest in COPI or AmeriCold Logistics. 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 $40.0
million of the total $120.4 million of rent payable for the nine months ended
September 30, 2004. The Operating Partnership's share of the deferred rent was
$16.0 million. The Operating Partnership recognizes rental income from the
Temperature-Controlled Logistics Properties when earned and collected and has
not recognized the $16.0 million of deferred rent in equity in net income of the
Temperature-Controlled Logistics Properties for the nine months ended September
30, 2004. As of September 30, 2004, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $122.4 million and $114.4 million, respectively, of which the Operating
Partnership's portions were $49.0 million and $45.8 million, respectively.
On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs and the
repayment of approximately $12.9 million in existing mortgages. On February 6,
2004, the Temperature-Controlled Logistics Corporation distributed cash of
approximately $90.0 million to the Company.
See "Recent Developments" for information regarding the purchase by the
Temperature-Controlled Logistics Corporation of all the ownership interests in
AmeriCold Logistics, the termination of the three triple-net master leases, and
the agreement to sell an interest in the Temperature-Controlled Logistics
Corporation to the Yucaipa Companies.
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,
- Consolidation of variable interest entities, and
- Allowance for doubtful accounts.
65
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.
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.
66
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 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.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 15, 2003, the FASB
approved the issuance of Interpretation 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." In December 2003, the FASB issued FIN 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"), which amended FIN 46.
Under FIN 46R, 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 46R 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.
67
The adoption of FIN 46R 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. ("Canyon Ranch
Entities") are VIEs under FIN 46R, 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 $57.7 million in Main Street Partners, L.P. and $5.1
million in the Canyon Ranch Entities at September 30, 2004.
During 2004, the Operating Partnership entered into three separate
exchange agreements with a third party intermediary. The first exchange
agreement included two parcels of undeveloped land, the second exchange
agreement included the 3930 Hughes Parkway Office Property, and the third
exchange agreement included The Alhambra Office Property. The agreements were
for a maximum term of 180 days and allow the Operating Partnership to pursue
favorable tax treatment on other properties sold by the Operating Partnership
within this period. During the 180-day periods, which ended or will end on
August 28, 2004, November 6, 2004, and February 2, 2005, respectively, 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 fully consolidates these
properties. The Operating Partnership took or will take legal ownership of the
properties no later than on the expiration of the 180-day period.
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 STANDARD
EITF 03-1. At the March 17-18, 2004 meeting, consensus was reached by the
FASB Emerging Issues Task Force on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Consensus applies to investments in debt and equity securities within the scope
of SFAS Nos. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." It also applies to investments in equity securities that are
both outside SFAS No. 115's scope and not accounted for under the equity method.
The Task Force reached a consensus that certain quantitative and qualitative
disclosures should be required for securities that are impaired at the balance
sheet date but for which an other - than-temporary impairment has not been
recognized. The new impairment guidance creates a model that calls for many
judgments and additional evidence gathering in determining whether or not
securities are other-than-temporarily impaired and lists some of these
impairment indicators. The impairment accounting guidance is effective for
periods beginning after June 15, 2004 and the disclosure requirements for annual
reporting periods are effective for periods ending after June 15, 2004. The
Operating Partnership adopted EITF 03-1 effective July 1, 2004 and it had no
impact on the Operating Partnership's financial condition or its results of
operations.
68
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 available to partners - 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 available to partners - diluted and FFO appropriate measures of
performance for an operating partnership of an equity REIT and for its
investment segments. However, FFO available to partners - diluted and FFO should
not be considered an alternative to net income determined in accordance with
GAAP as an indication of the Operating Partnership's operating performance.
The aggregate cash distributions paid to unitholders for the nine months
ended September 30, 2004 and 2003 were $131.8 million and $131.3 million,
respectively. The Operating Partnership reported FFO available to partners
before impairments charges related to real estate assets - diluted of $89.9
million and $121.3 million, for the nine months ended September 30, 2004 and
2003, respectively. The Operating Partnership reported FFO available to partners
after impairments charges related to real estate assets - diluted of $84.2
million and $100.9 million, for the nine months ended September 30, 2004 and
2003, respectively.
An increase or decrease in FFO available to partners - 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 available to partners -
diluted will generally require an increase in distributions to and unitholders
although not necessarily on a proportionate basis.
Accordingly, the Operating Partnership believes that to facilitate a clear
understanding of the consolidated historical operating results of the Operating
Partnership, FFO available to partners - 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 available to partners -
diluted may not be comparable to similarly titled measures of operating
partnerships of REITs (other than the Company) because these REITs may apply the
definition of FFO in a different manner than the Operating Partnership.
69
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
(in thousands)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Net (loss) income $(12,586) $ 3,855 $ (36,530) $ (10,568)
Adjustments to reconcile net (loss) income to
funds from operations available to partners - diluted:
Depreciation and amortization of real estate assets 42,984 39,617 119,406 109,017
Loss on property sales, net 193 14 2,683 719
Impairment charges related to real estate assets and assets
held for sale 2,847 2,356 5,699 20,374
Adjustment for investments in unconsolidated companies:
Office Properties 2,283 (1,613) 7,188 3,805
Resort/Hotel Properties - 394 - 1,143
Residential Development Properties (2,150) 8 (2,099) 235
Temperature-Controlled Logistics Properties 5,768 5,147 17,348 16,143
Other - 260 - 178
Series A Preferred Unit distributions (5,991) (4,556) (17,733) (13,668)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (6,057)
-------- -------- --------- ---------
Funds from operations available to partners before impairment
charges related to real estate assets - diluted $ 31,329 $ 43,463 $ 89,905 $ 121,321
Impairment charges related to real estate assets (2,847) (2,356) (5,699) (20,374)
-------- -------- --------- ---------
Funds from operations available to partners after impairment
charges related to real estate assets - diluted $ 28,482 $ 41,107 $ 84,206 $ 100,947
======== ======== ========= =========
Investment Segments:
Office Properties $ 68,410 $ 73,285 $ 211,708 $ 214,568
Resort/Hotel Properties 12,272 11,471 35,293 39,458
Residential Development Properties 3,779 2,773 15,121 13,766
Temperature-Controlled Logistics Properties 4,862 4,198 12,834 16,294
Other:
Corporate general and administrative (9,023) (7,356) (22,734) (18,968)
Interest expense (46,571) (43,074) (137,008) (129,380)
Series A Preferred Unit distributions (5,991) (4,556) (17,733) (13,668)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (6,057)
Other(1) 5,610 8,741 (1,519) 5,308
-------- -------- --------- ---------
Funds from operations available to partners before impairment
charges related to real estate assets - diluted $ 31,329 $ 43,463 $ 89,905 $ 121,321
Impairment charges related to real estate assets (2,847) (2,356) (5,699) (20,374)
-------- -------- --------- ---------
Funds from operations available to partners after impairment
charges related to real estate assets - diluted $ 28,482 $ 41,107 $ 84,206 $ 100,947
======== ======== ========= =========
Basic weighted average units 58,376 58,460 58,371 58,468
Diluted weighted average units(2) 58,432 58,464 58,457 58,470
- ----------
(1) Includes income from investment land sales, net, 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.
70
The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
(units in thousands) 2004 2003 2004 2003
- ---------------------------- ------ ------- ------- -------
Basic weighted average units: 58,376 58,460 58,371 58,468
Add: Restricted units and unit options 56 4 86 2
------ ------ ------ ------
Diluted weighted average units 58,432 58,464 58,457 58,470
====== ====== ====== ======
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 September 30, 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
DISCLOSURE 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 Securities Exchange Act of
1934, as amended (the "Exchange Act"), such as this report on Form 10-Q, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Operating Partnership's and
Crescent Finance Company's management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. These controls and procedures are based closely on the
definition of "disclosure controls and procedures" in Rule 13a-15(e) promulgated
under the Exchange Act. Rules adopted by the SEC require that the Operating
Partnership and Crescent Finance Company present the conclusions of the Chief
Executive Officer and Chief Financial Officer about the effectiveness of the
Operating Partnership's and Crescent Finance Company's disclosure controls and
procedures as of the end of the period covered by this quarterly report.
INTERNAL CONTROL OVER FINANCIAL REPORTING. Internal control over financial
reporting is a process designed by, or under the supervision of, the Operating
Partnership's and Crescent Finance Company's Chief Executive Officer and Chief
Financial Officer, as appropriate, and effected by the Operating Partnership's
and Crescent Finance Company's employees, including management and the Company's
Board of Trust Managers, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. This process includes policies and procedures that:
o pertain to the maintenance of records that accurately and fairly
reflect the transactions and dispositions of the Operating
Partnership's and Crescent Finance Company's assets in reasonable
detail;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that the Operating
Partnership's and Crescent Finance Company's receipts and expenditures
are made only in accordance with the authorization procedures the
Operating Partnership and Crescent Finance Company have established;
and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of any of the
Operating Partnership's and Crescent Finance Company's assets in
circumstances that could have a material adverse effect on the
Operating Partnership's and Crescent Finance Company's financial
statements.
71
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Management, including the
Chief Executive Officer and Chief Financial Officer, do not expect that the
Operating Partnership's and Crescent Finance Company's disclosure controls and
procedures or internal control over financial reporting will prevent all errors
and fraud. In designing and evaluating the Operating Partnership's and Crescent
Finance Company's control system, management recognized that any control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives. Further, the
design of a control system must reflect the fact that there are resource
constraints, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, that may affect the Operating Partnership's and Crescent Finance
Company's operation have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management's override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that the Operating Partnership's
and Crescent Finance Company's design will succeed in achieving its stated goals
under all potential future conditions. Over time, the Operating Partnership's
and Crescent Finance Company's current controls may become inadequate because of
changes in conditions that cannot be anticipated at the present time, or the
degree of compliance with the policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
SCOPE OF THE EVALUATION OF THE OPERATING PARTNERSHIP'S AND CRESCENT FINANCE
COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES. As of September 30, 2004, the
Operating Partnership and Crescent Finance Company carried out an evaluation of
the effectiveness of the design and operation of the Operating Partnership's and
Crescent Finance Company's disclosure controls and procedures. This evaluation
of the Operating Partnership's and Crescent Finance Company's disclosure
controls and procedures included a review of procedures and the Operating
Partnership's and Crescent Finance Company's internal audit, as well as
discussions with the Company's Disclosure Committee, and others in the
organization, as appropriate. In the course of the evaluation, the Operating
Partnership and Crescent Finance Company sought to identify data errors, control
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. The overall goals of
these various evaluation activities are to monitor the Operating Partnership's
and Crescent Finance Company's disclosure controls and procedures and to make
modifications as necessary. The Operating Partnership's and Crescent Finance
Company's intent in this regard is that the disclosure controls and procedures
will be maintained as systems that change (including with improvements and
corrections) as conditions warrant. Among other matters, the Operating
Partnership and Crescent Finance Company sought in this evaluation to determine
whether there were any "significant deficiencies" or "material
72
weaknesses" in the Operating Partnership's and Crescent Finance Company's
internal control over financial reporting, or whether the Operating Partnership
and Crescent Finance Company have identified any acts of fraud involving
personnel who have a significant role in the Operating Partnership's and
Crescent Finance Company's internal control over financial reporting. The
Operating Partnership and Crescent Finance Company also sought to deal with
other control matters in the evaluation, and in any case in which a problem was
identified, management considered what revision, improvement and/or correction
was necessary to be made in accordance with the Operating Partnership's and
Crescent Finance Company's on-going procedures.
PERIODIC EVALUATION AND CONCLUSION OF DISCLOSURE CONTROLS AND PROCEDURES. As of
September 30, 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 the Chief Financial Officer, of the
effectiveness of the design and operation of the Operating Partnership's and
Crescent Finance Company's disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that such controls and procedures were effective as of September 30, 2004.
SCOPE OF THE EVALUATION OF THE OPERATING PARTNERSHIP'S AND CRESCENT FINANCE
COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING. As with the Operating
Partnership's and Crescent Finance Company's evaluation of its disclosure
controls and procedures, the evaluation by the Company's Chief Executive Officer
and Chief Financial Officer of the Operating Partnership's and Crescent Finance
Company's internal control over financial reporting included a review, in
conjunction with the Operating Partnership's and Crescent Finance Company's
internal auditors and others in the Operating Partnership's and Crescent Finance
Company's organization, of the Operating Partnership's and Crescent Finance
Company's procedures relating to the reliability of the Operating Partnership's
and Crescent Finance Company's financial reporting and preparation of the
Operating Partnership's and Crescent Finance Company's financial statements in
accordance with generally accepted accounting principles ("GAAP"). Among other
matters, the Operating Partnership and Crescent Finance Company sought in the
evaluation to determine whether there were any "significant deficiencies" or
"material weaknesses" in the internal control over financial reporting, or
whether the Operating Partnership and Crescent Finance Company had identified
any acts of fraud involving personnel who have a significant role in the
Operating Partnership's and Crescent Finance Company's internal control over
financial reporting. This information is important both for the evaluation
generally and because the Section 302 certifications require that the Operating
Partnership's and Crescent Finance Company's Chief Executive Officer and Chief
Financial Officer disclose that information to the Audit Committee of the Board
of Trust Managers of the Company and the Operating Partnership's and Crescent
Finance Company's independent auditors and also require the Operating
Partnership and Crescent Finance Company to report on related matters in this
section of the report on Form 10-Q. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions"; these are
control issues that could
73
have a significant adverse effect on the Operating Partnership's and Crescent
Finance Company's ability to record, process, summarize and report financial
data reliably, in accordance with GAAP, in the Operating Partnership's and
Crescent Finance Company's external financial statements. A "material weakness"
is defined in the auditing literature as a significant deficiency where the
internal control does not reduce to a relatively low risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and would not be detected within a timely period by
employees in the normal course of performing their assigned functions. In
addition to evaluating the Operating Partnership's and Crescent Finance
Company's internal control over financial reporting, the Operating Partnership
and Crescent Finance Company have devoted significant resources to documenting
its internal control design and to testing the effectiveness of the internal
control processes. In connection with this documentation and testing, the
Operating Partnership and Crescent Finance Company have made changes to improve
the effectiveness of the internal controls over financial reporting, including
changes in the underlying controls and the documentation of existing controls.
Management identified and reported to the Audit Committee of the Company's
Board of Trust Managers certain deficiencies in the operations of internal
controls at entities in which the Operating Partnership and Crescent Finance
Company invests but which are managed by third parties, such as Crescent Resort
Development, Inc. ("CRDI") and Ventana Inn & Spa. Management identified
deficiencies at CRDI and Ventana Inn & Spa in the course of performing
documentation and testing phases of the internal controls of these entities.
These deficiencies included the lack of segregation of management and accounting
responsibilities, lack of timely reconciliations and deficiencies in the design
and operation of general computer controls and, in a number of cases, incomplete
account analysis. Management does not believe that these deficiencies had an
impact on the accuracy of the Operating Partnership's and Crescent Finance
Company's financial statements. The Operating Partnership and Crescent Finance
Company and the management of CRDI and Ventana Inn & Spa are working together to
correct these identified deficiencies through alternatives such as hiring
additional accounting staff to mitigate the lack of segregation and enhance the
account reconciliation and account analysis process.
The Operating Partnership and Crescent Finance Company are continuing their
evaluation, documentation and testing of the Operating Partnership's and
Crescent Finance Company's internal control over financial reporting so that
management will be able to report on, and the Operating Partnership's and
Crescent Finance Company's independent auditors will be able to attest to, the
Operating Partnership's and Crescent Finance Company's internal control over
financial reporting as of December 31, 2004, as required by applicable laws and
regulations, and the Operating Partnership and Crescent Finance Company will
continue to remediate the internal controls to the extent that the Operating
Partnership's and Crescent Finance Company's testing reveals inadequacies in the
controls. Management believes that the Operating Partnership and Crescent
Finance Company have adequate internal control over financial reporting but
cannot be certain that the identified deficiencies at CRDI or Ventana Inn & Spa
will not result in a management assessment that there is a material weakness in
the internal controls over financial reporting for these entities at the end of
the year or, since there is no precedent available by which the Operating
Partnership and Crescent Finance Company can measure the adequacy of the control
system in advance, that the Operating Partnership and Crescent Finance Company
or the Operating Partnership's and Crescent Finance Company's independent
auditors will be able to complete all the required testing of controls to attest
to the Operating Partnership's and Crescent Finance Company's assessment of
these controls on a timely basis.
74
required testing of controls to attest to the Operating Partnership's and
Crescent Finance Company's assessment of these controls on a timely basis since
there is no precedent available by which the Operating Partnership and Crescent
Finance Company can measure the adequacy of its control system in advance.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the period ended
September 30, 2004, there was no change in the Operating Partnership's and
Crescent Finance Company's internal control over financial reporting that
materially affected, or is reasonably likely to materially affect, the Operating
Partnership's and Crescent Finance Company's internal control over financial
reporting.
75
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
(b) Reports on Form 8-K
None.
76
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Registrant)
By: Crescent Real Estate Equities, Ltd.
Its General Partner
By /s/ John C. Goff
---------------------------------------------
John C. Goff
Date: November 8, 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: November 8, 2004 (Principal Financial and Accounting Officer)
CRESCENT FINANCE COMPANY
(Registrant)
By /s/ John C. Goff
---------------------------------------------
John C. Goff
Date: November 8, 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: November 8, 2004 (Principal Financial and Accounting Officer)
77
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 June 30,
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)
78