UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO
COMMISSION FILE NUMBER 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
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(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (817) 321-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class: on Which Registered:
-------------------- -------------------
Common Shares of Beneficial Interest par value $0.01 per share New York Stock Exchange
Series A Convertible Cumulative Preferred Shares of
Beneficial Interest par value $0.01 per share New York Stock Exchange
Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest par value $0.01 per share New York Stock Exchange
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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 reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES X NO
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As of June 30, 2004, the aggregate market value of the 92,476,149 common shares
held by non-affiliates of the registrant was approximately $1.5 billion.
Number of Common Shares outstanding as of March 2, 2005: 99,820,354
Number of Series A Preferred Shares outstanding as of March 2, 2005: 14,200,000
Number of Series B Preferred Shares outstanding as of March 2, 2005: 3,400,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2005 Annual Meeting of Shareholders to be held in
May 2005 are incorporated by reference into Part III.
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Business............................................................... 3
Item 2. Properties............................................................. 13
Item 3. Legal Proceedings...................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.................... 23
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.. 24
Item 6. Selected Financial Data................................................ 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............. 61
Item 8. Financial Statements and Supplementary Data............................ 62
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 123
Item 9A. Controls and Procedures................................................ 123
Item 9B. Other Information...................................................... 127
PART III.
Item 10. Trust Managers and Executive Officers of the Registrant................ 129
Item 11. Executive Compensation................................................. 129
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................ 129
Item 13. Certain Relationships and Related Transactions......................... 129
Item 14. Principal Accountant Fees and Services................................. 129
PART IV.
Item 15. Exhibits and Financial Statement Schedules............................. 130
2
PART I
ITEM 1. BUSINESS
References to "we," "us" or "our" refer to Crescent Real Estate Equities
Company and, unless the context otherwise requires, Crescent Real Estate
Equities Limited Partnership, which we refer to as our Operating Partnership,
and our other direct and indirect subsidiaries. We conduct our business and
operations through the Operating Partnership, our other subsidiaries and our
joint ventures. References to "Crescent" refer to Crescent Real Estate Equities
Company. The sole general partner of the Operating Partnership is Crescent Real
Estate Equities, Ltd., a wholly- owned subsidiary of Crescent Real Estate
Equities Company, which we refer to as the General Partner.
GENERAL
We operate as a real estate investment trust, or REIT, for federal income
tax purposes and provide management, leasing and development services for some
of our properties.
At December 31, 2004, our assets and operations consisted of four
investment segments:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, we owned in whole or in part the following
operating real estate assets, which we refer to as the Properties:
- THE OFFICE SEGMENT consisted of 78 office properties, which we refer
to as the Office Properties, located in 29 metropolitan submarkets
in eight states, with an aggregate of approximately 31.6 million net
rentable square feet. Fifty-seven of the Office Properties are
wholly-owned and twenty-one are owned through joint ventures, two of
which are consolidated and nineteen of which are unconsolidated.
- THE RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest nights
and three upscale business-class hotel properties with a total of
1,376 rooms, which we refer to as the Resort/Hotel Properties. Seven
of the Resort/Hotel Properties are wholly-owned and one is owned
through a joint venture that is consolidated.
- THE RESIDENTIAL DEVELOPMENT SEGMENT consisted of our ownership of
common stock representing interests of 98% to 100% in four
residential development corporations. These Residential Development
Corporations, through partnership arrangements, owned in whole or in
part 23 upscale residential development properties, which we refer
to as the Residential Development Properties.
- THE TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of our 31.7%
interest in AmeriCold Realty Trust, or AmeriCold, a REIT. As of
December 31, 2004, AmeriCold operated 103 facilities, of which 87
were wholly-owned, one was partially-owned and fifteen were managed
for outside owners. The 88 owned facilities, which we refer to as
the Temperature-Controlled Logistics Properties, had an aggregate of
approximately 443.7 million cubic feet (17.6 million square feet) of
warehouse space. AmeriCold also owned two quarries and the related
land.
See Note 3, "Segment Reporting," included in Item 8, "Financial Statements
and Supplementary Data," for a table showing selected financial information for
each of these investment segments for the three years ended December 31, 2004,
2003 and 2002, and total assets, consolidated property level financing,
consolidated other liabilities and minority interests for each of these
investment segments at December 31, 2004 and 2003.
See Note 1, "Organization and Basis of Presentation," included in Item 8,
"Financial Statements and Supplementary Data," for a table that lists our
principal subsidiaries and the properties that they own.
3
See Note 9, "Investments in Unconsolidated Companies," included in Item 8,
"Financial Statements and Supplementary Data," for a table that lists our
ownership in significant unconsolidated joint ventures and investments as of
December 31, 2004.
BUSINESS OBJECTIVES AND STRATEGIES
BUSINESS OBJECTIVES
Our primary business objective is to be the recognized leader in real
estate investment management of premier commercial office assets and to allocate
capital to high-yielding resort and residential real estate. We strive to
provide an attractive return on equity to our shareholders, through our focus on
increasing earnings, cash flow growth and predictability, and continually
strengthening our balance sheet. We also strive to attract and retain the best
talent available, to align their interests with the interests of our
shareholders and to empower management through the development and
implementation of a cohesive set of operating, investing and financing
strategies.
OPERATING STRATEGIES
We seek to enhance our operating performance by distinguishing ourselves
as the recognized leader in real estate investment management of premier
commercial office assets.
Our operating strategies include:
- using our operating platform to provide superior asset management
services to institutional partners in our joint venture office
assets;
- operating the Office Properties as long-term investments;
- providing exceptional customer service;
- increasing occupancies, rental rates and same-store net operating
income while continuing to limit tenant concessions to market
levels;
- capitalizing on economies of scale through dominant market position;
and
- emphasizing brand recognition of our Class A Office Properties and
luxury and destination fitness resorts and spas.
INVESTING STRATEGIES
We focus on investment opportunities primarily within the Office Segment
in markets considered "demand-driven," or metropolitan areas expected to enjoy
significant long-term employment and office demand growth. These investment
opportunities are evaluated in light of our long-term investment strategy of
investing in assets within markets with at least above national average economic
expansion rates combined with significant office development supply constraints.
We also focus on allocating capital in businesses which have experienced
operators, particularly in premier residential development and resort real
estate. Investment opportunities are expected to provide growth in earnings and
cash flow after applying management skills, renovation and expansion capital and
strategic vision.
Our investment strategies include:
- capitalizing on strategic acquisition opportunities, including
acquisitions with joint venture capital resources, primarily within
our investment segments;
- continually evaluating existing portfolio for potential
joint-venture opportunities with institutional partners;
- continually reviewing opportunities to maximize returns on assets
through strategic dispositions of assets based on current and
prospective market valuations;
4
- allocating capital to residential development partners for
opportunities that increase return on equity and add diversification
to our portfolio;
- investing in real estate-related securities and mezzanine debt to
maximize returns on excess capital; and
- evaluating future repurchases of our common shares, considering
stock price, cost of capital, alternative investment options and
growth implications.
FINANCING STRATEGIES
We employ a disciplined set of financing strategies to fund our operating
and investing activities.
Our financing strategies include:
- funding operating expenses and capital expenditures, debt service
payments and distributions to shareholders and unitholders primarily
through our cash flow from operations as well as return of capital
from the Residential Development Segment;
- taking advantage of market opportunities to refinance existing debt
to reduce interest costs, maintaining a conservative debt maturity
schedule and expanding our lending group;
- minimizing our exposure to market changes in interest rates through
fixed rate debt and interest rate swaps to limit floating rate debt;
and
- utilizing a combination of debt, equity, joint venture capital and
strategic asset disposition alternatives to finance acquisition and
development opportunities.
AVAILABLE INFORMATION
You can find our website on the Internet at www.crescent.com. We provide
free of charge on our website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports as
soon as reasonably practicable after electronically filed with or furnished to
the Securities and Exchange Commission.
EMPLOYEES
As of March 2, 2005, we had approximately 747 employees. None of these
employees are covered by collective bargaining agreements. We consider our
employee relations to be good.
TAX STATUS
We have elected to be taxed as a REIT under Sections 856 through 860 of
the U.S. Internal Revenue Code of 1986, as amended, or the Code, and operate in
a manner intended to enable us to continue to qualify as a REIT. As a REIT, we
generally will not be subject to corporate federal income tax on net income that
we currently distribute to our shareholders, provided that we satisfy certain
organizational and operational requirements including the requirement to
distribute at least 90% of our REIT taxable income to our shareholders each
year. If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate tax rates. We are subject to certain state
and local taxes.
We have elected to treat certain of our corporate subsidiaries as taxable
REIT subsidiaries, each of which we refer to as a TRS. In general, a TRS may
perform additional services for our tenants and may engage in any real estate or
non-real estate business (except for the operation or management of health care
facilities or lodging facilities or the provision to any person, under a
franchise, license or otherwise, of rights to any brand name under which any
lodging facility or health care facility is operated). A TRS is subject to
corporate federal income tax.
5
ENVIRONMENTAL MATTERS
We and our Properties are subject to a variety of federal, state and local
environmental, health and safety laws, including:
- Comprehensive Environmental Response, Compensation, and Liability
Act, as amended ("CERCLA");
- Resource Conservation & Recovery Act;
- Clean Water Act;
- Clean Air Act;
- Toxic Substances Control Act; and
- Occupational Safety & Health Act.
The application of these laws to a specific property that we own will be
dependent on a variety of property-specific circumstances, including the former
uses of the property and the building materials used at each property. Under
certain environmental laws, principally CERCLA and comparable state laws, a
current or previous owner or operator of real estate may be required to
investigate and clean up certain hazardous or toxic substances,
asbestos-containing materials, or petroleum product releases at the property.
They may also be held liable to a governmental entity or third parties for
property damage and for investigation and clean up costs such parties incur in
connection with the contamination, whether or not the owner or operator knew of,
or was responsible for, the contamination. In addition, some environmental laws
create a lien on the contaminated site in favor of the government for damages
and costs it incurs in connection with the contamination. The owner or operator
of a site also may be liable under certain environmental laws and common law to
third parties for damages and injuries resulting from environmental
contamination emanating from the site. Such costs or liabilities could exceed
the value of the affected real estate. The presence of contamination or the
failure to remediate contamination may adversely affect the owner's ability to
sell or lease real estate or to borrow using the real estate as collateral.
Our compliance with existing environmental, health and safety laws has not
had a material adverse effect on our financial condition or results of
operations, and management does not believe it will have such an effect in the
future. To further protect our financial interests regarding environmental
matters, we have in place a Pollution and Remediation Legal Liability insurance
policy which will respond in the event of certain future environmental
liabilities. In addition, we are not aware of any outstanding or future material
costs or liabilities due to environmental contamination at properties we
currently own or owned in the past. However, we cannot predict the impact of new
or changed laws or regulations on our current properties or on properties that
we may acquire in the future.
INDUSTRY SEGMENTS
OFFICE SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 2004, we owned or had an interest in 78 Office
Properties located in 29 metropolitan submarkets in eight states, with an
aggregate of approximately 31.6 million net rentable square feet. As lessor, we
have retained substantially all of the risks and benefits of ownership of the
Office Properties and account for the leases of our 59 consolidated Office
Properties as operating leases. Fifty-seven of the Office Properties are
wholly-owned and twenty-one are owned through joint ventures, two of which are
consolidated and nineteen of which are unconsolidated. Additionally, we provide
management and leasing oversight services for all of our Office Properties.
RECENT DEVELOPMENTS
JOINT VENTURES
During the year ended December 31, 2004, we contributed Office Properties
(Houston Center, Post Oak Central, The Crescent, Fountain Place and Trammell
Crow Center) to limited partnerships in which we have a 23.85% interest.
Subsequent to December 31, 2004, we contributed 1301 McKinney Street and an
adjacent parking garage to a limited partnership in which we have a 23.85%
interest.
6
PURCHASES
During the year ended December 31, 2004, we purchased the following office
properties:
- Peakview Tower in Denver, Colorado;
- 1301 McKinney Street in Houston, Texas;
- One Live Oak in Atlanta, Georgia;
- The Alhambra in Miami, Florida;
- Dupont Centre in Irvine, California;
- Six Office Properties and seven retail parcels within Hughes Center
in Las Vegas, Nevada.
Subsequent to December 31, 2004, we purchased the Exchange Building in
Seattle, Washington.
SALES
During the year ended December 31, 2004, we sold the following office
properties:
- 12404 Park Central in Dallas, Texas;
- 5050 Quorum in Dallas, Texas;
- Addison Tower in Dallas, Texas;
- Ptarmigan Place in Denver, Colorado;
- Liberty Plaza in Dallas, Texas;
- 1800 West Loop South in Houston, Texas.
Subsequent to December 31, 2004, we sold Albuquerque Plaza in Albuquerque,
New Mexico.
MARKET INFORMATION
The Office Property portfolio reflects our research-driven strategy of
investing in first-class assets within markets that have significant potential
for long-term rental growth. Within our selected submarkets, we have focused on
premier locations that management believes are able to attract and retain the
highest quality tenants and command premium rents. Consistent with our long-term
investment strategies, we have sought new acquisitions that have strong economic
returns based on in-place tenancy and/or strong value-creation potential given
the market and Crescent's core competencies. Moreover, we have also sought
assets with dominant positions within their markets and submarkets due to
quality and/or location which mitigates the risks of market volatility.
Accordingly, management's long-term investment strategy not only demands an
acceptable current cash flow return on invested capital, but also considers
long-term cash flow growth prospects. We apply a well-defined leasing strategy
in order to capture the potential rental growth in our portfolio of Office
Properties from occupancy gains within the markets and the submarkets in which
we have invested.
In selecting the Office Properties, our research has analyzed demographic,
economic and market data to identify metropolitan areas expected to enjoy
significant long-term employment and office demand growth. The markets in which
we are currently invested are projected to continue to exceed national
employment and population growth rates, as illustrated in the following table.
In addition, we consider these markets "Demand-Driven". Our research-based
office investment strategy also includes metropolitan regions with at least
above national average economic expansion rates combined with significant office
development supply constraints. Additionally, our investment strategy seeks
geographic and regional economic diversification within the universe of markets
expected to experience excellent economic and office demand growth.
7
PROJECTED POPULATION GROWTH AND EMPLOYMENT GROWTH FOR ALL COMPANY MARKETS
POPULATION EMPLOYMENT
GROWTH GROWTH
METROPOLITAN STATISTICAL AREA 2005-2007 2005-2007
----------------------------- ---------- ----------
Atlanta, GA 7.5 7.4
Austin, TX 9.1 9.8
Colorado Springs, CO 5.2 4.9
Dallas, TX 6.4 6.7
Denver, CO 4.1 5.1
Fort Worth, TX 6.5 6.6
Houston, TX 5.1 5.8
Las Vegas, NV 11.6 8.2
Miami, FL 3.0 4.5
Orange County, CA 4.1 6.0
Phoenix, AZ 7.9 8.6
San Diego, CA 5.6 6.5
Seattle, WA 4.3 7.8
United States 2.8 4.3
-----------------------------
Source: Economy.com, Inc. Data represents total percentage change for years
2005, 2006 and 2007.
Our major office markets, which include Dallas, Houston, Austin, Denver,
Miami, and Las Vegas, currently enjoy rising employment and are among the
leading metropolitan areas for population and employment growth over the next
three years.
UNEMPLOYMENT RATES FOR COMPANY MARKETS
AS OF DECEMBER 31,
------------------
MARKET 2004 2003
------------- ---- ----
United States 5.4% 6.0%
Texas 5.4 6.0
Dallas 5.5 6.1
Houston 5.5 6.1
Austin 4.0 4.8
Denver 5.1 6.0
Miami 5.4 6.2
Las Vegas 3.5 4.5
-----------------
Source: U.S. Bureau of Labor Statistics and Texas Workforce Commission
The market performance of all of our office markets improved in 2004.
Occupancy rose and economic net absorption (the measure of office demand) turned
positive in almost all the markets. The statistics for the Houston market did
not reflect improvement based on annual performance, but in the second half of
2004, Houston did experience positive net absorption and occupancy improvement.
The Texas and Denver markets are still soft but have shown signs of recovery.
The Miami market remains healthy, and the Las Vegas market is one of the best
office markets in the country.
8
OFFICE MARKET ABSORPTION AND OCCUPANCY FOR COMPANY MARKETS(1)
ECONOMIC NET ABSORPTION ECONOMIC NET ABSORPTION
ALL CLASSES CLASS A ECONOMIC OCCUPANCY ECONOMIC OCCUPANCY
(IN SQUARE FEET) (IN SQUARE FEET) ALL CLASSES CLASS A
--------- ----------------------- ------------------------ ------------------- -----------------
MARKET 2004 2003 2004 2003 2004 2003 2004 2003
--------- --------- ---------- --------- ---------- ----- ----- ------ -----
Dallas 1,075,000 (4,161,000) 917,000 (830,000) 75.2% 74.7% 79.3% 78.3%
Houston 75,000 (1,972,000) (345,000) (1,010,000) 82.8% 83.0% 84.2% 84.8%
Austin 961,000 (1,532,000) 991,000 (363,000) 82.3% 80.4% 82.1% 77.5%
Denver 13,000 (1,884,000) 493,000 (19,000) 81.7% 82.2% 82.3% 81.5%
Miami 1,318,000 252,000 1,036,000 291,000 89.0% 87.1% 85.0% 81.4%
Las Vegas 1,892,000 928,000 615,000 154,000 88.8% 87.4% 91.1% 90.4%
-----------------------------
Sources: CoStar Group (Dallas, Houston, Austin, Denver); Jones Lang LaSalle
(Miami); Grubb & Ellis Las Vegas (Las Vegas).
(1) Economic net absorption and economic occupancy exclude sublet space.
One of the reasons for the improved occupancy in 2004 is that most markets
have relatively low levels of construction activity. Therefore, all positive net
absorption translates directly into higher occupancy rates. The only market that
has significant construction (relative to its size) is Las Vegas, and its
occupancy levels demonstrate that this space, which is almost all Class B, is
being readily absorbed.
OFFICE MARKET CONSTRUCTION ACTIVITY FOR COMPANY MARKETS
OFFICE SPACE OFFICE SPACE OFFICE SPACE
COMPLETIONS COMPLETIONS UNDER
ALL CLASSES CLASS A CONSTRUCTION
(in square feet) --------------------- ------------------- ------------
MARKET 2004 2003 2004 2003 2004
---------------- --------- --------- ------- --------- ------------
Dallas 350,000 561,000 181,000 498,000 408,000
Houston 453,000 1,974,000 166,000 1,633,000 641,000
Austin 192,000 791,000 74,000 671,000 37,000
Denver 691,000 842,000 186,000 521,000 635,000
Miami 1,092,000 748,000 931,000 642,000 227,000
Las Vegas 1,296,000 1,018,000 210,000 139,000 1,488,000
------------------------
Sources: CoStar Group (Dallas, Houston, Austin, Denver); Jones Lang LaSalle
(Miami); Colliers International and Restrepo Consulting Group, LLC (Las Vegas).
COMPETITION
Our Office Properties, primarily Class A properties located within the
southwest, individually compete against a wide range of property owners and
developers, including property management companies and other REITs, that offer
space in similar classes of office properties (specifically Class A and Class B
properties). A number of these owners and developers may own more than one
property. The number and type of competing properties in a particular market or
submarket could have a material effect on our ability to lease space and
maintain or increase occupancy or rents in our existing Office Properties. We
believe, however, that the quality services and individualized attention that we
offer our tenants, together with our active preventive maintenance program and
superior building locations within markets, enhance our ability to attract and
retain tenants for our Office Properties. In addition, as of December 31, 2004,
on a weighted average basis, we owned approximately 14.7% of the Class A office
space in the 29 submarkets in which we owned Class A office properties, and
23.1% of the Class B office space in the one submarket in which we owned Class B
office properties. Management believes that ownership of a significant
percentage of office space in a particular market reduces property operating
expenses, enhances our ability to attract and retain tenants and potentially
results in increases in our net income.
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DIVERSIFIED TENANT BASE
Our top five tenants accounted for approximately 13% of our total Office
Segment revenues as of December 31, 2004. The loss of one or more of our major
tenants would have a temporary adverse effect on our financial condition and
results of operations until we are able to re-lease the space previously leased
to these tenants. Based on rental revenues from office leases in effect as of
December 31, 2004, no single tenant accounted for more than 6% of our total
Office Segment revenues for 2004.
RESORT/HOTEL SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 2004, we owned or had an interest in eight Resort/Hotel
Properties. We hold one of the Resort/Hotel Properties, the Fairmont Sonoma
Mission Inn & Spa, through a joint venture arrangement, pursuant to which we own
an 80.1% interest in the limited liability company that owns the property. The
remaining Resort/Hotel Properties are wholly-owned.
Seven of the Resort/Hotel Properties are leased to taxable REIT
subsidiaries that we own or in which we have an interest. The Omni Austin Hotel
is leased to HCD Austin Corporation, an unrelated third party. Third party
operators manage all of the Resort/Hotel Properties.
RECENT DEVELOPMENTS
CANYON RANCH
On January 18, 2005, we formed two new entities, which we collectively
refer to as Canyon Ranch, with the founders of Canyon Ranch. As a result, all
Canyon Ranch assets are held 48% by us and 52% by its founders. The assets
contributed or sold to Canyon Ranch by the equity owners comprise the following:
- Canyon Ranch Tucson and Canyon Ranch Lenox Destination Resorts;
- Canyon Ranch SpaClub at the Venetian Resort in Las Vegas;
- Canyon Ranch SpaClub on the Queen Mary 2 ocean liner;
- Canyon Ranch Living Community in Miami, Florida;
- Canyon Ranch SpaClub at the Gaylord Palms Resort in Kissimee, Florida;
- All Canyon Ranch trade names and trademarks;
- Resort management contracts.
As part of the transaction, Canyon Ranch completed a private placement of
$110 million of Mandatorily Redeemable Convertible Preferred Membership units
and completed a $95 million mortgage financing. As a result of these
transactions, we received approximately $91.9 million which was used to pay down
or defease debt related to our previous investment in the properties and to pay
down our credit facility.
HYATT REGENCY HOTEL
On October 19, 2004, we completed the sale of the Hyatt Regency Hotel in
Albuquerque, New Mexico.
MARKET INFORMATION
Lodging demand is highly dependent upon the global economy and volume of
business travel as well as leisure travel. The hospitality market began to
soften in early 2001 as the national economy went into recession. In 2001 and
2002, the industry experienced declines in occupancy, room rates, and revenue
per available room (RevPAR is a combination of occupancy and room rates and is
the chief measure of hotel market performance). Leisure travel recovered
slightly in 2003, but business travel remained weak. As a result, market
conditions were flat in 2003. In 2004, not only did leisure travel rise, but
business travel increased for the first time since 2000. The result for the
entire industry was a 2.2 percentage point increase in occupancy to 61.3%, a
4.0% increase in average daily room rates (ADR), and a 7.8% increase in RevPAR.
In 2004, for the luxury section of the industry, the most comparable to our
portfolio, hotel occupancy rose 3.4 percentage points to 68%, ADR increased
5.2%, and RevPAR increased 10.8%.
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COMPETITION
We believe that our luxury and destination fitness resorts and spas are
unique properties due to location, concept and high replacement cost, all of
which create barriers for competition to enter. However, the luxury and
destination fitness resorts and spas do compete against business-class hotels or
middle-market resorts in their geographic areas, as well as against luxury
resorts nationwide and around the world. Our upscale business class Resort/Hotel
Properties in Denver, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels.
RESIDENTIAL DEVELOPMENT SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 2004, we owned common stock representing interests of
98% to 100% in four Residential Development Corporations, which in turn, through
joint ventures or partnership arrangements, owned in whole or in part 23
Residential Development Properties. The Residential Development Corporations are
responsible for the continued development and the day-to-day operations of the
Residential Development Properties.
RECENT DEVELOPMENTS
On September 14, 2004, we completed the sale of Breckenridge Commercial
Retail Center in Breckenridge, Colorado.
On October 21, 2004, we entered into a partnership agreement with
affiliates of JPI Multi-Family Investments, L.P. to develop a multi-family
luxury apartment project in Dedham, Massachusetts. We 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.
COMPETITION AND MARKET INFORMATION
Our Residential Development Properties compete against a variety of other
housing alternatives in each of their respective areas. These alternatives
include other planned developments, pre-existing single-family homes,
condominiums, townhouses and non-owner occupied housing, such as luxury
apartments. Management believes that Desert Mountain and the properties owned by
CRDI, representing our most significant investments in Residential Development
Properties, contain certain features that provide competitive advantages to
these developments.
Desert Mountain, a luxury residential and recreational private community
in Scottsdale, Arizona, offers six 18-hole Jack Nicklaus signature golf courses
with adjacent clubhouses. Management believes Desert Mountain has few direct
competitors due in part to the superior environmental attributes and the amenity
package that Desert Mountain offers to its members. Sources of competition come
from the resale market of existing lots and homes within Desert Mountain and
from a few smaller projects in the area. In addition, Desert Mountain has a
superior amenity package and future residential golf development in the
Scottsdale area is limited due to the lack of water available for golf course
use.
CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Management believes that the Properties owned by CRDI have limited
direct competitors because the projects' locations are unique, land availability
is limited, and development rights are restricted in most of these locations.
Residential development demand is highly dependent upon the national
economy, mortgage interest rates and home sales. As the economy showed signs of
improvement in 2004, we generally saw improved activity, absorption, and pricing
in all regions of our residential investments.
11
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 2004, the Temperature-Controlled Logistics Segment
consisted of our 31.7% interest in AmeriCold Realty Trust, or AmeriCold, a REIT.
AmeriCold operates 103 facilities, of which 87 are wholly-owned, one is
partially-owned and fifteen are managed for outside owners. The 88 owned
facilities, which we refer to as the Temperature-Controlled Logistics
Properties, have an aggregate of approximately 443.7 million cubic feet (17.6
million square feet) of warehouse space. AmeriCold also owns two quarries and
the related land.
RECENT DEVELOPMENTS
On November 18, 2004, Vornado Crescent Portland Partnership, or VCPP, the
partnership through which we owned our 40% interest in AmeriCold, sold a 20.7%
interest in AmeriCold to The Yucaipa Companies for $145.0 million, resulting in
a gain of approximately $12.3 million, net of transaction costs, to us. In
addition, Yucaipa will assist in the management of AmeriCold and may earn a
promote of up to 20% of the increase in value through December 31, 2007. The
promote is payable out of the remaining outstanding common shares in AmeriCold,
including the common shares held by us, and limited to 10% of these remaining
common shares.
Immediately following this transaction, VCPP dissolved and, after the
payment of all of its liabilities, distributed its remaining assets to its
partners. The assets distributed to us consisted of common shares, representing
an approximately 31.7% interest in AmeriCold, cash of approximately $34.3
million and a note receivable of approximately $8.0 million.
On November 4, 2004, AmeriCold purchased 100% of the ownership interests
in its tenant, AmeriCold Logistics, for approximately $47.7 million. The
purchase was funded by a contribution from AmeriCold's owner, VCPP, which funded
its contribution through a loan from our partner, Vornado Realty, L.P. On
November 4, 2004, AmeriCold also purchased 100% of the ownership interests in
Vornado Crescent and KC Quarry, L.L.C., or VCQ, for approximately $24.9 million.
AmeriCold used a cash contribution from its owner, of which our portion was
approximately $9.9 million, to fund the purchase. As a result of our 56%
ownership interest in VCQ, we received proceeds from the sale of VCQ of
approximately $13.2 million.
On February 5, 2004, AmeriCold completed a $254.4 million mortgage
financing with Morgan Stanley Mortgage Capital Inc., which resulted in a cash
distribution to us of $90.0 million.
BUSINESS AND INDUSTRY INFORMATION
AmeriCold provides the food industry with refrigerated warehousing,
transportation management services and other logistical services. The
Temperature-Controlled Logistics Properties consist of production, distribution
and public facilities. In addition, AmeriCold manages facilities owned by its
customers for which it earns fixed and incentive fees. Production facilities
differ from distribution facilities in that they typically serve one or a small
number of customers located nearby. These customers store large quantities of
processed or partially processed products in the facility until they are further
processed or shipped to the next stage of production or distribution.
Distribution facilities primarily serve customers who store a wide variety of
finished products to support shipment to end-users, such as food retailers and
food service companies, in a specific geographic market. Public facilities
generally serve the needs of local and regional customers under short-term
agreements. Food manufacturers and processors use public facilities to store
capacity overflow from their production facilities or warehouses. These
facilities also provide a number of additional services such as blast freezing,
import/export and labeling.
AmeriCold provides supply chain management solutions to food manufacturers
and retailers who require multi-temperature storage, handling and distribution
capability for their products. Service offerings include comprehensive
transportation management, supply chain network modeling and optimization,
consulting and grocery retail-based distribution strategies such as multi-vendor
consolidation, direct-store delivery (DSD) and seasonal product distribution.
AmeriCold's technology provides food manufacturers with real time detailed
inventory information via the Internet.
12
AmeriCold's customers consist primarily of national, regional and local
food manufacturers, distributors, retailers and food service organizations. A
breakdown of AmeriCold's largest customers includes:
PERCENTAGE OF
2004 REVENUE
-------------
H.J. Heinz Company 16.0%
ConAgra Foods, Inc. 11.3
Altria Group Inc. (Kraft Foods) 6.7
Sara Lee Corp. 5.0
Tyson Foods, Inc. 4.0
General Mills, Inc. 3.9
Schwan Corp. 3.4
McCain Foods, Inc. 3.2
Jack in the Box 1.6
J.R. Simplot Company 1.6
Other 43.3
----
TOTAL 100%
====
On November 18, 2004, Tony Schnug became Chief Executive Officer of
AmeriCold. Mr. Schnug is a partner of The Yucaipa Companies and was responsible
for conducting due diligence of potential acquisitions and oversees management
of portfolio companies on strategy and operational issues. Previously, Mr.
Schnug was an executive officer of Yucaipa portfolio companies including Fred
Meyer, Ralphs and Food 4 Less with responsibilities covering logistics,
manufacturing and construction.
COMPETITION
AmeriCold is the largest operator of temperature-controlled warehouse
space in North America. As a result, AmeriCold does not have any competitors of
comparable size. AmeriCold operates in an environment in which competition is
national, regional and local in nature and in which the range of service,
temperature-controlled logistics facilities, customer mix, service performance
and price are the principal competitive factors.
ITEM 2. PROPERTIES
We consider all of our Properties to be in good condition,
well-maintained, suitable and adequate to carry on our business.
OFFICE PROPERTIES
As of December 31, 2004, we owned or had an interest in 78 Office
Properties, located in 29 metropolitan submarkets in eight states, with an
aggregate of approximately 31.6 million net rentable square feet. Our Office
Properties are located primarily in the Dallas and Houston, Texas, metropolitan
areas. As of December 31, 2004, our Office Properties in Dallas and Houston
represented an aggregate of approximately 69% of our office portfolio based on
total net rentable square feet (30% for Dallas and 39% for Houston).
13
OFFICE PROPERTY TABLE(1)
The following table shows, as of December 31, 2004, certain information
about our Office Properties. In the table, "CBD" means central business
district.
WEIGHTED
AVERAGE
FULL-SERVICE
ECONOMIC RENTAL RATE PER OUR
NO. OF NET RENTABLE OCCUPANCY OCCUPIED SQ. OWNERSHIP
STATE, CITY, PROPERTY PROPERTIES SUBMARKET YEAR COMPLETED AREA (SQ.FT.) PERCENTAGE FT. (2) PERCENTAGE
---------------------------- ---------- ------------------- -------------- ------------- --------------- --------------- ----------
TEXAS
DALLAS
Bank One Center 1 CBD 1987 1,530,957 79.5% $ 22.07 50%
The Crescent 2 Uptown/Turtle Creek 1985 1,299,522 91.2 32.95 24
Fountain Place 1 CBD 1986 1,200,266 94.1 21.04 24
Trammell Crow Center 1 CBD 1984 1,128,331 93.6 24.92 24
Stemmons Place 1 Stemmons Freeway 1983 634,381 82.8 17.64 100
Spectrum Center 1 Quorum/Bent Tree 1983 598,250 73.8 20.38 100
Waterside Commons 1 Las Colinas 1986 458,906 71.0 17.80 100
125 E. John Carpenter
Freeway 1 Las Colinas 1982 446,031 82.6 21.04 100
The Aberdeen 1 Quorum/Bent Tree 1986 320,629 100.0 15.89 100
MacArthur Center I & II 1 Las Colinas 1982/1986 298,161 89.0 19.91 100
Stanford Corporate Centre 1 Quorum/Bent Tree 1985 274,684 95.5 21.14 100
Palisades Central II 1 Richardson 1985 237,731 95.2 20.29 100
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,543 75.4 18.04 100
The Addison 1 Quorum/Bent Tree 1981 215,016 98.7 23.67 100
Palisades Central I 1 Richardson 1980 180,503 70.5 18.54 100
Greenway II 1 Richardson 1985 154,329 100.0 16.81 100
Greenway I & IA 2 Richardson 1983 146,704 49.4(3) 14.76 100
----- ----------- --------- --------- ---
Subtotal/Weighted Average 19 9,357,944 86.2% $ 22.62 62%
----- ----------- --------- --------- ---
FORT WORTH
Carter Burgess Plaza 1 CBD 1982 954,895 96.4% $ 18.39 100%
----- ---------- --------- -------- ---
HOUSTON
Greenway Plaza 10 Greenway Plaza 1969-1982 4,348,052 88.0% $ 20.69 100%
Houston Center 4 CBD 1974-1983 2,955,146 90.9 20.59 24
Post Oak Central 3 West Loop/Galleria 1974-1981 1,279,759 92.0 20.57 24
Five Houston Center 1 CBD 2002 580,875 94.9 30.45 25
Five Post Oak Park 1 West Loop/Galleria 1986 567,396 85.0 18.22 30
Four Westlake Park 1 Katy Freeway West 1992 561,065 99.6 22.75 20
BriarLake Plaza 1 Westchase 2000 502,410 96.3 24.18 30
Three Westlake Park 1 Katy Freeway West 1983 414,792 94.7 22.09 20
----- ----------- --------- -------- ---
Subtotal/Weighted Average 22 11,209,495 90.6% $ 21.40 54%
----- ----------- --------- -------- ---
AUSTIN
816 Congress (4) 1 CBD 1984 433,024 73.0%(3) $ 21.04 100%
301 Congress Avenue 1 CBD 1986 418,338 73.3 22.52 50
Bank One Tower 1 CBD 1974 389,503 95.9 23.56 20
Austin Centre 1 CBD 1986 343,664 75.4 20.28 100
100
The Avallon 3 Northwest 1993/1997 318,217 78.8 18.22
Barton Oaks Plaza One 1 Southwest 1986 98,955 59.8 24.04 100
----- ----------- --------- -------- ---
Subtotal/Weighted Average 8 2,001,701 78.2% $ 21.49 74%
----- ----------- --------- -------- ---
14
WEIGHTED
AVERAGE
FULL-SERVICE
ECONOMIC RENTAL RATE PER OUR
NO. OF YEAR NET RENTABLE OCCUPANCY OCCUPIED SQ. OWNERSHIP
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED AREA (SQ.FT.) PERCENTAGE FT. (2) PERCENTAGE
---------------------------- ---------- ------------------------ ---------- ------------- ------------ --------------- ----------
COLORADO
DENVER
Johns Manville Plaza 1 CBD 1978 675,400 93.6% $ 19.78 100%
707 17th Street 1 CBD 1982 550,805 87.4 21.03 100
Regency Plaza 1 Denver Technology Center 1985 309,862 82.9 20.18 100
55 Madison 1 Cherry Creek 1982 137,176 86.6 19.27 100
The Citadel 1 Cherry Creek 1987 130,652 95.7 25.24 100
44 Cook 1 Cherry Creek 1984 124,174 90.4 19.81 100
----- ----------- ------ ------- ---
Subtotal/Weighted Average 6 1,928,069 89.6% $ 20.54 100%
----- ----------- ------ ------- ---
COLORADO SPRINGS
Briargate Office and
Research Center 1 Colorado Springs 1988 260,046 68.2% $ 16.60 100%
----- ----------- ------ ------- ---
FLORIDA
MIAMI
Miami Center 1 CBD 1983 782,211 93.9% $ 30.34 40%
Datran Center 2 South Dade/Kendall 1986/1988 476,412 93.6 27.07 100
The BAC - Colonnade
Building 1 Coral Gables 1989 216,115 92.9 30.37 100
The Alhambra 2 Coral Gables 1961/1987 317,566 86.5 29.39 100
----- ----------- ------ ------- ---
Subtotal/Weighted Average 6 1,792,304 92.4% $ 29.31 74%
----- ----------- ------ ------- ---
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 84.9% $ 23.94 100%
----- ----------- ------ ------- ---
CALIFORNIA
SAN DIEGO
Chancellor Park 1 University Town Centre 1988 195,733 82.4% $ 28.55 100%
----- ----------- ------ ------- ---
IRVINE
Dupont Centre 1 John Wayne Airport 1986 250,782 89.6% $ 27.52 100%
----- ----------- ------ ------- ---
NEVADA
LAS VEGAS
Hughes Center (5) 8 Central East 1986 - 1999 1,110,890 97.7% $ 30.89 98%
----- ----------- ------ ------- ---
PORTFOLIO EXCLUDING
PROPERTIES HELD FOR SALE AND
PROPERTIES NOT STABILIZED 74 29,538,232 88.5%(3) $ 22.63(6) 67%
===== =========== ====== ======= ===
PROPERTIES HELD FOR SALE
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza (7) 1 CBD 1990 366,236 84.5% $ 18.96 100%
----- ----------- ------ ------- ---
PROPERTIES NOT STABILIZED
TEXAS
HOUSTON
1301 McKinney St.(8) 1 CBD 1982 1,247,061 48.1% $ 21.21 100%
----- ----------- ------ ------- ---
COLORADO
DENVER
Peakview Tower (8) 1 Greenwood Village 2001 264,149 75.0% $ 23.22 100%
----- ----------- ------ ------- ---
GEORGIA
ATLANTA
One Live Oak (8) 1 Buckhead 1981 201,488 68.1% $ 23.13 100%
----- ----------- ------ ------- ---
TOTAL PORTFOLIO 78 31,617,166 69%
===== =========== ===
------------------
(1) Office Property Table data is presented without adjustments to give effect
to our actual ownership percentage in joint ventured properties.
(2) Calculated in accordance with GAAP based on base rent payable as of
December 31, 2004, giving effect to free rent and scheduled rent increases
and including adjustments for expenses payable by or reimbursable from
customers.
15
(3) Leases have been executed at certain Office Properties but had not commenced
as of December 31, 2004. If such leases had commenced as of December 31,
2004, the percent leased for Office Properties excluding held for sale
properties would have been 89.8%. Properties whose percent leased exceeds
economic occupancy by 5 percentage points or more are as follows: Greenway I
& IA - 58.4% and 816 Congress - 78.6%.
(4) 816 Congress was formerly known as Frost Bank Plaza.
(5) Hughes Center consists of seven wholly-owned office properties and one joint
ventured office property in which we own a 67% general partner interest.
(6) The weighted average full-service cash rental rate per square foot
calculated based on base rent payable for Office Properties excluding held
for sale properties as of December 31, 2004, without giving effect to free
rent and scheduled rent increases that are taken into consideration under
GAAP but including adjustment for expenses paid by or reimbursed from
customers, is $21.89.
(7) We completed the disposition of Albuquerque Plaza in February 2005.
(8) Property statistics exclude 1301 McKinney Street (acquired December 21,
2004), Peakview Tower (acquired December 29, 2004) and One Live Oak
(acquired December 15, 2004). These office properties will be included in
portfolio statistics once stabilized. Stabilization is deemed to occur upon
the earlier of (a) achieving 90% occupancy or (b) one year following the
acquisition date.
The following table shows, as of December 31, 2004, the principal
businesses conducted by the tenants at our Office Properties, based on
information supplied to us from the tenants. Based on rental revenues from
office leases in effect as of December 31, 2004, no single tenant
accounted for more than 6% of our total Office Segment revenues for 2004.
Percent of
Industry Sector Leased Sq. Ft.
------------------------- ----------------
Professional Services (1) 32%
Financial Services (2) 21
Energy(3) 19
Technology 5
Telecommunications 4
Manufacturing 3
Food Service 3
Government 3
Retail 2
Medical 2
Other (4) 6
---
TOTAL LEASED 100%
===
------------------
(1) Includes legal, accounting, engineering, architectural and advertising
services.
(2) Includes banking, title and insurance and investment services.
(3) Includes oil and gas and utility companies.
(4) Includes construction, real estate and other industries.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following tables show schedules of lease expirations for leases in
place as of December 31, 2004, for our total Office Properties and for Dallas,
Houston and Austin, Texas; Denver, Colorado; Miami, Florida and Las Vegas,
Nevada, individually, for each of the 10 years beginning 2005.
16
TOTAL OFFICE PROPERTIES(1)
SQUARE SQUARE
FOOTAGE FOOTAGE ANNUAL NUMBER
OF SIGNED OF ANNUAL PERCENTAGE EXPIRING OF
EXPIRING RENEWALS EXPIRING PERCENTAGE FULL-SERVICE OF ANNUAL PER SQUARE CUSTOMERS
LEASES OF LEASES OF SQUARE RENT UNDER FULL-SERVICE FOOTAGE WITH
YEAR OF LEASE (BEFORE EXPIRING (AFTER FOOTAGE EXPIRING RENT FULL-SERVICE EXPIRING
EXPIRATION RENEWALS) LEASES (2) RENEWALS) EXPIRING LEASES (3) EXPIRING RENT(3) LEASES
------------- ---------- ----------- ---------- ---------- ------------- ------------ ------------ ---------
2005 4,018,746 (4) (1,259,578) 2,759,168 (4)(5) 10.7% $ 60,347,813 10.3% $ 21.87 461
2006 2,539,559 (301,283) 2,238,276 (6) 8.7 55,145,138 9.4 24.64 296
2007 2,739,463 76,435 2,815,898 10.9 63,713,617 10.9 22.63 281
2008 1,934,875 33,603 1,968,478 7.6 44,547,182 7.6 22.63 226
2009 2,487,870 48,117 2,535,987 9.8 57,735,181 9.9 22.77 226
2010 2,095,934 420,497 2,516,431 9.7 58,775,551 10.1 23.36 134
2011 1,438,847 14,789 1,453,636 5.6 34,718,839 5.9 23.88 63
2012 1,165,786 66,788 1,232,574 4.8 30,668,203 5.3 24.88 48
2013 1,446,151 93,344 1,539,495 6.0 33,852,852 5.8 21.99 43
2014 2,858,279 137,013 2,995,292 11.6 60,795,889 10.4 20.30 47
2015 and
thereafter 3,147,209 670,275 3,817,484 14.6 83,670,579 14.4 21.92 65
---------- ----------- ---------- ---------- ------------- -------- ----------- ------
Total 25,872,719 - 25,872,719 (7) 100.0% $ 583,970,844 100.0% $ 22.57 1,890
========== =========== ========== ========== ============= ======== =========== ======
------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties. Excludes held for sale
properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent and
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based on
current expense levels.
(4) As of December 31, 2004, leases totaling 1,497,682 square feet (including
renewals of 1,259,578 square feet and new leases of 238,104 square feet)
have been signed and will commence during 2005. These signed leases
represent approximately 37% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 859,269 square feet Q2: 853,232
square feet Q3: 568,988 square feet Q4: 477,679 square feet.
(6) Expirations by quarter are as follows: Q1: 540,479 square feet Q2: 488,865
square feet Q3: 505,485 square feet Q4: 703,447 square feet.
(7) Reconciliation of Occupied Square Feet to Net Rentable Area:
SQUARE FEET
-----------
Occupied Square Footage, per 10 Year Expiration Report: 25,872,719
Non-revenue Generating Space: 275,504
-----------
Total Occupied Office Square Footage: 26,148,223
Total Vacant Square Footage: 3,390,009
-----------
Total Office Net Rentable Area: 29,538,232
===========
DALLAS OFFICE PROPERTIES(1)
SQUARE SQUARE
FOOTAGE FOOTAGE ANNUAL NUMBER
OF SIGNED OF ANNUAL PERCENTAGE EXPIRING OF
EXPIRING RENEWALS EXPIRING PERCENTAGE FULL-SERVICE OF ANNUAL PER SQUARE CUSTOMERS
LEASES OF LEASES OF SQUARE RENT UNDER FULL-SERVICE FOOTAGE WITH
YEAR OF LEASE (BEFORE EXPIRING (AFTER FOOTAGE EXPIRING RENT FULL-SERVICE EXPIRING
EXPIRATION RENEWALS) LEASES (2) RENEWALS) EXPIRING LEASES (3) EXPIRING RENT(3) LEASES
------------- ---------- ----------- ---------- ---------- ------------- ------------ ------------ ---------
2005 1,607,787 (4) (736,163) 871,624 (4)(5) 10.9% $ 18,509,275 10.4% $ 21.24 121
2006 563,269 (8,963) 554,306 (6) 6.9 13,839,468 7.7 24.97 54
2007 822,112 112,771 934,883 11.7 21,449,731 12.0 22.94 57
2008 493,335 16,140 509,475 6.4 11,448,312 6.4 22.47 58
2009 432,917 3,797 436,714 5.5 11,485,245 6.4 26.30 40
2010 716,402 231,985 948,387 11.9 23,360,283 13.1 24.63 34
2011 431,838 11,664 443,502 5.5 10,431,664 5.8 23.52 17
2012 288,698 4,485 293,183 3.7 5,942,177 3.3 20.27 18
2013 252,305 130,066 382,371 4.8 8,513,851 4.8 22.27 12
2014 743,673 - 743,673 9.3 16,069,375 9.0 21.61 14
2015 and
thereafter 1,640,574 234,218 1,874,792 23.4 37,738,399 21.1 20.13 23
Total 7,992,910 - 7,992,910 100.0% $178,787,780 100.0% $ 22.37 448
========== ========= ========== ======= ============ ====== ========= ====
-----------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent and
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based on
current expense levels.
(4) As of December 31, 2004, leases totaling 854,034 square feet (including
renewals of 736,163 square feet and new leases of 117,871 square feet) have
been signed and will commence during 2005. These signed leases represent
approximately 53% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 242,092 square feet Q2: 185,443
square feet Q3: 287,116 square feet Q4: 156,973 square feet.
(6) Expirations by quarter are as follows: Q1: 178,876 square feet Q2: 169,727
square feet Q3: 165,230 square feet Q4: 40,473 square feet.
17
HOUSTON OFFICE PROPERTIES (1)
SQUARE SQUARE
FOOTAGE FOOTAGE ANNUAL NUMBER
OF SIGNED OF ANNUAL PERCENTAGE EXPIRING OF
EXPIRING RENEWALS EXPIRING PERCENTAGE FULL-SERVICE OF ANNUAL PER SQUARE CUSTOMERS
LEASES OF LEASES OF SQUARE RENT UNDER FULL-SERVICE FOOTAGE WITH
YEAR OF LEASE (BEFORE EXPIRING (AFTER FOOTAGE EXPIRING RENT FULL-SERVICE EXPIRING
EXPIRATION RENEWALS) LEASES (2) RENEWALS) EXPIRING LEASES (3) EXPIRING RENT(3) LEASES
------------- ---------- ----------- ---------- ---------- ------------- ------------ ------------ ---------
2005 946,093 (4) (273,066) 673,027 (4)(5) 6.7% $ 12,499,178 5.8% $ 18.63 161
2006 1,069,805 (228,259) 841,546 (6) 8.4 18,095,454 8.4 21.50 95
2007 1,167,054 (26,188) 1,140,866 11.3 23,637,226 11.0 20.72 87
2008 920,793 (10,177) 910,616 9.0 18,323,643 8.5 20.12 78
2009 1,005,511 4,836 1,010,347 10.0 19,471,578 9.1 19.27 71
2010 856,119 171,959 1,028,078 10.2 21,960,170 10.2 21.36 53
2011 692,079 300 692,379 6.9 15,242,281 7.1 22.01 23
2012 546,773 43,898 590,671 5.9 15,079,960 7.0 25.53 17
2013 477,800 (960) 476,840 4.7 11,640,875 5.4 24.41 12
2014 1,317,353 51,264 1,368,617 13.6 26,724,035 12.5 19.53 14
2015 and
thereafter 1,064,938 266,393 1,331,331 13.3 31,927,702 15.0 23.98 16
---------- --------- ---------- ----- ------------- ------- --------- ------
Total 10,064,318 - 10,064,318 100.0% $ 214,602,102 100.0% $ 21.33 627
========== ========= ========== ===== ============= ======= ========= ======
----------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based on
current expense levels.
(4) As of December 31, 2004, leases totaling 313,700 square feet (including
renewals of 273,066 square feet and new leases of 40,634 square feet) have
been signed and will commence during 2005. These signed leases represent
approximately 33% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 307,477 square feet Q2: 159,088
square feet Q3: 62,527 square feet Q4: 143,935 square feet.
(6) Expirations by quarter are as follows: Q1: 89,986 square feet Q2: 135,073
square feet Q3: 135,965 square feet Q4: 480,522 square feet.
AUSTIN OFFICE PROPERTIES (1)
SQUARE SQUARE
FOOTAGE FOOTAGE ANNUAL NUMBER
OF SIGNED OF ANNUAL PERCENTAGE EXPIRING OF
EXPIRING RENEWALS EXPIRING PERCENTAGE FULL-SERVICE OF ANNUAL PER SQUARE CUSTOMERS
LEASES OF LEASES OF SQUARE RENT UNDER FULL-SERVICE FOOTAGE WITH
YEAR OF LEASE (BEFORE EXPIRING (AFTER FOOTAGE EXPIRING RENT FULL-SERVICE EXPIRING
EXPIRATION RENEWALS) LEASES (2) RENEWALS) EXPIRING LEASES (3) EXPIRING RENT(3) LEASES
------------- ---------- ----------- ---------- ---------- ------------- ------------ ------------ ---------
2005 543,129(4) (46,104) 497,025(4)(5) 32.9% $ 11,074,450 33.9% $ 22.28 39
2006 182,458 (20,004) 162,454(6) 10.7 4,567,801 14.0 28.12 22
2007 87,781 - 87,781 5.8 2,124,806 6.5 24.12 19
2008 66,785 21,627 88,412 5.8 1,880,276 5.8 21.27 17
2009 141,810 - 141,810 9.4 2,960,701 9.1 20.88 17
2010 133,011 3,820 136,831 9.0 2,306,692 7.1 16.86 17
2011 19,302 - 19,302 1.3 325,185 1.0 16.85 4
2012 7,278 - 7,278 0.5 123,055 0.4 16.91 1
2013 11,604 - 11,604 0.8 259,977 0.8 22.40 1
2014 241,570 - 241,570 16.0 4,753,138 14.6 19.68 4
2015 and
thereafter 78,069 40,661 118,730 7.8 2,267,539 6.8 19.10 9
--------- ---------- ---------- ------ ------------ ------- -------- -----
Total 1,512,797 - 1,512,797 100.0% $ 32,643,620 100.0% $ 21.58 150
========= ========== ========== ====== ============ ======= ======== =====
--------------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end of
the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based on
current expense levels.
(4) As of December 31, 2004, leases totaling 68,541 square feet (including
renewals of 46,104 square feet and new leases of 22,437 square feet) have
been signed and will commence during 2005. These signed leases represent
approximately 13% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 89,222 square feet Q2: 358,196
square feet Q3: 17,033 square feet Q4: 32,574 square feet.
(6) Expirations by quarter are as follows: Q1: 92,831 square feet Q2: 36,126
square feet Q3: 14,368 square feet Q4: 19,129 square feet.
18
DENVER OFFICE PROPERTIES (1)
ANNUAL FULL- PERCENTAGE OF
YEAR OF SQUARE FOOTAGE SIGNED RENEWALS SQUARE FOOTAGE PERCENTAGE SERVICE RENT ANNUAL
LEASE OF EXPIRING LEASES OF EXPIRING LEASES OF EXPIRING LEASES OF SQUARE FOOTAGE UNDER EXPIRING FULL-SERVICE
EXPIRATION (BEFORE RENEWALS) (2) (AFTER RENEWALS) EXPIRING LEASES (3) RENT EXPIRING
---------- ------------------ ------------------ ------------------- ----------------- ------------ -------------
2005 111,378 (4) (3,147) 108,231 (4) (5) 6.3% $ 2,429,559 6.9%
2006 101,052 (2,036) 99,016 (6) 5.8 2,491,238 7.1
2007 137,380 - 137,380 8.0 2,964,855 8.4
2008 101,899 (495) 101,404 5.9 2,058,116 5.8
2009 314,655 (12,208) 302,447 17.6 6,432,115 18.2
2010 129,283 - 129,283 7.5 2,881,425 8.2
2011 48,310 - 48,310 2.8 910,457 2.6
2012 89,005 17,886 106,891 6.2 2,432,213 6.9
2013 160,009 (86,709) 73,300 4.3 1,427,502 4.0
2014 344,885 86,709 431,594 25.2 8,253,439 23.4
2015 and
thereafter 176,578 - 176,578 10.4 3,024,976 8.5
--------- ------- --------- ----- ------------ -----
Total 1,714,434 - 1,714,434 100.0% $ 35,305,895 100.0%
========= ======= ========= ===== ============ =====
ANNUAL EXPIRING NUMBER
YEAR OF PER SQUARE FOOTAGE OF CUSTOMERS WITH
LEASE FULL-SERVICE EXPIRING
EXPIRATION RENT(3) LEASES
---------- ------------------ -----------------
2005 $ 22.45 22
2006 25.16 19
2007 21.58 24
2008 20.30 15
2009 21.27 23
2010 22.29 7
2011 18.85 5
2012 22.75 3
2013 19.47 5
2014 19.12 4
2015 and
thereafter 17.13 6
----------- ---
Total $ 20.59 133
=========== ===
------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end
of the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewal), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based
on current expense levels.
(4) As of December 31, 2004, leases totaling 29,051 square feet (including
renewals of 3,147 square feet and new leases of 25,904 square feet) have
been signed and will commence during 2005. These signed leases represent
approximately 26% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 84,072 square feet Q2: 5,911
square feet Q3: 13,956 square feet Q4: 4,292 square feet.
(6) Expirations by quarter are as follows: Q1: 30,371 square feet Q2: 22,869
square feet Q3: 45,776 square feet Q4: None.
MIAMI OFFICE PROPERTIES (1)
ANNUAL FULL
SQUARE FOOTAGE SIGNED RENEWALS SQUARE FOOTAGE PERCENTAGE SERVICE RENT PERCENTAGE OF
YEAR OF LEASE OF EXPIRING LEASES OF EXPIRING LEASES OF EXPIRING LEASES OF SQUARE FOOTAGE UNDER EXPIRING ANNUAL FULL-SERVICE
EXPIRATION (BEFORE RENEWALS) (2) (AFTER RENEWALS) EXPIRING LEASES (3) RENT EXPIRING
------------- ------------------ ------------------ ------------------ ----------------- -------------- -------------------
2005 298,831 (4) (87,397) 211,434 (4)(5) 12.8% $ 5,999,117 12.2%
2006 173,875 10,037 183,912 (6) 11.1 5,366,608 10.9
2007 185,374 (20,079) 165,295 10.0 4,551,250 9.3
2008 122,471 13,659 136,130 8.3 4,188,186 8.5
2009 309,264 12,391 321,655 19.5 9,073,007 18.5
2010 197,177 11,433 208,610 12.6 6,305,265 12.8
2011 82,608 - 82,608 5.0 2,900,993 5.9
2012 142,887 - 142,887 8.7 4,822,107 9.8
2013 47,684 - 47,684 2.9 1,500,314 3.1
2014 36,952 - 36,952 2.2 1,039,717 2.1
2015 and
thereafter 52,402 59,956 112,358 6.9 3,420,368 6.9
--------- -------- --------- ----- -------------- -----
Total 1,649,525 - 1,649,525 100.0% $ 49,166,932 100.0%
========= ======== ========= ===== ============== =====
NUMBER
ANNUAL EXPIRING PER OF CUSTOMERS WITH
YEAR OF LEASE SQUARE FOOTAGE EXPIRING
EXPIRATION FULL-SERVICE RENT(3) LEASES
------------- -------------------- ------------------
2005 $ 28.37 56
2006 29.18 41
2007 27.53 38
2008 30.77 27
2009 28.21 37
2010 30.23 14
2011 35.12 4
2012 33.75 5
2013 31.46 4
2014 28.14 2
2015 and
thereafter 30.44 6
--------- ---
Total $ 29.81 234
========= ===
------------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end
of the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based
on current expense levels.
(4) As of December 31, 2004, leases totaling 106,560 square feet (including
renewals of 87,397 square feet and new leases of 19,163 square feet) have
been signed and will commence during 2005. These signed leases represent
approximately 36% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 56,415 square feet Q2: 44,147
square feet Q3: 70,616 square feet Q4: 40,256 square feet.
(6) Expirations by quarter are as follows: Q1: 35,503 square feet Q2: 25,099
square feet Q3: 28,701 square feet Q4: 94,609 square feet.
19
LAS VEGAS OFFICE PROPERTIES (1)
ANNUAL
FULL-SERVICE PERCENTAGE OF
SQUARE FOOTAGE SIGNED RENEWALS SQUARE FOOTAGE PERCENTAGE RENT UNDER ANNUAL
YEAR OF LEASE OF EXPIRING LEASES OF EXPIRING LEASES OF EXPIRING LEASES OF SQUARE FOOTAGE EXPIRING FULL-SERVICE RENT
EXPIRATION (BEFORE RENEWALS) (2) (AFTER RENEWALS EXPIRING LEASES (3) EXPIRING
------------- ------------------ ------------------ ------------------ ----------------- ------------ -----------------
2005 263,527 (4) (61,460) 202,067 (4)(5) 18.7% $ 5,962,078 17.8%
2006 203,609 - 203,609 (6) 18.8 6,134,333 18.3
2007 110,598 9,931 120,529 11.2 3,566,248 10.6
2008 160,703 8,473 169,176 15.7 5,255,285 15.7
2009 127,085 - 127,085 11.8 4,069,287 12.1
2010 52,101 - 52,101 4.8 1,658,818 4.9
2011 98,108 2,825 100,933 9.3 3,541,153 10.6
2012 26,134 - 26,134 2.4 848,665 2.5
2013 19,580 - 19,580 1.8 649,533 1.9
2014 19,295 - 19,295 1.8 592,589 1.8
2015 and
thereafter - 40,231 40,231 3.7 1,270,541 3.8
--------- ------ --------- ----- ------------ -----
Total 1,080,740 - 1,080,740 100.0% $ 33,548,530 100.0%
========= ====== ========= ===== ============ =====
NUMBER OF
ANNUAL EXPIRING PER CUSTOMERS WITH
YEAR OF LEASE SQUARE FOOTAGE EXPIRING
EXPIRATION FULL-SERVICE RENT(3) LEASES
------------- -------------------- -----------------
2005 $ 29.51 25
2006 30.13 35
2007 29.59 25
2008 31.06 20
2009 32.02 16
2010 31.84 5
2011 35.08 4
2012 32.47 2
2013 33.17 2
2014 30.71 2
2015 and
thereafter 31.58 1
----------- ---
Total $ 31.04 137
=========== ===
------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end
of the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based
on current expense levels.
(4) As of December 31, 2004, leases totaling 64,389 square feet (including
renewals of 61,460 feet and new leases of 2,929 square feet) have been
signed and will commence during 2005. These signed leases represent
approximately 24% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 22,478 square feet Q2: 12,948
square feet Q3: 103,265 square feet Q4: 63,376 square feet.
(6) Expirations by quarter are as follows: Q1: 40,699 square feet Q2: 47,134
square feet Q3: 47,062 square feet Q4: 68,714 square feet.
OTHER OFFICE PROPERTIES (1)
ANNUAL
FULL-SERVICE PERCENTAGE OF
SQUARE FOOTAGE SIGNED RENEWALS SQUARE FOOTAGE PERCENTAGE RENT UNDER ANNUAL
YEAR OF LEASE OF EXPIRING LEASES OF EXPIRING LEASES OF EXPIRING LEASES OF SQUARE FOOTAGE EXPIRING FULL-SERVICE RENT
EXPIRATION (BEFORE RENEWALS) (2) (AFTER RENEWALS EXPIRING LEASES (3) EXPIRING
------------- ------------------ ------------------ ------------------ ----------------- ------------ -----------------
2005 248,001 (4) (52,241) 195,760 (4)(5) 10.5% $ 3,874,156 9.7%
2006 245,491 (52,058) 193,433 (6) 10.4 4,650,236 11.7
2007 229,164 - 229,164 12.3 5,419,501 13.6
2008 68,889 (15,624) 53,265 2.9 1,393,364 3.5
2009 156,628 39,301 195,929 10.6 4,243,248 10.6
2010 11,841 1,300 13,141 0.7 302,898 0.8
2011 66,602 - 66,602 3.6 1,367,106 3.4
2012 65,011 519 65,530 3.5 1,420,026 3.6
2013 477,169 50,947 528,116 28.4 9,860,800 24.7
2014 154,551 (960) 153,591 8.3 3,363,596 8.4
2015 and
thereafter 134,648 28,816 163,464 8.8 4,021,054 10.0
--------- ------- --------- ----- ------------ -----
Total 1,857,995 - 1,857,995 100.0% $ 39,915,985 100.0%
========= ======= ========= ===== ============ =====
NUMBER
ANNUAL EXPIRING PER OF CUSTOMERS WITH
YEAR OF LEASE SQUARE FOOTAGE EXPIRING
EXPIRATION FULL-SERVICE RENT(3) LEASES
------------- -------------------- -----------------
2005 $ 19.79 37
2006 24.04 30
2007 23.65 31
2008 26.16 11
2009 21.66 22
2010 23.05 4
2011 20.53 6
2012 21.67 2
2013 18.67 7
2014 21.90 7
2015 and
thereafter 24.60 4
-------- ---
Total $ 21.48 161
======== ===
------------------------
(1) Lease expiration data is presented without giving effect to our actual
ownership percentage in joint ventured properties. Includes Ft. Worth,
Colorado Springs, Phoenix, San Diego and Irvine. Excludes held for sale
properties.
(2) Signed renewals extend the expiration dates of in-place leases to the end
of the renewed term.
(3) Calculated based on base rent payable under the lease for net rentable
square feet expiring (after renewals), giving effect to free rent or
scheduled rent increases taken into account under GAAP and including
adjustments for expenses payable by or reimbursable from customers based
on current expense levels.
(4) As of December 31, 2004, leases totaling 61,407 square feet (including
renewals of 52,241 feet and new leases of 9,166 square feet) have been
signed and will commence during 2005. These signed leases represent
approximately 24% of gross square footage expiring during 2005.
(5) Expirations by quarter are as follows: Q1: 57,513 square feet Q2: 87,499
square feet Q3: 14,475 square feet Q4: 36,273 square feet.
(6) Expirations by quarter are as follows: Q1: 72,213 square feet Q2: 52,837
square feet Q3: 68,383 square feet Q4: None.
20
RESORT/HOTEL PROPERTIES(1)
The following table shows certain information for the years ended December
31, 2004 and 2003, with respect to our Resort/Hotel Properties. The information
for the Resort/Hotel Properties is based on available rooms, except for Canyon
Ranch-Tucson and Canyon Ranch-Lenox, which measure their performance based on
available guest nights.
YEAR
COMPLETED/
RESORT/HOTEL PROPERTY (2) LOCATION RENOVATED ROOMS
------------------------- ----------- ------------------- -----
OPERATING PROPERTIES
UPSCALE BUSINESS CLASS HOTELS:
Omni Austin Hotel(3) Austin, TX 1986 375
Renaissance Houston Hotel Houston, TX 1975/2000 388
-----
TOTAL/WEIGHTED AVERAGE 763
=====
LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort and Spa Avon, CO 1989/2001 275
Fairmont Sonoma Mission Inn & Spa(4) Sonoma, CA 1927/1987/1997/2004 228
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62
-----
TOTAL/WEIGHTED AVERAGE 565
=====
GUEST
DESTINATION FITNESS RESORTS AND SPAS: (5) NIGHTS
------
Canyon Ranch-Tucson Tucson, AZ 1980 259(6)
Canyon Ranch-Lenox Lenox, MA 1989 212(6)
-----
TOTAL/WEIGHTED AVERAGE 471
=====
LUXURY AND DESTINATION FITNESS RESORTS COMBINED
TOTAL/WEIGHTED AVERAGE FOR RESORT/HOTEL
PROPERTIES EXCLUDING HELD FOR SALE PROPERTIES 1,799
=====
HELD FOR SALE PROPERTIES
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613
-----
TOTAL/WEIGHTED AVERAGE FOR HELD FOR
SALE RESORT/HOTEL PROPERTIES
613
=====
GRAND TOTAL/WEIGHTED AVERAGE FOR
RESORT/HOTEL PROPERTIES 2,412
=====
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
----------------------------------------------
RESORT/HOTEL PROPERTY (2) 2004 2003 2004 2003 2004 2003
------------------------- ---- ---- ------ ------ ------ ------
OPERATING PROPERTIES
UPSCALE BUSINESS CLASS HOTELS:
Omni Austin Hotel(3) 73% 75% $ 114 $ 113 $ 83 $ 84
Renaissance Houston Hotel 61 62 103 108 63 67
-- -- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 67% 68% $ 109 $ 111 $ 73 $ 76
== == ====== ====== ====== ======
LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort and Spa 60% 60% $ 277 $ 278 $ 167 $ 166
Fairmont Sonoma Mission Inn & Spa(4) 59 61 253 245 149 150
Ventana Inn & Spa 64 75 430 412 274 309
-- -- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 60% 62% $ 285 $ 282 $ 171 $ 174
== == ====== ====== ====== ======
DESTINATION FITNESS RESORTS AND SPAS: (5)
Canyon Ranch-Tucson
Canyon Ranch-Lenox
-- -- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 79% 76% $ 713 $ 661 $ 521 $ 475
== == ====== ====== ====== ======
LUXURY AND DESTINATION FITNESS RESORTS COMBINED 69% 68% $ 501 $ 469 $ 331 $ 311
== == ====== ====== ====== ======
TOTAL/WEIGHTED AVERAGE FOR RESORT/HOTEL
PROPERTIES EXCLUDING HELD FOR SALE PROPERTIES 68% 68% $ 333 $ 314 $ 221 $ 211
== == ====== ====== ====== ======
HELD FOR SALE PROPERTIES
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center 72% 73% $ 124 $ 128 $ 90 $ 93
-- -- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE FOR HELD FOR
SALE RESORT/HOTEL PROPERTIES 72% 73% $ 124 $ 128 $ 90 $ 93
== == ====== ====== ====== ======
GRAND TOTAL/WEIGHTED AVERAGE FOR
RESORT/HOTEL PROPERTIES 69% 70% $ 277 $ 264 $ 188 $ 181
== == ====== ====== ====== ======
----------
(1) Resort/Hotel Property Table is presented at 100% without any adjustment to
give effect to our actual ownership in Resort/Hotel Properties.
(2) We have entered into agreements with Ritz-Carlton Hotel Company, L.L.C to
develop the Ritz-Carlton hotel and residence project in Dallas, Texas upon
reaching a specified 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.
(3) The Omni Austin Hotel is leased pursuant to a lease to HCD Austin
Corporation.
(4) We have an 80.1% member interest in the limited liability company that
owns Fairmont Sonoma Mission Inn & Spa. Renovation of 97 historic inn
rooms began in November 2003, at which time those rooms were removed from
service. Total cost of the renovation was approximately $12.1 million and
was completed in July 2004.
(5) On January 18, 2005, we contributed the Canyon Ranch-Tucson and Canyon
Ranch-Lenox properties to a newly formed entity, CR Operating LLC, for a
48% common member interest in that entity. The remaining 52% of CR
Operating LLC is owned by the founders of Canyon Ranch.
(6) Represents available guest nights, which is the maximum number of guests
the resort can accommodate per night.
21
RESIDENTIAL DEVELOPMENT PROPERTIES
The following table shows certain information as of December 31, 2004, relating
to the Residential Development Properties.
PLANNED
OUR SALES CLOSED
PREFERRED LOTS/ LOTS/
RETURN / PRODUCT UNITS/ UNITS/
CORPORATION / PROJECT LOCATION OWNERSHIP(1) TYPE (2) ACRES ACRES
--------------------------------- ---------------- ----------- ------------ ------- ------
DESERT MOUNTAIN DEVELOPMENT CORP.
Desert Mountain (4) Scottsdale, AZ 93% SF, TH(B) 2,483 2,360
CRESCENT RESORT DEVELOPMENT INC.
TAHOE MOUNTAIN RESORTS
Northstar - Iron Horse and
Great Bear Lake Tahoe, CA 13% / 57%(5) CO(S) 100 0
Northstar - Remaining Phases Lake Tahoe, CA 13% / 57%(5) CO, TH, TS(S) 1,700 0
Old Greenwood-Lots Lake Tahoe, CA 13% / 71% SF(B) 100 96
Old Greenwood-Units Lake Tahoe, CA 13% / 71% TH, TS(S) 165 12.9
Gray's Crossing Lake Tahoe, CA 13% / 71% SF(B) 445 101
DENVER DEVELOPMENT
Creekside I at Riverfront Park Denver, CO 12% / 64% CO(P) 40 39
Creekside II at Riverfront Park Denver, CO 12% / 64% CO(P) 40 0
Creekside Townhomes at
Riverfront Park Denver, CO 12% / 64% TH(P) 23 0
Brownstones (Phase I) Denver, CO 12% / 64% TH(P) 16 0
Delgany Denver, CO 12% / 64% CO(P) 44 0
Riverfront Park Denver, CO 12% / 64% CO, TH(P) 215 0
Downtown Acreage Denver, CO 12% / 64% ACR 22.5 10.8
MOUNTAIN AND OTHER DEVELOPMENT
Horizon Pass Lodge Bachelor Gulch, 12% / 64% CO(S) 30 25
CO
Hummingbird Bachelor Gulch, 12% / 64% CO(S) 40 0
CO
Eagle Ranch Eagle, CO 12% / 60% SF(P) 1,438 791
Main Street Station Vacation Club Breckenridge, CO 12% / 30%(5) TS(P) 42 28.3
Riverbend Charlotte, NC 12% / 60% SF(P) 650 393
Three Peaks Sliverthorne, CO 12% / 30%(5) SF(S) 292 217
Identified Future Projects Colorado 12% / 64% CO, TH(S) 173 0
HOUSTON AREA DEVELOPMENT CORP.
Falcon Point Houston, TX 98% SF(P) 527 509
Spring Lakes Houston, TX 98% SF(P) 508 423
CRESCENT PLAZA RESIDENTIAL
The Residences at the
Ritz-Carlton Dallas, TX 100% CO(P) 70 0
AVERAGE PROPOSED
SALES AVERAGE
PHYSICAL CRPRICE SALES PRICE
REMAINING INVENTORY ON CLOSED ON REMAINING
LOTS/UNITS/ LOTS/UNITS/ LOTS/UNITS/ LOTS/UNITS/
CORPORATION / PROJECT ACRES ACRES ACRES(3) ACRES
--------------------------------- ----------- ----------- ----------- ------------
DESERT MOUNTAIN DEVELOPMENT CORP.
Desert Mountain (4) 123 36 $ 551 $ 1,150
CRESCENT RESORT DEVELOPMENT INC.
TAHOE MOUNTAIN RESORTS
Northstar - Iron Horse and
Great Bear 100 0 N/A 1,410
Northstar - Remaining Phases 1,700 0 N/A 1,730
Old Greenwood-Lots 4 4 330 795
Old Greenwood-Units 152.1 4.3 1,870 1,884
Gray's Crossing 344 0 270 420
DENVER DEVELOPMENT
Creekside I at Riverfront Park 1 1 330 390
Creekside II at Riverfront Park 40 0 N/A 370
Creekside Townhomes at
Riverfront Park 23 0 N/A 750
Brownstones (Phase I) 16 0 N/A 1,740
Delgany 44 0 N/A 640
Riverfront Park 215 0 N/A 560
Downtown Acreage 11.7 11.7 1,980 3,660
MOUNTAIN AND OTHER DEVELOPMENT
Horizon Pass Lodge 5 5 2,200 2,970
Hummingbird 40 0 N/A 2,380
Eagle Ranch 647 115 80 110
Main Street Station Vacation Club 13.7 13.7 1,200 1,070
Riverbend 257 63 30 40
Three Peaks 75 75 240 270
Identified Future Projects 173 0 N/A 1,790
HOUSTON AREA DEVELOPMENT CORP.
Falcon Point 18 18 39 39
Spring Lakes 85 50 34 42
CRESCENT PLAZA RESIDENTIAL
The Residences at the
Ritz-Carlton 70 0 N/A 1,778
----------
(1) Our ownership percentage represents the profit percentage allocation after
we receive a preferred return on invested capital.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); TS (Timeshare
Equivalent Units): and ACR (Acreage). Superscript items represent P
(Primary residence); S (Secondary residence); and B (Both Primary and
Secondary residence).
(3) Based on lots, units and acres closed during our ownership period.
(4) Average Sales Price includes golf membership, which as of December 31,
2004 is $0.3 million.
(5) A joint venture partner participates in this project.
22
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of December 31, 2004:
TOTAL CUBIC TOTAL TOTAL CUBIC TOTAL
NUMBER OF FOOTAGE SQUARE FEET NUMBER OF FOOTAGE SQUARE FEET
STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS) STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS)
------------- ------------- ------------- ------------- -------------- ------------- ------------- -------------
Alabama 4 10.7 0.4 Mississippi 1 4.7 0.2
Arizona 1 2.9 0.1 Missouri 2 46.8 2.7
Arkansas 6 33.1 1.0 Nebraska 2 4.4 0.2
California 7 25.1 0.9 New York 1 11.8 0.4
Colorado 1 2.8 0.1 North Carolina 3 10.0 0.4
Florida 5 6.5 0.3 Ohio 1 5.5 0.2
Georgia 8 49.5 1.7 Oklahoma 2 2.1 0.1
Idaho 2 18.7 0.8 Oregon 6 40.4 1.7
Illinois 2 11.6 0.4 Pennsylvania 2 27.4 0.9
Indiana 1 9.1 0.3 South Carolina 1 1.6 0.1
Iowa 2 12.5 0.5 South Dakota 1 2.9 0.1
Kansas 2 5.0 0.2 Tennessee 3 10.6 0.4
Kentucky 1 2.7 0.1 Texas 2 6.6 0.2
Maine 1 1.8 0.2 Utah 1 8.6 0.4
Massachusetts 5 10.5 0.5 Virginia 2 8.7 0.3
Minnesota 1 3.0 0.1 Washington 6 28.7 1.1
Wisconsin 3 17.4 0.6
------- --------- --------
TOTAL 88 443.7 17.6
======= ========= ========
----------
(1) As of December 31, 2004, AmeriCold Realty Trust operated 103 facilities, of
which 87 were wholly-owned facilities, one was partially-owned and fifteen
were managed for outside owners.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceeding nor, to our
knowledge, is any material legal proceeding contemplated against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2004.
23
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common shares have been traded on the New York Stock Exchange
under the symbol "CEI" since the completion of our initial public offering in
May 1994.For each calendar quarter indicated, the following table reflects the
high and low sales prices during the quarter for the common shares and the
distributions declared with respect to each quarter.
PRICE
---------------------
HIGH LOW DISTRIBUTIONS
--------- --------- -------------
2003
First Quarter $ 17.00 $ 13.60 $ 0.375
Second Quarter 17.42 14.18 0.375
Third Quarter 17.30 14.22 0.375
Fourth Quarter 17.51 14.82 0.375
2004
First Quarter $ 18.75 $ 17.31 $ 0.375
Second Quarter 17.90 15.05 0.375
Third Quarter 16.58 15.37 0.375
Fourth Quarter 19.09 15.47 0.375
As of March 2, 2005, there were approximately 864 holders of record of our
common shares.
DISTRIBUTION POLICY
Our actual results of operations and the amounts actually available for
distribution will be affected by a number of factors, including:
- the general condition of the United States economy;
- general leasing activity in the markets in which the Office
Properties are located;
- the ability of tenants to meet their rent obligations;
- our operating and interest expenses;
- consumer preferences relating to the Resort/Hotel Properties and the
Residential Development Properties;
- cash flows from unconsolidated entities;
- capital expenditure requirements;
- federal, state and local taxes payable by us; and
- the adequacy of cash reserves.
Our future distributions will be at the discretion of our Board of Trust
Managers.The Board of Trust Managers has indicated that it will review the
adequacy of our distribution rate on a quarterly basis.
Under the Code, REITs are subject to numerous organizational and
operational requirements, including the requirement to distribute at least 90%
of REIT taxable income each year.Pursuant to this requirement, we were required
to distribute $88.0 million and $48.0 million for 2004 and 2003,
respectively.Our actual distributions to common and preferred shareholders were
$180.6 million and $174.6 million for 2004 and 2003, respectively.
Distributions to the extent of our current and accumulated earnings and
profits for federal income tax purposes generally will be taxable to a
shareholder as ordinary dividend income.For tax years beginning after December
31, 2002, qualified dividends paid to shareholders are taxed at capital gains
rates, as added by the Jobs and Growth Tax Relief Reconciliation Act of
2003.Distributions in excess of current and accumulated earnings and profits
will be treated as a nontaxable reduction of the shareholder's basis in such
shareholder's shares, to the extent thereof, and thereafter as taxable
gain.Distributions that are treated as a reduction of the shareholder's basis in
its shares will have the effect of deferring taxation until the sale of the
shareholder's shares.No assurances can be given regarding what portion, if any,
of distributions in 2005 or subsequent years will constitute a return of capital
for federal income tax purposes.
24
Following is the income tax status of distributions paid during the years
ended December 31, 2004 and 2003 to common shareholders:
2004 2003
----- -----
Ordinary dividend -% 2.0%
Qualified dividend eligible for 15% tax rate - 7.1
Capital gain 23.2 1.2
Return of capital 57.4 88.7
Unrecaptured Section 1250 gain 19.4 1.0
----- -----
100.0% 100.0%
===== =====
Distributions on the 14,200,000 Series A Convertible Cumulative Preferred
Shares issued by us in February 1998, April 2002, and January 2004 are payable
at a rate of $1.6875 per annum per Series A Convertible Cumulative Preferred
Share, prior to distributions on the common shares.
Distributions on the 3,400,000 Series B Cumulative Redeemable Preferred
Shares issued by us in May and June 2002 are payable at a rate of $2.3750 per
annum per Series B Cumulative Redeemable Preferred Share, prior to
distributions on the common shares.
Following is the income tax status of distributions paid during the years
ended December 31, 2004 and 2003 to preferred shareholders:
CLASS A PREFERRED CLASS B PREFERRED
----------------- -----------------
2004 2003 2004 2003
----- ----- ----- -----
Ordinary dividend -% 17.9% -% 17.9%
Qualified dividend eligible for 15% tax rate - 62.4 - 62.4
Capital gain 54.4 10.9 54.4 10.9
Unrecaptured Section 1250 Gain 45.6 8.8 45.6 8.8
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
UNREGISTERED SALES OF EQUITY SECURITIES
During the three months ended December 31, 2004, we issued an aggregate of
65,000 common shares to holders of Operating Partnership units in exchange for
32,500 units. Of the 65,000 shares, 15,000 were issued on October 20, 2004,
20,000 were issued on December 2, 2004 and 30,000 were issued on December 3,
2004. The issuances of common shares were exempt from registration as private
placements under Section 4(2) of the Securities Act of 1933, as amended, or the
Securities Act. We registered the resale of such common shares under the
Securities Act.
25
ITEM 6. SELECTED FINANCIAL DATA
The following table includes certain of our financial information on a
consolidated historical basis. You should read this section in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Item 8, "Financial Statements and Supplementary Data."
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR YEARS ENDED DECEMBER 31,
---------------------------------------------
2004(1) 2003(1) 2002(1)
------------- ------------- -------------
OPERATING DATA:
Total Property revenue $ 978,761 $ 871,716 $ 933,016
Income from Property Operations $ 316,771 $ 303,940 $ 340,852
Income (loss) from continuing operations before minority
interests and income taxes $ 189,278 $ 61,942 $ 78,098
Basic earnings (loss) per common share:
Income (loss) available to common shareholders before
discontinued operations and cumulative effect of a change in
accounting principle $ 1.35 $ 0.03 $ 0.39
Net income (loss) available to common shareholders-basic $ 1.43 $ - $ 0.63
Diluted earnings (loss) per common share:
Income (loss) available to common shareholders before
discontinued operations and cumulative effect of a change in
accounting principle $ 1.34 $ 0.03 $ 0.39
Net income (loss) available to common shareholders - diluted $ 1.42 $ - $ 0.63
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 4,037,764 $ 4,314,463 $ 4,289,433
Total debt $ 2,152,255 $ 2,558,699 $ 2,382,910
Total shareholders' equity $ 1,300,250 $ 1,221,804 $ 1,354,813
OTHER DATA:
Cash distribution declared per common share $ 1.50 $ 1.50 $ 1.50
Weighted average
Common shares and units outstanding - basic 116,747,408 116,634,546 117,523,248
Weighted average
Common shares and units outstanding - diluted 116,965,897 116,676,242 117,725,984
Cash flow provided by (used in):
Operating activities $ 95,684 $ 127,951 $ 280,303
Investing activities 629,253 (36,484) 55,181
Financing activities (710,698) (91,859) (293,325)
Adjusted funds from operations available to common shareholders
- diluted (2) $ 143,176 $ 212,556 $ 238,178
Impairment charges related to real estate assets (8,332) (37,794) (16,894)
Extinguishment of debt expense related to real estate asset
sales (39,121) - -
------------- ------------- -------------
Funds from operations available to common shareholders - diluted
- NAREIT definition $ 95,723 $ 174,762 $ 221,284
FOR YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000
------------- -------------
OPERATING DATA:
Total Property revenue $ 590,264 $ 662,863
Income from Property Operations $ 348,884 $ 419,441
Income (loss) from continuing operations before minority
interests and income taxes $ (10,605) $ 294,584
Basic earnings (loss) per common share:
Income (loss) available to common shareholders before
discontinued operations and cumulative effect of a change in
accounting principle $ (0.39) $ 1.99
Net income (loss) available to common shareholders-basic $ (0.17) $ 2.05
Diluted earnings (loss) per common share:
Income (loss) available to common shareholders before
discontinued operations and cumulative effect of a change in
accounting principle $ (0.38) $ 1.96
Net income (loss) available to common shareholders - diluted $ (0.17) $ 2.02
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 4,142,149 $ 4,543,318
Total debt $ 2,214,094 $ 2,271,895
Total shareholders' equity $ 1,405,940 $ 1,731,327
OTHER DATA:
Cash distribution declared per common share $ 1.85 $ 2.20
Weighted average
Common shares and units outstanding - basic 121,017,605 127,535,069
Weighted average
Common shares and units outstanding - diluted 122,544,421 128,731,883
Cash flow provided by (used in):
Operating activities $ 210,055 $ 273,735
Investing activities 212,752 430,286
Financing activities (425,488) (737,981)
Adjusted funds from operations available to common shareholders
- diluted (2) $ 177,117 $ 326,897
Impairment charges related to real estate assets (21,705) (9,349)
Extinguishment of debt expense related to real estate asset
sales - -
------------- -------------
Funds from operations available to common shareholders - diluted
- NAREIT definition $ 155,412 $ 317,548
-------------------------
(1) For the years ended December 31, 2004, 2003 and 2002, in accordance with
SFAS No. 144, the results of operations of assets sold or held for sale
have been reclassified to discontinued operations.
(2) Funds from operations, or FFO, is a supplemental non-GAAP financial
measurement used in the real estate industry to measure and compare the
operating performance of real estate companies, although those companies
may calculate funds from operations in different ways. The National
Association of Real Estate Investment Trusts (NAREIT) defines funds from
operations as Net Income (Loss) determined in accordance with generally
accepted accounting principles (GAAP), excluding gains (or losses) from
sales of depreciable operating property, excluding extraordinary items
(determined by GAAP), plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. We calculate FFO available to common shareholders - diluted -
NAREIT definition in the same manner, except the Net Income (Loss) is
replaced by Net Income (Loss) Available to Common Shareholders and we
include the effect of Operating Partnership unitholder minority interests.
We calculate Adjusted Funds From Operations Available to Common
Shareholders - diluted (FFO) by excluding the effect of impairment charges
related to real estate assets and by excluding the effect of
extinguishment of debt related to real estate asset sales. For a more
detailed definition and description of FFO and a reconciliation to net
income determined in accordance with GAAP, see "Funds from Operations"
included in Item 7, "Management's Discussion and Analysis of Financial
Condition ad Results of Operations."
26
ITEM 7. 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
Page
----
Forward-Looking Statements.................................... 28
Overview...................................................... 29
Recent Developments........................................... 31
Results of Operations
Years ended December 31, 2004 and 2003............. 36
Years ended December 31, 2003 and 2002............. 40
Liquidity and Capital Resources
Overview........................................... 44
Liquidity Requirements............................. 48
Equity and Debt Financing..................................... 50
Unconsolidated Investments.................................... 54
Significant Accounting Policies............................... 55
Funds from Operations......................................... 59
27
FORWARD-LOOKING STATEMENTS
You should read this section in conjunction with the selected
financial data and the consolidated financial statements and the accompanying
notes in Item 6, "Selected Financial Data," and Item 8,"Financial Statements and
Supplemental Data," of this report.Capitalized terms used but not otherwise
defined in this section have the meanings given to them in Items 1-6 of this
report.
This Form 10-K 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 we believe that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, our actual
results could differ materially from those described in the forward-looking
statements.
The following factors might cause such a difference:
- Our ability, at our 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 decreased
rental rates and the vacancy levels 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 our office portfolio as a result of conditions within our
principal markets;
- Our ability to reinvest available funds at anticipated returns and
consummate anticipated office acquisitions on favorable terms and
within anticipated time frames;
- Adverse changes in the financial condition of existing tenants, in
particular El Paso Energy and its affiliates which provide 5.8% of
our annualized office revenues;
- Further deterioration in our 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 of
residential land or luxury residences, including single-family
homes, townhomes and condominiums;
- Financing risks, such as our 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,
our ability to meet financial and other covenants and our ability to
consummate financings and refinancings on favorable terms and within
any applicable time frames;
- Our ability to dispose of investment land, and other non-core
assets, on favorable terms and within anticipated time frames;
- The concentration of a significant percentage of our assets in
Texas;
- The existence of complex regulations relating to our 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 our filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements.We are not obligated to update these forward-looking
statements to reflect any future events or circumstances.
28
OVERVIEW
We are a REIT with assets and operations divided into four
investment segments: Office, Resort/Hotel, Residential Development and
Temperature-Controlled Logistics.Our primary business is our Office Segment,
which consisted of 78 Office Properties and represented 60% of total assets as
of December 31, 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.
We have adapted our strategy to align ourselves 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, we are focusing on acquiring assets jointly with
these institutional investors, moving existing assets into joint-venture
arrangements with these investors, and capitalizing on our award-winning
platform in office management and our leasing expertise to continue to provide
these services, for a fee, for the properties in the ventures.Where possible, we
will strive to negotiate performance based incentives that allow for additional
equity to be earned if return targets are exceeded.
Consistent with this strategy, we continually evaluate our existing
portfolio for potential joint venture opportunities.Recently, we completed
significant joint venture transactions involving five of our landmark Properties
valued at approximately $1.2 billion.As with previous ventures, we are now a
minority partner but continue to provide leasing and management services to the
ventures. In addition, in January 2005, we completed the recapitalization of our
Canyon Ranch Resort/Hotel Properties.
Further, we sold $171.5 million of non-core assets in 2004 and
expect to sell an additional $120.0 million in the near term, including land
holdings that are currently not contributing to our earnings.Included in these
sales are two business class hotels, one of which was sold in October 2004 at a
gain and the remaining hotel, which we believe we can sell at an attractive
gain, and at the same time further simplify our business model.As the expected
sales are completed, we will redeploy proceeds to acquire real estate assets and
pay down certain consolidated debt and other obligations.
OFFICE SEGMENT
The following table shows the performance factors on stabilized
properties used by management to assess the operating performance of the Office
Segment:
2004 2003
------------- ------------
Economic Occupancy (1) 88.5% (3) 86.0% (3)
Leased Occupancy (2) 89.8% (3) 88.5% (3)
In-Place Weighted Average Full-Service Rental Rate $ 22.63 (3) $ 22.63
Tenant Improvement and Leasing Costs per Sq. Ft. per year $ 3.13 $ 3.14
Average Lease Term 7.4 years 7.8 years
Same-Store NOI(4)(Decline) (5.3)%(3) (11.5)%
Same-Store Average Occupancy 86.0% (3) 84.3%
-------------------------------------
(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) Excludes held for sale properties.
(4) 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.
2004 was a year of occupancy stabilization in our markets.In 2005,
we expect continued improvement in the economy.This allows us to remain
cautiously optimistic about occupancy gains in 2005.We expect that year-end 2005
occupancy for our portfolio will increase to over 90%.
29
RESORT/HOTEL SEGMENT
The following table shows the performance factors used by management
to assess the operating performance of our luxury and destination fitness
resorts.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
-------------------- ---------------------- ---------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Luxury and Destination Fitness Resorts 69% 68% $501 $469 $331 c$311
The occupancy increase at our luxury and destination fitness resorts
for the year ended December 31, 2004 as compared to 2003 is partially driven by
increases at Canyon Ranch Tucson and Canyon Ranch Lenox, at which occupancy
increased three percentage points (from 76% to 79%).Average daily rate increased
8% (from $661 to $713), and revenue per available room increased 10% (from $475
to $521) as a result of expanded medical service offerings. These increases are
partially offset by decreases in occupancy at Sonoma Mission Inn (from 61% 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 at which
time the 97 rooms were put back into service.In addition, occupancy decreased
eleven percentage points (from 75% to 64%) at Ventana Inn as a result of the
renovation of thirteen suites which were taken out of service in April 2004 and
completed in September 2004.
We anticipate an 8% to 10% increase in revenue per available room in
2005 at the luxury and destination fitness resorts and a 3 to 5 percentage point
increase in occupancy, driven by the continued recovery of the economy and
travel industry and improvement from Sonoma Mission Inn and Ventana Inn, which
were under construction in 2004.
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 our
significant investments in this Segment as of December 31, 2004.
Desert Mountain
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(dollars in thousands) 2004 2003
---------------------- ---- ----
Residential Lot Sales 68 60
Average Sales Price per Lot (1) $756 $653
-------------------
(1) Includes equity golf membership
Desert Mountain is in the latter stages of development and
management anticipates minor additions to its decreasing available
inventory.While a higher average lot sales price is projected in 2005, total
sales are expected to be lower as a result of reduced inventory availability.
CRDI
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(dollars in thousands) 2004 2003
------ ------
Residential Lot Sales 353 246
Residential Unit Sales
Townhome Sales 12 4
Condominium Sales 41 82
Residential Equivalent Timeshare Units 14.6 4.2
Average Sales Price per Residential Lot $ 152 $ 129
Average Sales Price per Residential Unit $1,833 $ 939
Average Sales Price per Residential Equivalent Timeshare Unit $1,825 $1,443
30
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 2005, management expects that unit sales will increase but the
average sales price will decrease at CRDI, with approximately 53% presold as of
February 7, 2005. In addition, lot sales are expected to increase in 2005.
RECENT DEVELOPMENTS
CANYON RANCH
On January 18, 2005, we contributed the Canyon Ranch Tucson, our 50%
interest and our preferred interest in CR Las Vegas, LLC, and our 30% interest
in CR License, L.L.C., CR License II, L.L.C., CR Orlando LLC and CR Miami LLC,
to two newly formed entities, CR Spa, LLC and CR Operating, LLC. In exchange, we
received a 48% common equity interest in each new entity. The remaining 52%
interest in these entities is held by the founders of Canyon Ranch, who
contributed their interests in CR Las Vegas, LLC, CR License II, L.L.C., CR
Orlando LLC and CR Miami LLC and the resort management contracts. In addition,
we sold the Canyon Ranch Lenox Destination Resort Property to a subsidiary of CR
Operating, LLC. The founders of Canyon Ranch sold their interest in CR License,
L.L.C. to a subsidiary of CR Operating, LLC. As a result of these transactions,
the new entities own the following assets: Canyon Ranch Tucson, Canyon Ranch
Lenox, Canyon Ranch SpaClub at the Venetian Resort in Las Vegas, Canyon Ranch
SpaClub on the Queen Mary 2 ocean liner, Canyon Ranch Living Community in Miami,
Florida, Canyon Ranch SpaClub at The Gaylord Palms Resort in Kissimmee, Florida,
and the Canyon Ranch trade names and trademarks.
In addition, the newly formed entities completed a private
placement of Mandatorily Redeemable Convertible Preferred Membership Units for
aggregate gross proceeds of approximately $110.0 million. Richard E. Rainwater,
Chairman of our Board of Trust Managers, and certain of his family members
purchased approximately $27.1 million of these units. The units are convertible
into a 25% common equity interest in CR Spa, LLC and CR Operating, LLC and pay
distributions at the rate of 8.5% per year in years one through seven, and 11%
in years eight through ten. At the end of this period, the holders of the units
are entitled to receive a premium in an amount sufficient to result in a
cumulative return of 11% per year. The units are redeemable after seven years.
Also on January 18, 2005, the new entities completed a $95.0 million financing
with Bank of America. The loan has an interest-only term until maturity in
February 2015, bears interest at 5.94% and is secured by the Canyon Ranch
Tucson and Canyon Ranch Lenox Destination Resort Properties. As a result of
these transactions, we received proceeds of approximately $91.9 million, which
was used to pay down or defease debt related to our previous investment in the
Properties and to pay down our credit facility.
JOINT VENTURES
On November 10, 2004, we contributed nine of our office properties
to a limited partnership in which we initially had a 40% interest and a fund
advised by JP Morgan Fleming Asset Management, or JPM, has a 60% interest. The
office properties contributed to the partnership are The Crescent (two Office
Properties) in Dallas, Texas and Houston Center (four Office Properties) and
Post Oak Central (three Office Properties) both in Houston, Texas. The Office
Properties were valued at $897.0 million. This transaction generated net
proceeds of approximately $290.0 million after the pay off of the JP Morgan
Mortgage Note, pay down of a portion of Fleet Fund I Term Loan and defeasance
of a portion of LaSalle Note I. The joint venture was accounted for as a
partial sale of the Office Properties, resulting in a net gain of approximately
$194.1 million. On December 23, 2004, an affiliate of General Electric Pension
Fund, which we refer to as GE, purchased a 16.15% interest in the partnership
from us, reducing our ownership interest to 23.85%. This transaction generated
net proceeds of approximately $49.0 million and a net gain of $56.7 million.
The net proceeds from both transactions were used to pay off the remaining
portion of the Fleet Fund I Term Loan and pay down our credit facility. We
incurred debt pre-payment penalties of approximately $35.0 million relating to
the early extinguishment of the JP Morgan Mortgage Note and the partial
defeasance of LaSalle Note I, which is reflected in the "Extinguishment of
debt" line item in the Consolidated Statements of Operations.
On November 23, 2004, we contributed two of our office properties to
a limited partnership in which we have a 23.85% interest and a fund advised by
JPM has a 76.15% interest. The two office properties contributed to the
partnership are Fountain Place and Trammell Crow Center, both in Dallas, Texas.
The Office Properties were valued at $320.5 million. This transaction generated
net proceeds of approximately $71.5 million after the pay off of the Lehman
Capital Note. The joint venture was accounted for as a partial sale of the
Office Properties, resulting in a net gain of approximately $14.9 million. The
net proceeds from this transaction were used to pay down a portion of our credit
facility.
On February 24, 2005, we contributed 1301 McKinney Street and an
adjacent parking garage, subject to the Morgan Stanley Mortgage Capital Inc.
Note, to a limited partnership in which we have a 23.85% interest, a fund
advised by JPM has a 60% interest and GE has a 16.15% interest. The property was
valued at $106.0 million and the transaction generated net proceeds to us of
approximately $33.4 million which were used to pay down our credit facility.
31
As a result of GE's purchase of an interest in the first
partnership, GE serves along with us as general partner and we serve as the sole
and managing general partner of the second and third partnerships. Each of the
Office Properties contributed to the partnerships is owned by a separate limited
partnership. Each of those property partnerships (excluding Trammell Crow
Center) has entered into a separate leasing and management agreement with us,
and, in the case of Trammell Crow Center, the property partnership also has
entered into a management oversight agreement and a mortgage servicing agreement
with us. We have no commitment to reinvest the cash proceeds back into the joint
venture. None of the mortgage financing at the joint venture level is guaranteed
by us. We account for our interest in these partnerships as unconsolidated
equity investments.
TEMPERATURE-CONTROLLED LOGISTICS
As of December 31, 2004, the Temperature-Controlled Logistics
Segment consisted of our 31.7% interest in AmeriCold.AmeriCold operates 103
facilities, of which 87 are wholly-owned, one is partially-owned and fifteen are
managed for outside owners. We account for our interest in AmeriCold as an
unconsolidated equity investment.
On November 18, 2004, Vornado Crescent Portland Partnership, the
partnership through which we owned our 40% interest in AmeriCold, sold a 20.7%
interest in AmeriCold to The Yucaipa Companies for $145.0 million, resulting in
a gain of approximately $12.3 million, net of transaction costs, to us. In
addition, Yucaipa will assist in the management of AmeriCold and may earn a
promote of up to 20% of the increase in value through December 31, 2007. The
promote is payable out of the remaining outstanding common shares in AmeriCold,
including the common shares held by us, and limited to 10% of these remaining
common shares.
Immediately following this transaction, Vornado Crescent Portland
Partnership, or VCPP, dissolved and, after the payment of all of its
liabilities, distributed its remaining assets to its partners. The assets
distributed to us consisted of common shares, representing an approximately
31.7% interest in AmeriCold, cash of approximately $34.3 million and a note
receivable of approximately $8.0 million. In connection with the dissolution of
the partnership, Vornado Realty L.P., or Vornado, agreed to terminate the
preferential allocation payable to it under the partnership agreement. In
consideration of this, we agreed to pay Vornado an annual management fee of $4.5
million, payable only out of dividends we receive from AmeriCold and proceeds
from sales of the common shares of AmeriCold that we own. Unpaid annual
management fees will accrue without interest. The amount of the annual
management fee will be reduced in proportion to any sales by us of our interest
in AmeriCold. We also agreed to pay Vornado, from the proceeds of any sales of
the common shares of AmeriCold that we own, a termination fee equal to the
product of $23.8 million and the percentage reduction in our ownership of
AmeriCold, as of November 18, 2004, represented by the sale. Our obligation to
pay the annual management fee and the termination fee will end on October 30,
2027, or, if earlier, the date on which we sell all of the common shares of
AmeriCold that we own.
On November 4, 2004, AmeriCold purchased 100% of the ownership
interests in its tenant, AmeriCold Logistics, for approximately $47.7
million. The purchase was funded by a contribution from AmeriCold's owner, VCPP,
which funded its contribution through a loan from Vornado. Prior to the
consummation of this transaction, AmeriCold Logistics leased the
Temperature-Controlled Logistics Properties from AmeriCold under three
triple-net master leases. Under the terms of the leases, AmeriCold Logistics was
permitted to defer a portion of the rent payable to AmeriCold. As of November 4,
2004, AmeriCold's deferred rent balance from AmeriCold Logistics was $125.1
million, of which our portion was $50.0 million. For each of the years ended
December 31, 2004, 2003, and 2002, we recognized rental income from AmeriCold
Logistics when earned and collected and, accordingly, did not recognize any of
the rent deferred during those years as equity in net income of AmeriCold. In
connection with the purchase of AmeriCold Logistics by AmeriCold, the leases
were terminated and all deferred rent was cancelled.
On November 4, 2004, AmeriCold also purchased 100% of the ownership
interests in Vornado Crescent and KC Quarry, L.L.C., or VCQ, for approximately
$24.9 million. AmeriCold used a cash contribution from its owner, of which our
portion was approximately $9.9 million, to fund the purchase. As a result of our
56% ownership interest in VCQ, we received proceeds from the sale of VCQ of
approximately $13.2 million.
On February 5, 2004, AmeriCold 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 AmeriCold were
approximately $225.0 million, after closing costs and the repayment of
approximately $12.9 million in existing mortgages. On February 6, 2004,
AmeriCold distributed cash of approximately $90.0 million to us.
32
ASSET PURCHASES
During the year ended December 31, 2004 and through February 2005,
we completed the following acquisitions:
(in millions) PURCHASE
DATE PROPERTY LOCATION PRICE
----------------- ----------------------------------------------------------- ------------------- -----------------
February 7, 2005 The Exchange Building - Class A Office Property Seattle, Washington $ 52.5 (1)
December 29, 2004 Peakview Tower - Class A Office Property Denver, Colorado $ 47.5 (1)
December 21, 2004 1301 McKinney Street - Class A Office Property Houston, Texas $ 101.0 (2)
December 15, 2004 One Live Oak - Class A Office Property Atlanta, Georgia $ 31.0 (1)
August 6, 2004 The Alhambra - Two Class A Office Properties Miami, Florida $ 72.3 (3)
March 31, 2004 Dupont Centre - Class A Office Property Irvine, California $ 54.3 (4)
Jan - May 2004 Hughes Center - Six Class A Office Properties, Seven Retail
Parcels, and 12.85 acres undeveloped land Las Vegas, Nevada $ 203.6 (5) (6)
------------------------------
(1) The acquisition was funded by a draw on our credit facility.The property
is wholly-owned.
(2) The acquisition was funded by a new $70.0 million loan from Morgan Stanley
Mortgage Capital Inc., and a draw on our credit facility.
(3) The acquisition was funded by the assumption of a $45.0 million loan from
Wachovia Securities and a draw on our credit facility. The properties are
wholly-owned.
(4) The acquisition was funded by a draw on our credit facility.The property
is wholly-owned.
(5) The acquisition of the Office Properties and retail parcels was funded by
the assumption of $85.4 million in mortgage loans and a portion of
proceeds from the 2003 sale of the Woodlands entities.One of the Office
Properties is owned through a joint venture in which we have a 67%
interest.The remaining Office Properties are wholly-owned.
(6) The acquisition of two tracts of undeveloped land was funded by a $7.5
million loan from the Rouse Company and proceeds from the 2003 sale of the
Woodlands entities. The properties are wholly-owned.
OTHER REAL ESTATE INVESTMENTS
On November 9, 2004, we completed a $22.0 million mezzanine loan
secured by ownership interests in an entity that owns an office property in Los
Angeles, California.The loan bears interest at LIBOR plus 925 basis points
(11.65% at December 31, 2004) with an interest-only term until maturity in
November 2006, subject to the right of the borrower to extend the loan pursuant
to four six-month extension options.
On February 7, 2005, we completed a $34.5 million mezzanine loan in
which we immediately sold a 50% participating interest for $17.25 million.The
loan is secured by ownership interests in an entity that owns an office property
in New York, New York.The loan bears interest at LIBOR plus 775 basis points
with an interest-only term until maturity in March 2007, subject to the right of
the borrower to extend the loan pursuant to three one-year extension options.
33
ASSET SALES
The following table summarizes our significant asset sales during
the year ended December 31, 2004 and into the first quarter of 2005:
NET
(in millions) NET GAIN
DATE PROPERTY LOCATION PROCEEDS IMPAIRMENT (1) (LOSS) (1)
----------------------- --------------------------------------- ----------------------- ---------- -------------- ----------
OFFICE
February 7, 2005 Albuquerque Plaza Office Property Albuquerque, New Mexico $ 34.7 (2) $ - $ 1.8
July 29, 2004 12404 Park Central Office Property Dallas, Texas 9.3 (2) 4.0 (3) -
July 2, 2004 5050 Quorum Office Property (4) Dallas, Texas 8.9 (5) 0.8 (6) (0.1)
June 29, 2004 Addison Tower Office Property Dallas, Texas 8.8 (5) - 0.2
June 17, 2004 Ptarmigan Place Office Property Denver, Colorado 25.3 (2) 0.5 (6) (2.0)
April 13, 2004 Liberty Plaza Office Property Dallas, Texas 10.8 (5) 3.6 (7) (0.2)
March 23, 2004 1800 West Loop South Office Property Houston, Texas 28.2 (5) 13.9 (7) 0.2
RESORT/HOTEL
October 19, 2004 Hyatt Regency Hotel Albuquerque,
New Mexico 32.2 (8) - 3.6
RESIDENTIAL DEVELOPMENT
September 14, 2004 Breckenridge Commercial Retail Center Breckenridge, 1.5 0.7 (7) (0.1)
Colorado
UNDEVELOPED LAND
December 23, 2004 5.7 acres undeveloped land Houston, Texas 4.0 (5) - 1.4
December 17, 2004 5.3 acres undeveloped land Houston, Texas 22.3 (5) - 8.3
November 12, 2004 72.7 acres undeveloped land Monterey, 1.0 (5) - 0.7
California
August 16, 2004 2.5 acres undeveloped land Houston, Texas 6.4 (5)(9) - 7.6
June 17, 2004 Ptarmigan Place - 3.0 acres of adjacent Denver, Colorado 2.9 (2) - 0.9
undeveloped land
-------------------------------------
(1) Amounts are net of minority interest.
(2) Proceeds were used to pay down a portion of our Bank of America Fund XII
Term Loan.
(3) Of the $4.0 million impairments recorded, $2.9 million was recorded during
the year ended December 31, 2003 and $1.1 million during the year ended
December 31, 2004.
(4) We continue to provide management and leasing services for this property.
(5) Proceeds were used primarily to pay down our credit facility.
(6) Impairment was recognized during the year ended December 31, 2004.
(7) Impairment was recognized during the year ended December 31, 2003.
(8) Proceeds were used to pay down our Bank of America Fund XII Term Loan in
the amount of $26.0 million and the remainder was used to pay down our
credit facility.
(9) In addition to the $6.4 million net cash proceeds, we also received a note
receivable of $5.6 million.The note provides for payments of principal of
$0.5 million due December 2004, annual installments of $1.0 million due
beginning August 2005 through August 2008, and $1.1 million due at
maturity in August 2009 and does not bear interest.
34
RESULTS OF OPERATIONS
The following table shows the variance in dollars for certain of our
operating data between the years ended December 31, 2004 and 2003 and the years
ended December 31, 2003 and 2002.
TOTAL VARIANCE IN TOTAL VARIANCE IN
DOLLARS BETWEEN DOLLARS BETWEEN
THE YEARS ENDED THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
(in millions) 2004 AND 2003 2003 AND 2002
----------------- -----------------
REVENUE:
Office Property $ 8.1 $(41.2)
Resort/Hotel Property 9.5 16.9
Residential Development Property 89.4 (37.0)
------ ------
TOTAL PROPERTY REVENUE $107.0 $(61.3)
------ ------
EXPENSE:
Office Property real estate taxes $ (3.4) $ (7.3)
Office Property operating expenses 10.4 4.1
Resort/Hotel Property expense 12.9 18.2
Residential Development Property expense 74.3 (39.4)
------ ------
TOTAL PROPERTY EXPENSE $ 94.2 $(24.4)
------ ------
INCOME FROM PROPERTY OPERATIONS $ 12.8 $(36.9)
------ ------
OTHER INCOME (EXPENSE):
Income from sale of investment in unconsolidated company, net $(86.2) $ 86.2
Income from investment land sales, net 5.8 (9.6)
Gain on joint venture of properties, net 265.7 (18.1)
Loss on property sales, net - 0.8
Interest and other income 10.2 (6.4)
Corporate general and administrative (6.2) (6.9)
Interest expense (4.7) 6.9
Amortization of deferred financing costs (2.0) (0.8)
Extinguishment of debt (42.6) -
Depreciation and amortization (19.4) (15.0)
Impairment charges related to real estate assets 4.5 4.6
Other expenses 5.2 6.9
Equity in net income (loss) of unconsolidated companies:
Office Properties (4.9) (12.1)
Resort/Hotel Properties (6.0) 5.9
Residential Development Properties (12.7) (29.4)
Temperature-Controlled Logistics Properties 4.0 5.1
Other 3.8 2.6
------ ------
TOTAL OTHER INCOME (EXPENSE) $114.5 $ 20.7
------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES $127.3 $(16.2)
Minority interests (30.8) 13.2
Income tax benefit (provision) 40.0 (31.7)
------ ------
INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $136.5 $(34.7)
Income from discontinued operations, net of minority interests (2.1) (15.2)
Impairment charges related to real estate assets from discontinued operations,
net of minority interests 22.1 (20.9)
Gain on real estate from discontinued operations, net of minority interests (9.2) (0.1)
Cumulative effect of a change in accounting principle, net of minority
interests (0.4) 9.2
------ ------
NET INCOME $146.9 $(61.7)
Series A Preferred Share distributions (5.5) (1.5)
Series B Preferred Share distributions - (3.0)
------ ------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $141.4 $(66.2)
====== ======
35
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 TO THE YEAR ENDED DECEMBER 31,
2003
PROPERTY REVENUES
Total property revenues increased $107.0 million, or 12.3%, to
$978.7 million for the year ended December 31, 2004, as compared to $871.7
million for the year ended December 31, 2003. The primary components of the
increase in total property revenues are discussed below.
- Office Property revenues increased $8.1 million, or 1.7%, to $484.0
million, primarily due to:
- an increase of $48.7 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 , The Alhambra in August 2004, and
1301 McKinney Street, One Live Oak and Peakview Tower in
December 2004; and
- an increase of $3.8 million resulting from third party
management services and related direct expense
reimbursements; partially offset by
- a decrease of $21.6 million due to the joint venture of
The Crescent, Trammell Crow Center, Fountain Place,
Houston Center and Post Oak Central in November 2004;
- a decrease of $21.1 million from the 43 consolidated
Office Properties (excluding 2003 and 2004 acquisitions,
dispositions and properties held for sale) that we owned
or had an interest in, primarily due to a decrease in
full service weighted average rental rates, a 0.5
percentage point decline in average occupancy (from
83.2% to 82.7%), a decrease in recoveries due to expense
reductions and base year rollover of significant
customers, and a decline in net parking revenues;
- a decrease of $1.1 million due to nonrecurring revenue
earned in 2003; and
- a decrease of $0.7 million in net lease termination fees
(from $9.7 million to $9.0 million).
- Resort/Hotel Property revenues increased $9.5 million, or 5.5%, to
$183.5 million, primarily due to:
- an increase of $8.7 million at the luxury and
destination fitness resort Properties related to a 10%
increase in revenue per available room (from $475 to
$521) as a result of an 8% increase in average daily
rate (from $661 to $713) and a 3 percentage point
increase in occupancy (from 76% to 79%); and
- an increase of $1.1 million at the Resort Properties
primarily related to an increase in food and beverage
and spa revenue of $1.7 million, partially offset by a
2% decrease in revenue per available room (from $174 to
$171) as a result of a 2 percentage point decrease in
occupancy(from 62% to 60%) related to the renovation of
97 historic inn rooms at the Sonoma Mission Inn, which
were out of service for the first six months of 2004,
and the renovation of 13 suites at the Ventana Inn,
which were out of service in the second and third
quarters of 2004; partially offset by
- a decrease of $0.3 million at the business class hotel
Properties related to a 4% decrease in revenue per
available room (from $76 to $73) as a result of a 2%
decrease in average daily rate (from $111 to $109) and a
1 percentage point decrease in occupancy (from 68% to
67%) partially offset by a $0.5 million increase in food
and beverage revenue.
- Residential Development Property revenues increased $89.4 million,
or 40.3%, to $311.2 million, primarily due to:
- an increase of $65.6 million in CRDI revenues related to
product mix in lots and units available for sale in 2004
versus 2003, primarily at the Old Greenwood timeshare
project and Gray's Crossing lot project in Tahoe,
California and the Horizon Pass project in Bachelor
Gulch, Colorado, which had sales in 2004 but none for
the year ended December 31, 2003 as the projects were
not available for sale; partially offset by the Old
Greenwood lot project in Tahoe, California, the Cresta
project in Arrowhead, Colorado, the Creekside at
Riverfront Park project in Denver, Colorado, and the One
Vendue project in Charleston, South Carolina, which had
reduced or no sales in 2004;
- an increase of $13.4 million in DMDC revenues related to
product mix and increased lots sales (from 60 to 68);
- An increase of $8.2 million in other revenue at DMDC and
CRDI. The increase at DMDC is primarily due to a
settlement for partial reimbursement of construction
remediation costs and an increase in membership transfer
fees, and at CRDI is primarily due to restaurant
revenues in Denver, Colorado, beginning in the fourth
quarter of 2003; and
- An increase of $4.8 million in club revenue at DMDC and
CRDI. The increase at DMDC is primarily due to increased
membership levels and an increase in dues, and at CRDI
is primarily due to the addition of a golf course in
Truckee, California and the full impact in 2004 of the
sale of club memberships at the Tahoe Mountain Resorts
property, which began selling memberships in mid-2003;
partially offset by
36
- a decrease of $1.7 million in other revenue due to
interest income recorded in 2003 for our note receivable
with the Woodlands entities which was sold in December
2003.
PROPERTY EXPENSES
Total property expenses increased $94.2 million, or 16.6%, to $662.0
million for the year ended December 31, 2004, as compared to $567.8 million for
the year ended December 31, 2003. The primary components of the variances in
property expenses are discussed below.
- Office Property expenses increased $7.0 million, or 3.1%, to $234.4
million, primarily due to:
- an increase of $16.1 million from the acquisition of The
Colonnade in August 2003, Hughes Center Properties in
December 2003 through May 2004, the Dupont Centre in
March 2004, the Alhambra in August 2004, 1301 McKinney
Street, One Live Oak, and Peakview Tower in December
2004; and
- an increase of $3.2 million related to the cost of
providing third party management services to joint
venture properties, which are recouped by increased
third party fee income and direct expense
reimbursements; partially offset by
- a decrease of $10.9 million due to the joint venture of
The Crescent, Trammell Crow Center, Fountain Place,
Houston Center and Post Oak Central in November 2004;
and
- a decrease of $1.7 million from the 43 consolidated
Office properties (excluding 2003 and 2004 acquisitions,
dispositions and properties held for sale) that we owned
or had an interest in, primarily due to:
- $2.9 million decrease in property taxes and
insurance; and
- $0.4 million decrease in utilities;
partially offset by
- $0.9 million increase in building repairs
and maintenance; and
- $0.7 million increase in administrative
expenses.
- Resort/Hotel Property expenses increased $12.9 million, or 9.0%, to
$155.8 million, primarily due to:
- an increase of $8.7 million primarily resulting from a
$4.6 million increase in operating expenses at the
luxury and destination fitness resort Properties related
to increased expenses associated with the medical
service segment and the increase in average occupancy
of 3 percentage points (from 76% to 79%), and a $3.7
million increase primarily in general and
administrative, marketing and employee benefit costs;
- an increase of $2.3 million in operating expenses
primarily related to food and beverage and spa operating
costs at Park Hyatt Beaver Creek resulting from
increased volume; and
- an increase of $1.9 million in other expense categories,
primarily related to an increase in Sarbanes-Oxley
compliance costs and management fees at the luxury and
destination fitness resort Properties as a result of
higher revenues.
- Residential Development Property expenses increased $74.3 million,
or 37.6%, to $271.8 million, primarily due to:
- an increase of $47.8 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
timeshare project and Gray's Crossing lot project in
Tahoe, California and the Horizon Pass project in
Bachelor Gulch, Colorado, which had sales in 2004 but
none for the year ended December 31, 2003 as the
projects were not available for sale; partially offset
by the Old Greenwood lot project in Tahoe, California,
the Cresta project in Arrowhead, Colorado, the Creekside
at Riverfront Park project in Denver, Colorado, and the
One Vendue project in Charleston, South Carolina, which
had reduced or no sales in 2004;
- an increase of $10.6 million in marketing and other
expenses at certain CRDI projects and the Ritz Carlton
condominium Dallas residence project;
- an increase of $8.3 million in DMDC cost of sales due to
increased lot sales and higher priced lots sold in 2004
compared to 2003;
- an increase of $6.3 million in club operating expenses
due to increased membership levels at CRDI and DMDC, a
restaurant addition at CRDI and golf course and
clubhouse additions at DMDC and CRDI; and
- an increase of $0.8 million in other expense categories.
37
OTHER INCOME/EXPENSE
Total other income and expenses decreased $114.5 million, or 47.3%,
to $127.5 million for the year ended December 31, 2004, compared to $242.0
million for the year ended December 31, 2003. The primary components of the
decrease in total other income and expenses are discussed below.
OTHER INCOME
Other income increased $179.7 million, or 135.5%, to $312.3 million
for the year ended December 31, 2004, as compared to $132.6 million for the year
ended December 31, 2003. The primary components of the increase in other income
are discussed below.
- Gain on joint venture of properties, net increased $265.7 million,
due to the joint venture of The Crescent, Fountain Place, Trammell
Crow Center, Houston Center and Post Oak Central Office Properties.
- Income from sales of investments in unconsolidated company, net
decreased $86.2 million due to the sale of our interest in the
Woodlands entities in December 2003.
- Income from investment land sales, net increased $5.8 million due to
the gain of $18.9 million on sales of five parcels of undeveloped
investment land in 2004 as compared to the gain of $13.1 million on
sales of three parcels of undeveloped investment land in 2003.
- Interest and other income increased $10.2 million, or 130.8%,
primarily due to:
- $3.7 million received from COPI pursuant to the COPI
bankruptcy plan for notes receivable previously written
off in 2001;
- $2.8 million of interest on U.S. Treasury and government
sponsored agency securities purchased in December 2003
and January 2004 related to debt defeasance;
- $1.6 million of interest and dividends received on other
marketable securities;
- $1.1 million increase in interest on certain notes
resulting from note amendments in December 2003; and
- $0.4 million of interest on a mezzanine loan secured by
an ownership interest in an entity that owns an office
property in Los Angeles, California.
- Equity in net income of unconsolidated companies decreased $15.8
million, or 62.2%, to $9.6 million, primarily due to:
- a decrease of $13.8 million in Office Properties,
Residential Development Properties and Other equity in
net income primarily due to:
- a decrease of $14.4 million in net income
recorded in 2003 related to our interests in
the Woodlands entities which were sold in
December 2003; partially offset by
- an increase of $1.2 million in income
recorded on Main Street Partners, L.P.; and
- an increase of $1.0 million in income
recorded from the joint venture of The
Crescent, Fountain Place, Trammell Crow
Center, Houston Center and Post Oak Central
Office Properties.
- a decrease of $6.0 million in Resort/Hotel Properties
equity in net income primarily due to net income
recorded in 2003 for our interest in the Ritz-Carlton
Hotel, which was sold in November 2003, and included a
$1.1 million payment which we received from the operator
of the property pursuant to the terms of the operating
agreement because the property did not achieve a
specified net operating income level; partially offset
by
- an increase of $4.0 million in AmeriCold Realty Trust
equity in net income primarily due to the $12.3 million
gain, net of transaction costs, on the sale of a portion
of our interests in AmeriCold to The Yucaipa Companies;
partially offset by
- a $3.6 million increase in interest expense
primarily attributable to the $254.0 million
mortgage financing with Morgan Stanley in
February 2004;
- a $1.9 million impairment recorded in
connection with the business combination of
the tenant and landlord entities; and
- a $1.5 million decrease associated with a
decrease in rental income.
38
OTHER EXPENSES
Other expenses increased $65.2 million, or 17.4%, to $439.8 million
for the year ended December 2004, compared to $374.6 million for the year ended
December 31, 2003. The primary components of the increase in other expenses are
discussed below.
- Extinguishment of debt increased $42.6 million, primarily due to:
- $17.5 million related to the securities purchased in
excess of the debt balance to defease LaSalle Note I in
connection with the joint venture of office properties;
- $17.5 million prepayment penalty associated with the
payoff of the JP Morgan Chase Mortgage Loan in
connection with the joint venture of office properties;
- $1.0 million mortgage prepayment fee associated with the
payoff of the Lehman Brothers Holdings, Inc. Loan in
connection with the joint venture of office properties;
- $6.6 million write off of deferred financing costs,
of which $3.1 million related to the joint venture
or sale of real estate assets.
- Depreciation and amortization costs increased $19.4 million, or
13.5%, to $163.6 million primarily due to:
- $10.7 million increase in Office Property depreciation
expense attributable to:
- $16.1 million increase from the acquisitions
of The Colonnade in August 2003, Hughes
Center in December 2003 through May 2004,
Dupont Centre in March 2004, and The
Alhambra in August 2004;
- $1.3 million increase due to building
improvements; partially offset by
- $3.8 million decrease due to accelerated
depreciation for lease terminations in 2003;
and
- $2.2 million decrease due to the joint
venture of The Crescent, Fountain Place,
Trammell Crow Center, Houston Center and
Post Oak Central in November 2004;
- $4.4 million increase in Resort/Hotel Property
depreciation and amortization costs; and
- $4.1 million increase in Residential Development
Property depreciation and amortization costs.
- Corporate general and administrative costs increased $6.2 million,
or 19.0%, to $38.9 million due to Sarbanes-Oxley compliance related
costs, increased legal and external audit costs as well as costs
associated with salary merit increases and employee benefits.
- Interest expense increased $4.7 million, or 2.7%, to $176.8 million
primarily due to:
- $4.2 million related to the Fountain Place Office
Property transaction;
- $2.9 million related to an increase of $175.0 million in
the weighted average debt balance (from $2,498 million
to $2,673 million) partially offset by a 0.3% decrease
in the hedged weighted average interest rate (from 7.1%
to 6.8%); partially offset by
- $2.4 million decrease related to amortization of above
average interest rate on obligations assumed in the
acquisition of Hughes Center.
- Amortization of deferred financing costs increased $2.0 million, or
18.0%, to $13.1 million due to debt restructuring and refinancing
activities, primarily related to the new Bank of America Fund XII
Term Loan.
- Other expenses decreased $5.2 million, or 88.1%, to $0.7 million
primarily due to:
- $2.8 million decrease due to impairment and disposals of
marketable securities in 2003; and
- $2.6 million decrease due to reduction of the reserve
for the COPI bankruptcy pursuant to the settlement terms
in 2004; partially offset by
- $1.0 million increase due to the impairment of a
marketable security in 2004.
- Impairment charges related to real estate assets decreased $4.5
million, or 52.3%, to $4.1 million due to:
- a decrease of $6.5 million due to the impairment
associated with the settlement of a real estate note
obligation in 2003 with an unconsolidated investment
that primarily held real estate investments and
marketable securities;
- a decrease of $1.2 million due to the impairment of the
North Dallas Athletic Club in 2003; partially offset by
- an increase of $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.
39
INCOME TAX BENEFIT/ PROVISION
The $40.0 million decrease in the income tax expense to a $13.0
million income tax benefit for the year ended December 31, 2004, as compared to
the income tax provision of $27.0 million for the year ended December 31, 2003,
is primarily due to the $34.7 million tax expense related to the gain on the
sale of our interests in the Woodlands entities, and a $5.4 million tax benefit
associated with lower net income recorded in 2004 compared to 2003 for the
Resort/Hotel and Residential Development Properties' operations.
DISCONTINUED OPERATIONS
Income from discontinued operations from assets sold and held for
sale increased $10.8 million, to $8.3 million, primarily due to:
- an increase of $13.9 million, net of minority interest, due to the
impairment of the 1800 West Loop South Office Property in 2003;
- an increase of $4.1 million, net of minority interest, due to the
$7.1 million impairment of three properties in 2003 compared to the
$3.0 million impairment of three properties in 2004; and
- an increase of $4.1 million, net of minority interest, due to
impairments recorded in 2003 on the behavioral healthcare
properties; partially offset by
- a decrease of $9.2 million, net of minority interest, due to a $10.3
million aggregate gain on the sale of two Office Properties in 2003
compared to a $1.1 million aggregate gain on the sale of nine
properties in 2004; and
- a decrease of $2.1 million, net of minority interest, due to the
reduction of net income associated with properties held for sale in
2004 compared to 2003.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003, TO THE YEAR ENDED DECEMBER 31,
2002
The following comparison of the results of operations for the year
ended December 31, 2003, and for the year ended December 31, 2002, reflects the
consolidation of eight of the Resort/Hotel Properties and three of the
Residential Development Properties commencing on February 14, 2002, as a result
of the COPI transaction. Prior to February 14, 2002, the results of operations
of the Resort/Hotel Properties were reflected in our consolidated financial
statements as lease payments and as equity in net income for the Residential
Development Properties. Because the results of operations of these Properties
are consolidated for the full period in 2003, as compared to a partial period in
2002, our financial statements do not provide a direct comparison of the results
of operations of the Resort/Hotel Properties or the Residential Development
Properties for the full periods in 2003 and 2002.
PROPERTY REVENUES
Total property revenues decreased $61.3 million, or 6.6%, to $871.7
million for the year ended December 31, 2003, as compared to $933.0 million for
the year ended December 31, 2002. The components of the decrease in total
revenues are discussed below.
- Office Property revenues decreased $41.2 million, or 8.0%, to $475.9
million, primarily due to:
- a decrease of $27.7 million from the 53 consolidated
Office Properties (excluding 2002 and 2003 acquisitions
and properties held for sale) that we owned or had an
interest in, primarily due a 4.6 percentage point
decline in occupancy (from 89.4% to 84.8%) resulting in
decreases in both rental revenue and operating expense
recoveries and decreases in net parking revenues;
- a decrease of $23.6 million resulting from the
contribution of two Office Properties to joint ventures
in third quarter 2002;
- a decrease of $5.0 million related to net insurance
proceeds received in 2002 as a result of an insurance
claim on one of our Office Properties that had been
damaged as a result of a tornado;
- a decrease of $1.1 million in development revenue from
the construction of 5 Houston Center in 2002; partially
offset by
- an increase of $11.5 million from the acquisition of
Johns Manville Plaza in August 2002 and The Colonnade in
August 2003;
- an increase of $3.7 million resulting from third party
management services and related direct expense
reimbursements; and
- an increase of $1.3 million resulting from deferred rent
recognition for a tenant in 2003.
40
- Resort/Hotel Property revenues increased $16.9 million, or 10.8%, to
$174.1 million, primarily due to the consolidation of the operations
of seven of the Resort/Hotel Properties for the full period in 2003
as compared to a partial period in 2002 as a result of the COPI
transaction (prior to February 14, 2002, we recognized lease
payments related to these Properties).
- Residential Development Property revenues decreased $37.0 million,
or 14.3%, to $221.7 million, primarily due to a reduction in lot and
unit sales at Desert Mountain and CRDI.
PROPERTY EXPENSES
Total property expenses decreased $24.4 million, or 4.1%, to $567.8
million for the year ended December 31, 2003, as compared to $592.2 million for
the year ended December 31, 2002.The components of the decrease in expenses are
discussed below.
- Office Property expenses decreased $3.2 million, or 1.4%, to $227.4
million, primarily due to:
- a decrease of $10.9 million resulting from the
contribution of two Office Properties to joint ventures
in 2002;
- a decrease of $1.6 million related to consulting fees
incurred in 2002 on the 5 Houston Center Office Property
development and a reduction in nonrecurring legal fees
for the Office Segment; and
- a decrease of $0.7 million in operating expenses from
the 53 consolidated Office Properties (excluding 2002
and 2003 acquisitions and properties held for sale) that
we owned or had an interest in, due to:
- $4.8 million decrease in property taxes and
other taxes and assessments;
- $2.9 million decrease in bad debt expense;
- $2.1 million decrease in building repairs
and maintenance;
- $1.2 million decrease in cleaning and
security expenses; partially offset by
- $10.5 million increase in utilities expense,
primarily attributable to a utility contract
for the Texas Office Properties entered into
in February 2003 in which we paid a higher
fixed contract price for actual electricity
consumed; partially offset by
- an increase of $4.3 million from the acquisition of
Johns Manville Plaza in August 2002 and The Colonnade in
August 2003; and
- an increase of $3.1 million related to the cost of
providing third party management services to joint
venture properties, which are recouped by increased
third party fee income and direct expense
reimbursements.
- Resort/Hotel Property expense increased $18.2 million, or 14.6%, to
$142.9 million, primarily due to the consolidation of the operations
of seven of the Resort/Hotel Properties for a full period in 2003,
as compared to a partial period in 2002, as a result of the COPI
transaction on February 14, 2002.
- Residential Development Property expense decreased $39.4 million, or
16.6%, to $197.5 million, primarily due to a reduction in lot and
unit sales and related costs at Desert Mountain and CRDI.
OTHER INCOME/EXPENSES
Total other income and expenses decreased $20.7 million, or 7.9%, to
$242.0 million for the year ended December 31, 2003, as compared to $262.7
million for the year ended December 31, 2002.The primary components of the
decrease in total other income and expenses are discussed below.
OTHER INCOME
Other income increased $24.2 million, or 22.3%, to $132.6 million
for the year ended December 31, 2003, as compared to $108.4 million for the year
ended December 31, 2002.The primary components of the increase in other income
are discussed below.
- Income from sale of investment in unconsolidated company, net
increased $86.2 million due to the income received from the sale of
our interests in the Woodlands entities which were sold in December
2003;
41
- Equity in net income of unconsolidated companies decreased $27.9
million, or 52.2%, to $25.5 million due to:
- a decrease of $29.4 million in Residential Development
Properties equity in net income, primarily due to the
consolidation of the operations of Desert Mountain and
CRDI for the full period in 2003, as compared to a
partial period in 2002, as a result of the COPI
transaction on February 14, 2002;
- a decrease of $12.1 million in Office Properties equity
in net income, primarily due to the gain in 2002 from
the sale of The Woodlands Mall partnership interest in
which we had a 52.5% economic interest; partially offset
by
- an increase of $5.9 million in Resort/Hotel Properties
equity in net income, primarily due to a gain on the
sale of the Ritz Carlton Hotel in November 2003, and a
payment received in 2003 from the operator of the
property pursuant to the terms of the operating
agreement because the property did not achieve the
specified net operating income level;
- an increase of $5.1 million in Temperature-Controlled
Logistics Properties equity in net income due to the
loss on the sale of one facility in 2002 and the gain on
the sale of one facility in 2003, a decrease in interest
expense, an increase in rental income due to improved
operations, an increase in other income related to
interest earned on deferred rent balance and reduced
general and administrative expenses; and
- an increase of $2.6 million in other unconsolidated
companies primarily due to:
- the consolidation of DBL Holdings, Inc., or
DBL, on January 2, 2003, which incurred a
$5.2 million impairment in 2002 for Class
C-1 Notes issued by Juniper CBO 1000-1 Ltd.,
partially offset by earnings from G2
Opportunity Fund, L.P., or G2, in 2002;
- $1.2 million of equity in earnings from G2
in 2003; partially offset by
- equity losses of $2.4 million in 2003
resulting from operations at the Woodlands
Conference Center and Country Club in 2003.
- Gain on joint venture of properties, net decreased $18.1 million,
due primarily to a net gain of $17.7 million on the joint venture of
three properties in 2002.
- Income from investment land sales, net decreased $9.6 million, or
42.5%, due to $22.6 million net income on the sale of three
investments in undeveloped land, located in Texas and Arizona in
2002, compared to $13.0 million net income on the sale of three
investments in undeveloped land located in Texas in 2003.
- Interest and other income decreased $6.4 million, or 45.1%, to $7.8
million, primarily due to the payoff of two notes receivable, a gain
on the sale of marketable securities, partially offset by legal
settlement fees, all in 2002.
OTHER EXPENSES
Other expenses increased $3.5 million, or 0.9%, to $374.6 million
for the year ended December 31, 2003, as compared to $371.1 million the year
ended December 31, 2002. The primary components of the increase in other
expenses are discussed below.
- Depreciation expense increased $15.0 million, or 11.6%, to $144.2
million in 2003, primarily due to:
- $13.1 million increase in Office Property depreciation,
due to:
- $15.1 million increase due to an increase in
building improvements, lease commissions and
other leasing costs;
- an increase of $2.4 million from Johns
Manville Office Property acquired in August
2002; partially offset by
- a decrease of $4.4 million due to the
contribution of two Office Properties to
joint ventures in 2002; and
- $2.1 million increase in Residential Development
Property and Resort/Hotel Property.
- Corporate general and administrative expenses increased $6.9
million, or 26.7%, to $32.7 million, primarily due to increased
payroll and benefits, shareholder services, Sarbanes-Oxley related
costs, management information systems and insurance expenses.
42
- Interest expense decreased $6.9 million, or 3.9%, to $172.1 million,
primarily due to a decrease of 0.69% in the hedged weighted average
interest rate, partially offset by an increase of $73.4 million in
the weighted average debt balance.
- Other expenses decreased $6.9 million, or 53.9%, primarily due to
expenses incurred in 2002 of:
- $3.8 million due to legal expenses associated with
matters relating to the Office Segment;
- $1.9 million due to expense related to stock option note
term extensions; and
- $1.8 million due to write-off of costs associated with
acquisitions no longer being actively pursued.
- Impairment and other charges related to real estate assets decreased
$4.6 million, or 34.8%, to $8.6 million due to:
- a decrease of $9.6 million due to the impairment of the
Canyon Ranch Las Vegas Spa in 2002;
- a decrease of $2.6 million due to the impairment of the
investment in Manalapan in 2002;
- a decrease of $1.0 million due to the impairment on a
parcel of undeveloped land located adjacent to the
Washington Harbour Office Property; partially offset by
- an increase of $6.5 million due to the impairment
associated with the settlement of a real estate note
obligation in 2003 with an unconsolidated investment
that primarily held real estate investments and
marketable securities;
- an increase of $1.2 million due to the impairment of the
North Dallas Athletic Club in 2003; and
- an increase of $0.9 million due to the impairment of an
executive home in 2003 which we acquired in June 2002 as
part of the executive's relocation agreement.
INCOME TAX BENEFIT/PROVISION
The $31.7 million increase in the income tax provision to $27.1
million for the year ended December 31, 2003, as compared to the income tax
benefit of $4.6 million for the year ended December 31, 2002, is primarily due
to the $34.7 million tax expense related to the gain on the sale of our
interests in the Woodlands entities.
DISCONTINUED OPERATIONS
Income from discontinued operations from assets sold and held for
sale decreased $36.2 million, or 107.1%, to a loss of $2.4 million for the year
ended December 31, 2003.The primary components of the decrease in income from
discontinued operations are discussed below:
- a decrease of $13.9 million, net of minority interest, due to the
impairment in 2003 of the 1800 West Loop South Office Property;
- a decrease of $15.2 million, net of minority interest, due to the
reduction of net income associated with properties held for sale in
2003 compared to 2002; and
- a decrease of $6.8 million, net of minority interest, due to the
impairment of two Office Properties and six behavioral healthcare
properties in 2003 compared to three behavioral healthcare
properties in 2002.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Cumulative effect of a change in accounting principle increased $9.2
million due to the adoption of SFAS No. 142 on January 1, 2002.As a result of
the initial application of this Statement, we recognized a goodwill impairment
charge related to the Temperature-Controlled Logistics Properties of
approximately $9.2 million. This charge was reported as a change in accounting
principle for the year ended December 31, 2002.
43
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our primary sources of liquidity are cash flow from operations, our
credit facility, net cash received from our Residential Development Segment and
proceeds from asset sales and joint ventures. Our short-term liquidity
requirements through December 31, 2005, consist primarily of our normal
operating expenses, principal and interest payments on our debt, amounts due at
maturity of our debt obligations, distributions to our shareholders and capital
expenditures. Our long-term liquidity requirements consist primarily of debt
obligations maturing after December 31, 2005, distributions to our shareholders
and capital expenditures.
SHORT-TERM LIQUIDITY
We believe that cash flow from operations will be sufficient to
cover our normal operating expenses, interest payments on our debt,
distributions on our preferred shares, non-revenue enhancing capital
expenditures and revenue enhancing capital expenditures (including property
improvements, tenant improvements and leasing commissions) in 2005 and 2006.
The cash flow from our Residential Development segment is cyclical in nature and
primarily realized in the last quarter of each year. We expect to meet
temporary shortfalls in operating cash flow caused by this cyclicality through
working capital draws under our credit facility. However, our cash flow from
operations is not expected to fully cover the distributions on our common
shares in 2005 and 2006. We intend to use cash generated from 1) cash received
in excess of required reinvestment in our Residential Development Segment,
estimated at approximately $79.0 million and $66.0 million in 2005 and 2006,
respectively; 2) business initiatives including investment land sales; 3) other
income to cover this shortfall and 4) borrowings under our credit facility.
In addition, in 2005 we expect to make capital expenditures of
approximately $80.9 million, primarily relating to new developments of
investment property, that are not in the ordinary course of operations of our
business. We anticipate funding these short-term liquidity requirements
primarily through construction loans and borrowings under our credit facility or
additional debt facilities. As of December 31, 2004, we also had maturing debt
obligations of $229.2 million through December 31, 2005, consisting primarily of
our credit facility of $142.5 million and the maturity of a single asset loan of
$36.8 million in December. We refinanced the credit facility in February 2005
with a new $300 million revolving credit facility which matures on December 31,
2006 and intend to refinance the Metropolitan Life Note V secured by the Datran
Center with a new fixed rate facility. The remaining maturities consist
primarily of normal principal amortization and will be met with cash flow from
operations. Of the $229.2 million of debt maturing in 2005, $22.7 million
relates to the Residential Development Segment and will be retired with the
sales of the corresponding land or units or will be refinanced.
LONG-TERM LIQUIDITY
Our long-term liquidity requirements as of December 31, 2004,
consist primarily of $1.9 billion of debt maturing after December 31, 2005. We
also have $152.6 million of expected long-term capital expenditures relating to
capital investments that are not in the ordinary course of operations of our
business. We anticipate meeting these 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 from asset sales and
joint ventures and construction loans.
CASH FLOWS
Our cash flow from operations is primarily attributable to the
operations of our Office, Resort/Hotel and Residential Development
Properties. The level of our cash flow depends on multiple factors, including
rental rates and occupancy rates at our Office Properties, room rates and
occupancy rates at our Resort/Hotel Properties and sales of lots and units at
our Residential Development Properties. Our net cash provided by operating
activities is also affected by the level of our operating and other expenses.
For the year ended December 31, 2004, the Office Segment,
Resort/Hotel Segment and Residential Development Segment accounted for 49%, 19%
and 32%, respectively, of our total revenues. Our top five tenants accounted for
approximately 13% of our total Office Segment rental revenues for the year ended
December 31, 2004. The loss of one or more of our major tenants would have a
temporary adverse effect on cash flow from operations until we were able to
re-lease the space previously leased to these tenants. Based on rental revenues
from office leases in effect as of December 31, 2004, no single tenant accounted
for more than 6% of our total Office Segment rental revenues for 2004.
44
During the year ended December 31, 2004, our cash flow from
operations was insufficient to meet our short-term liquidity requirements,
excluding capital expenditures not in the ordinary course of operations of our
business and debt maturities. We funded this shortfall primarily with a
combination of borrowings under our credit facility, cash received less required
investment from our Residential Development Segment, and proceeds from asset
sales and joint ventures.
DEBT AND EQUITY FINANCING ALTERNATIVES
Debt and equity financing alternatives currently available to us to
satisfy our liquidity requirements include:
- Additional proceeds from our new credit facility under which we had
up to $199.8 million of borrowing capacity available as of March 1,
2005, and which may be increased by $100.0 million subject to
certain market conditions;
- 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 our ability to utilize these
financing alternatives:
- A reduction in the operating results of the Properties supporting
our 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
our ability to refinance existing secured and unsecured debt, or
extend maturity dates or could result in an uncured or unwaived
event of default;
- We may be unable to obtain debt or equity financing on favorable
terms, or at all, as a result of our financial condition or market
conditions at the time we seek additional financing;
- Restrictions under our debt instruments or outstanding equity may
prohibit us from incurring debt or issuing equity on terms available
under then-prevailing market conditions or at all;
- We may be unable to service additional or replacement debt due to
increases in interest rates or a decline in our operating
performance; and
- We may be unable to increase our new credit facility by $100.0
million, as provided under the terms of the facility, due to adverse
changes in market conditions.
FUNDS AVAILABLE FOR INVESTMENT
In addition, through the joint venture of $1.2 billion in assets,
partial sale of our equity position in Temperature-Controlled Logistics, the
consummated and expected sales of other non-core assets which include land
sales, future sale of the Denver Marriott and Albuquerque Plaza, and the
recapitalization of Canyon Ranch, all of which occurred in the fourth quarter
2004 or are expected to occur in the first or second quarter 2005, we expect to
have approximately $525.0 million in liquidity for new investments, of which
$481.6 million has been received to date. Of this amount, $184.4 million has
been invested and $297.2 million has been used to pay down debt until
reinvestment opportunities arise.
45
CASH FLOWS
Cash and cash equivalents were $92.3 million and $78.1 million at
December 31, 2004 and 2003, respectively. This 18.2% increase is attributable to
$95.7 million provided by operating activities, partially offset by $81.5
million used in investing and financing activities.
FOR THE YEAR ENDED
(in millions) DECEMBER 31, 2004
------------- ------------------
Cash provided by Operating Activities $ 95.7
Cash provided by Investing Activities 629.2
Cash used in Financing Activities (710.7)
------
Increase in Cash and Cash Equivalents $ 14.2
Cash and Cash Equivalents, Beginning of Period 78.1
------
Cash and Cash Equivalents, End of Period $ 92.3
======
OPERATING ACTIVITIES
Our cash provided by operating activities of $95.7 million is attributable to
Property operations.
INVESTING ACTIVITIES
Our cash provided by investing activities of $629.2 million is
primarily attributable to:
- $1,028.9 million of proceeds from joint venture partners
due to the joint venture of Office Properties in
November 2004;
- $174.9 million of proceeds from the sale of six Office
Properties and one Resort/Hotel Property;
- $125.1 million return of investment from AmeriCold
Realty Trust Properties due primarily to the $90.0
million received as a result of additional financing at
AmeriCold Realty Trust and proceeds received from the
sale of an interest in AmeriCold Realty Trust to The
Yucaipa Companies;
- $75.4 million decrease in restricted cash, due primarily
to an $89.9 million decrease in escrow deposits for the
purchase of the Hughes Center Office Properties in
January and February 2004;
- $13.8 million of proceeds from defeasance investment
maturities;
- $3.2 million of proceeds from the sale of VCQ;
- $3.0 million return of investment from unconsolidated
Office Properties; and
- $1.3 million return of investment from unconsolidated
Resort/Hotel Properties.
The cash provided by investing activities is partially offset by:
- $381.7 million for the acquisition of investment
properties, primarily due to the acquisition of twelve
Office Properties;
- $206.5 million purchase of U.S. Treasuries and
government sponsored agency securities in connection
with the defeasance of LaSalle Note II and Nomura
Funding VI;
- $92.9 million for revenue and non-revenue enhancing
tenant improvement and leasing costs for Office
Properties;
- $42.0 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;
- $35.4 million for development of amenities at the
Residential Development Properties;
46
- $15.2 million increase in notes receivables, primarily
due to a $22.0 million mezzanine loan secured by
ownership interests in an office property in Los
Angeles, California;
- $10.1 million of additional investment in unconsolidated
Office Properties primarily due to a $9.6 million
contribution to Main Street Partners L.P., which owns
Bank One Center Office Property;
- $4.4 million additional investment in unconsolidated
Other companies;
- $4.1 million for development of properties, primarily
the Houston Center Shops redevelopment; and
- $2.4 million additional investment in unconsolidated
Temperature-Controlled Logistics Properties;
- $2.2 million additional investment in unconsolidated
Residential Development Properties.
FINANCING ACTIVITIES
Our cash used in financing activities of $710.7 million is primarily
attributable to:
- $1,027.7 million payments under borrowings, due
primarily to the pay off of the Deutsche Bank-CMBS Loan,
the JP Morgan Mortgage Note, the Fleet Fund I Term Loan,
the Lehman Capital Note and the pay down of the Bank of
America Fund XII Term Loan and LaSalle Note I;
- $626.5 million payments under our credit facility;
- $175.6 million distributions to common shareholders and
unitholders;
- $118.5 million Residential Development Property note
payments;
- $32.0 million distributions to preferred shareholders;
- $12.9 million debt financing costs primarily associated
with the $275 million Bank of America Fund XII Term
Loan, the Lehman Capital Note, and the Morgan Stanley
Mortgage Capital Inc Note;
- $8.6 million capital distributions to joint venture
partners; and
- $2.4 million amortization of debt premiums.
The cash used in financing activities is partially offset by:
- $577.1 million 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, the Morgan Stanley Mortgage Capital
Inc. Note secured by the 1301 McKinney Street Office
Property, and the Wachovia Securities Note secured by
The Alhambra Office Properties;
- $530.0 million proceeds from borrowings under our credit
facility;
- $111.7 million proceeds from borrowings for construction
costs for infrastructure development at the Residential
Development Properties;
- $71.0 million net proceeds from issuance of Series A
Preferred Shares;
- $2.8 million capital contributions from joint venture
partners; and
- $0.8 million proceeds from exercise of share options.
47
LIQUIDITY REQUIREMENTS
CONTRACTUAL OBLIGATIONS
The table below presents, as of December 31, 2004, our future
scheduled payments due under these contractual obligations.
PAYMENTS DUE BY PERIOD
----------------------
(in millions) TOTAL 2005 2006/2007 2008/2009 THEREAFTER
-------- -------- --------- --------- ---------
Long-term debt(1) $2,729.4 $ 372.4 $ 1,030.2 $ 886.6 $ 440.2
Operating lease obligations (ground 151.5 2.0 4.1 4.2 141.2
leases) Purchase obligations:
Mezzanine Debt (2) 34.5 34.5 - - -
Capital expenditure obligations (3) 233.5 80.9 152.6 - -
-------- -------- --------- --------- ---------
Total contractual obligations (4) $3,148.9 $ 489.8 $ 1,186.9 $ 890.8 $ 581.4
======== ======== ========= ========= =========
-------------------------
(1) Amounts include scheduled principal and interest payments for consolidated
debt.
(2) On December 3, 2004, we entered into an agreement to loan $34.5 million in
the form of a mezzanine loan secured by an ownership interest in an entity
that owns an office property in New York, New York. On February 7, 2005,
we closed on this commitment and immediately sold a 50% interest. The loan
bears interest at LIBOR plus 775 basis points with an interest-only term
until maturity in March of 2007, with the borrower having three one-year
extension options.
(3) For further detail of capital expenditure obligations, see table under
"Capital Expenditures" in this Item 7.
(4) As part of our ongoing operations, we execute operating lease agreements
which generally provide tenants with leasehold improvement
allowances. Committed leasehold improvement allowances for leases executed
over the past three years have averaged approximately $67 million per
year. Tenant leasehold improvement amounts are not included in the above
table.
DEBT FINANCING SUMMARY
The following tables show summary information about our debt,
including our pro rata share of unconsolidated debt, as of December 31, 2004.
Additional information about the significant terms of our debt financing
arrangements and our unconsolidated debt is contained in Note 11, "Notes Payable
and Borrowings under Credit Facility," and Note 9, "Investments in
Unconsolidated Companies," of Item 8, "Financial Statements and Supplemental
Data."
AS OF DECEMBER 31, 2004
-----------------------
SHARE OF
TOTAL UNCONSOLIDATED
(in thousands) COMPANY DEBT DEBT TOTAL
---------------- -------------- ----------
Fixed Rate Debt $ 1,552,514 $ 439,217 $1,991,731
Variable Rate Debt 599,741(1) 140,132 739,873
---------------- -------------- ----------
Total Debt $ 2,152,255 $ 579,349 $2,731,604
================ ============== ==========
-------------------------
(1) $411.3 million of this variable rate debt has been hedged.
Listed below are the aggregate required principal payments by year
as of December 31, 2004. Scheduled principal installments and amounts due at
maturity are included.
UNSECURED
DEBT TOTAL SHARE OF
SECURED UNSECURED LINE OF COMPANY UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL(1)
-------------- ---------- -------- --------- ------------ -------------- -----------
2005 $ 86,670 $ - $ 142,500 $ 229,170 $ 62,712 $ 291,882
2006 459,173 - - 459,173 24,805 483,978
2007 104,252 250,000 - 354,252 47,126 401,378
2008 108,370 - - 108,370 43,280 151,650
2009 274,230 375,000 - 649,230 79,643 728,873
Thereafter 352,060 - 352,060 321,783 673,843
---------- -------- --------- ------------ -------------- -----------
$1,384,755 $ 625,000 $ 142,500 $ 2,152,255 $ 579,349 $ 2,731,604
========== ========= ========= ============ ============== ===========
------------------------------------
(1) Based on contractual maturity and does not include the refinance of the
credit facility, extension options on Bank of America Fund XII Term Loan,
Morgan Stanley Mortgage Capital Inc. Note II, Fleet National Bank Note or
the expected early payment of LaSalle Note I.
48
CAPITAL EXPENDITURES
As of December 31, 2004, we had unfunded capital expenditures of
approximately $233.5 million relating to capital investments that are not in the
ordinary course of operations of the Company's business segments. The table
below specifies our requirements for capital expenditures and the amounts funded
as of December 31, 2004, and amounts remaining to be funded (future funding
classified between short-term and long-term capital requirements):
CAPITAL EXPENDITURES
AMOUNT --------------------
TOTAL FUNDED AS OF AMOUNT SHORT-TERM
PROJECT DECEMBER 31, REMAINING (NEXT 12 LONG-TERM
(in millions) PROJECT COST (1) 2004 TO FUND MONTHS) (2) (12+ MONTHS) (2)
-------------------------------------------------- -------- ------------ --------- ----------- ---------------
OFFICE SEGMENT
Houston Center Shops Redevelopment (3) $ 12.1 $ 12.1 $ - $ - $ -
RESIDENTIAL DEVELOPMENT SEGMENT
Tahoe Mountain Club (4) 74.6 53.4 21.2 21.2 -
JPI Multi-family Investments Luxury Apartments (5) 53.3 20.9 32.4 19.4 13.0
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land-
Construction Loan (6) 2.4 1.2 1.2 1.2 -
OTHER
SunTx (7) 19.0 16.0 3.0 3.0 -
The Ritz-Carlton (8) 195.8 20.1 175.7 36.1 139.6
-------- ------------ --------- ----------- ---------------
TOTAL $ 357.2 $ 123.7 $ 233.5 $ 80.9 $ 152.6
======== ============ ========= =========== ===============
-----------------------------
(1) All amounts are approximate.
(2) Reflects our estimate of the breakdown between short-term and long-term
capital expenditures.
(3) Located within the Houston Center Office Property complex.
(4) As of December 31, 2004, we had invested $53.4 million in Tahoe Mountain
Club, which includes the acquisition of land and development of a golf
course and club amenities. We plan to invest an additional
$21.2 million in 2005 for the development of dining and ski facilities on
the mountain and an additional golf course. We anticipate collecting
membership deposits which will be utilized to fund a portion of the
development costs.
(5) In October 2004, we entered into an agreement with JPI Multi-Family
Investments, L.P. to develop a multi-family apartment project in Dedham,
Massachusetts.
(6) We have a $2.4 million construction loan with the purchaser of the land,
which is secured by nine developed lots and a $0.4 million letter of
credit.
(7) This commitment is related to our 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) In April 2004, we 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.
OFF-BALANCE SHEET ARRANGEMENTS - GUARANTEE COMMITMENTS
Our guarantees in place as of December 31, 2004 are listed in the
table below. For the guarantees on indebtedness, no triggering events or
conditions are anticipated to occur that would require payment under the
guarantees and management believes the assets associated with the loans that are
guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require us to provide additional collateral to
support the guarantees.
GUARANTEED AMOUNT MAXIMUM GUARANTEED
OUTSTANDING AT AMOUNT AT
(in thousands) DECEMBER 31, 2004 DECEMBER 31, 2004
-------------- ----------------- -----------------
DEBTOR
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 7,572 $ 7,572
Main Street Partners, L.P. - Letter of Credit (2) (3) 4,250 4,250
------- -------
Total Guarantees $11,822 $11,822
======= =======
----------------------------
(1) We provide 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 9, "Investments in Unconsolidated Companies" of Item 8,
"Financial Statements and Supplemental Data," for a description of the
terms of this debt.
(3) We and our 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.
49
EQUITY AND DEBT FINANCING
EQUITY FINANCING
SERIES A PREFERRED OFFERING
On January 15, 2004, we completed an offering of an additional
3,400,000 Series A Convertible Cumulative 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 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 our
option, by paying $25.00 per share plus any accumulated accrued and unpaid
distributions.Dividends on the additional Series A Preferred Shares are
cumulative from November 16, 2003, and are payable quarterly in arrears on the
fifteenth of February, May, August and November, commencing February 16,
2004.The annual fixed dividend on the Series A Preferred Shares is $1.6875 per
share.
Net proceeds to us from the January 2004 Series A Preferred Offering
after underwriting discounts and other offering costs of approximately $3.7
million were approximately $71.0 million.We used the net proceeds to pay down
our credit facility.
SHARE REPURCHASE PROGRAM
We commenced our share repurchase program in March 2000.On October
15, 2001, our 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.There were no share repurchases under the program for the year
ended December 31, 2004.As of December 31, 2004, we 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.All repurchased shares were recorded as treasury shares.
SHELF REGISTRATION STATEMENT
On October 29, 1997, we filed a shelf registration statement with
the SEC relating to the future offering of up to an aggregate of $1.5 billion of
common shares, preferred shares and warrants exercisable for common
shares.Management believes the shelf registration statement will provide us with
more efficient and immediate access to capital markets when considered
appropriate.As of March 2, 2005, approximately $510.0 million was available
under the shelf registration statement for the issuance of securities.
50
DEBT FINANCING ARRANGEMENTS
The significant terms of our primary debt financing arrangements
existing as of December 31, 2004, are shown below:
BALANCE INTEREST
OUTSTANDING RATE AT
MAXIMUM AT DECEMBER DECEMBER 31, MATURITY
DESCRIPTION (1) BORROWINGS 31, 2004 2004 DATE
------------------------------------------------- ---------- ----------- ----------------- ------------------
(dollars in thousands)
SECURED FIXED RATE DEBT:
AEGON Partnership Note (Greenway Plaza) $ 254,604 $ 254,604 7.53% July 2009
LaSalle Note II (Fund II Defeasance) (2) 157,477 157,477 7.79 March 2006
LaSalle Note I (Fund I)(3) 103,300 103,300 7.83 August 2027
Cigna Note (707 17th Street/Denver Marriott) 70,000 70,000 5.22 June 2010
Morgan Stanley I (Alhambra) 50,000 50,000 5.06 October 2011
Bank of America Note (Colonnade) 38,000 38,000 5.53 May 2013
Metropolitan Life Note V (Datran Center) 36,832 36,832 8.49 December 2005
Mass Mutual Note (3800 Hughes) (4) 36,692 36,692 7.75 August 2006
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) (4) 25,509 25,509 6.65 September 2010
JP Morgan Chase (3773 Hughes) 24,755 24,755 4.98 September 2011
Metropolitan Life Note VI (3960 Hughes) (4) 23,919 23,919 7.71 October 2009
JP Morgan Chase I (3753/3763 Hughes) 14,350 14,350 4.98 September 2011
Northwestern Life II (3980 Hughes) (4) 10,168 10,168 7.40 July 2007
Woodmen of the World Note (Avallon IV) 8,500 8,500 8.20 April 2009
Nomura Funding VI Note (Fund VI Defeasance) (5) 7,659 7,659 10.07 July 2010
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 4,249 4,249 2.90 to 9.27 May 05 to Feb 09
---------- ----------- ------------
Subtotal/Weighted Average $ 927,514 $ 927,514 6.96%
---------- ----------- ------------
UNSECURED FIXED RATE DEBT:
The 2009 Notes (6) $ 375,000 $ 375,000 9.25% April 2009
The 2007 Notes (6) 250,000 250,000 7.50 September 2007
---------- ----------- ------------
Subtotal/Weighted Average $ 625,000 $ 625,000 8.55%
---------- ----------- ------------
SECURED VARIABLE RATE DEBT:
Bank of America Term Loan (Fund XII) (7) $ 199,995 $ 199,995 4.53% January 2006
Fleet Term Loan (Distributions from Fund III, IV
and V) 75,000 75,000 6.81 February 2007
Morgan Stanley II (1301 McKinney Street) (8) 70,000 70,000 3.64 January 2008
National Bank of Arizona (Desert Mountain) 26,000 25,459 5.25 to 6.25 June 2006
Texas Capital Bank (Ritz-Carlton Hotel
Construction) 10,500 10,500 4.46 July 2006
FHI Finance Loan (Sonoma Mission Inn) 10,000 10,000 6.81 September 2009
The Rouse Company (Hughes Center undeveloped
land) 7,500 7,500 6.25 December 2005
Wells Fargo Bank (3770 Hughes) (9) 4,774 4,774 4.00 January 2005
Fleet National Bank (Jefferson Station
Apartments) (10) 41,009 4,300 4.35 November 2007
Construction, Acquisition and other obligations
for various CRDI and Mira Vista projects 147,262 49,713 4.66 to 6.25 July 05 to Sept 08
---------- ----------- ------------
Subtotal/Weighted Average $ 592,040 $ 457,241 4.96%
---------- ----------- ------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility (11) $ 300,473 $ 142,500(12) 4.61% May 2005
---------- ----------- ------------
Subtotal/Weighted Average $ 300,473 $ 142,500 4.61%
---------- ----------- ------------
TOTAL/WEIGHTED AVERAGE $2,445,027 $ 2,152,255 6.84%(13)
========== =========== ============
AVERAGE REMAINING TERM 3.7 years
-----------------------------
(1) For more information regarding the terms of our debt financing
arrangements, including the amounts payable at maturity, properties
securing our secured debt and the method of calculation of the interest
rate for our variable rate debt, see Note 11, "Notes Payable and Borrowing
under the Credit Facility," included in Item 8, "Financial Statements and
Supplementary Data."
(2) In December 2003 and January 2004, we purchased a total of $179.6 million
of U.S. Treasuries and government sponsored agency securities, or
defeasance investments, to substitute as collateral for this loan. The
cash flow from the defeasance investments (principal and interest) match
the total debt service payment of this loan.
(3) In January 2005, we purchased a total of $115.8 million of defeasance
investments to substitute as collateral for this loan. The cash flow from
the defeasance investments (principal and interest) match the total debt
service payment of this loan. In November 2004, we purchased $146.2
million of defeasance investments to legally defease $128.7 million of
this loan.
(4) Includes a portion of total premiums of $6.5 million reflecting market
value of debt acquired with the purchase of Hughes Center portfolio.
(5) In December 2004, we purchased a total of $10.1 million of defeasance
investments to substitute as collateral for this loan. The cash flow from
the defeasance investments (principal and interest) match the total debt
service payment of this loan.
(6) To incur any additional debt, the indenture requires us to meet thresholds
for a number of customary financial and other covenants, including maximum
leverage ratios, minimum debt service coverage ratios, maximum secured
debt as a percentage of total undepreciated assets, and ongoing
maintenance of unencumbered assets. Additionally, as long as the 2009
Notes are not rated investment grade, there are restrictions on our
ability to make certain payments including distributions to shareholders
and investments. In December 2004, we obtained consent from bondholders of
the 2009 Notes to eliminate an increase in a debt incurrence test calling
for the debt service ratio test to increase from 1.75x to 2.0x as of April
15, 2005 and to clarify the definition of assets and liabilities to
exclude in-substance defeased debt and its related assets.
51
(7) This loan has a one one-year extension option.
(8) This loan has two one-year extension options and was transferred to a new
joint venture on February 24, 2005.
(9) In January 2005, we entered into a new loan with Wells Fargo for $7.8
million. The loan has an interest-only term until maturity in January
2008, with two one-year extension options, and bears interest at LIBOR
plus 125 basis points.
(10) This loan has two one-year extension options.
(11) In February 2005, we entered into a new $300 million credit facility which
replaces the previous facility. All outstanding amounts under the previous
facility were repaid in full using cash on hand and proceeds from an
initial borrowing under the new facility. The interest rate on the new
facility is LIBOR plus 200 basis points and matures on December 31,
2006. Under the new facility, we are subject to certain limitations
including the ability to: incur additional debt or sell assets, make
certain investments and acquisitions and grant liens. We are also subject
to financial covenants, which include debt service ratios, leverage ratios
and, in the case of the Operating Partnership, a minimum tangible net
worth limitation and a fixed charge coverage ratio.
(12) The outstanding balance excludes letters of credit issued under the credit
facility of $7.9 million.
(13) The overall weighted average interest rate does not include the effect of
our cash flow hedge agreements. Including the effect of these agreements,
the overall weighted average interest rate would have been 7.06%.
We are generally obligated by our 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 we are
subject include, among others, leverage ratios, debt service coverage ratios and
limitations on total indebtedness. The affirmative covenants to which we are
subject under our debt agreements include, among others, provisions requiring us
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 our debt agreements generally restrict our ability to transfer
or pledge assets or incur additional debt at a subsidiary level, limit our
ability to engage in transactions with affiliates and place conditions on our or
our subsidiaries' 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 our loans can trigger an increase in interest rates, an acceleration of
payment on the loan in default, and for our secured debt, foreclosure on the
property securing the debt, and could cause the credit facility to become
unavailable to us. In addition, an event of default by us or any of our
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, 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
our business, financial condition, or liquidity.
Our secured 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 year ended December 31, 2004, we paid a prepayment penalty of $17.5
million in connection with the early repayment of the JP Morgan Mortgage Note.
There were no other circumstances that required prepayment penalties or
increased collateral related to our existing debt.
DEFEASANCE OF LASALLE NOTE I
In November 2004, in connection with the joint venture of The
Crescent Office Property, we released The Crescent, which is held in Funding I,
as collateral for the Fleet Fund I Term Loan and the LaSalle Note I by paying
off the $160.0 million Fleet Fund I Term Loan and by purchasing $146.2 million
of U.S. Treasury and government sponsored agency securities. We placed those
securities into a trust for the sole purpose of funding payment of principal and
interest on approximately $128.7 million of the LaSalle Note I. This was
structured as a legal defeasance, therefore, the debt is reflected as paid down
and the difference between the amount of securities purchased and the debt paid
down, $17.5 million, was recorded in the "Extinguishment of debt" line item in
the Consolidated Statements of Operations.
In January 2005, we released the remaining properties in Funding I
that served as collateral for the LaSalle Note I, by purchasing an additional
$115.8 million of U.S. Treasury and government sponsored agency securities with
an initial weighted average yield of 3.20%. We placed those securities into a
collateral account for the sole purpose of funding payments of principal and
interest on the remainder of LaSalle Note I. The cash flow from these securities
is structured to match the cash flow (principal and interest payments) required
under the LaSalle Note I. This transaction was accounted for as an in-substance
defeasance, therefore, the debt and the securities purchased remain on our
Consolidated Balance Sheets.
DEFEASANCE OF NOMURA FUNDING VI
On December 20, 2004, we released Canyon Ranch - Lenox, which is
held in Funding VI, as collateral for the Nomura Funding VI Note by purchasing
$10.1 million of U.S. Treasury and government sponsored agency securities with
an initial weighted average yield of 3.59%. We placed those securities into a
collateral account for the sole purpose of funding payments of principal and
interest on the Nomura Funding VI Note. The cash flow from the securities is
structured to match the cash flow (principal and interest payments) required
under the Nomura Funding
52
VI Note. This transaction was accounted for as an in-substance defeasance,
therefore, the debt and the securities purchased remain on our Consolidated
Balance Sheets.
DEFEASANCE OF LASALLE NOTE II
In January 2004, we released the remaining properties in Funding II,
that served as collateral for the Fleet Fund I and II Term Loan and the LaSalle
Note 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%. We
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. This
transaction was accounted for as an in-substance defeasance, therefore, the debt
and the securities purchased remain on our Consolidated Balance Sheets. 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 us 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.
LINE OF CREDIT
On October 26, 2004, we entered into a syndicated construction loan
with Bank One, NA. The loan is a line of credit with a maximum commitment of
$105.8 million which will be used for the development of Northstar at Tahoe and
matures October 2006. No amount was outstanding under the loan as of December
31, 2004.
UNCONSOLIDATED DEBT ARRANGEMENTS
As of December 31, 2004, the total debt of the unconsolidated joint
ventures and equity investments in which we have ownership interests was $2.0
billion, of which our share was $579.3 million. We guaranteed $4.3 million of
this debt as of December 31, 2004. Additional information relating to our
unconsolidated debt financing arrangements is contained in Note 9, "Investments
in Unconsolidated Companies," of Item 8, "Financial Statements and Supplementary
Data."
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivative financial instruments to convert a portion of our
variable rate debt to fixed rate debt and to manage the fixed to variable rate
debt ratio. As of December 31, 2004, we had interest rate swaps and interest
rate caps designated as cash flow hedges, which are accounted for in conformity
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138 and No. 149, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133."
The following table shows information regarding the fair value of
our interest rate swaps and caps designated as cash flow hedge agreements, which
is included in the "Accounts payable, accrued expenses and other liabilities"
line item in the Consolidated Balance Sheets, and additional interest expense
and unrealized gains (losses) recorded in OCI for the year ended December 31,
2004.
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
------------------- -------- -------- --------- ----------- ---------------- ----------------
(in thousands)
INTEREST RATE SWAPS
4/18/00 $100,000 4/18/04 6.76% $ - $ 1,712 $ 1,695
2/15/03 100,000 2/15/06 3.26% (232) 1,845 2,114
2/15/03 100,000 2/15/06 3.25% (229) 1,842 2,111
9/02/03 200,000 9/01/06 3.72% (1,585) 4,712 5,076
7/08/04(1) 11,266 1/01/06 2.94% 22 - 22
---------- ---------------- ---------------
$ (2,024) $ 10,111 $ 11,018
INTEREST RATE CAPS
7/08/04(1) $ 12,206 1/01/06 4.00% $ 1 $ - $ (15)
12/21/04 70,000 1/09/06 3.50% 53 - (26)
---------- ---------------- ---------------
$ (1,970) $ 10,111 $ 10,977
========== ================ ===============
---------------------
(1)Cash flow hedge is at CRDI, a consolidated subsidiary.
In addition , two of our unconsolidated companies have interest rate caps
designated as cash flow hedges of which our portion of change in unrealized
gains reflected in OCI was approximately $0.8 million for the year ended
December 31, 2004.
53
REIT QUALIFICATION
We intend to maintain our qualification as a REIT under Section 856
of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and operate
in a manner intended to enable us to continue to qualify as a REIT. As a REIT,
we generally will not be subject to corporate federal income tax on income that
we currently distributes to our shareholders, provided that we satisfy certain
organizational and operational requirements of the Code, including the
requirement to distribute at least 90% of its REIT taxable income to its
shareholders.
UNCONSOLIDATED INVESTMENTS
The following is a summary of our ownership in significant
unconsolidated joint ventures and investments as of December 31, 2004.
OUR OWNERSHIP
AS OF DECEMBER
ENTITY CLASSIFICATION 31,2004
---------------------------------------- ------------------------------------------------------- --------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, LLC Office (Miami Center - Miami) 40.0% (2) (3)
Office (Post Oak, Houston Center - Houston) Office (The 23.9% (4) (3)
Crescent Big Tex I, L.P. Crescent - Dallas)
Crescent Big Tex II, L.P. Office (Trammell Crow Center, Fountain Place - Dallas) 23.9% (5) (3)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (6) (3)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0% (7) (3)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (8) (3)
Austin PT BK One Tower Office Limited
Partnership Office (Bank One Tower-Austin) 20.0% (9) (3)
Houston PT Three Westlake Office Limited
Partnership Office (Three Westlake Park - Houston) 20.0% (9) (3)
Houston PT Four Westlake Office Limited
Partnership Office (Four Westlake Park-Houston) 20.0% (9) (3)
AmeriCold Realty Trust Temperature-Controlled Logistics 31.7% (10)
Blue River Land Company, L.L.C. Other 50.0% (11)
Canyon Ranch Las Vegas, L.L.C. Other 50.0% (12)
EW Deer Valley, L.L.C. Other 41.7% (13)
CR License, L.L.C. Other 30.0% (14)
CR License II, L.L.C. Other 30.0% (15)
SunTx Fulcrum Fund, L.P. Other 23.5% (16)
SunTx Capital Partners, L.P. Other 14.5% (17)
G2 Opportunity Fund, L.P. (G2) Other 12.5% (18)
------------------------------------------------------------
(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, LLC is owned by an
affiliate of a fund managed by JPM.
(3) We have negotiated performance based incentives that allow for additional
equity to be earned if return targets are exceeded.
(4) Of the remaining 76.1% interest in Crescent Big Tex I, L.P. , 60% is owned
by a fund advised by JPM and 16.1% is owned by affiliates of GE.
(5) The remaining 76.1% interest in Crescent Big Tex II, L.P. is owned by a
fund advised by JPM.
(6) The remaining 70% interest in Crescent Five Post Oak Park, L.P. is owned
by an affiliate of GE.
(7) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JPM.
(8) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by
a pension fund advised by JPM.
(9) 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.
(10) Of the remaining 68.3% interest in AmeriCold Realty Trust, 47.6% is owned
by Vornado and 20.7% is owned by The Yucaipa Companies.
(11) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to us. Blue River Land Company, L.L.C. was formed to
acquire, develop and sell certain real estate property in Summit County,
Colorado.
(12) 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 our Resort/Hotel
Properties and 15% is owned by us through our 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. In January 2005, this entity was contributed to CR
Spa, L.L.C.
(13) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to us. 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.
(14) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of our Resort/Hotel Properties. CR
License, L.L.C. owns the licensing agreement related to certain Canyon
Ranch trade names and trademarks. In January 2005, this entity was
contributed to CR Operating L.L.C.
(15) The remaining 70% interest in CR License II, L.L.C. is owned by an
affiliate of the management company of two of our 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. In January
2005, this entity was contributed to CR Spa, L.L.C.
(16) 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 us. SunTx Fulcrum Fund, L.P.'s objective is to
invest in a portfolio of entities that offer the potential for substantial
capital appreciation.
54
(17) SunTx Capital Partners, L.P. is the general Partner of the SunTx Fulcrum
Fund, L.P.The remaining 85.5% interest in SunTx Capital Partners, L.P. is
owned by parties unrelated to us.
(18) 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. , or
GMSPLP, and by parties unrelated to us.G2 is managed and controlled by an
entity that is owned equally by GMSPLP and GMAC Commercial Mortgage
Corporation, or GMACCM. The ownership structure of GMSPLP consists of an
approximately 86% limited partnership interest owned directly and
indirectly by Richard E. Rainwater, Chairman of our Board of Trust
Managers, 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 our Board
of Trust Managers and our Chief Executive Officer. The remaining
approximately 2% general partnership interest is owned by unrelated
parties. Our investment balance at December 31, 2004 was $13.0 million and
in February 2005 we received a cash distribution of approximately $17.9
million, bringing the total distributions to $40.3 million on an initial
investment of $24.2 million.
SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of
operations is based on our 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 us 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. We evaluate our
assumptions and estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe 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.
We believe 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.
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, we record 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. Our
estimates of cash flows of the Properties requires us to make assumptions
related to future rental rates, occupancies, operating expenses, the ability of
our tenants to perform pursuant to their lease obligations and proceeds to be
generated from the eventual sale of our Properties. Any changes in estimated
future cash flows due to changes in our 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 we consider 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. We allocate 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." We initially record the allocation based on a preliminary
purchase price allocation with adjustments recorded within one year of the
acquisition.
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
55
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. We perform this analysis on a lease by lease basis. The
capitalized above-market lease values are amortized as a reduction to rental
income over the remaining non-cancelable terms of the respective leases. The
capitalized below-market lease values are amortized as an increase to rental
income over the initial term plus the term of the below-market fixed rate
renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those
acquired at the property at acquisition based on current market conditions.
These costs are recorded based on the present value of the amortized in-place
leasing costs on a lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based
on management's evaluation of the specific characteristics of each customer's
lease and our overall relationship with that respective customer.
Characteristics considered by management in allocating these values include the
nature and extent of our 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 lease values would be charged to expense.
RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. We use 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 we receive
an inadequate cash down payment and take 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 sales 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 our estimates of costs or
56
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. We perform
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 us 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 our receivables, if any, related to the sale are
collectible and are subject to subordination, and the degree of our continuing
involvement with the real estate asset after the sale. If full gain recognition
is not appropriate, we account for the sale under an appropriate deferral
method.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. We perform evaluations
of each of our investment partnerships, real estate partnerships and joint
ventures to determine if the associated entities constitute a Variable Interest
Entity, or VIE, as defined under Interpretations 46 and 46R, "Consolidation of
Variable Interest Entities," or FIN 46 and 46R, respectively. In general, a VIE
is an entity that has (i) an insufficient amount of equity for the entity to
carry on its principal operations, without additional subordinated financial
support from other parties, (ii) a group of equity owners that are unable to
make decisions about the entity's activities, or (iii) equity that does not
absorb the entity's losses or receive the benefits of the entity. If any one of
these characteristics is present, the entity is subject to FIN 46R's variable
interests consolidation model.
Quantifying the variability of VIEs is complex and subjective,
requiring consideration and estimates of a significant number of possible
future outcomes as well as the probability of each outcome occurring. The
results of each possible outcome are allocated to the parties holding interests
in the VIE and, based on the allocation, a calculation is performed to determine
which party, if any, has a majority of the potential negative outcomes (expected
losses) or a majority of the potential positive outcomes (expected residual
returns). That party, if any, is the VIE's primary beneficiary and is required
to consolidate the VIE. Calculating expected losses and expected residual
returns requires modeling potential future results of the entity, assigning
probabilities to each potential outcome, and allocating those potential outcomes
to the VIE's interest holders. If our estimates of possible outcomes and
probabilities are incorrect, it could result in the inappropriate consolidation
or deconsolidation of the VIE.
For entities that do not constitute VIEs, we consider other GAAP, as
required, determining (i) consolidation of the entity if our ownership interests
comprise a majority of its outstanding voting stock or otherwise control the
entity, or (ii) application of the equity method of accounting if we do not have
direct or indirect control of the entity, with the initial investment carried at
costs and subsequently adjusted for our share of net income or less and cash
contributions and distributions to and from these entities.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our accounts receivable balance is
reduced by an allowance for amounts that may become uncollectible in the
future. Our receivable balance is composed primarily of rents and operating cost
recoveries due from its tenants, receivables associated with club memberships at
our Residential Development properties and guest receivables at our Resort/Hotel
properties. We also maintain 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 our tenants or members, any delinquency in payment, historical trends
and current economic conditions. If the assumptions regarding the collectibility
of accounts receivable prove incorrect, we could experience write-offs in excess
of its allowance for doubtful accounts, which would result in a decrease in net
income.
ADOPTION OF NEW ACCOUNTING STANDARDS
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
57
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. We
adopted EITF 03-1 effective July 1, 2004 and it had no impact on our financial
condition or its results of operations.
SFAS NO. 123R. In December 2004, the FASB issued SFAS No. 123
(Revised 2004), "Share-Based Payment." The new FASB rule requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. We will be required to apply SFAS No.
123R as of the first interim reporting period that begins after June 15, 2005.
The scope of SFAS No. 123R includes a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS No.
123R replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
supersedes Accounting Principles Board, or APB, Opinion No. 25, "Accounting for
Stock Issued to Employees."SFAS No. 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to the financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. Effective
January 1, 2003, we adopted the fair value expense recognition provisions of
SFAS No. 123 on a prospective basis. Except for the 2004 Unit Plan, we do not
believe there will be a significant impact to our financial condition or results
of operations from the adoption of SFAS No. 123R. We are continuing to evaluate
the impact of the adoption of SFAS No. 123R as it relates to the 2004 Unit Plan.
SFAS NO. 153. In December 2004, the FASB issued SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29. "The
amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The statement eliminates the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe there will be an impact to our financial
condition or results of operations from the adoption of SFAS No. 153.
SOP 04-2. In December 2004, the AICPA issued Statement of Position,
or SOP, 04-2, "Accounting for Real Estate Time-Sharing Transactions." This SOP
provides guidance to a seller of real estate time sharing interests and
provides, among other requirements, that uncollectibles be reflected as a
reduction of revenues rather than as bad debt expense. The provisions in the SOP
are effective for financial statements for fiscal years beginning after June 15,
2005. To facilitate the issuance of this standard, the FASB issued Statement No.
152, "Accounting for Real Estate Time-Sharing Transactions - An Amendment of
FASB Statements No. 66 and 67," on December 16, 2004 which references the
financial accounting and reporting guidance for real estate time-sharing
transactions to SOP 04-2. We do not believe there will be a significant impact
to our financial condition or results of operations from the adoption of SOP
04-2.
58
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.
We calculate FFO available to common shareholders - diluted - NAREIT
definition in the same manner, except that Net Income (Loss) is replaced by Net
Income (Loss) Available to Common Shareholders and we include the effect of
operating partnership unitholder minority interests.
The National Association of Real Estate Investment Trusts, or
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.We consider FFO available to
common shareholders - diluted - NAREIT definition and FFO appropriate measures
of performance for an equity REIT and for its investment segments.However, FFO
available to common shareholders - diluted - NAREIT definition and FFO should
not be considered an alternative to net income determined in accordance with
GAAP as an indication of our operating performance.
The aggregate cash distributions paid to common shareholders and
unitholders for the years ended December 31, 2004, 2003 and 2002 were $175.6
million, $175.5 million, and $176.4 million respectively.We reported Adjusted
FFO available to common shareholders - diluted of $143.2 million, $212.6, and
$238.2 million, for the years ended December 31, 2004, 2003, and 2002
respectively.We calculate Adjusted FFO available to common shareholders -
diluted by excluding the effect of impairment charges related to real estate
assets and the effect of extinguishment of debt expense related to real estate
asset sales.We reported FFO available to common shareholders - diluted - NAREIT
definition of $95.7 million, $174.8 million, and $212.1million for the years
ended December 31, 2004, 2003, and 2002.
An increase or decrease in FFO available to common shareholders -
diluted - NAREIT definition does not necessarily result in an increase or
decrease in aggregate distributions because our Board of Trust Managers is not
required to increase distributions on a quarterly basis unless necessary to
maintain our REIT status.However, we must distribute 90% of our REIT taxable
income (as defined in the Code).Therefore, a significant increase in FFO
available to common shareholders - diluted - NAREIT definition will generally
require an increase in distributions to shareholders and unitholders although
not necessarily on a proportionate basis.
Accordingly, we believe that to facilitate a clear understanding of
our consolidated historical operating results, FFO available to common
shareholders - diluted - NAREIT definition should be considered in conjunction
with our net income and cash flows reported in the consolidated financial
statements and notes to the financial statements.However, our measure of FFO
available to common shareholders - diluted - NAREIT definition may not be
comparable to similarly titled measures of other REITs because these REITs may
apply the definition of FFO in a different manner than we apply it.
59
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2004 2003
--------- ---------
Net income $ 172,936 $ 26,022
Adjustments to reconcile net income to
funds from operations available to common shareholders -
diluted:
Depreciation and amortization of real estate assets 156,766 150,788
Gain on property sales, net (267,053) (8,919)
Extinguishment of debt expense related to real estate
asset sales (1) 39,121 -
Impairment charges related to real estate assets and assets
held for sale 6,008 37,794
Adjustment for investments in unconsolidated companies:
Office Properties 11,601 6,254
Resort/Hotel Properties - (2,544)
Residential Development Properties (228) 3,573
Temperature-Controlled Logistics Properties (2) 24,873 21,136
Other - 206
Unitholder minority interest 30,950 4,546
Series A Preferred Share distributions (23,723) (18,225)
Series B Preferred Share distributions (8,075) (8,075)
--------- ---------
Adjusted funds from operations available to common shareholders
-diluted(3) $ 143,176 $ 212,556
Impairment charges related to real estate assets (8,332) (37,794)
Extinguishment of debt expense related to real estate asset
sales(1) (39,121) -
--------- ---------
Funds from operations available to common shareholders
-diluted(3) - NAREIT definition $ 95,723 $ 174,762
========= =========
Investment Segments:
Office Properties $ 268,829 $ 282,838
Resort/Hotel Properties 44,978 51,123
Residential Development Properties 31,216 88,127
Temperature-Controlled Logistics Properties (2) 31,026 23,308
Other:
Corporate general and administrative (38,889) (32,661)
Interest expense (176,771) (172,232)
Series A Preferred Share distributions (23,723) (18,225)
Series B Preferred Share distributions (8,075) (8,075)
Other(4) 14,585 (1,647)
--------- ---------
Adjusted funds from operations available to common shareholders
-diluted(3) $ 143,176 $ 212,556
Impairment charges related to real estate assets (8,332) (37,794)
Extinguishment of debt expense related to real estate
asset sales(1) (39,121) -
--------- ---------
Funds from operations available to common shareholders
-diluted(3) - NAREIT definition $ 95,723 $ 174,762
========= =========
Basic Weighted average shares outstanding 99,025 98,886
Diluted Weighted average shares and units outstanding (5) 116,966 116,676
-------------------------
(1) Extinguishment of debt directly related to the sale of real estate
assets.An additional $3.5 million for the year ended 2004 of
extinguishment of debt that is not related to the sale of real estate
assets is included in funds from operations available to common
shareholders.
(2) Excludes impairment charges related to real estate assets of $2.3 million
for the year ended 2004.
(3) To calculate basic funds from operations available to common shareholders,
deduct unitholder minority interest.
(4) Includes income from investment land sales, net, interest and other
income, extinquishment of debt, income/loss from other unconsolidated
companies, other expenses, depreciation and amortization of non-real
estate assets, and amortization of deferred financing costs.
(5) See calculations for the amounts presented in the reconciliation following
this table.
60
The following schedule reconciles our basic weighted average shares to the
diluted weighted average shares/units presented above:
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
(shares/units in thousands) 2004 2003
----------------------------- ------------ ----------
Basic weighted average shares: 99,025 98,886
Add: Weighted average units 17,722 17,749
Restricted shares and share and unit options 219 41
------------ ----------
Diluted weighted average shares and units 116,966 116,676
============ ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our use of financial instruments, such as debt instruments, subject us to
market risk which may affect our future earnings and cash flows as well as the
fair value of our assets. Market risk generally refers to the risk of loss from
changes in interest rates and market prices. We manage our market risk by
attempting to match anticipated inflow of cash from its operating, investing and
financing activities with anticipated outflow of cash to fund debt payments,
distributions to shareholders, investments, capital expenditures and other cash
requirements. We also enter into derivative financial instruments such as
interest rate swaps to mitigate our interest rate risk on a related financial
instrument or to effectively lock the interest rate on a portion of our variable
rate debt.
The following discussion of market risk is based solely on hypothetical
changes in interest rates related to our variable rate debt. This discussion
does not purport to take into account all of the factors that may affect the
financial instruments discussed in this section.
INTEREST RATE RISK
Our interest rate risk is most sensitive to fluctuations in interest rates
on our short-term variable rate debt. We had total outstanding debt of
approximately $2.2 billion at December 31, 2004, of which approximately $188.5
million, or approximately 8.8%, was unhedged variable rate debt. The variable
rate debt is based on an index (LIBOR or Prime plus a credit spread). The
weighted average interest rate on such unhedged variable rate debt was 4.7% as
of December 31, 2004. A 10% increase in the underlying index would cause an
increase of 34.5 basis points to the weighted average interest rate on such
unhedged variable rate debt, which would result in an annual decrease in net
income and cash flows of approximately $0.7 million. Conversely, a 10 % decrease
in the underlying index would cause a decrease of 34.5 basis points to the
weighted average interest rate on such unhedged variable rate debt, which would
result in an annual increase in net income and cash flows of approximately $0.7
million based on the unhedged variable rate debt outstanding as of December 31,
2004.
CASH FLOW HEDGES
We use derivative financial instruments to convert a portion of our
variable rate debt to fixed rate debt and to manage the fixed to variable rate
debt ratio. A description of these derivative financial instruments is contained
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Equity and Debt Financing - Derivative Instruments and
Hedging Activities."
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm............................................... 63
Consolidated Balance Sheets at December 31, 2004 and 2003............................................. 64
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002............ 65
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004, 2003,
and 2002............................................................................................. 66
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 ........... 67
Notes to Consolidated Financial Statements............................................................ 68
Schedule III Consolidated Real Estate Investments and Accumulated Depreciation........................ 132
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trust Managers and Shareholders
Crescent Real Estate Equities Company and subsidiaries
We have audited the accompanying consolidated balance sheets of Crescent Real
Estate Equities Company and subsidiaries (the "Company") as of December 31, 2004
and 2003, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004. Our audits also included the financial statement schedule listed in
the index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Crescent Real
Estate Equities Company and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangibles," as of January 1, 2002. As a result, the Company recorded the
cumulative effect of a change in accounting principle in the consolidated
statement of operations for the year ended December 31, 2002, referred to above,
in accordance with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Crescent Real
Estate Equities Company and subsidiaries' internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 14, 2005, expressed an
unqualified opinion on management's assessment and an adverse opinion on the
effectiveness of internal control over financial reporting.
ERNST & YOUNG LLP
Dallas, Texas
March 14, 2005
63
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
2004 2003
----------- -----------
ASSETS:
Investments in real estate:
Land $ 209,392 $ 236,956
Land improvements, net of accumulated depreciation of $23,592 and $19,270
at December 31, 2004 and December 31, 2003, respectively 69,086 105,236
Building and improvements, net of accumulated depreciation of $416,530 and
$576,682 at December 31, 2004 and December 31, 2003, respectively 1,835,662 2,103,717
Furniture, fixtures and equipment, net of accumulated depreciation of $40,562 and
$33,344 at December 31, 2004 and December 31, 2003, respectively 43,465 43,227
Land held for investment or development 501,379 450,279
Properties held for disposition, net 81,741 220,010
----------- -----------
Net investment in real estate $ 2,740,725 $ 3,159,425
Cash and cash equivalents $ 92,291 $ 78,052
Restricted cash and cash equivalents 93,739 217,329
Defeasance investments 175,853 9,620
Accounts receivable, net 60,004 40,740
Deferred rent receivable 58,271 65,267
Investments in unconsolidated companies 362,643 440,594
Notes receivable, net 102,173 78,453
Income tax asset - current and deferred, net 13,839 17,506
Other assets, net 338,226 207,477
----------- -----------
Total assets $ 4,037,764 $ 4,314,463
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 142,500 $ 239,000
Notes payable 2,009,755 2,319,699
Accounts payable, accrued expenses and other liabilities 422,348 370,136
Current income tax payable - 7,995
----------- -----------
Total liabilities $ 2,574,603 $ 2,936,830
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 10,535,139 and 8,873,347 units, at December 31, 2004 and
December 31, 2003, respectively $ 113,572 $ 108,706
Consolidated real estate partnerships 49,339 47,123
----------- -----------
Total minority interests $ 162,911 $ 155,829
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Cumulative Preferred Shares,
liquidation preference of $25.00 per share, 14,200,000 and 10,800,000 shares issued
and outstanding at December 31, 2004 and December 31, 2003 respectively $ 319,166 $ 248,160
Series B Cumulative Preferred Shares,
liquidation preference of $25.00 per share, 3,400,000 shares issued and outstanding at
December 31, 2004 and December 31, 2003 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares, 124,542,018 and
124,396,168 shares issued and outstanding at December 31, 2004 and
December 31, 2003, respectively 1,245 1,237
Additional paid-in capital 2,246,335 2,245,683
Deferred compensation on restricted shares (2,233) (4,102)
Accumulated deficit (885,016) (877,120)
Accumulated other comprehensive income (1,022) (13,829)
----------- -----------
$ 1,760,398 $ 1,681,952
Less - shares held in treasury, at cost, 25,121,861 common shares at December 31, 2004
and December 31, 2003 (460,148) (460,148)
----------- -----------
Total shareholders' equity $ 1,300,250 $ 1,221,804
----------- -----------
Total liabilities and shareholders' equity $ 4,037,764 $ 4,314,463
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
64
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
REVENUE:
Office Property $ 484,049 $ 475,944 $ 517,124
Resort/Hotel Property 183,515 174,059 157,145
Residential Development Property 311,197 221,713 258,747
--------- --------- ---------
Total Property Revenue $ 978,761 $ 871,716 $ 933,016
--------- --------- ---------
EXPENSE:
Office Property real estate taxes $ 60,390 $ 63,818 $ 71,086
Office Property operating expenses 173,969 163,598 159,521
Resort/Hotel Property expense 155,812 142,869 124,695
Residential Development Property expense 271,819 197,491 236,862
--------- --------- ---------
Total Property Expense $ 661,990 $ 567,776 $ 592,164
--------- --------- ---------
Income from Property Operations $ 316,771 $ 303,940 $ 340,852
--------- --------- ---------
OTHER INCOME (EXPENSE):
Income from sale of investment in unconsolidated company, net $ - $ 86,186 $ -
Income from investment land sales, net 18,879 13,038 22,591
Gain on joint venture of properties, net 265,772 100 18,166
Loss on property sales, net - - (803)
Interest and other income 18,005 7,766 14,118
Corporate general and administrative (38,889) (32,661) (25,777)
Interest expense (176,771) (172,116) (178,956)
Amortization of deferred financing costs (13,056) (11,053) (10,266)
Extinguishment of debt (42,608) - -
Depreciation and amortization (163,630) (144,184) (129,218)
Impairment charges related to real estate assets (4,094) (8,624) (13,216)
Other expenses (725) (5,946) (12,842)
Equity in net income (loss) of unconsolidated companies:
Office Properties 6,262 11,190 23,328
Resort/Hotel Properties (245) 5,760 (115)
Residential Development Properties (2,266) 10,427 39,778
Temperature-Controlled Logistics Properties 6,153 2,172 (2,933)
Other (280) (4,053) (6,609)
--------- --------- ---------
Total other income (expense) $(127,493) $(241,998) $(262,754)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS
AND INCOME TAXES $ 189,278 $ 61,942 $ 78,098
Minority interests (37,211) (6,439) (19,654)
Income tax benefit (provision) 12,937 (27,055) 4,635
--------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE $ 165,004 $ 28,448 $ 63,079
Income from discontinued operations, net of minority interests 10,221 12,339 27,527
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (2,978) (25,052) (4,123)
Gain on real estate from discontinued operations, net of minority
interests 1,052 10,287 10,397
Cumulative effect of a change in accounting principle,
net of minority interests (363) - (9,172)
--------- --------- ---------
NET INCOME $ 172,936 $ 26,022 $ 87,708
Series A Preferred Share distributions (23,723) (18,225) (16,702)
Series B Preferred Share distributions (8,075) (8,075) (5,047)
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 141,138 $ (278) $ 65,959
========= ========= =========
BASIC EARNINGS PER SHARE DATA:
Income available to common shareholders before discontinued operations and
cumulative effect of a change in accounting principle $ 1.35 $ 0.03 $ 0.39
Income from discontinued operations, net of minority interests 0.10 0.12 0.27
Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.03) (0.25) (0.04)
Gain on real estate from discontinued operations, net of minority interests 0.01 0.10 0.10
Cumulative effect of a change in accounting principle, net of
minority interests - - (0.09)
--------- --------- ---------
Net income (loss) available to common shareholders - basic $ 1.43 $ - $ 0.63
========= ========= =========
DILUTED EARNINGS PER SHARE DATA:
Income available to common shareholders before discontinued operations and
cumulative effect of a change in accounting principle $ 1.34 $ 0.03 $ 0.39
Income from discontinued operations, net of minority interests 0.10 0.12 0.27
Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.03) (0.25) (0.04)
Gain on real estate from discontinued operations, net of minority interests 0.01 0.10 0.10
Cumulative effect of a change in accounting principle, net of minority
interests - - (0.09)
--------- --------- ---------
Net income (loss) available to common shareholders - diluted $ 1.42 $ - $ 0.63
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
65
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Series A Series B
Preferred Shares Preferred Shares Treasury Shares Common Shares
--------------------- -------------------- ---------------------- ----------------------
Shares Net Value Shares Net Value Shares Net Value Shares Par Value
---------- --------- --------- --------- ---------- ---------- ----------- ---------
SHAREHOLDERS' EQUITY,
December 31, 2001 8,000,000 $ 200,000 - $ - 18,770,418 $ (359,728) 123,396,017 $ 1,227
Preferred Equity Issuance 2,800,000 48,160 3,400,000 81,923 - - - -
Issuance of Common Shares - - - - - - 8,642 -
Exercise of Common Share
Options - - - - - - 338,050 4
Extension on employee stock
option notes - - - - - - - -
Deferred Compensation - - - - - - 300,000 3
Issuance of Shares in
Exchange for Operating
Partnership Units - - - - - - 238,158 2
Share Repurchases - - - - 6,298,341 (99,632) - -
Dividends Paid - - - - - - - -
Net Income Available to
Common Shareholders - - - - - - - -
Unrealized Loss or
Marketable Securities - - - - - - - -
Unrealized Net Gain on Cash
Flow Hedges - - - - - - - -
---------- --------- --------- --------- ---------- ---------- ----------- ---------
SHAREHOLDERS' EQUITY,
December 31, 2002 10,800,000 $ 248,160 3,400,000 $ 81,923 25,068,759 $ (459,360) 124,280,867 $ 1,236
Issuance of Common Shares - - - - - - 9,911 -
Exercise of Common Share
Options - - - - - - 95,400 1
Accretion of Discount on
Employee Stock Option Notes - - - - - - - -
Issuance of Shares in
Exchange for Operating
Partnership Units - - - - - - 9,990 -
Stock Option Grants - - - - - - - -
Purchase under Compensation
Plan - - - - 53,102 (788) - -
Amortization of Deferred
Compensation on Restricted
Shares - - - - - - - -
Dividends Paid - - - - - - - -
Net Loss Available to Common
Shareholders - - - - - - - -
Unrealized Gain on
Marketable Securities - - - - - - - -
Unrealized Net Gain on Cash
Flow Hedges - - - - - - - -
---------- --------- --------- --------- ---------- ---------- ----------- ---------
SHAREHOLDERS' EQUITY,
December 31, 2003 10,800,000 $ 248,160 3,400,000 $ 81,923 25,121,861 $ (460,148) 124,396,168 $ 1,237
Issuance of Common Shares - - - - - - 7,954 -
Exercise of Common Share
Options - - - - - - 53,980 1
Accretion of Discount on
Employee Stock Option Notes - - - - - - - -
Issuance of Shares in
Exchange for Operating
Partnership Units - - - - - - 83,916 7
Preferred Equity Issuance 3,400,000 71,006 - - - - - -
Stock Option Grants - - - - - - - -
Amortization of Deferred
Compensation on Restricted
Shares - - - - - - - -
Dividends Paid - - - - - - - -
Net Income Available to
Common Shareholders - - - - - - - -
Unrealized Net Gain on
Marketable Securities - - - - - - - -
Unrealized Net Gain on Cash
Flow Hedges - - - - - - - -
---------- --------- --------- --------- ---------- ---------- ----------- ---------
SHAREHOLDERS' EQUITY,
December 31, 2004 14,200,000 $ 319,166 3,400,000 $ 81,923 25,121,861 $ (460,148) 124,542,018 $ 1,245
========== ========= ========= ========= ========== ========== =========== =========
Deferred Accumulated
Additional Compensation Other
Paid-in on Restricted Accumulated Comprehensive
Capital Shares (Deficit) Income Total
---------- ------------- ----------- ------------- ----------
SHAREHOLDERS' EQUITY,
December 31, 2001 $2,234,360 $ - $ (638,435) $ (31,484) $1,405,940
Issuance of Preferred Shares - - - - 130,083
Issuance of Common Shares 153 - - - 153
Exercise of Common Share
Options 577 - - - 581
Extension on employee stock
option notes 1,628 - - - 1,628
Deferred Compensation 5,250 (5,253) - - -
Issuance of Shares in
Exchange for Operating
Partnership Units 1,493 - - - 1,495
Share Repurchases (42) - - - (99,674)
Dividends Paid - - (155,584) - (155,584)
Net Income Available to
Common Shareholders - - 65,959 - 65,959
Unrealized Loss or
Marketable Securities - - - (833) (833)
Unrealized Net Gain on Cash
Flow Hedges - - - 5,065 5,065
---------- ------------- ---------- ------------- ----------
SHAREHOLDERS' EQUITY,
December 31, 2002 $2,243,419 $ (5,253) $ (728,060) $ (27,252) $1,354,813
Issuance of Common Shares 157 - - - 157
Exercise of Common Share
Options 1,436 - - - 1,437
Accretion of Discount on
Employee Stock Option Notes (252) - - - (252)
Issuance of Shares in
Exchange for Operating
Partnership Units 8 - - - 8
Stock Option Compensation 915 - - - 915
Purchase under Compensation
Plan - - - - (788)
Amortization of Deferred
Compensation on Restricted
Shares - 1,151 - - 1,151
Dividends Paid - - (148,782) - (148,782)
Net Loss Available to Common
Shareholders - - (278) - (278)
Unrealized Gain on
Marketable Securities - - - 3,761 3,761
Unrealized Net Gain on Cash
Flow Hedges - - - 9,662 9,662
---------- ------------- ---------- ------------- ----------
SHAREHOLDERS' EQUITY,
December 31, 2003 $2,245,683 $ (4,102) $ (877,120) $ (13,829) $1,221,804
Issuance of Common Shares 130 - - - 130
Exercise of Common Share
Options 821 - - - 822
Accretion of Discount on
Employee Stock Option Notes (252) - - - (252)
Issuance of Shares in
Exchange for Operating
Partnership Units (37) - - - (30)
Preferred Equity Issuance - - - - 71,006
Stock Option Grants (10) - - - (10)
Amortization of Deferred
Compensation on Restricted
Shares - 1,869 - - 1,869
Dividends Paid - - (149,034) - (149,034)
Net Income Available to
Common Shareholders - - 141,138 - 141,138
Unrealized Net Gain on
Marketable Securities - - - 1,036 1,036
Unrealized Net Gain on Cash
Flow Hedges - - - 11,771 11,771
---------- ------------- ---------- ------------- ----------
SHAREHOLDERS' EQUITY,
December 31, 2004 $2,246,335 $ (2,233) $ (885,016) $ (1,022) $1,300,250
========== ============= ========== ============= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
66
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES: ------------- ------------- -------------
Net income $ 172,936 $ 26,022 $ 87,708
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 176,686 155,237 139,484
Residential Development cost of sales 161,853 107,163 160,057
Residential Development capital expenditures (205,714) (130,692) (91,046)
Impairment charges related to real estate assets from
discontinued operations, net of minority interests 2,978 25,052 4,123
Gain on real estate from discontinued operations, net of
minority interests (1,052) (10,287) (10,397)
Discontinued operations - depreciation and minority interests 5,152 19,178 20,927
Extinguishment of debt 6,459 - -
Impairment charges related to real estate assets 4,094 8,624 13,216
Gain from sale of investment in unconsolidated company, net
of tax - (51,556) -
Income from investment land sales, net (18,879) (13,038) (22,591)
Gain on joint venture of properties, net (265,772) (100) (18,166)
Loss on property sales, net - - 803
Minority interests 37,211 6,439 19,654
Cumulative effect of a change in accounting principle,
net of minority interests 363 - 9,172
Non-cash compensation 1,737 1,093 1,956
Equity in (earnings) loss from unconsolidated companies:
Office Properties (6,262) (11,190) (23,328)
Ownership portion of Office Properties Fee 1,833 1,246 408
Resort/Hotel Properties 245 (5,760) 115
Residential Development Properties 2,266 (10,427) (39,778)
Temperature-Controlled Logistics Properties (6,153) (2,172) 2,933
Other 280 4,053 6,609
Distributions received from unconsolidated companies:
Office Properties 4,833 10,313 25,510
Resort/Hotel Properties - - 325
Residential Development Properties 113 11,000 34,418
Temperature-Controlled Logistics Properties 1,822 3,500 4,975
Other 1,214 1,187 974
Change in assets and liabilities, net of effect of consolidations
and acquisitions:
Restricted cash and cash equivalents 54,889 (10,574) (5,357)
Accounts receivable (17,924) 4,436 7,192
Deferred rent receivable (16,246) (2,728) 3,677
Income tax -current and deferred, net (21,657) (430) (17,925)
Other assets (16,449) 343 6,474
Accounts payable, accrued expenses and other liabilities 34,828 (7,981) (41,819)
------------- ------------- -------------
Net cash provided by operating activities $ 95,684 $ 127,951 $ 280,303
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously
unconsolidated companies $ 334 $ 11,574 $ 38,226
Proceeds from property sales 174,881 43,155 121,422
Proceeds from sale of investment in unconsolidated company
and related property sales 3,229 178,667 -
Proceeds from joint venture partner 1,028,913 - 164,067
Acquisition of investment properties (381,672) (44,732) (120,206)
Development of investment properties (4,142) (6,613) (2,477)
Property improvements - Office Properties (14,297) (18,023) (17,241)
Property improvements - Resort/Hotel Properties (27,739) (13,574) (16,745)
Tenant improvement and leasing costs - Office Properties (92,876) (77,279) (49,175)
Residential Development Properties Investments (35,428) (42,631) (28,584)
Decrease (increase) in restricted cash and cash equivalents 75,395 (100,313) 19,071
Purchase of defeasance investments and other securities (206,515) (13,485) -
Proceeds from defeasance investment maturities 13,754 - -
Return of investment in unconsolidated companies:
Office Properties 2,981 7,846 3,709
Resort/Hotel Properties 1,299 17,973 -
Residential Development Properties 14 8,528 12,767
Temperature-Controlled Logistics Properties 125,109 3,201 -
Other 290 5,231 -
Investment in unconsolidated companies:
Office Properties (10,100) (7,968) (449)
Resort/Hotel Properties - - (7,924)
Residential Development Properties (2,192) (6,013) (32,966)
Temperature-Controlled Logistics Properties (2,400) (900) (3,280)
Other (4,355) (3,685) (2,930)
(Increase) decrease in notes receivable (15,230) 22,557 (22,104)
------------- ------------- -------------
Net cash provided by (used in) investing activities $ 629,253 $ (36,484) $ 55,181
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (12,918) $ (9,321) $ (9,178)
Borrowings under Credit Facility 530,000 320,500 433,000
Payments under Credit Facility (626,500) (245,500) (552,000)
Notes Payable proceeds 577,146 177,958 380,000
Notes Payable payments (1,027,661) (118,852) (185,415)
Residential Development Properties note payable borrowings 111,672 79,834 83,383
Residential Development Properties note payable payments (118,495) (85,434) (118,681)
Purchase of GMAC preferred interest - - (218,423)
Amortization of debt premiums (2,386) - -
Capital distributions - joint venture partner (8,565) (11,699) (3,792)
Capital distributions - joint venture preferred equity - - (6,967)
Capital contributions - joint venture partner 2,833 2,028 -
Proceeds from exercise of share options 829 1,205 643
Common share repurchases held in Treasury - (788) (28,500)
Issuance of preferred shares-Series A 71,006 - 48,160
Issuance of preferred shares-Series B - - 81,923
Series A Preferred Share distributions (23,963) (18,225) (17,044)
Series B Preferred Share distributions (8,075) (8,075) (4,015)
Dividends and unitholder distributions (175,621) (175,490) (176,419)
------------- ------------- -------------
Net cash used in financing activities $ (710,698) $ (91,859) $ (293,325)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 14,239 $ (392) $ 42,159
CASH AND CASH EQUIVALENTS,
Beginning of period 78,052 78,444 36,285
CASH AND CASH EQUIVALENTS,
------------- ------------- -------------
End of period $ 92,291 $ 78,052 $ 78,444
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
67
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
References to "we," "us" or "our" refer to Crescent Real Estate Equities
Company and, unless the context otherwise requires, Crescent Real Estate
Equities Limited Partnership, which we refer to as our Operating Partnership,
and our other direct and indirect subsidiaries. We conduct our business and
operations through the Operating Partnership, our other subsidiaries and our
joint ventures. References to "Crescent" refer to Crescent Real Estate Equities
Company. The sole general partner of the Operating Partnership is Crescent Real
Estate Equities, Ltd., a wholly-owned subsidiary of Crescent Real Estate
Equities Company, which we refer to as the General Partner.
We operate as a real estate investment trust, or REIT, for federal income
tax purposes and provide management, leasing and development services for some
of our properties.
The following table shows our consolidated subsidiaries 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 December 31, 2004.
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties) and Dupont
Centre. These properties are included in our
Office Segment.
Non wholly-owned assets, consolidated - 301
Congress Avenue (50% interest) is included
in our Office Segment. Sonoma Mission Inn
(80.1% interest) is included in our
Resort/Hotel Segment.
Non wholly-owned assets, unconsolidated -
Bank One Center (50% interest), Bank One
Tower (20% interest), Three Westlake Park
(20% interest), Four Westlake Park (20%
interest), Miami Center (40% interest), 5
Houston Center (25% interest), BriarLake
Plaza (30% interest), Five Post Oak Park
(30% interest), Houston Center (23.85%
interest in three office properties and the
Houston Center Shops), The Crescent Atrium
(23.85% interest), The Crescent Office
Towers (23.85% interest), Trammell Crow
Center(1) (23.85% interest), Post Oak
Central (23.85% interest in three Office
Properties), and Fountain Place (23.85%
interest). These properties are included in
our Office Segment. AmeriCold Realty Trust
(31.7% interest in 88 properties), included
in our Temperature-Controlled Logistics
Segment.
Hughes Center Entities(2) Wholly-owned assets - Hughes Center
Properties (seven office properties each in
a separate limited liability company). These
properties are included in our Office
Segment.
Non wholly-owned assets, consolidated - 3770
Hughes Parkway (67% interest), included in
our Office Segment.
Crescent Real Estate Funding Wholly-owned assets - The Aberdeen, The
I, L.P. ("Funding I") Avallon I, II & III, Carter Burgess Plaza,
The Citadel, Regency Plaza One, Waterside
Commons and 125 E. John Carpenter Freeway.
These properties are included in our 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")(3) properties are included in our Office
Segment. Renaissance Houston Hotel is
included in our Resort/Hotel Segment.
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in our Resort/Hotel Segment.
("Funding VI")
Crescent Real Estate Funding Wholly-owned assets - The Addison, Austin
VIII, L.P. ("Funding VIII") Centre, The Avallon V, Chancellor Park, 816
Congress, Greenway I & IA (two office
properties), Greenway II, Johns Manville
Plaza, One Live Oak, Palisades Central I,
Palisades Central II, Peakview Tower,
Stemmons Place, 3333 Lee Parkway, 44 Cook
and 55 Madison. These properties are
included in our Office Segment. The Canyon
Ranch - Tucson, Omni Austin Hotel, and
Ventana Inn & Spa, all of which are included
in our Resort/Hotel Segment.
Crescent Real Estate Funding Wholly-owned assets - Albuquerque Plaza(4),
XII, L.P. ("Funding XII") Barton Oaks Plaza, Briargate Office and
Research Center, MacArthur Center I & II,
Stanford Corporate Center, and Two
Renaissance Square. These properties are
included in our Office Segment. The Park
Hyatt Beaver Creek Resort & Spa is included
in our Resort/Hotel Segment.
Crescent 707 17th Street, Wholly-owned assets - 707 17th Street,
L.L.C included in our Office Segment, and The
Denver Marriott City Center, included in our
Resort/Hotel Segment.
Crescent Alhambra, L.L.C. Wholly-owned asset - Alhambra Plaza (two
Office Properties), included in our Office
Segment.
Crescent Spectrum Center, L.P Non wholly-owned asset, consolidated -
Spectrum Center (approximately 100%
interest), . included in our Office Segment.
68
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Colonnade, L.L.C. Wholly-owned asset - The BAC-Colonnade
Building, included in our Office Segment.
Crescent 1301 McKinney, L.P. Wholly-owned asset - 1301 McKinney Street,
included in our Office Segment.
Mira Vista Development Corp. Non wholly-owned asset, consolidated - Mira
("MVDC") Vista (98% interest), included in our
Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated -
Corp. ("HADC") Falcon Point (98% interest) and Spring Lakes
(98% interest). These properties are
included in our Residential Development
Segment.
Desert Mountain Development Non wholly-owned assets, consolidated -
Corporation ("DMDC") Desert Mountain (93% interest), included in
our Residential Development Segment.
Crescent Resort Development Non wholly-owned assets, consolidated -
Inc.("CRDI") Brownstones (64% interest), Creekside at
Inc. ("CRDI") Riverfront (64% 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), Riverbend (60%
interest), Riverfront Park (64% interest).
These properties are included in our
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. (41.7% interest), included in our
Residential Development Segment.
------------------------------------
(1) We own 23.85% of the economic interest in Trammell Crow Center through our
ownership of a 23.85% interest in the joint venture that holds fee simple
title to the Office 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.
(2) In addition, we own nine retail parcels located in Hughes Center.
(3) 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.
(4) This Office Property was sold in February 2005.
See Note 9, "Investments in Unconsolidated Companies," for a table that
lists our ownership in significant unconsolidated joint ventures and investments
as of December 31, 2004.
See Note 11, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries, all of which are consolidated in our
financial statements and were formed primarily for the purpose of obtaining
secured debt or joint venture financing.
SEGMENTS
Our assets and operations consisted of four investment segments at
December 31, 2004, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, we owned in whole or in part the following
operating real estate assets, which we refer to as the Properties, as of
December 31, 2004:
- OFFICE SEGMENT consisted of 78 office properties, which we refer to
as the Office Properties, located in 29 metropolitan submarkets in
eight states, with an aggregate of approximately 31.6 million net
rentable square feet. Fifty-seven of the Office Properties are
wholly-owned and twenty-one are owned through joint ventures, two of
which are consolidated and nineteen 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 three upscale business-class hotel properties with a total of
1,376 rooms, which we refer to as the Resort/Hotel Properties. Seven
of the Resort/Hotel Properties are wholly-owned and one is owned
through a joint venture that is consolidated.
69
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- RESIDENTIAL DEVELOPMENT SEGMENT consisted of our ownership of common
stock representing interests of 98% to 100% in four residential
development corporations. These Residential Development
Corporations, through partnership arrangements, owned in whole or in
part 23 upscale residential development properties, which we refer
to as the Residential Development Properties.
- THE TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of our 31.7%
interest in AmeriCold Realty Trust, or AmeriCold, a REIT. As of
December 31, 2004, AmeriCold operated 103 facilities, of which 87
were wholly-owned, one was partially-owned and fifteen were managed
for outside owners. The 88 owned facilities, which we refer to as
the Temperature-Controlled Logistics Properties, had an aggregate of
approximately 443.7 million cubic feet (17.6 million square feet) of
warehouse space. AmeriCold also owned two quarries and the related
land. We account for our interest in AmeriCold as an unconsolidated
equity investment.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include all of our
direct and indirect subsidiary entities. The equity interests that we do not own
in those direct and indirect subsidiaries are reflected as minority interests.
All significant intercompany balances and transactions have been eliminated.
Certain amounts in prior period financial statements have been
reclassified to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADOPTION OF NEW ACCOUNTING STANDARDS
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 Statements of Financial Accounting Standards, or 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. We adopted EITF 03-1 effective July 1, 2004 and it had no impact
on our financial condition or results of operations.
SFAS NO. 123R. In December 2004, the FASB issued SFAS No. 123 (Revised
2004), "Share-Based Payment." The new FASB rule requires that the compensation
cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. We will be required to apply SFAS No. 123R as of
the first interim reporting period that begins after June 15, 2005. The scope of
SFAS No. 123R includes a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123R replaces
SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes
Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that statement permitted entities the
option of continuing to apply the guidance in Opinion 25, as long as the
footnotes to the financial statements disclosed what net income would have been
had the preferable fair-value-based method been used. Effective January 1, 2003,
we adopted the fair value expense recognition provisions of SFAS No. 123 on a
prospective basis. Except for the 2004 Unit Plan, we do not believe there will
be a significant impact to our financial condition or results of operations from
the adoption of SFAS No. 123R. We are continuing to evaluate the impact of the
adoption of the SFAS No. 123R as it relates to the 2004 Unit Plan.
70
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS NO. 153. In December 2004, the FASB issued SFAS No. 153, "Exchanges
of Nonmonetary Assets - an amendment of APB Opinion No. 29." The amendments made
by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The
statement eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe there will be an impact to our financial
condition or results of operations from the adoption of SFAS No. 153.
SOP 04-2. In December 2004, the AICPA issued Statement of Position, or
SOP, 04-2, "Accounting for Real Estate Time-Sharing Transactions." This SOP
provides guidance to a seller of real estate time sharing interests and
provides, among other requirements, that uncollectibles be reflected as a
reduction of revenues rather than as bad debt expense. The provisions in the SOP
are effective for financial statements for fiscal years beginning after June 15,
2005. To facilitate the issuance of this standard, the FASB issued SFAS No. 152,
"Accounting for Real Estate Time-Sharing Transactions - An Amendment of FASB
Statements No. 66 and 67," on December 16, 2004 which references the financial
accounting and reporting guidance for real estate time-sharing transactions to
SOP 04-2. We do not believe there will be a significant impact to our financial
condition or results of operations from the adoption of SOP 04-2.
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," or 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" or FIN 46R, which amended FIN 46.
Under FIN 46R, consolidation requirements are effective immediately for new
Variable Interest Entities, or 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 VIE's expected residual
returns or both.
The adoption of FIN 46R did not have a significant impact on our 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, we have consolidated GDW LLC, a subsidiary of DMDC, as of
December 31, 2003 and Elijah Fulcrum Fund Partners, L.P., which we refer to as
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 entities that offer the potential for substantial
capital appreciation. While it was determined that one of our 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., which we refer
to as the Canyon Ranch Entities, are VIEs under FIN 46R, we are not the primary
beneficiary and are not required to consolidate these entities under other
Generally Accepted Accounting Principles, or GAAP. Our maximum exposure to loss
is limited to our equity investment of approximately $57.8 million in Main
Street Partners, L.P. and $5.1 million in the Canyon Ranch Entities at December
31, 2004.
During 2004, we 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 allowed us to
pursue favorable tax treatment on other properties sold by us within this
period. During the 180-day periods, which ended on August 28, 2004, November 6,
2004, and February 2, 2005, respectively, the third party intermediary was the
legal owner of the properties, although we controlled the properties, retained
all of the economic benefits and risks associated with these properties and
71
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indemnified the third party intermediary and, therefore, we fully consolidated
these properties. We took legal ownership of the properties no later than the
expiration of the respective 180-day periods.
ACQUISITION OF OPERATING PROPERTIES. We allocate 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."
We initially record the allocation based on a preliminary purchase price
allocation with adjustments recorded within one year of the acquisition.
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 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. We perform this analysis on a lease by lease basis. The
capitalized above-market lease values are amortized as a reduction to rental
income over the remaining non-cancelable terms of the respective leases. The
capitalized below-market lease values are amortized as an increase to rental
income over the initial term plus the term of the below-market fixed rate
renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired at
the property at acquisition based on current market conditions. These costs are
recorded based on the present value of the amortized in-place leasing costs on a
lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and our overall relationship with that respective customer. Characteristics
considered by management in allocating these values include the nature and
extent of our 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.
72
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INVESTMENTS IN REAL ESTATE. Real estate, for operating properties, is
carried at cost, net of accumulated depreciation. Betterments, major
renovations, and certain costs directly related to the acquisition, improvements
and leasing of real estate are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, as
follows:
Buildings and Improvements 5 to 46 years
Tenant Improvements Terms of leases, which approximates the
useful life of the asset
Furniture, Fixtures and Equipment 3 to 5 years
Real Estate also includes land and capitalized project costs associated
with the acquisition and the development of land, construction of residential
units, amenities and facilities, interest and loan origination costs on land
under development, and certain general and administrative expenses to the extent
they benefit the development of land. We adhere to the accounting and reporting
standards under SFAS No. 67, "Accounting for Costs and Initial Rental Operations
of Real Estate Projects" for costs associated with the acquisition, development,
construction and sale of real estate projects. In addition, we capitalize
interest costs as a part of the historical cost of acquiring certain assets that
qualify for capitalization under SFAS No. 34, "Capitalization of Interest Cost."
Our assets that qualify for accounting treatment under this pronouncement must
require a period of time to prepare for their intended use, such as our land
development project assets that are intended for sale or lease and constructed
as discrete projects. In accordance with the authoritative guidance, the
interest cost capitalized by us is the interest cost recognized on borrowings
and other obligations. The amount capitalized is an allocation of the interest
cost incurred during the period required to complete the asset. The interest
rate for capitalization purposes is based on the rates of our outstanding
borrowings.
An impairment loss is recognized on a property by property basis on
Properties classified as held for use, when expected undiscounted cash flows are
less than the carrying value of the property. In cases where we do not expect to
recover our carrying costs on a Property, we reduce its carrying costs to fair
value, and for Properties held for disposition, we reduce its carrying costs to
the fair value less estimated selling costs. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we record
assets held for disposition at the lower of carrying value or sales price less
costs to sell. Depreciation expense is not recognized on Properties classified
as held for disposition.
CONCENTRATION OF REAL ESTATE INVESTMENTS. Our Office Properties are
located primarily in the Dallas and Houston, Texas, metropolitan areas. As of
December 31, 2004, our Office Properties in Dallas and Houston represented an
aggregate of approximately 69% of our office portfolio based on total net
rentable square feet. As a result of this geographic concentration, our
operations could be adversely affected by a recession or general economic
downturn in the areas where these Properties are located.
CASH AND CASH EQUIVALENTS. We consider all highly liquid investments with
an original maturity of 90 days or less to be cash and cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS. Restricted cash includes escrows
established pursuant to certain mortgage financing arrangements for real estate
taxes, insurance, security deposits, ground lease expenditures, capital
expenditures and capital requirements related to cash flow hedges.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are carried at
outstanding principal and are reduced by an allowance for amounts that may
become uncollectible in the future. Our accounts receivable balance consists of
rents and operating cost recoveries due from office tenants, receivables
associated with club memberships at our Residential Development Properties and
guest receivables at our Resort/Hotel Properties. We also maintain an allowance
for deferred rent receivables, which arise from the straight-lining of rents as
necessary. The allowance for doubtful accounts is reviewed at least quarterly
for adequacy by reviewing such factors as the credit quality of our tenants or
members, any delinquency in payment, historical trends and current economic
conditions. If our assumptions regarding the collectibility of accounts
receivable prove incorrect, we could experience write-offs in excess of the
allowance for doubtful accounts, which would result in a decrease in our
earnings.
73
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS IN UNCONSOLIDATED COMPANIES. Investments in unconsolidated
joint ventures and companies are recorded initially at cost and subsequently
adjusted for equity in earnings and cash contributions and distributions. We
also recognize an impairment loss on an investment by investment basis when the
fair value of an investment experiences a non-temporary decline below the
carrying value. See Note 9, "Investment in Unconsolidated Companies" for a table
that lists our ownership in significant unconsolidated joint ventures and
investments as of December 31, 2004.
Upon the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002, AmeriCold compared the fair value of Temperature-Controlled
Logistics Properties based on discounted cash flows to the carrying value of
Temperature-Controlled Logistics Properties and the related goodwill. Based on
this test, the fair value did not exceed its carrying value, and the second step
of the impairment test was performed to measure the impairment loss. The second
step compared the implied fair value of goodwill with the carrying amounts of
goodwill which exceeded the fair value on January 1, 2002. As a result, we
recognized a goodwill impairment charge of approximately $9.2 million, net of
minority interest, due to the initial application of this statement. This charge
was reported as a change in accounting principle and is included in our
Consolidated Statements of Operations as a "Cumulative effect of a change in
accounting principle" for the year ended December 31, 2002.
OTHER ASSETS. Other assets consist principally of leasing costs, deferred
financing costs, intangible assets and marketable securities. Leasing costs are
amortized on a straight-line basis during the terms of the respective leases,
and unamortized leasing costs are written off upon early termination of lease
agreements. Deferred financing costs are amortized on a straight-line basis
(when it approximates the effective interest method) over the shorter of the
expected lives or the terms of the respective loans. The effective interest
method is used to amortize deferred financing costs on loans where the
straight-line basis does not approximate the effective interest method, over the
terms of the respective loans.
Intangible assets, which include memberships, trademarks, water rights and
net intangible leases created by SFAS No. 141, "Business Combinations," are
amortized and reviewed annually for impairment. Upon the formation of Desert
Mountain Properties, L.P. in August 1997, the partnership allocated a portion of
the fair value of its assets of Desert Mountain to the remaining club
memberships and recorded the amount as an intangible asset. Upon the conveyance
of a pipeline from Desert Mountain to the local government, we reclassified the
fair value of the water pipeline from land improvements into an intangible
asset, or water rights.
Marketable securities are considered either available-for-sale, trading or
held-to-maturity, in accordance with SFAS No. 115. Realized gains or losses on
sale of securities are recorded based on specific identification.
Available-for-sale securities are marked to market value on a monthly basis with
the corresponding unrealized gains and losses included in accumulated other
comprehensive income. Trading securities are marked to market on a monthly basis
with the unrealized gains and losses included in earnings. Held-to-maturity
securities are carried at amortized cost. Held-to-maturity securities consists
of U.S. Treasury and government sponsored agency securities purchased
in-substance to defease debt, and are included in the "Defeasance investments"
line. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and cash
equivalents, restricted cash and cash equivalents, short-term investments,
accounts receivable, deferred rent receivable, notes receivable, other assets,
accounts payable and other liabilities are reasonable estimates of their fair
values. The fair value of our defeasance investments was approximately $173.7
million as of December 31, 2004. The fair value of our notes payable is most
sensitive to fluctuations in interest rates. Since our $599.7 million in
variable rate debt changes with these changes in interest rates, it also
approximates the fair market value of the underlying debt. We reduce the
variability in future cash flows by maintaining a sizable portion of debt with
fixed payment characteristics. Although the cash flow to or from us does not
change, the fair value of the $1.6 billion in fixed rate debt, based upon
current interest rates for similar debt instruments with similar payment terms
and expected payoff dates, would be approximately $1.7 billion as of December
31, 2004. Disclosure about fair value of financial instruments is based on
pertinent information available to management as of December 31, 2004.
74
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Our objective in using derivatives is to add stability to interest expense and
to manage our exposure to interest rate movements or other identified risks.
Derivative financial instruments are used to convert a portion of our variable
rate debt to fixed rate debt and to manage our fixed to variable rate debt
ratio.
To accomplish this objective, we primarily use interest rate swaps as part
of our cash flow hedging strategy. Interest rate swaps designated as cash flow
hedges are entered into to achieve a fixed interest rate on variable rate debt.
We measure our derivative instruments and hedging activities at fair value
and record them as an asset or liability, depending on our rights or obligations
under the applicable derivative contract. For derivatives designated as fair
value hedges, the changes in the fair value of both the derivative instrument
and the hedged items are recorded in earnings. Derivatives used to hedge the
exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. For derivatives
designated as cash flow hedges, the effective portions of changes in fair value
of the derivative are reported in other comprehensive income and are
subsequently reclassified into earnings when the hedged item affects earnings.
Changes in fair value of derivative instruments not designated as hedges and
ineffective portions of hedges are recognized in earnings in the affected
period. We assess the effectiveness of each hedging relationship by comparing
the changes in fair value or cash flows of the derivative hedging instrument
with the changes in fair value or cash flows of the designated hedged item or
transaction.
As of December 31, 2004, no derivatives were designated as fair value
hedges or hedges of net investments in foreign operations. We do not use
derivatives for trading or speculative purposes.
At December 31, 2004, derivatives with a negative fair value of $2.0
million were included in "Accounts payable, accrued expenses and other
liabilities." The change in net unrealized gains of $11.8 million in 2004 for
derivatives designated as cash flow hedges is separately disclosed in the
Consolidated Statements of Shareholders' Equity.
Amounts reported in accumulated other comprehensive income related to
derivatives will be reclassified to interest expense as interest payments are
made on our variable rate debt. The change in net unrealized gains/losses on
cash flow hedges reflects the recognition of $10.1 million of net unrealized
losses from other comprehensive income to interest expense during 2004. We
estimate that during 2005 an additional $2.0 million of unrealized losses will
be recognized as interest expense.
GAIN RECOGNITION ON SALE OF REAL ESTATE ASSETS. We perform 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 us 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 our receivables, if any, related to the sale are collectible and
are subject to subordination, and the degree of our continuing involvement with
the real estate asset after the sale. If full gain recognition is not
appropriate, we account for the sale under an appropriate deferral method.
REVENUE RECOGNITION - OFFICE PROPERTIES. As a lessor, we have retained
substantially all of the risks and benefits of ownership of the Office
Properties and account for our leases as operating leases. Income on leases,
which includes scheduled increases in rental rates during the lease term and/or
abated rent payments for various periods following the tenant's lease
commencement date, is recognized on a straight-line basis. Deferred rent
receivable represents the excess of rental revenue recognized on a straight-line
basis over cash received pursuant to the applicable lease provisions. Office
Property leases generally provide for the reimbursement of annual increases in
operating expenses above base year operating expenses ("excess operating
expenses"), payable to us in equal installments throughout the year based on
estimated increases. Any differences between the estimated increase and actual
amounts incurred are adjusted at year end.
75
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION - RESORT/HOTEL PROPERTIES. On February 14, 2002, we
executed an agreement with Crescent Operating, Inc., or COPI, pursuant to which
COPI transferred to subsidiaries of ours, in lieu of foreclosure, COPI's lessee
interests in the eight Resort/Hotel Properties previously leased to COPI. See
Note 21, "COPI." For all of the Resort/Hotel Properties, except the Omni Austin
Hotel, during the period from February 14, 2002 to December 31, 2004, we
recognized revenues for room sales and guest nights and revenues from guest
services whenever rooms were occupied and services had been rendered. Lease
revenue is recognized for the Omni Austin Hotel. Prior to February 14, 2002, we
recognized base rental income from leases on the properties on a straight-line
basis over the terms of the respective leases.
REVENUE RECOGNITION - RESIDENTIAL DEVELOPMENT PROPERTIES. We use the
accrual method to recognize revenue from the sale of Residential Development
Properties when a third-party buyer has made an adequate cash down payment and
has attained the attributes of ownership. 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 we receive
an inadequate cash down payment and take 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 sales 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 our 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.
At our golf clubs, members are expected to pay an advance initiation fee
or refundable deposit upon their acceptance as a member to the club. These
initiation fees and deposits vary in amount based on a variety of factors such
as the supply and demand for our services in each particular market, number of
golf courses and breadth of amenities available to the members, and the prestige
of having the right to membership of the club. A significant portion of our
initiation fees are deferred equity memberships which are recorded as deferred
revenue when sold and recognized as membership fee revenue on a straight-line
basis over the number of months remaining until the turnover date of the club to
the members. Refundable deposits relate to the non-equity membership portion of
each membership sold which will be refunded upon resignation by the member and
upon reissuance of the membership, or at the termination of the membership as
provided by the membership agreement. The refundable deposit is not recorded as
revenue but rather as a liability due to the refundable nature of the deposit.
The deferred revenue and refundable deposits, net of related deferred expenses,
are presented in our Consolidated Balance Sheets in Accounts payable, accrued
expenses, and other liabilities.
INCOME TAXES. We have elected to be taxed as a REIT under Sections 856
through 860 of the U.S. Internal Revenue Code of 1986, as amended, or the Code,
and operate in a manner intended to enable us to continue to qualify as a REIT.
As a REIT, we generally will not be subject to corporate federal income tax on
net income that we currently distribute to our shareholders, provided that we
satisfy certain organizational and operational requirements including the
requirement to distribute at least 90% of our REIT taxable income to our
shareholders each year. Accordingly, we do not believe we will be liable for
federal income taxes on our REIT taxable income or state income taxes in most of
the states in which we operate.
We have elected to treat certain of our corporate subsidiaries as
taxable REIT subsidiaries, each of which we refer to as a TRS. In general, a TRS
may perform additional services for tenants and generally may engage in any real
estate or non-real estate business (except for the operation or management of
health care facilities or lodging facilities or the provision to any person,
under a franchise, license or otherwise, of rights to any brand name under which
any lodging facility or health care facility is operated). A TRS is subject to
corporate federal income tax, state and local taxes.
76
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION. Effective January 1, 2003, we adopted the fair
value expense recognition provisions of SFAS No. 123 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 year ended December 31, 2004, we granted stock options and recognized
compensation expense that was not significant to our results of operations. With
respect to our stock options which were granted prior to 2003, we accounted for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25, and related Interpretations. Had compensation cost been
determined based on the fair value at the grant dates for awards under the Plans
consistent with SFAS No. 123, our net income (loss) and earnings (loss) per
share would have been reduced to the following pro forma amounts:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
(in thousands, except per share amounts) 2004 2003 2002
---------------------------------------- ----------- -------- ----------
Net income (loss) available to common shareholders, as reported $ 141,138 $ (278) $ 65,959
Add: Stock-based employee compensation expense included in
reported net income 2,340 1,188 -
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of minority interest (4,270) (2,916) (4,318)
----------- -------- ----------
Pro forma net income (loss) available to common shareholders $ 139,208 $ (2,006) $ 61,641
Earnings (loss) per share:
Basic - as reported $ 1.43 $ - $ 0.63
Basic - pro forma $ 1.41 $ (0.02) $ 0.60
Diluted - as reported $ 1.42 $ - $ 0.63
Diluted - pro forma $ 1.40 $ (0.02) $ 0.59
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," or EPS, specifies
the computation, presentation and disclosure requirements for earnings per
share.
Basic EPS is computed by dividing net income available to common
shareholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
into common shares, where such exercise or conversion would result in a lower
EPS amount. We present both basic and diluted earnings per share.
77
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a reconciliation for the years ended December
31, 2004, 2003 and 2002 of basic and diluted earnings per share from "Income
before discontinued operations and cumulative effect of a change in accounting
principle" to "Net income (loss) available to common shareholders." The table
also includes weighted average shares on a basic and diluted basis.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------ --------------------------
Wtd. Per Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount (Loss) Shares Amount
----------------------------------------- ------------ ------ -------- -------- ------ ------ -------- ------- -------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 165,004 99,025 $ 28,448 98,886 $ 63,079 103,528
Series A Preferred Share distributions (23,723) (18,225) (16,702)
Series B Preferred Share distributions (8,075) (8,075) (5,047)
------------ ------ -------- -------- ------ ------ -------- ------- -------
Income available to common shareholders
before discontinued operations and
cumulative effect of a change in
accounting principle $ 133,206 99,025 $ 1.35 $ 2,148 98,886 $ 0.03 $ 41,330 103,528 $ 0.39
Income from discontinued operations,
net of minority interests 10,221 0.10 12,339 0.12 27,527 0.27
Impairment charges related to real
estate assets from discontinued
operations, net of minority interests (2,978) (0.03) (25,052) (0.25) (4,123) (0.04)
Gain on real estate from discontinued
operations, net of minority interests 1,052 0.01 10,287 0.10 10,397 0.10
Cumulative effect of a change in
accounting principle, net of
minority interests (363) - - - (9,172) (0.09)
------------ ------ -------- -------- ------ ------ -------- ------- -------
Net income (loss) available to common
shareholders $ 141,138 99,025 $ 1.43 $ (278) 98,886 $ - $ 65,959 103,528 $ 0.63
============ ====== ======== ======== ====== ====== ======== ======= =======
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------ --------------------------
Wtd. Per Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount (Loss) Shares Amount
----------------------------------------- ------------ ------ -------- -------- ------ ------ -------- ------- -------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 165,004 99,025 $ 28,448 98,886 $ 63,079 103,528
Series A Preferred Share distributions (23,723) (18,225) (16,702)
Series B Preferred Share distributions (8,075) (8,075) (5,047)
Effect of dilutive securities
Additional common shares relating to:
Share and unit options 219 42 203
------------------------------ ------------------------ --------------------------
Income available to common shareholders
before discontinued operations and
cumulative effect of a change in
accounting principle $ 133,206 99,244 $ 1.34 $ 2,148 98,928 $0 .03 $ 41,330 103,731 $ 0.39
Income from discontinued operations,
net of minority interests 10,221 0.10 12,339 0.12 27,527 0.27
Impairment charges related to real
estate assets from discontinued
operations, net of minority interests (2,978) (0.03) (25,052) (0.25) (4,123) (0.04)
Gain on real estate from discontinued
operations, net of minority interests 1,052 0.01 10,287 0.10 10,397 0.10
Cumulative effect of a change in
accounting principle, net of minority
interests (363) - - - (9,172) (0.09)
------------ ------ -------- -------- ------ ------ -------- ------- -------
Net income (loss) available to common
shareholders $ 141,138 99,244 $ 1.42 $ (278) 98,928 $ - $ 65,959 103,731 $ 0.63
============ ====== ======== ======== ====== ====== ======== ======= =======
The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares or the convertible Operating Partnership units are not included
in the computation of Diluted EPS for the years ended December 31, 2004, 2003
and 2002, since the effect of the conversions are antidilutive.
78
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: ---------------------------------------
(in thousands) 2004 2003 2002
--------------------------------------------------------------- --------- --------- ---------
Interest paid on debt $ 171,520 $ 153,916 $ 146,150
Interest capitalized - Office - - 317
Interest capitalized - Resort/Hotel 294 34 -
Interest capitalized - Residential Development 15,556 18,233 16,667
Additional interest paid in conjunction with cash flow hedges 8,713 19,278 24,125
--------- --------- ---------
Total interest paid $ 196,083 $ 191,461 $ 187,259
========= ========= =========
Cash paid (received) for income taxes $ 8,364 $ (7,215) $ 10,200
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:
Assumption of debt in conjunction with acquisitions
of Office Property $ 139,807 $ 48,713 $ -
Financed sale of land parcel 4,878 11,800 7,520
Financed purchase of land parcel 7,500 - -
SUPPLEMENTAL SCHEDULE OF 2004 CONSOLIDATION OF ELIJAH, 2003
CONSOLIDATIONS OF DBL, MVDC, HADC AND GDW AND THE 2002
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES PURSUANT TO THE
FEBRUARY 14, 2002 AGREEMENT WITH COPI:
Net investment in real estate $ - $ (40,178) $(570,175)
Restricted cash and cash equivalents - - (3,968)
Accounts receivable, net (848) (3,067) (23,338)
Investments in unconsolidated companies (2,478) 33,123 309,103
Notes receivable, net 4,363 (25) 29,816
Income tax asset - current and deferred, net (274) (3,564) (21,784)
Other assets, net - (820) (63,263)
Notes payable - 312 129,157
Accounts payable, accrued expenses and other liabilities - 14,047 201,159
Minority interest - consolidated real estate partnerships (140) 11,746 51,519
Other comprehensive income, net of tax 139 - -
Cumulative effect of a change in accounting principle (428) - -
--------- --------- ---------
Increase in cash $ 334 $ 11,574 $ 38,226
========= ========= =========
3. SEGMENT REPORTING
For purposes of segment reporting as defined in SFAS No. 131, we have 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.
We use funds from operations, or 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,
or 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.
We calculate FFO available to common shareholders - diluted - NAREIT
definition in the same manner, except that Net Income (Loss) is replaced by Net
Income (Loss) Available to Common Shareholders and we include the effect of
Operating Partnership unitholder minority interests.
79
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. We consider FFO available to
common shareholders - diluted - NAREIT definition and FFO appropriate measures
of performance for an equity REIT and for its investment segments. However, FFO
available to common shareholders - diluted - NAREIT definition and FFO should
not be considered as alternatives to net income determined in accordance with
GAAP as an indication of our operating performance.
Our measures of FFO available to common shareholders - diluted - NAREIT
definition and FFO may not be comparable to similarly titled measures of other
REITs if those REITs apply the definition of FFO in a different manner than we
apply it. We calculate Adjusted FFO available to common shareholders - diluted
by excluding the effect of impairment charges related to real estate assets and
the effect of extinguishment of debt expense related to real estate asset sales.
Selected financial information related to each segment for the three years
ended December 31, 2004, 2003, and 2002, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of the segments at December 31, 2004 and 2003, are presented in the following
tables:
FOR THE YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER(3) TOTAL
------------------------------------------- ---------- ------------ ----------- ------------ ------------ ---------
Total Property revenue $ 484,049 $ 183,515 $ 311,197 $ - $ - $ 978,761
Total Property expense 234,359 155,812 271,819 - - 661,990
---------- ------------ ----------- ------------ ------------ ---------
Income from Property Operations $ 249,690 $ 27,703 $ 39,378 $ - $ - $ 316,771
Total other income (expense) 147,501 (23,867) (17,826) 6,153(4) (239,454) (127,493)
Minority interests and income taxes (1,788) 8,165 (703) - (29,948) (24,274)
Discontinued operations - income, gain
on real estate and impairment charges
related to real estate assets, net of
minority interests (2,522) 13,411 (95) - (2,499) 8,295
Cumulative effect of a change in
accounting principle, net of minority
interests - - - - (363) (363)
---------- ------------ ----------- ------------ ------------ ---------
Net income (loss) $ 392,881 $ 25,412 $ 20,754 $ 6,153 $ (272,264) $ 172,936
---------- ------------ ----------- ------------ ------------ ---------
Depreciation and amortization of real
estate assets $ 124,858 $ 23,775 $ 8,078 $ - $ 55 $ 156,766
(Gain) loss on property sales, net (263,363) (4,209) 115 - 404 (267,053)
Extinguishment of debt related to real
estate assets - - - - 39,121 39,121
Impairment charges related to real
estate assets 2,852 - 2,497 - 659 6,008
Adjustments for investment in
unconsolidated companies 11,601 - (228) 24,873(5) - 36,246
Unitholder minority interest - - - - 30,950 30,950
Series A Preferred share distributions - - - - (23,723) (23,723)
Series B Preferred share distributions - - - - (8,075) (8,075)
---------- ------------ ----------- ------------ ------------ ---------
Adjustments to reconcile net income
(loss) to funds from operations available
to common shareholders - diluted $ (124,052) $ 19,566 $ 10,462 $ 24,873 $ 39,391 $ (29,760)
---------- ------------ ----------- ------------ ------------ ---------
Adjusted funds from operations
available to common shareholders -
diluted $ 268,829 $ 44,978 $ 31,216 $ 31,026 $ (232,873) $ 143,176
Impairment charges related to real
estate assets (2,852) - (2,497) (2,324) (659) (8,332)
Extinguishment of debt related to
real estate asset sales - - - - (39,121) (39,121)
---------- ------------ ----------- ------------ ------------ ---------
Funds from operations available to
common shareholders - diluted -
NAREIT definition $ 265,977 $ 44,978 $ 28,719 $ 28,702 $ (272,653) $ 95,723
========== ============ =========== ============ ============ =========
See footnotes to the following table.
80
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER(3) TOTAL
----------------------------------------- ---------- ------------ ----------- ------------ ------------ ---------
Total Property revenue $ 475,944 $ 174,059 $ 221,713 $ - $ - $ 871,716
Total Property expense 227,416 142,869 197,491 - - 567,776
---------- ------------ ----------- ------------ ------------ ---------
Income from Property Operations $ 248,528 $ 31,190 $ 24,222 $ - $ - $ 303,940
Total other income (expense) (104,555) (13,371) 91,718 2,172 (217,962) (241,998)
Minority interests and income taxes (344) 5,730 (36,050) - (2,830) (33,494)
Discontinued operations - income, gain
on real estate and impairment charges
related to real estate assets, net of
minority interests (4,057) 6,452 (839) - (3,982) (2,426)
---------- ------------ ----------- ------------ ------------ ---------
Net income (loss) $ 139,572 $ 30,001 $ 79,051 $ 2,172 $ (224,774) $ 26,022\
---------- ------------ ----------- ------------ ------------ ---------
Depreciation and amortization of real
estate assets $ 122,302 $ 23,666 $ 4,820 $ - $ - $ 150,788
(Gain) loss on property sales, net (9,390) - - - 471 (8,919)
Impairment charges related to real
estate assets 24,100 - 683 - 13,011 37,794
Adjustments for investment in
unconsolidated companies 6,254 (2,544) 3,573 21,136 206 28,625
Unitholder minority interest - - - - 4,546 4,546
Series A Preferred share distributions - - - - (18,225) (18,225)
Series B Preferred share distributions - - - (8,075) (8,075)
---------- ------------ ----------- ------------ ------------ ---------
Adjustments to reconcile net income
(loss) to funds from operations
available to common shareholders $ 143,266 $ 21,122 $ 9,076 $ 21,136 $ (8,066) $ 186,534
---------- ------------ ----------- ------------ ------------ ---------
Adjusted funds from operations
available to common shareholders -
diluted $ 282,838 $ 51,123 $ 88,127 $ 23,308 $ (232,840) $ 212,556
Impairment charges related to real
estate assets (24,100) - (683) - (13,011) (37,794)
---------- ------------ ----------- ------------ ------------ ---------
Funds from operations available to
common shareholders - diluted -
NAREIT definition $ 258,738 $ 51,123 $ 87,444 $ 23,308 $ (245,851) $ 174,762
========== ============ =========== ============ ============ =========
See footnotes to the following table.
FOR THE YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
SELECTED FINANCIAL INFORMATION: OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER(3) TOTAL
----------------------------------------- ---------- ------------ ----------- ------------ ------------ ---------
Total Property revenue $ 517,124 $ 157,145 $ 258,747 $ - $ - $ 933,016
Total Property expense 230,607 124,695 236,862 - - 592,164
---------- ------------ ----------- ------------ ------------ ---------
Income from Property Operations $ 286,517 $ 32,450 $ 21,885 $ - $ - $ 340,852
Total other income (expense) (56,158) (23,735) 31,860 (2,933) (211,788) (262,754)
Minority interests and income taxes (992) 12,292 (12,260) - (14,059) (15,019)
Discontinued operations - income, gain
on real estate and impairment charges
related to real estate assets, net of
minority interests 34,923 7,413 (459) - (8,076) 33,801
Cumulative effect of a change in
accounting principle, net of minority
interests - - - (9,172) (9,172)
---------- ------------ ----------- ------------ ------------ ---------
Net income (loss) $ 264,290 $ 28,420 $ 41,026 $ (12,105) $ (233,923) $ 87,708
---------- ------------ ----------- ------------ ------------ ---------
Depreciation and amortization of real
estate assets $ 110,260 $ 22,198 $ 4,001 $ - $ - $ 136,459
(Gain) loss on property sales, net (31,459) 3,311 - - 47 (28,101)
Cumulative effect of a change in
accounting principle - - - 9,172 - 9,172
Impairment charges related to real
estate assets - 2,569 1,448 - 12,877 16,894
Adjustments for investment in
unconsolidated companies (10,192) 195 4,529 23,933 6,213 24,678
Unitholder minority interest - - - - 13,117 13,117
Series A Preferred share distributions - - - - (16,702) (16,702)
Series B Preferred share distributions - - - - (5,047) (5,047)
---------- ------------ ----------- ------------ ------------ ---------
Adjustments to reconcile net income
(loss) to funds from operations
available to common shareholders $ 68,609 $ 28,273 $ 9,978 $ 33,105 $ 10,505 $ 150,470
---------- ------------ ----------- ------------ ------------ ---------
Adjusted funds from operations
available to common shareholders -
diluted $ 332,899 $ 56,693 $ 51,004 $ 21,000 $ (223,418) $ 238,178
Impairment charges related to real
estate assets - (2,569) (1,448) - (12,877) (16,894)
---------- ------------ ----------- ------------ ------------ ---------
Funds from operations available to
common shareholders - diluted -
NAREIT definition $ 332,899 $ 54,124 $ 49,556 21,000 $ (236,295) $ 221,284
========== ============ =========== ============ ============ =========
See footnotes to the following table.
81
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMPERATURE-
RESORT/ RESIDENTIAL CONTROLLED CORPORATE
OFFICE HOTEL DEVELOPMENT LOGISTICS AND
(in millions) SEGMENT SEGMENT SEGMENT (6) SEGMENT OTHER TOTAL
----------------------------------- ------- ------- ----------- ------------ --------- -------
TOTAL ASSETS BY SEGMENT: (7)
Balance at December 31, 2004(8) $ 2,142 $ 469 $ 821 $ 180 $ 426 (9) $ 4,038
Balance at December 31, 2003 2,503 468 707 300 336 4,314
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at December 31, 2004 (942) (111) (84) - (1,015) (10) (2,152)
Balance at December 31, 2003 (1,459) (138) (88) - (874) (10) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at December 31, 2004 (108) (47) (196) (2) (70) (422)
Balance at December 31, 2003 (120) (27) (109) - (122) (378)
MINORITY INTERESTS:
Balance at December 31, 2004 (9) (7) (34) - (113) (163)
Balance at December 31, 2003 (9) (7) (31) - (109) (156)
---------------------------------------
(1) The property revenue includes lease termination fees (net of the write-off
of deferred rent receivables) of approximately $9.0 million, $9.7 million,
and $16.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
(2) We sold our 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) Includes the net gain of approximately $12.3 million from the sale of a
20.7% interest in AmeriCold to The Yucaipa Companies.
(5) Excludes impairment charges related to real estate assets of $2.3 million
for the year ended 2004.
(6) Our net book value for the Residential Development Segment includes total
assets, consolidated property level financing, consolidated other
liabilities and minority interest totaling $507 million at December 31,
2004. The primary components of net book value are $351 million for CRDI,
consisting of Tahoe Mountain Resort properties of $230 million, Denver
development properties of $45 million and Colorado Mountain development
properties of $76 million, $113 million for Desert Mountain and $43
million for other land development properties.
(7) Total assets by segment are inclusive of investments in unconsolidated
companies.
(8) Non-income producing land held for investment or development of $67.5
million by segment is as follows: Corporate $60.5 million and Resort/Hotel
$7.0 million.
(9) Includes U.S. Treasury and government sponsored agency securities of
$175.9 million.
(10) Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
Loan, the $7.5 million Rouse Company Note, the $157.5 million Funding II
defeased debt and $7.7 million of Canyon Ranch-Lenox defeased debt.
82
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS
ASSET ACQUISITIONS
The following table summarizes the office acquisitions that we made during the
years ended December 31, 2004 and 2003:
(in millions) PURCHASE
DATE PROPERTY LOCATION PRICE
----------------- ---------------------------------------------------------- ---------------------- ---------------
2004
Jan - May 2004 Hughes Center - Six Class A Office Properties, Seven
Retail Parcels and 12.85 acres undeveloped land Las Vegas, Nevada $ 203.6 (1)(2)
March 31, 2004 Dupont Centre - Class A Office Property Irvine, California 54.3 (3)
August 6, 2004 The Alhambra - Two Class A Office Properties Miami, Florida 72.3 (4)
December 15, 2004 One Live Oak - Class A Office Property Atlanta, Georgia 31.0 (5)
December 21, 2004 1301 McKinney St. - Class A Office Property Houston, Texas 101.0 (6)
December 29, 2004 Peakview Tower - Class A Office Property Denver, Colorado 47.5 (5)
2003
August 26, 2003 The Colonnade - Class A Office Property Miami, Florida 51.4 (7)
December 31, 2003 Hughes Center - Two Class A Office Properties & Two Retail
Parcels Las Vegas, Nevada 38.9 (8)
-----------------------
(1) The acquisition of the Office Properties was funded by the assumption of
$85.4 million in mortgage loans and a portion of proceeds from the 2003
sale of the Woodlands entities. One of the Office Properties is owned
through a joint venture in which we own a 67% interest. The remaining
Office Properties are wholly-owned.
(2) The acquisition of two tracts of undeveloped land was funded by a $7.5
million loan from the Rouse Company and a draw on our credit facility. The
properties are wholly-owned.
(3) The acquisition was funded by a draw on our credit facility. We
subsequently placed a $35.5 million non-recourse first mortgage loan on
the Property. The property is wholly-owned.
(4) The acquisition was funded by the assumption of a $45.0 million loan from
Wachovia Securities and a draw on our credit facility. The properties are
wholly-owned.
(5) The acquisition was funded by a draw on our credit facility. The property
is wholly-owned.
(6) The acquisition was funded by a $70.0 million loan from Morgan Stanley
Mortgage Capital Inc., and a draw on our credit facility. The property is
wholly-owned.
(7) The acquisition was funded by the assumption of a $38.0 million loan from
Bank of America and a draw on our credit facility. The property is
wholly-owned.
(8) The acquisition was funded by the assumption of a $9.6 million mortgage
loan from The Northwestern Mutual Life Insurance Co. and a portion of the
proceeds from the sale of our interests in the Woodlands entities.
OTHER REAL ESTATE INVESTMENTS
On November 9, 2004, we completed a $22.0 million mezzanine loan
secured by ownership interests in an entity that owns an office property in Los
Angeles, California. The loan bears interest at LIBOR plus 925 basis points
(11.65% at December 31, 2004) with an interest-only term until maturity in
November 2006, subject to the right of the borrower to extend the loan pursuant
to four six-month extension options.
83
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, the results of operations of the
assets sold or held for sale have been presented as "Income from discontinued
operations, net of minority interests," gain or loss on the assets sold or held
for sale have been presented as "Gain on real estate from discontinued
operations, net of minority interests" and impairments on the assets sold or
held for sale have been presented as "Impairment charges related to real estate
assets from discontinued operations, net of minority interests" in the
accompanying Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002. Minority interests for wholly-owned properties
represent unitholders' share of related income, gains, losses and impairments.
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
December 31, 2004 and December 31, 2003. We consider a property as held for sale
when we have entered into a sales contract which is subject to customary closing
conditions.
ASSETS SOLD
OFFICE SEGMENT
The following table presents the sales of consolidated Office
Properties for the years ended December 31, 2004, 2003 and 2002:
NET
(in millions) NET GAIN
DATE PROPERTY LOCATION PROCEEDS IMPAIRMENT (LOSS)
------------------ ------------------------------------ --------------- ---------- ---------- ------
2004
March 23, 2004 1800 West Loop South Office Property Houston, Texas $ 28.2 (1) $ 13.9 (2) $ 0.2
April 13, 2004 Liberty Plaza Office Property Dallas, Texas 10.8 (1) 3.6 (2) (0.2)
June 17, 2004 Ptarmigan Place Office Property Denver, Colorado 25.3 (3) 0.5 (4) (2.0)
June 29, 2004 Addison Tower Office Property Dallas, Texas 8.8 (1) - 0.2
July 2, 2004 5050 Quorum Office Property Dallas, Texas 8.9 (1) 0.8 (4) (0.1)
July 29, 2004 12404 Park Central Office Property Dallas, Texas 9.3 (3) 4.0 (5) -
2003
December 15, 2003 Las Colinas Plaza Dallas, Texas 20.6 - 14.5
December 31, 2003 Woodlands Office Properties Houston, Texas(6) 15.0 - (2.3)
2002
January 18, 2002 Cedar Springs Plaza Dallas, Texas 12.0 - 4.5
May 29, 2002 Woodlands Office Properties Houston, Texas(7) 3.2 - 1.9
August 1, 2002 6225 North 24th Street Phoenix, Arizona 8.8 - 1.3
September 20, 2002 Reverchon Plaza Dallas, Texas 29.2 - 0.5
December 31, 2002 Woodlands Office Properties Houston, Texas(7) 4.8 (8) - 3.6
----------------------------------
(1) Proceeds were used primarily to pay down our credit facility.
(2) Impairment was recognized during the year ended December 31, 2003.
(3) Proceeds were used to pay down a portion of our Bank of America Fund XII
Term Loan.
(4) Impairment was recognized during the year ended December 31, 2004.
(5) Of the $4.0 million in impairment recorded, $2.9 million was recorded
during the year ended December 31, 2003 and $1.1 million was recorded
during the year ended December 31, 2004.
(6) The sale included our four remaining Office Properties in The Woodlands.
These properties were held through Woodlands Office Equities - '95 Limited
Partnership, or WOE, which was owned 75% by us and 25% by the
Woodlands Commercial Properties Company, L.P.
(7) This sale included two Office Properties held through WOE.
(8) This sale also generated a note receivable in the amount of $10.6 million.
The interest rate on the note was 7.5% and all principal and accrued
interest was received on February 19, 2003.
84
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEHAVIORAL HEALTHCARE PROPERTY
See Note 22, "Behavioral Healthcare Properties," for information on
the dispositions of these properties.
RESORT / HOTEL SEGMENT
On October 19, 2004, we completed the sale of the Hyatt Regency
Hotel in Albuquerque, New Mexico. The sale generated proceeds, net of selling
costs, of $32.2 million and a net gain of $3.6 million, net of minority
interests. This property was wholly-owned. The proceeds were used to pay down
$26.0 million of our Bank of America Fund XII Term Loan and the remainder was
used to pay down our credit facility.
RESIDENTIAL DEVELOPMENT SEGMENT
On September 14, 2004, we completed the sale of the Breckenridge
Commercial Retail Center in Breckenridge, Colorado. The sale generated proceeds,
net of selling costs and repayment of debt, of $1.5 million, and a net loss of
$0.1 million, net of minority interests and income tax. We previously recorded
an impairment charge of approximately $0.7 million, net of minority interests
and income tax, during the year ended December 2003. The proceeds from the sale
were used primarily to pay down our credit facility.
On December 31, 2002, CRDI, a consolidated subsidiary, completed the
sale of its 50% interest in two Colorado transportation companies, EWRT I and
EWRT II, to an affiliate of CRDI business partners for $7.0 million, consisting
of $1.4 million in cash and a $5.6 million note receivable. The note bears
interest at 7.0% payable quarterly beginning August 1, 2005 and maturing May 1,
2008. We recognized a $1.4 million gain, after tax, related to the sale of these
companies.
ASSETS HELD FOR SALE
The following Properties were classified as held for sale as of
December 31, 2004.
PROPERTY LOCATION
--------------------------- -----------------------
Albuquerque Plaza (1) Albuquerque, New Mexico
Denver Marriott City Center Denver, Colorado
-------------------------------------------
(1) This property was sold in February 2005.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale as of the years ended December 31, 2004, and 2003.
(in thousands) DECEMBER 31, 2004(1) DECEMBER 31, 2003(2)
-------------- -------------------- --------------------
Land $ 101 $ 13,924
Buildings and improvements 93,383 241,587
Furniture, fixtures and equipment 13,854 18,822
Accumulated depreciation (27,714) (60,323)
Other assets, net 2,117 6,000
------------- ------------
Net investment in real estate $ 81,741 $ 220,010
============= ============
--------------------------------------------
(1) Includes one Office Property, one Resort/Hotel Property and other
assets.
(2) Includes seven Office Properties, two Resort/Hotel Properties, one
behavioral healthcare property and other assets.
85
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present revenues, operating and other expenses,
depreciation and amortization, unitholder minority interests, gain on sale of
properties and impairments of real estate for the years ended December 31, 2004,
2003 and 2002, for properties included in discontinued operations.
(in thousands) 2004 2003 2002
-------------- ---------- ---------- ------------
Total revenues $ 58,360 $ 87,989 $ 115,756
Operating and other expenses (42,980) (56,605) (67,589)
Depreciation and amortization (3,330) (16,830) (16,918)
Unitholder minority interests (1,829) (2,215) (3,722)
--------- --------- -----------
Income from discontinued operations, net of minority interests $ 10,221 $ 12,339 $ 27,527
--------- --------- -----------
(in thousands) 2004 2003 2002
-------------- ---------- ---------- ------------
Realized gain on sale of properties $ 1,241 $ 12,134 $ 11,803
Unitholder minority interests (189) (1,847) (1,406)
--------- --------- -----------
Gain on real estate from discontinued operations, net of
minority interests $ 1,052 $ 10,287 $ 10,397
--------- ---------- -----------
(in thousands) 2004 2003 2002
-------------- ---------- ---------- ------------
Impairment charges related to real estate assets $ (3,511) $ (29,549) $ (4,679)
Unitholder minority interests 533 4,497 556
--------- ---------- -----------
Impairment charges related to real estate assets from
discontinued operations, net of minority interests $ (2,978) $ (25,052) $ (4,123)
--------- ---------- -----------
6. OTHER DISPOSITIONS
The gains and losses for consolidated asset dispositions during the years
ended December 31, 2004, 2003 and 2002, listed in this Note did not meet the
criteria which would require reporting under SFAS No. 144. Accordingly, the
related gains and losses from these consolidated asset dispositions are included
in income before discontinued operations and cumulative effect of a change in
accounting principle.
The gains and losses for all unconsolidated asset dispositions result in
an increase or decrease in the "Equity in net income (loss) of unconsolidated
companies," which is reflected in our Consolidated Statements of Operations.
86
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNDEVELOPED LAND SALES
The following table presents the significant dispositions of undeveloped
land for the years ended December 31, 2004, 2003 and 2002 including location of
the land, the acreage, net proceeds received, and net gain on sale included in
the "Income from investment land sales, net" line item in the Consolidated
Statements of Operations.
(dollars in millions)
NET GAIN
DATE LOCATION ACREAGE NET PROCEEDS (LOSS)
--------------------- -------------------- ------- ------------ ----------
2004
June 17, 2004 Denver, Colorado 3.0 $ 2.9 $ 0.9
August 16, 2004 Houston, Texas 2.5 6.4 (1) 7.6
November 12, 2004 Monterey, California 72.7 1.0 0.7
December 17, 2004 Houston, Texas 5.3 22.3 8.3
December 23, 2004 Houston, Texas 5.7 4.0 1.4
2003
April 24, 2003 Dallas, Texas 0.5 0.3 0.3
May 15, 2003 Coppell, Texas 24.8 3.0 1.1
June 27, 2003 Houston, Texas 3.5 2.1 (2) 8.9
September 30, 2003 Houston, Texas 3.1 5.3 2.8
2002
September 30, 2002 Tucson, Arizona 30.0 1.9 (3) 5.5
September 30, 2002 Washington, D.C. 1.4 15.1 0.1 (4)
December 31, 2002(5) Houston, Texas 5.5 33.1 15.1
December 31, 2002 Houston, Texas 3.1 5.2 2.0
-------------------
(1) In addition to the $6.4 million net cash proceeds, we also received a note
receivable 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.
(2) This sale also generated a note receivable in the amount of $11.8 million,
with annual installments of principal and interest payments beginning June
27, 2004, through maturity on June 27, 2010. The principal payment amounts
are calculated based upon a 20-year amortization and the interest rate is
4% for the first two years and thereafter the prime rate, as defined in
the note, through maturity.
(3) In addition to the $1.9 million net cash proceeds, we also received a
promissory note for $7.5 million with an interest rate of 6.5%, payable
quarterly and maturing on October 1, 2007, of which $5.6 million was
outstanding at December 31, 2004. In addition, we have a $2.4 million
construction loan with the purchaser of the land, which is secured by nine
developed lots and a $0.4 million letter of credit. As of December 31,
2004, approximately $1.2 million was outstanding under this loan.
(4) We recorded a $1.0 million impairment during the year ended December 31,
2002 on this parcel of undeveloped land.
(5) Under the terms of the purchase and sale contract, the purchaser has
options to purchase two additional parcels of undeveloped land from us.
The first parcel is comprised of approximately 3.47 acres and has a
purchase option closing deadline of June 2005. Under the terms of the
contract, we are leasing this parcel to the purchaser from December 2002
through June 2005. The purchase option closing deadline for the second
parcel of approximately 1.59 acres is June 2007.
OFFICE SEGMENT
FOUNTAIN PLACE TRANSACTION
On June 28, 2004, we completed a transaction related to the Fountain Place
Office Property with Crescent FP Investors, L.P., which we refer to as FP
Investors, a limited partnership that was owned 99.9% by LB FP L.L.C., an
affiliate of Lehman Brothers Holding, Inc., (we refer to the affiliate as
Lehman), and 0.1% by us. In the transaction, the Fountain Place Office Property
was sold to FP Investors for $168.2 million, including the assumption by FP
Investors of a new $90.0 million loan from Lehman Capital. We received net
proceeds of approximately $78.2 million.
87
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the terms of this transaction was a provision which provided
Lehman the unconditional right to require us 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, this unconditional
right, or contingency, results in the transaction requiring accounting
associated with a financing transaction. As a result, no gain was recorded on
the transaction. We paid 99.9% of the distributable funds from the Office
Property to Lehman, which was recorded in the "Interest expense" line item in
our Consolidated Statements of Operations. As a result of the joint venture of
this property on November 23, 2004, Lehman's unconditional right to require us
to repurchase Lehman's interest in FP Investors was terminated and the $79.9
million obligation was repaid. As a result of the November 23, 2004 transaction,
we have determined the June 28, 2004 transaction will also be reported as a
financing transaction for tax purposes.
THE WOODLANDS
During the year ended December 31, 2002, The Woodlands Commercial
Properties Company, L.P., an unconsolidated company, or Woodlands CPC, sold
three office properties and its 50% interest in one industrial property located
within The Woodlands, Texas. The sales generated net proceeds, after the
repayment of debt, of approximately $12.1 million, of which our portion was
approximately $6.4 million. The sales generated a net gain of approximately
$13.5 million, of which our portion was approximately $7.1 million. The proceeds
were used primarily to pay down our credit facility.
On December 19, 2002, the Woodlands CPC sold its 50% interest in the
Woodlands Mall partnership located in The Woodlands, Texas. The sale generated
net proceeds of approximately $38.4 million, of which our 52.5% interest was
approximately $20.2 million. The net gain on the sale of the property was
approximately $33.6 million, of which our portion was approximately $17.7
million. The proceeds were used primarily to pay down our credit facility.
RESIDENTIAL DEVELOPMENT SEGMENT
During the year ended December 31, 2004, the Sonoma Club was demolished in
order to begin construction on a new clubhouse. Accordingly, we 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.
On December 31, 2003, we sold all of our interests in the Woodlands
entities, to a subsidiary of the Rouse Company. The interests we sold consist
of:
- a 52.5% economic interest, including a 10% earned promotional interest, in
the Woodlands Land Development Company, L.P., or WLDC, the partnership
through which we owned our interest in The Woodlands residential
development property, and a promissory note due in 2007 in the original
principal amount of $10.6 million from WLDC;
- a 75% interest in Woodlands Office Equities - '95 Limited Partnership, the
partnership through which we owned our interests in four office properties
located in The Woodlands;
- a 52.5% economic interest, including a 10% earned promotional interest, in
Woodlands CPC; and
- a 52.5% economic interest, including a 10% earned promotional interest, in
The Woodlands Operating Company, L.P.
Total consideration to us for the sale of our interests in the Woodlands
entities was $387.0 million, consisting of approximately $202.8 million in cash
and approximately $184.2 million in assumption of debt by the purchaser. We
received approximately $18.0 million of the $202.8 million cash component prior
to closing in the form of partnership distributions net of working capital
adjustments. The debt represents 52.5% of the debt of the unconsolidated
partnerships through which we owned our interests in the Woodlands entities. The
sale resulted in a net gain of approximately $83.9 million, $49.2 million net of
tax, to us. We allocated $15.0 million of the total consideration, which
generated a $2.3 million net loss included in "Gain on real estate from
discontinued operations, net of minority interests" in our Consolidated
Statements of Operations, to the sale of our interest in Woodland's Office
Equities - '95 Limited Partnership, which had four remaining office properties.
These Office Properties were consolidated and included in our Office Segment and
were classified as held for sale. The remaining $86.2 million gain is included
in "Income from sale of investment in unconsolidated company, net" in our
Consolidated Statements of Operation.
88
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the sale on December 31, 2003, $57.5 million was included in
"Investments in unconsolidated companies" on the Consolidated Balance Sheets for
the unconsolidated partnerships through which we owned our interests in the
Woodlands entities. The "Equity in net income (loss) of unconsolidated
companies" included in our Consolidated Statements of Operations for the years
ended December 31, 2003 and 2002 was $14.6 million and $52.8 million,
respectively.
7. JOINT VENTURES
OFFICE SEGMENT
2004 TRANSACTIONS
On November 10, 2004, we contributed nine of our office properties to a
limited partnership in which we initially had a 40% interest and a fund advised
by JP Morgan Fleming Asset Management, or JPM, has a 60% interest. The office
properties contributed to the partnership are The Crescent (two Office
Properties) in Dallas, Texas and Houston Center (four Office Properties) and
Post Oak Central (three Office Properties), both in Houston, Texas. The Office
Properties were valued at $897.0 million. This transaction generated net
proceeds of approximately $290.0 million after the pay off of the JP Morgan
Mortgage Note, pay down of a portion of the Fleet Fund I Term Loan and
defeasance of a portion of LaSalle Note I. The joint venture was accounted for
as a partial sale of the Office Properties, resulting in a net gain of
approximately $194.1 million. On December 23, 2004, an affiliate of General
Electric Pension Fund, which we refer to as GE, purchased a 16.15% interest in
the partnership from us, reducing our ownership interest to 23.85%. This
transaction generated net proceeds of approximately $49.0 million and a net
gain of $56.7 million. The net proceeds from both transactions were used to pay
off the remaining portion of the Fleet Fund I Term Loan and pay down our credit
facility. We incurred debt pre-payment penalties of approximately $35.0 million
relating to the early extinguishment of the JP Morgan Mortgage Note and the
partial defeasance of LaSalle Note I, which is reflected in the "Extinguishment
of debt" line item in the Consolidated Statements of Operations.
On November 23, 2004, we contributed two of our office properties to a
limited partnership in which we have a 23.85% interest and a fund advised by JPM
has a 76.15% interest. The two office properties contributed to the partnership
are Fountain Place and Trammell Crow Center, both in Dallas, Texas. The Office
Properties were valued at $320.5 million. This transaction generated net
proceeds of approximately $71.5 million after the pay off of the Lehman Capital
Note. The joint venture was accounted for as a partial sale of the Office
Properties, resulting in a net gain of approximately $14.9 million. The net
proceeds from this transaction were used to pay down a portion of our credit
facility.
As a result of GE's purchase of an interest in the first partnership, GE
serves along with us as general partner and we serve as the sole and managing
general partner of the second partnership. Each of the Office Properties
contributed to the partnerships is owned by a separate limited partnership. Each
of those property partnerships (excluding Trammell Crow Center) has entered into
a separate leasing and management agreement with us, and, in the case of
Trammell Crow Center, the property partnership also has entered into a
management oversight agreement and a mortgage servicing agreement with us. We
have no commitment to reinvest the cash proceeds back into the joint ventures.
None of the mortgage financing at the joint venture level is guaranteed by us.
We account for our interest in these partnerships as unconsolidated equity
investments.
89
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 TRANSACTIONS
BriarLake Plaza
On October 8, 2003, we entered into a joint venture, Crescent One
BriarLake, L.P., with affiliates of JPM. The joint venture purchased BriarLake
Plaza, located in the Westchase submarket of Houston, Texas, for approximately
$74.4 million. The Property is a 20-story, 502,000 square foot Class A office
building. The affiliates of JPM own a 70% interest, and we own a 30% interest,
in the joint venture. The initial cash equity contribution to the joint venture
was $24.4 million, of which our portion was $7.3 million. Our equity
contribution and an additional working capital contribution of $0.5 million were
funded primarily through a draw under our credit facility. The remainder of the
purchase price of the Property was funded by a secured loan to the joint venture
in the amount of $50.0 million. None of the mortgage financing at the joint
venture level is guaranteed by us. We manage and lease this Office Property on a
fee basis. This Office Property is an unconsolidated investment and included in
our Office Segment.
2002 TRANSACTIONS
Three Westlake Park
On August 21, 2002, we entered into a joint venture arrangement with an
affiliate of GE in connection with which we contributed an Office Property,
Three Westlake Park in Houston, Texas. GE made a cash contribution. The joint
venture is structured such that GE holds an 80% equity interest in Three
Westlake Park, and we continue to hold the remaining 20% equity interest in the
Office Property, which is accounted for under the equity method. The joint
venture generated approximately $47.1 million in net cash proceeds to us,
resulting from the sale of its 80% equity interest and $6.6 million from our
portion of mortgage financing at the joint venture level. None of the mortgage
financing at the joint venture level is guaranteed by us. We have no commitment
to reinvest the cash proceeds back into the joint venture. The joint venture was
accounted for as a partial sale of this Office Property, resulting in a gain of
$17.0 million. The proceeds were used to pay down our credit facility. We manage
and lease the Office Property on a fee basis.
Miami Center
On September 25, 2002, we entered into a joint venture arrangement with an
affiliate of a fund managed by JPM in connection with which JPM purchased a 60%
interest in Crescent Miami Center, LLC with a cash contribution. Crescent Miami
Center, LLC owns a 782,000 square foot Office Property, Miami Center, located in
Miami, Florida. The joint venture is structured such that JPM holds a 60% equity
interest in Miami Center, and we hold the remaining 40% equity interest in the
Office Property, which is accounted for under the equity method. The joint
venture generated approximately $111.0 million in net cash proceeds to us,
resulting from the sale of a 60% equity interest and $32.4 million from our
portion of mortgage financing at the joint venture level. None of the mortgage
financing at the joint venture level is guaranteed by us. We have no commitment
to reinvest the cash proceeds into the joint venture. The joint venture was
accounted for as a partial sale of this Office Property, resulting in a gain of
approximately $4.6 million. The proceeds were used to pay down our credit
facility. We manage this Office Property on a fee basis.
Five Post Oak Park
On December 20, 2002, we entered into a joint venture arrangement, Five
Post Oak Park, L.P., with GE. The joint venture purchased Five Post Oak Park
located in the Galleria area of Houston, Texas, for $64.8 million. This Property
is a 567,000 square foot Class A office building. GE owns a 70% interest, and we
own a 30% interest, in the joint venture. The initial cash equity contribution
to the joint venture was $19.8 million, of which our portion was $5.9 million.
Our equity contribution and an additional working capital contribution of $0.3
million were funded through a draw under our credit facility. The remainder of
the purchase price of this Property was funded by a secured loan to the joint
venture in the amount of $45.0 million. None of the mortgage financing at the
joint venture level is guaranteed by us. We manage and lease the Office Property
on a fee basis.
90
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESORT/HOTEL SEGMENT
2003 AND 2002 TRANSACTIONS
Manalapan Hotel Partners
On November 21, 2003, Manalapan Hotel Partners, L.L.C., or Manalapan,
owned 50% by us and 50% by WB Palm Beach Investors, L.L.C., which we refer to as
Westbrook, sold the Ritz Carlton Palm Beach Resort/Hotel Property in Palm Beach,
Florida. The sale generated net proceeds of approximately $34.7 million, of
which our portion was approximately $18.0 million, and generated a net gain of
approximately $6.7 million, of which our portion was approximately $3.9 million.
In addition, Manalapan retained its accounts receivable of approximately $2.4
million, of which our portion is approximately $1.3 million, which was collected
in 2004. The proceeds from the sales were used primarily to pay down our credit
facility. This Property was an unconsolidated investment.
In October 2002, in a series of transactions, we acquired the remaining
75% economic interest in Manalapan. We acquired the additional interests in
Manalapan for $6.5 million, which was funded by a draw on our credit facility.
Subsequently, we entered into a joint venture arrangement with Westbrook
pursuant to which Westbrook purchased a 50% equity interest in Manalapan. We
held the remaining 50% equity interest. During 2002, we recognized an impairment
on this investment of approximately $2.6 million reflected in "Impairment
charges related to real estate assets" to reflect the fair value of our 50%
equity investment.
Sonoma Mission Inn & Spa
On September 1, 2002, we entered into a joint venture arrangement with a
subsidiary of Fairmont Hotels & Resorts, Inc., which we refer to as FHR,
pursuant to which we contributed a Resort/Hotel Property, the Sonoma Mission Inn
& Spa in Sonoma County, California and FHR purchased a 19.9% equity interest in
the limited liability company that owns the Resort/Hotel Property. We continue
to hold the remaining 80.1% equity interest. The joint venture generated
approximately $8.0 million in net cash proceeds to us that were used to pay down
our credit facility. We loaned $45.1 million to the joint venture at an interest
rate of LIBOR plus 300 basis points. The maturity date of the loan was extended
to September 2005. The joint venture exercised its option to extend our $45.1
million loan for two successive six-month periods by paying a fee. We manage the
limited liability company that owns the Sonoma Mission Inn & Spa, and FHR
operates and manages this Property for the tenant under the Fairmont brand. FHR
funded $10.0 million of renovations at Sonoma Mission Inn & Spa through a
mezzanine loan in 2004, which was outstanding at December 31, 2004. This joint
venture transaction in 2002 was accounted for as a partial sale of this
Resort/Hotel Property, resulting in a loss to us of approximately $4.0 million
on the interest sold. The joint venture leases Sonoma Mission Inn & Spa to a
taxable REIT subsidiary in which we also hold an 80.1% equity interest.
RESIDENTIAL DEVELOPMENT SEGMENT
On October 21, 2004, we entered into a partnership agreement with
affiliates of JPI Multi-Family Investments, L.P. to develop a multi-family
luxury apartment project in Dedham, Massachusetts. We 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. We
consolidate the partnership, Jefferson Station, L.P., in accordance with FIN 46,
as it was determined to be a VIE of which we are the primary beneficiary.
8. TEMPERATURE-CONTROLLED LOGISTICS
As of December 31, 2004, the Temperature-Controlled Logistics Segment
consisted of our 31.7% interest in AmeriCold. AmeriCold operates 103 facilities,
of which 87 are wholly-owned, one is partially-owned and fifteen are managed for
outside owners. We account for our interest in AmeriCold as an unconsolidated
equity investment.
On November 18, 2004, Vornado Crescent Portland Partnership, or VCPP, the
partnership through which we owned our 40% interest in AmeriCold, sold a 20.7%
interest in AmeriCold to The Yucaipa Companies for $145.0 million, resulting in
a gain of approximately $12.3 million, net of transaction costs, to us. In
addition, Yucaipa will assist in the management of AmeriCold and may earn a
promote of up to 20% of the increase in value through December 31,
91
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007. The promote is payable out of the remaining outstanding common shares in
AmeriCold, including the common shares held by us, and limited to 10% of these
remaining common shares.
Immediately following this transaction, VCPP dissolved and, after the
payment of all of its liabilities, distributed its remaining assets to its
partners. The assets distributed to us consisted of common shares, representing
an approximately 31.7% interest in AmeriCold, cash of approximately $34.3
million and a note receivable of approximately $8.0 million. In connection with
the dissolution of the partnership, Vornado Realty L.P. or Vornado, agreed to
terminate the preferential allocation payable to it under the partnership
agreement. In consideration of this, we agreed to pay Vornado an annual
management fee of $4.5 million, payable only out of dividends we receive from
AmeriCold and proceeds from sales of the common shares of AmeriCold that we own.
Unpaid annual management fees will accrue without interest. The amount of the
annual management fee will be reduced in proportion to any sales by us of our
interest in AmeriCold. We also agreed to pay Vornado, from the proceeds of any
sales of the common shares of AmeriCold that we own, a termination fee equal to
the product of $23.8 million and the percentage reduction in our ownership of
AmeriCold, as of November 18, 2004, represented by the sale. Our obligation to
pay the annual management fee and the termination fee will end on October 30,
2027, or, if earlier, the date on which we sell all of the common shares of
AmeriCold that we own.
On November 4, 2004, AmeriCold purchased 100% of the ownership interests
in its tenant, AmeriCold Logistics, for approximately $47.7 million. The
purchase was funded by a contribution from AmeriCold's owner, VCPP, which funded
its contribution through a loan from Vornado. Prior to the consummation of this
transaction, AmeriCold Logistics leased the Temperature-Controlled Logistics
Properties from AmeriCold under three triple-net master leases. Under the terms
of the leases, AmeriCold Logistics was permitted to defer a portion of the rent
payable to AmeriCold. As of November 4, 2004, AmeriCold's deferred rent balance
from AmeriCold Logistics was $125.1 million, of which our portion was $50.0
million. For each of the years ended December 31, 2004, 2003, and 2002, we
recognized rental income from AmeriCold Logistics when earned and collected and,
accordingly, did not recognize any of the rent deferred during those years as
equity in net income of AmeriCold. In connection with the purchase of AmeriCold
Logistics by AmeriCold, the leases were terminated and all deferred rent was
cancelled.
On November 4, 2004, AmeriCold also purchased 100% of the ownership
interests in Vornado Crescent and KC Quarry, L.L.C., or VCQ, for approximately
$24.9 million. AmeriCold used a cash contribution from its owner, of which our
portion was approximately $9.9 million, to fund the purchase. As a result of our
56% ownership interest in VCQ, we received proceeds from the sale of VCQ of
approximately $13.2 million.
On February 5, 2004, AmeriCold 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 AmeriCold were
approximately $225.0 million, after closing costs and the repayment of
approximately $12.9 million in existing mortgages. On February 6, 2004,
AmeriCold distributed cash of approximately $90.0 million to us.
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
our contribution for the purchase of the trade receivables. The receivables were
collected during the first quarter of 2004. On March 20, 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 us 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. All
receivables were collected and cash was distributed to the owners as part of the
November 4, 2004 AmeriCold purchase of VCQ.
92
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of our ownership in significant unconsolidated
joint ventures and investments as of December 31, 2004.
OUR OWNERSHIP
AS OF DECEMBER 31,
ENTITY CLASSIFICATION 2004
---------------------------------------- ------------------------------------------------------ ------------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, LLC Office (Miami Center - Miami) 40.0% (2) (3)
Crescent Big Tex I, L.P. Office (Post Oak, Houston Center - Houston)
Office (The Crescent - Dallas) 23.9% (4) (3)
Crescent Big Tex II, L.P. Office (Trammell Crow Center, Fountain Place - Dallas) 23.9% (5) (3)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (6) (3)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0% (7) (3)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (8) (3)
Austin PT BK One Tower Office Limited
Partnership Office (Bank One Tower-Austin) 20.0% (9) (3)
Houston PT Three Westlake Office Limited
Partnership Office (Three Westlake Park - Houston) 20.0% (9) (3)
Houston PT Four Westlake Office Limited
Partnership Office (Four Westlake Park-Houston) 20.0% (9) (3)
AmeriCold Realty Trust Temperature-Controlled Logistics 31.7% (10)
Blue River Land Company, L.L.C. Other 50.0% (11)
Canyon Ranch Las Vegas, L.L.C. Other 50.0% (12)
EW Deer Valley, L.L.C. Other 41.7% (13)
CR License, L.L.C. Other 30.0% (14)
CR License II, L.L.C. Other 30.0% (15)
SunTx Fulcrum Fund, L.P. Other 23.5% (16)
SunTx Capital Partners, L.P. Other 14.5% (17)
G2 Opportunity Fund, L.P. (G2) Other 12.5% (18)
------------------
(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, LLC is owned by an
affiliate of a fund managed by JPM.
(3) We have negotiated performance based incentives that allow for additional
equity to be earned if return targets are exceeded.
(4) Of the remaining 76.1% interest in Crescent Big Tex I, L.P. , 60% is owned
by a fund advised by JPM and 16.1% is owned by affiliates of GE.
(5) The remaining 76.1% interest in Crescent Big Tex II, L.P. is owned by a
fund advised by JPM.
(6) The remaining 70% interest in Crescent Five Post Oak Park, L.P. is owned
by an affiliate of GE.
(7) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JPM.
(8) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by
a pension fund advised by JPM.
(9) 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 GE.
(10) Of the remaining 68.3% interest in AmeriCold Realty Trust, 47.6% is owned
by Vornado and 20.7% is owned by The Yucaipa Companies.
(11) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to us. Blue River Land Company, L.L.C. was formed to
acquire, develop and sell certain real estate property in Summit County,
Colorado.
(12) 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 our Resort/Hotel
Properties and 15% is owned by us through our 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. In January 2005, this entity was contributed to CR
Spa, L.L.C.
(13) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to us. 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.
(14) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of our Resort/Hotel Properties. CR
License, L.L.C. owns the licensing agreement related to certain Canyon
Ranch trade names and trademarks. In January 2005, this entity was
contributed to CR Operating L.L.C.
(15) The remaining 70% interest in CR License II, L.L.C. is owned by an
affiliate of the management company of two of our 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. In January
2005, this entity was contributed to CR Spa, L.L.C.
(16) 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 us. SunTx Fulcrum Fund, L.P.'s objective is to
invest in a portfolio of entities that offer the potential for substantial
capital appreciation.
(17) SunTx Capital Partners, L.P. is the general partner of the SunTx Fulcrum
Fund, L.P. The remaining 85.5% interest in SunTx Capital Partners, L.P. is
owned by parties unrelated to us.
(18) 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. , or
GMSPLP, and by parties unrelated to us. G2 is managed and controlled by an
entity that is owned equally by GMSPLP and GMAC Commercial Mortgage
Corporation, or GMACCM. The ownership structure of GMSPLP consists of an
approximately 86% limited partnership interest owned directly and
indirectly by Richard E. Rainwater, Chairman of our Board of Trust
Managers, 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 our Board
of Trust Managers and our Chief Executive Officer. The remaining
approximately 2% general partnership interest is owned by unrelated
parties. Our investment balance at December 31, 2004 was $13.0 million and
in February 2005 we received a cash distribution of approximately $17.9
million, bringing the total distributions to $40.3 million on an initial
investment of $24.2 million.
93
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENTS OF UNCONSOLIDATED INVESTMENTS
HBCLP, INC.
On December 31, 2003, we executed an agreement with HBCLP, Inc., pursuant
to which we surrendered 100% of our investment in HBCLP, Inc. and released
HBCLP, Inc. from its note obligation to us in exchange for cash of $3.0 million
and other assets valued at approximately $8.7 million, resulting in an
impairment charge of approximately $6.5 million reflected in "Impairment charges
related to real estate assets" in our Consolidated Statements of Operations.
CR LICENSE, L.L.C. AND CRL INVESTMENTS, INC.
On February 14, 2002, we executed an agreement with COPI pursuant to which
COPI transferred to certain of our subsidiaries, pursuant to a strict
foreclosure, COPI's 1.5% interest in CR License, L.L.C. and 5.0% interest,
representing all of the voting stock, in CRL Investments, Inc. As of December
31, 2004, we had a 30% interest in CR License, L.L.C., the entity which owns the
right to the future use of the "Canyon Ranch" name. In addition, as of December
31, 2004, we had a 100% interest in CRL Investments, Inc., which owns a 50%
interest in the Canyon Ranch Spa Club in the Venetian Hotel in Las Vegas,
Nevada, or Canyon Ranch Las Vegas and a 30% interest in CR License II, which
owns the remaining 50% interest in Canyon Ranch Las Vegas. We evaluated our
investment in Canyon Ranch Las Vegas and determined that an impairment charge
was warranted. Accordingly, a $9.6 million impairment charge was recognized and
reflected in our Consolidated Statements of Operations for the year ended
December 31, 2002 in "Impairment charges related to real estate assets."
DBL-CBO, INC.
In 1999, DBL-CBO, Inc., a wholly-owned subsidiary of DBL Holdings, Inc.,
or DBL, in which we owned a 97.4% non-voting interest at December 31, 2002,
acquired an aggregate of $6.0 million in principal amount of Class C-1 Notes
issued by Juniper CBO 1999-1 Ltd., a Cayman Islands limited liability company.
Juniper 1999-1 Class C-1 is the privately-placed equity interest of a
collateralized bond obligation. During the year ended December 31, 2002, we
recognized a charge related to this investment of $5.2 million reflected in
"Equity in net income (loss) of unconsolidated companies, Other" in our
Consolidated Statements of Operations. As a result of this impairment charge, at
December 31, 2002, this investment was valued at $0.
SUMMARY FINANCIAL INFORMATION
We report our share of income and losses based on our ownership interest
in our 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 December 31, 2004:
- Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex
II, L.P., 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, LLC,
Crescent Five Post Oak Park L.P. and Crescent One BriarLake Plaza,
L.P.;
- Temperature-Controlled Logistics - This includes AmeriCold Realty
Trust; 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,
LLC, Crescent Five Post Oak Park L.P. and Crescent One BriarLake
Plaza, L.P.;
- Temperature-Controlled Logistics - This includes the Vornado
Crescent Portland Partnership and VCQ; and
94
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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 year ended December 31, 2004:
- Office - This includes Crescent Big Tex I, L.P., Crescent Big Tex
II, L.P., 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, LLC,
Crescent Five Post Oak Park L.P. and Crescent One BriarLake Plaza,
L.P.;
- Temperature-Controlled Logistics - This includes AmeriCold Realty
Trust, Vornado Crescent Portland Partnership and VCQ;
- 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 year ended 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,
LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza,
L.P. and Woodlands Commercial Properties Company, L.P.;
- Temperature-Controlled Logistics - This includes the Vornado
Crescent Portland 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., EW Deer Valley, L.L.C., CR License, L.L.C., CR
License II, L.L.C., the Woodlands Operating Company, L.P., Canyon
Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P. and G2.
Summary Statements of Operations for the year ended December 31, 2002:
- 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,
LLC, Crescent Five Post Oak Park L.P. and Woodlands Commercial
Properties Company, L.P.;
- Temperature-Controlled Logistics - This includes the Vornado
Crescent Portland Partnership and VCQ;
- The Woodlands Land Development Company, L.P. This includes The
Woodlands Land Development Company's operating results for the
period February 15 through December 31, 2002, and The Woodlands Land
Company's operating results for the period January 1, through
February 14, 2002; and
- Other - This includes Manalapan Hotel Partners, L.L.C., MVDC, HADC,
Blue River Land Company, L.L.C., CR License, L.L.C., CR License II,
L.L.C., the Woodlands Operating Company, L.P., Canyon Ranch Las
Vegas, L.L.C., SunTx Fulcrum Fund, L.P., G2, and the operating
results for DMDC and CRDI for the period January 1 through February
14, 2002.
BALANCE SHEETS:
AS OF DECEMBER 31, 2004
---------------------------------------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
-------------- ----------- ------------- ---------- ----------
Real estate, net $ 1,861,989 $ 1,177,190
Cash 90,801 21,694
Other assets 108,698 233,153
----------- ------------
Total assets $ 2,061,488 $ 1,432,037
=========== ============
Notes payable $ 1,180,178 $ 801,042
Other liabilities 76,541 100,555
Equity 804,769 530,440
----------- ------------
Total liabilities and equity $ 2,061,488 $ 1,432,037
=========== ============
Our share of unconsolidated debt $ 325,418 $ 253,931 $ - $ 579,349
=========== ============ ========== ==========
Our investments in unconsolidated
companies $ 146,065 $ 172,609 $ 43,969 $ 362,643
=========== ============ ========== ==========
95
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE(1) LOGISTICS OTHER TOTAL
-------------- ----------- -------------- ---------- ----------
Total revenues $ 154,406 $ 223,990
Expenses:
Operating expense 76,022 121,935 (2)
Interest expense 34,368 52,069
Depreciation and amortization 35,314 59,813
Taxes and other (income) expense 113 1,509
----------- ----------
Total expenses $ 145,817 $ 235,326
Gain on sale of assets - 32,975
----------- ----------
Net income $ 8,589 $ 21,639
=========== ==========
Our equity in net income (loss) of
unconsolidated companies $ 6,262 $ 6,153 $ (2,791) $ 9,624
=========== ========== ========= ==========
-----------------
(1) This column includes information for The Crescent, Houston Center, Post
Oak Central, Trammell Crow Center and Fountain Place from the date of
their contribution to joint ventures in November 2004.
(2) Inclusive of the preferred return paid to Vornado (1% per annum of the
total combined assets through November 18, 2004).
BALANCE SHEETS:
AS OF DECEMBER 31, 2003
--------------------------------------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(in thousands) OFFICE LOGISTICS OTHER TOTAL
-------------- ------------ ------------ ---------- -----------
Real estate, net $ 754,882 $ 1,187,387
Cash 31,309 12,439
Other assets 51,219 88,668
------------ -----------
Total assets $ 837,410 $ 1,288,494
============ ===========
Notes payable $ 515,047 $ 548,776
Other liabilities 29,746 11,084
Equity 292,617 728,634
------------ -----------
Total liabilities and equity $ 837,410 $ 1,288,494
============ ===========
Our share of unconsolidated debt $ 172,376 $ 219,511 $ 2,495 $ 394,382
============ =========== ========== ===========
Our investments in unconsolidated
companies $ 99,139 $ 300,917 $ 40,538 $ 440,594
============ =========== ========== ===========
96
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------------------------------------------------------
TEMPERATURE- THE WOODLANDS
CONTROLLED AND DEVELOPMENT
(in thousands) OFFICE LOGISTICS COMPANY, L.P. OTHER TOTAL
-------------- ------------ --------------- ---------------- ----------- -----------
Total revenues $ 140,188 $ 124,413 $ 135,411
Expenses:
Operating expense 60,576 24,158 (2) 100,005
Interest expense 29,976 41,727 6,991
Depreciation and amortization 35,613 58,014 6,735
Tax expense (benefit) - (2,240) -
Other (income) expense - (2,926) -
------------ ----------- --------------
Total expenses $ 126,165 $ 118,733 $ 113,731
Gain (loss) on sale of assets 810
Net income, impairments and gain
(loss) on real estate from
discontinued operations 10,533 (727)
------------ ----------- --------------
Net income $ 24,556 $ 6,490 $ 20,953
============ =========== ==============
Our equity in net income (loss) of
unconsolidated companies $ 11,190 $ 2,172 $ 11,000 $ 1,134 $ 25,496
============ =========== ============== =========== ===========
---------------
(1) We sold our interest in The Woodlands Land Development Company, L.P. on
December 31, 2003.
(2) Inclusive of the preferred return paid to Vornado (1% per annum of the
total combined assets).
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------
TEMPERATURE- THE WOODLANDS
CONTROLLED AND DEVELOPMENT
(in thousands) OFFICE LOGISTICS COMPANY, L.P. OTHER TOTAL
-------------- ------------ --------------- ---------------- ----------- -----------
Total revenues $ 90,166 $ 111,604 $ 168,142
Expenses:
Operating expense 48,245 15,742 (1) 92,414
Interest expense 19,909 42,695 5,132
Depreciation and amortization 23,226 59,328 3,816
Tax expense (benefit) - - 406
Other (income) expense - (1,228) -
------------ ----------- -------------
Total expenses $ 91,380 $ 116,537 $ 101,768
Gain (loss) on sale of assets (3,377)
Net income, impairments and gain
(loss) on real estate from
discontinued operations 48,275 -
------------ ----------- -------------
Net income $ 47,061 $ (8,310)(2) $ 66,374
============ =========== =============
Our equity in net income (loss) of
unconsolidated companies $ 23,328 $ (2,933) $ 33,847 $ (793)(3) $ 53,449
============ =========== ============= ======= ===========
(1) Inclusive of the preferred return paid to Vornado (1% per annum of the
total combined assets).
(2) Excludes the goodwill write-off for Temperature-Controlled Logistics
Segment, which is recorded in the accompanying financial statements as a
cumulative effect of a change in accounting principle.
(3) Includes impairment of DBL-CBO of $5.2 million.
97
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The following table shows, as of December 31, 2004, information about our
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.
BALANCE OUR SHARE OF
OUTSTANDING BALANCE AT INTEREST RATE
AT DECEMBER DECEMBER AT DECEMBER FIXED/VARIABLE
DESCRIPTION 31, 2004 31, 2004 31, 2004 MATURITY DATE SECURED/UNSECURED
----------- ----------- ------------ -------------- -------------------- -----------------
(in thousands)
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
AmeriCold Realty Trust - 31.7%
Goldman Sachs (1) $ 483,483 $ 153,264 6.89% 5/11/2023 Fixed/Secured
Morgan Stanley (2) 250,207 79,316 5.35% 4/9/2009 Variable/Secured
Various Capital Leases 47,362 15,014 3.48 to 13.63% 6/1/2006 to 4/1/2017 Fixed/Secured
Vornado Crescent Portland Partnership (3) 19,940 6,321 2.42% 12/31/2010 Variable/Secured
Bank of New York 50 16 12.88% 5/1/2008 Fixed/Secured
----------- ----------
$ 801,042 $ 253,931
----------- ----------
OFFICE SEGMENT:
Crescent HC Investors, L.P. - 23.85% $ 269,705 $ 64,325 5.03% 11/7/2011 Fixed/Secured
Crescent TC Investors, L.P. - 23.85% 214,770 51,223 5.00% 11/1/2011 Fixed/Secured
Main Street Partners, L.P. - 50% (4) (5) (6) 108,991 54,495 5.23% 12/1/2005 Variable/Secured
Crescent Fountain Place, L.P. - 23.85% 105,932 25,265 4.95% 12/1/2011 Fixed/Secured
Crescent POC Investors, L.P. - 23.85% 97,504 23,255 4.98% 12/1/2011 Fixed/Secured
Crescent 5 Houston Center, L.P. - 25% 90,000 22,500 5.00% 10/1/2008 Fixed/Secured
Crescent Miami Center, LLC - 40% 81,000 32,400 5.04% 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30% 50,000 15,000 5.40% 11/1/2010 Fixed/Secured
Houston PT Four Westlake Office Limited
Partnership - 20% 47,405 9,481 7.13% 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% 45,000 13,500 4.82% 1/1/2008 Fixed/Secured
Austin PT BK One Tower Office Limited
Partnership - 20% 36,871 7,374 7.13% 8/1/2006 Fixed/Secured
Houston PT Three Westlake Office Limited
Partnership - 20% 33,000 6,600 5.61% 9/1/2007 Fixed/Secured
----------- ----------
$ 1,180,178 $ 325,418
----------- ----------
TOTAL UNCONSOLIDATED DEBT $ 1,981,220 $ 579,349
=========== ==========
FIXED RATE/WEIGHTED AVERAGE 5.96% 10.2 years
VARIABLE RATE/WEIGHTED AVERAGE 5.17% 3.1 years
-------- -------------------
TOTAL WEIGHTED AVERAGE 5.77% 8.5 years
-------- -------------------
----------------
(1) URS Real Estate, L.P. and AmeriCold Real Estate, L.P. expect to repay the
notes on the Optional Prepayment Date of April 11, 2008.
(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, a
subsidiary of AmeriCold Realty Trust entered into an interest-rate cap
agreement with a maximum LIBOR of 6.50% on the entire amount of the loan.
(3) On November 18, 2004, this partnership dissolved and distributed the note
to its partners, Vornado Realty, L.P. and us. The note is secured by cash
collateral.
(4) Senior Note - Note A: $80.5 million at variable interest rate, LIBOR +
189 basis points, $4.7 million at variable interest rate, LIBOR + 250
basis points with a LIBOR floor of 2.50%. Note B: $23.7 million at
variable interest rate, LIBOR + 650 basis points with a LIBOR floor of
2.50%. Interest-rate cap agreement maximum LIBOR of 4.25% on all notes.
All notes amortized based on a 25-year schedule.
(5) We and our JV partner each obtained a separate letter of credit
to guarantee the repayment of up to $4.3 million of principal each of the
Main Street Partners, L.P. Loan.
(6) We exercised a one-year extension option, extending the maturity date to
12/1/2005. There is one one-year extension option remaining.
98
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. OTHER ASSETS AND OTHER LIABILITIES
OTHER ASSETS
DECEMBER 31,
-------------------------
(in thousands) 2004 2003
-------------- ----------- -----------
Leasing costs $ 116,773 $ 136,868
Deferred financing costs 43,457 61,421
Prepaid expenses 20,102 12,853
Marketable securities(1) 34,690 12,960
Other intangibles 115,036 67,031
Intangible office leases 99,853 16,875
Other 34,330 37,807
---------- ----------
$ 464,241 $ 345,815
Less - accumulated amortization (126,015) (138,338)
---------- ----------
$ 338,226 $ 207,477
========== ==========
--------------
(1) Includes securities reported at cost of approximately $4.6 million and
$6.0 million at December 31, 2004 and 2003, respectively.
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31,
(in thousands) 2004 2003
-------------- ---------- ----------
Deferred revenue $ 115,388 $ 113,631
Accounts payable 71,496 30,257
Accrued property taxes 32,936 65,758
Security and advanced
deposits 27,454 21,914
Accrued interest 19,483 21,135
Hedge instruments 2,046 12,978
Other accrued expenses 153,545 104,463
---------- ----------
$ 422,348 $ 370,136
========== ==========
MARKETABLE SECURITIES
The following tables present the cost, fair value and unrealized gains and
losses as of December 31, 2004, and 2003 and the realized gains and change in
Accumulated Other Comprehensive Income, or OCI, for the years ended December 31,
2004, 2003 and 2002 for our marketable securities.
AS OF DECEMBER 31, 2004 AS OF DECEMBER 31, 2003
----------------------------------- ------------------------------------
(in thousands) FAIR UNREALIZED FAIR UNREALIZED
TYPE OF SECURITY COST VALUE GAIN/(LOSS) COST VALUE GAIN/(LOSS)
----------- --------- ----------- -------- --------- ---------------
Held to maturity(1) $ 175,853 $ 173,650 $ (2,203) $ 9,620 $ 9,621 $ 1
Trading(2) 3,535 3,814 N/A 4,473 4,714 N/A
Available for sale(3) 25,191 26,227 1,036 2,278 2,278 -
----------- --------- ---------- -------- --------- -------
Total $ 204,579 $ 203,691 $ (1,167) $ 16,371 $ 16,613 $ 1
========-== ========= ========== ======== ========= =======
99
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------ ----------------- -----------------
(in thousands) REALIZED CHANGE REALIZED CHANGE REALIZED CHANGE
TYPE OF SECURITY GAIN/(LOSS) IN OCI GAIN/(LOSS) IN OCI GAIN/(LOSS) IN OCI
----------- ------- ----------- ------ ----------- ------
Held to maturity(1) $ - N/A $ - $ N/A $ - $ N/A
Trading(2) 1,149 N/A 76 N/A - N/A
Available for sale(3) 6 1,036 (502) 514 - 26
----------- ------- ----------- ------ ----------- ------
Total $ 1,155 $ 1,036 $ (426) $ 514 $ - $ 26
----------- ------- ----------- ------ ----------- ------
-------------------
(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 and
the Nomura Funding VI note. See Note 11, "Notes Payable and Borrowings
Under Credit Facility," for additional information on the defeasance of
these notes.
(2) Trading securities consist of primarily marketable securities purchased in
connection with our dividend incentive unit program. These securities are
included in "Other assets, net" in the accompanying Consolidated Balance
Sheets and are marked to market value on a monthly basis with the change
in fair value recognized in earnings.
(3) Available for sale securities consist of marketable securities that we
intend to hold for an indefinite period of time. These securities consist
of $18.8 million of bonds and $6.4 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 we own $5.5 million Series B
Preferred shares reported at cost at December 31, 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. Based on our evaluation of our
preferred interest in Fresh Choice at December 31, 2004, we recorded a $1.0
million valuation reserve during the year ended December 31, 2004, which is
reflected in the "Other expenses" line item in the Consolidated Statements of
Operations.
11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of our debt financing at December 31, 2004 and
2003:
DECEMBER 31,
------------
2004 2003
---- -----
SECURED DEBT (in thousands)
AEGON Partnership Note(1) due July 2009, bears interest at 7.53% with monthly
principal and interest payments based on a 25-year amortization schedule,
secured by the Funding III, IV and V Properties (Greenway Plaza) ............................... $ 254,604 $ 260,101
Bank of America Fund XII Term Loan due January 2006, bears interest at LIBOR plus 225
basis points (at December 31, 2004, the interest rate was 4.53%), with a two-year interest-only
term and a one-year extension option, secured by the Funding XII Properties..................... 199,995 -
LaSalle Note II(2) 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 .................................................................................... 157,477 159,560
LaSalle Note I(3) due August 2027, bears interest at 7.83% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the Funding I Properties.......... 103,300 235,037
Fleet Term Loan(4) due February 2007, bears interest at LIBOR plus 450 basis points
(at December 31, 2004, the interest rate was 6.81%) with an interest-only term, secured by
excess cash flow distributions from Funding III, IV and V....................................... 75,000 75,000
100
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 70,000
Morgan Stanley Mortgage Capital Inc. Note II(5) due January 2008, bears interest at LIBOR
plus 123 basis points (at December 31, 2004, the interest rate was 3.64%), with an interest-only
term, secured by the 1301 McKinney Street Office Property ...................................... 70,000 -
DECEMBER 31,
-------------------
2004 2003
---- ----
SECURED DEBT - CONTINUED (in thousands)
Morgan Stanley Mortgage Capital Inc. Note I due October 2011, bears interest at 5.06% with
an interest-only term, secured by the Alhambra Office Property.................................. 50,000 -
Bank of America Note(6) 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 38,000
Metropolitan Life Note V(7) 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................................................................................. 36,832 37,506
Mass Mutual Note(8) 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................................................................................. 36,692 -
Metropolitan Life Note VII due May 2011, bears interest at 4.31% with monthly interest-only
payments, secured by the Dupont Centre Office Property ......................................... 35,500 -
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 26,000
Allstate Note(8) 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.................................................................. 25,509 -
National Bank of Arizona Revolving Line of Credit(9) maturing in June 2006,
bears interest at prime rate plus 0 to 100 basis points (at December 31, 2004,
the interest rate was 5.25% to 6.25%) secured by certain DMDC assets............................ 25,459 40,588
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(8) 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......................................................................... 23,919 -
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 -
Texas Capital Bank(10) pre-construction line of credit due July 2006, bears interest at LIBOR
plus 225 basis points (at December 31, 2004, the interest rate was 4.46%) with interest-only
payments, secured by land underlying the development project ................................... 10,500 -
101
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northwestern Life Note II(8) 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 ................................................................. 10,168 10,713
FHI Finance Loan(11) bears interest at LIBOR plus 450 basis points (at December 31, 2004 the
interest rate was 6.81%), with an initial interest-only term until the Net Operating Income
Hurdle Date, 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 2,959
Woodmen of the World Note(12) due April 2009, bears interest at 8.20% with an
initial five-year interest-only term (through November 2006), followed by
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Avallon IV Office Property ............................................ 8,500 8,500
Nomura Funding VI Note (13) due July 2010 bears interest at 10.07% with monthly
principal and interest payments based on a 25-year amortization schedule,
secured by defeasance investments............................................................... 7,659 7 ,853
DECEMBER 31,
------------------
2004 2003
---- ----
SECURED DEBT - CONTINUED (in thousands)
The Rouse Company Notes due December 2005 bears interest at prime rate plus 100 basis
points (at December 31, 2004, the interest rate was 6.25%) with an interest-only term,
secured by undeveloped land at Hughes Center.................................................... 7,500 -
Wells Fargo Note(14) due January 2005, bears interest at LIBOR plus 200 basis points
(at December 31, 2004, the interest rate was 4.00%) with an interest-only term, secured by
3770 Hughes Parkway Office Property............................................................. 4,774 -
Fleet National Bank Note(15) maturing November 2007, bears interest at LIBOR plus 200
basis points (at December 31, 2004, the interest rate was 4.35%) with an interest-only term,
secured by the Jefferson Station Apartments..................................................... 4,300 -
Construction, acquisition and other obligations, bearing fixed and variable
interest rates ranging from 2.90% to 9.27% at December 31, 2004, with maturities
ranging between May 2005 and February 2009, secured by various CRDI and MVDC projects(16)....... 53,962 47,357
Fleet Fund I Term Loan due May 2005, bears interest at LIBOR plus 350 basis
points, secured by equity interests in Funding I and Funding II................................. - 264,214
Deutsche Bank - CMBS Loan due May 2004, bears interest at the 30-day LIBOR (with a floor
of 3.5%) plus 234 basis points, secured by the Funding X Properties and Spectrum Center......... - 220,000
JP Morgan Mortgage Note 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................... - 191,311
102
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNSECURED DEBT
2009 Notes(17) (18) 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 .................................................. 375,000 375,000
2007 Notes(17) bear interest at a fixed rate of 7.50% with a ten-year interest-only term,
due September 2007.............................................................................. 250,000 250,000
Credit Facility(19)(20) interest-only due May 2005, bears interest at LIBOR plus
212.5 basis points (at December 31, 2004, the interest rate was 4.61%).......................... 142,500 239,000
----------
TOTAL NOTES PAYABLE $2,152,255 $ 2,558,699
========== ===========
-----------------
(1) The outstanding balance of this note at maturity will be approximately
$223.4 million.
(2) In December 2003 and January 2004, we purchased a total of $179.6 million
of U.S. Treasuries and government sponsored agency securities, or
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.
(3) In January 2005, we purchased a total of $115.8 million of U.S. Treasuries
and government sponsored agency securities, or defeasance investments, to
substitute as collateral for this loan. The cash flow from defeasance
investments (principal and interest) match the total debt service payment
of this loan. In November 2004, we purchased $146.2 million of defeasance
investments to legally defease $128.7 million of this loan.
(4) Effective March 2005, we received a modification to this loan agreement to
conform certain definitions and financial covenants with the new $300
million credit facility. The covenant modifications include elimination of
increase in debt service coverage ratio and fixed charge coverage ratio.
The definition changes include calculation of Capitalization Value and
eliminating the effect of defeased debt and related assets from the
definition of Consolidated Total Assets and Consolidated Total
Liabilities.
(5) In December 2004, we entered into a one-year interest rate cap agreement
with Bear Stearns Financial Products, Inc. with a notional amount of $70.0
million, which limits the interest rate exposure to 3.50%. This loan has
two one-year extension options. This loan was transferred to a new joint
venture on February 24, 2005.
(6) The outstanding principal balance of this loan at maturity will be
approximately $33.4 million.
(7) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.
(8) We 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 December 31, 2004, the effective interest rate of
the debt including the premium and the outstanding principal balance at
maturity:
(dollars in thousands)
Unamortized Effective Balance at
Loan Premium Rate Maturity
------------------------ --------------- --------- ----------------
Mass Mutual Note $ 2,278 3.47% $ 32,692
Allstate Note 1,456 5.19% 20,882
Metropolitan Life Note VI 1,926 5.68% 19,295
Northwestern Life Note II 792 3.80% 8,689
--------------- ----------------
Total $ 6,452 $ 81,558
--------------- ----------------
The premium was recorded as an increase in the carrying amount of the underlying
debt and is being amortized using the effective interest rate method as a
reduction of interest expense through maturity of the underlying debt.
(9) This facility is a $26.0 million line of credit secured by certain DMDC
land and asset improvements (revolving credit facility), and notes
receivable (warehouse facility). The line restricts the revolving credit
facility to a maximum outstanding amount of $20.0 million and is subject
to certain borrowing base limitations and bears interest at prime (at
December 31, 2004, the interest rate was 5.25%). The warehouse facility
bears interest at prime plus 100 basis points (at December 31, 2004, the
interest rate was 6.25%) and is limited to $6.0 million. The blended rate
at December 31, 2004, for the revolving credit facility and the warehouse
facility was 5.48%.
(10) This facility is a $10.5 million pre-construction development line of
credit secured by land underlying the development project located in
Dallas, Texas.
(11) Our 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.
(12) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.
(13) In December 2004, we purchased a total of $10.1 million of 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.
(14) In January 2005, we entered into a new loan with Wells Fargo for $7.8
million. The loan has an interest-only term until maturity in January
2008, with two one-year extension options, and bears interest at LIBOR
plus 125 basis points. The new loan was used to repay the $4.8 million
Wells Fargo Note and is secured by 3770 Hughes Parkway. In January 2005,
we entered into a LIBOR interest rate cap agreement with a notional amount
of $7.8 million which limits the interest rate exposure to 6.0%.
(15) This facility is a $41.0 million construction line of credit secured by
the Jefferson Station Apartments in Dedham, Massachusetts.
(16) Includes $4.3 million of fixed rate debt ranging from 2.9% to 9.27% and
$49.7 million of variable rate debt ranging from 4.66% to 6.25%. In July
2004, CRDI entered into an interest rate cap agreement with Bank of
America with a notional amount of $2.2 million, increasing to $12.2
million based on the amount of the related loan. At December 31, 2004,
$12.1 million was outstanding under this loan. The agreement limits the
interest rate exposure on the notional amount to a maximum LIBOR rate of
4.0%.
(17) To incur any additional debt, the indenture requires us to meet thresholds
for a number of customary financial and other covenants including maximum
leverage ratios, minimum debt service coverage ratios, maximum secured
debt as a percentage of total undepreciated assets, and ongoing
maintenance of unencumbered assets. Additionally, as long as the 2009
Notes are not rated investment grade, there are restrictions on our
ability to make certain payments, including distributions to shareholders
and investments.
(18) In December 2004, we obtained consent from bondholders to eliminate an
increase in a debt incurrence test calling for the debt service ratio test
to increase from 1.75x to 2.0x as of April 15, 2005 and to clarify the
definition of assets and liabilities to exclude in-substance defeased debt
and its related assets.
(19) In February 2005, we entered into a new $300 million credit facility which
replaces the previous facility. All outstanding amounts under the previous
facility were repaid in full using cash on hand and proceeds from an
initial borrowing under the new facility. The interest rate on the new
facility is LIBOR plus 200 basis points and matures on December 31, 2006.
Under the new facility, we are subject to certain limitations including
the ability to: incur additional debt or sell assets, make certain
investments and acquisitions and grant liens. We are also subject to
financial covenants, which include debt service ratios, leverage ratios
and, in the case of the Operating Partnership, a minimum tangible net
worth limitation and a fixed charge coverage ratio.
(20) The outstanding balance excludes letters of credit issued under the
credit facility of $7.6 million.
103
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information about our consolidated fixed and
variable rate debt and does not take into account any extension options, hedging
arrangements or our anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT (1) RATE MATURITY
------------------ ------------- ------------ --------- ----------------
Fixed Rate Debt $ 1,552,514 72% 7.60% 5.2 years
Variable Rate Debt 599,741 28 4.85 1.4 years
------------- ------------ -------- ------------
Total Debt $ 2,152,255 100% 6.84%(2) 3.7 Years
============= ============ ========= ============
-----------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $411.3 million of hedged variable rate debt, are
91% and 9%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 7.06%.
Listed below are the aggregate principal payments by year required as of
December 31, 2004 under our indebtedness. Scheduled principal installments and
amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL (1)
-------------- ------------- ---------- -------------- -------------
2005 $ 86,670 $ - $ 142,500 $ 229,170
2006 459,173 - - 459,173
2007 104,252 250,000 - 354,252
2008 108,370 - - 108,370
2009 274,230 375,000 - 649,230
Thereafter 352,060 - - 352,060
------------ --------- ----------- -----------
$ 1,384,755 $ 625,000 $ 142,500 $ 2,152,255
============ ========= =========== ===========
-----------------
(1) Based on contractual maturity and does not include the refinance of the
credit facility, extension options on Bank of America Fund XII Term Loan,
Morgan Stanley Mortgage Capital Inc. Note II, Fleet National Bank Note or
the expected early payment of LaSalle Note I.
104
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are generally obligated by our 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 our loans can trigger an increase in interest rates, an
acceleration of payment on the loan in default, and for our secured debt,
foreclosure on the property securing the debt. In addition, a default by us or
any of our 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 and the Fleet Term
Loan after the notice and cure periods for the other indebtedness have passed.
As of December 31, 2004, no event of default had occurred, and we were in
compliance with all covenants related to our outstanding debt. Our 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 year
ended December 31, 2004, except for notes prepaid there were no circumstances
that required prepayment or increased collateral related to our existing debt.
In addition to the subsidiaries listed in Note 1, "Organization and Basis
of Presentation," certain other of our subsidiaries were formed primarily for
the purpose of obtaining secured and unsecured debt or joint venture financings.
These entities, all of which are consolidated and are grouped based on the
Properties to which they relate, are: Funding I Properties (CREM Holdings, LLC,
Crescent Capital Funding, LLC, Crescent Funding Interest, LLC, CRE Management I
Corp., CRE Management II Corp.); Funding III Properties (CRE Management III
Corp.); Funding IV Properties (CRE Management IV Corp.); Funding V Properties
(CRE Management V Corp.); Funding VI Properties (CRE Management VI Corp.);
Funding VIII Properties (CRE Management VIII, LLC); 707 17th Street (Crescent
707 17th Street, LLC); Funding X Properties (CREF X Holdings Management, LLC,
CREF X Holdings, L.P., CRE Management X, LLC); 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), 1301 McKinney Street,
(Crescent 1301 Holdings GP, LLC, Crescent 1301 Holdings, L.P., Crescent 1301 GP,
LLC, Crescent 1301 McKinney, L.P.); The Alhambra, (Crescent Alhambra, LLC);
Crescent BT I Investors, L.P. (Crescent BT I Management, LLC, Crescent BT I GP,
L.P.) and Crescent Finance Company.
DEFEASANCE OF LASALLE NOTE I
In November 2004, in connection with the joint venture of The Crescent
Office Property, we released The Crescent, which is held in Funding I, as
collateral for the Fleet Fund I Term Loan and the LaSalle Note I, by paying off
the $160.0 million Fleet Fund I Term Loan and by purchasing $146.2 million of
U.S. Treasury and government sponsored agency securities. We placed those
securities into a trust for the sole purpose of funding payment of principal and
interest on approximately $128.7 million of the LaSalle Note I. This was
structured as a legal defeasance, therefore, the debt is reflected as paid down
and the difference between the amount of securities purchased and the debt paid
down, $17.5 million, was recorded in the "Extinguishment of debt" line item in
the Consolidated Statements of Operations.
In January 2005, we released the remaining properties in Funding I that
served as collateral for the LaSalle Note I, by purchasing an additional $115.8
million of U.S. Treasury and government sponsored agency securities with an
initial weighted average yield of 3.20%. We placed those securities into a
collateral account for the sole purpose of funding payments of principal and
interest on the remainder of LaSalle Note I. The cash flow from these securities
is structured to match the cash flow (principal and interest payments) required
under the LaSalle Note I. This transaction was accounted for as an in-substance
defeasance, therefore, the debt and the securities purchased remain on our
Consolidated Balance Sheets.
DEFEASANCE OF NOMURA FUNDING VI
On December 20, 2004, we released Canyon Ranch - Lenox, which is held in
Funding VI, as collateral for the Nomura Funding VI Note by purchasing $10.1
million of U.S. Treasury and government sponsored agency securities with an
initial weighted average yield of 3.59%. We placed those securities into a
collateral account for the sole purpose of funding payments of principal and
interest on the Nomura Funding VI Note. The cash flow from the securities is
structured to match the cash flow (principal and interest payments) required
under the Nomura Funding VI Note. This transaction was accounted for as an
in-substance defeasance, therefore, the debt and the securities purchased remain
on our Consolidated Balance Sheets.
DEFEASANCE OF LASALLE NOTE II
In January 2004, we released the properties in Funding II, that served as
collateral for the Fleet Fund I and II Term Loan and the LaSalle Note 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%. We 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. This transaction was accounted for
as an in-substance defeasance, therefore, the debt and the securities purchased
remain on our Consolidated Balance Sheets. The retirement of the Fleet Fund I
and II Term 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 Fund XII Term Loan is structured to
allow us 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.
LINE OF CREDIT
On October 26, 2004, we entered into a syndicated construction loan with
Bank One, NA. The loan is a line of credit with a maximum commitment of $105.8
million which will be used for the development of Northstar at Tahoe and
matures October 2006. No amount was outstanding under the loan as of December
31, 2004.
105
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INTEREST RATE SWAPS AND CAPS
We use derivative financial instruments to convert a portion of our
variable rate debt to fixed rate debt and to manage the fixed to variable rate
debt ratio. As of December 31, 2004, we had interest rate swaps and interest
rate caps designated as cash flow hedges, 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" and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities."
The following table shows information regarding the fair value of our
interest rate swaps and caps designated as cash flow hedge agreements, which is
included in the "Accounts payable, accrued expenses and other liabilities" line
item in the Consolidated Balance Sheets, and additional interest expense and
unrealized gains (losses) recorded in OCI for the year ended December 31, 2004.
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
-------------- ---------- --------- --------- ------------- ---------------- -----------------
(in thousands)
--------------
INTEREST RATE
SWAPS
4/18/00 $ 100,000 4/18/04 6.76% $ - $ 1,712 $ 1,695
2/15/03 100,000 2/15/06 3.26% (232) 1,845 2,114
2/15/03 100,000 2/15/06 3.25% (229) 1,842 2,111
9/02/03 200,000 9/01/06 3.72% (1,585) 4,712 5,076
7/08/04(1) 11,266 1/01/06 2.94% 22 - 22
------------- ---------------- -----------------
$ (2,024) $ 10,111 $ 11,018
INTEREST RATE
CAPS
7/08/04(1) $ 12,206 1/01/06 4.00% $ 1 $ - $ (15)
12/21/04 70,000 1/09/06 3.50% 53 - (26)
------------- ---------------- -----------------
$ (1,970) $ 10,111 $ 10,977
------------- ---------------- -----------------
--------------------------
(1) Cash flow hedge is at CRDI, a consolidated subsidiary.
In addition, two of our unconsolidated companies have interest rate caps
designated as cash flow hedges of which our portion of change in unrealized
gains reflected in OCI was approximately $0.8 million for the year ended
December 31, 2004.
We have designated our cash flow hedge agreements as cash flow hedges of
LIBOR-based monthly interest payments on a designated pool of variable rate
LIBOR indexed debt. The interest rate swaps 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 recognized in earnings as interest expense when the hedged items
impact earnings. If an interest rate swap falls outside 80%-125% effectiveness
for a quarter, all changes in the fair value of the 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. Hedge
ineffectiveness of $0.1 million on the designated hedges due to
notional/principal mismatches between the hedges and the hedged debt was
recognized in interest expense during 2004.
Over the next 12 months, an estimated $2.0 million of Accumulated Other
Comprehensive Income will be recognized as interest expense and charged against
earnings related to the effective portions of the cash flow hedge agreements.
FAIR VALUE CAPS
In March 2004, in connection with the Bank of America Fund XII Term Loan,
we 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, we sold a LIBOR interest rate cap
with the same terms. Since these instruments do not reduce our 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.
106
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RENTALS UNDER OPERATING LEASES
As of December 31, 2004, we received rental income from the lessees of 59
consolidated Office Properties and one Resort/Hotel Property under operating
leases.
We lease one Resort/Hotel Property for which we recognize rental income
under an operating lease that provides for percentage rent. For the years ended
December 31, 2004, 2003 and 2002, the percentage rent amounts for the one
Resort/Hotel Property were $4.7 million, $4.9 million and $4.7 million,
respectively.
In general, Office Property leases provide for the payment of fixed base
rents and the reimbursement by the tenant to us of annual increases in operating
expenses in excess of base year operating expenses. The excess operating expense
amounts totaled $66.0 million, $78.9 million and $88.9 million, for the years
ended December 31, 2004, 2003 and 2002, respectively. These excess operating
expenses are generally payable in equal installments throughout the year, based
on estimated increases, with any differences adjusted at year end based upon
actual expenses.
For non-cancelable operating leases for wholly-owned and non wholly-owned
consolidated Office Properties owned as of December 31, 2004, future minimum
rentals (base rents) during the next five years and thereafter (excluding tenant
reimbursements of operating expenses for Office Properties) are as follows:
FUTURE
MINIMUM
(in millions) RENTALS
------------- -------------
2005 $ 277.2
2006 260.7
2007 229.4
2008 201.2
2009 172.8
Thereafter 599.5
-------------
$ 1,740.8
=============
See Note 2, "Summary of Significant Accounting Policies," for discussion of
revenue recognition.
107
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS, CONTINGENCIES AND LITIGATION
COMMITMENTS
LEASE COMMITMENTS
We had seventeen wholly-owned Properties at December 31, 2004 located on
land that is subject to long-term ground leases, which expire between 2015 and
2080. Lease expense associated with ground leases during each of the three years
ended December 31, 2004, 2003, and 2002 was $4.2 million, $2.6 million and $2.9
million, respectively. Future minimum lease payments due under such leases as of
December 31, 2004, are as follows:
FUTURE MINIMUM
(in thousands) LEASE PAYMENTS
------------- --------------
2005 $ 2,042
2006 2,041
2007 2,044
2008 2,052
2009 2,090
Thereafter 141,219
-----------
$ 151,488
===========
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. Our
guarantees in place as of December 31, 2004 are listed in the table below. For
the guarantees on indebtedness, no triggering events or conditions are
anticipated to occur that would require payment under the guarantees and
management believes the assets associated with the loans that are guaranteed are
sufficient to cover the maximum potential amount of future payments and
therefore, would not require us to provide additional collateral to support the
guarantees. We have not recorded a liability associated with these guarantees as
they were entered into prior to the adoption of FIN 45.
MAXIMUM
GUARANTEED AMOUNT GUARANTEED
OUTSTANDING AT AMOUNT AT
(in thousands) DECEMBER 31, 2004 DECEMBER 31, 2004
-------------- ------------------- ------------------
DEBTOR
------
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 7,572 $ 7,572
Main Street Partners, L.P. - Letter of Credit (2)(3) 4,250 4,250
------------------- ------------------
Total Guarantees $ 11,822 $ 11,822
=================== ==================
------------------------------
(1) We provide 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 9, "Investments in Unconsolidated Companies," for a description
of the terms of this debt.
(3) We and our 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.
OTHER COMMITMENTS
On December 3, 2004 we entered into an agreement to provide a $34.5
million mezzanine loan secured by ownership interests in an entity that owns an
office property in New York, New York. The loan was funded in February 2005, and
we immediately sold a 50% participating interest for $17.25 million.
108
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2003, we 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. We 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, we received $0.01 million of consideration to
extend this option for an additional year.
See Note 8, "Temperature-Controlled Logistics," for a description of our
commitments related to our ownership of common shares in AmeriCold and the
termination of our partnership with Vornado.
See Note 21, "COPI," for a description of our commitments related to the
agreement with COPI, executed on February 14, 2002, all of which have been
fulfilled.
CONTINGENCIES
ENVIRONMENTAL MATTERS
All of the Properties have been subjected to Phase I environmental
assessments, and some Properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments have not
revealed, nor is management aware of, any environmental liabilities that
management believes would have a material adverse effect on our financial
position or results of operations.
LITIGATION
We are involved from time to time in various claims and legal actions in
the ordinary course of business. Management does not believe that the impact of
such matters will have a material adverse effect on our financial condition or
results of operations when resolved. During the year ended December 31, 2004, we
received $3.7 million ($2.3 million, net of tax) in partial litigation
settlement fees which was recorded in the "Residential Development Property
Revenue" line item in our Consolidated Statements of Operations. During the year
ended December 31, 2003, we paid $1.7 million to settle claims arising in the
ordinary course of business. During the year ended December 31, 2002, we
received a $4.5 million litigation settlement fee, which was recorded in the
"Interest and other income" line item in our Consolidated Statements of
Operations. In connection with the same litigation, we incurred $2.6 million of
legal fees, which is included in the "Other expenses" line item in our
Consolidated Statements of Operations.
15. STOCK AND UNIT BASED COMPENSATION
STOCK OPTION PLANS
Crescent has two stock incentive plans, the 1995 Stock Incentive Plan,
which we refer to as the 1995 Plan, and the 1994 Stock Incentive Plan, which we
refer to as the 1994 Plan. Due to the approval of the 1995 Plan, additional
options and restricted shares will no longer be granted under the 1994 Plan.
Under the 1994 Plan, Crescent had granted, net of forfeitures, 2,509,800 options
which are fully vested and no restricted shares. The maximum number of options
and/or restricted shares that Crescent was able to initially grant at inception
under the 1995 Plan was 2,850,000 shares. The maximum aggregate number of shares
available for grant under the 1995 Plan increases automatically on January 1 of
each year by an amount equal to 8.5% of the increase in the number of common
shares and units outstanding since January 1 of the preceding year, subject to
certain adjustment provisions. As of January 1, 2005, the number of shares
Crescent may issue under the 1995 Plan is 9,981,647. Under the 1995 Plan,
Crescent had issued shares due to the exercise of options and restricted shares
of 2,071,196 and 323,718, respectively, through December 31, 2004. In addition,
under the 1995 Plan, Crescent had granted, net of forfeitures, unexercised
options to purchase 5,872,530 shares as of December 31, 2004. Under both plans,
options are granted at a price not less than the market value of the shares on
the date of grant and expire ten years from the date of grant. The options that
have been granted under the 1995 Plan vest over five years, with the exception
of 500,000 options that vest over two years, 250,000 options that vest over
three and a half years and 60,000 options that vest six months from the initial
date of grant.
109
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2002, John Goff, Vice-Chairman of our Board of Trust Managers and our
Chief Executive Officer, was granted the right to earn 300,000 restricted shares
under the 1995 Plan. These shares vest at 100,000 shares per year on February
19, 2005, February 19, 2006 and February 19, 2007. Compensation expense is being
recognized on a straight-line basis. For the year ended December 31, 2004,
approximately $1.9 million was recorded as compensation expense related to this
grant.
A summary of the status of Crescent's 1994 and 1995 Plans as of December
31, 2004, 2003 and 2002, and changes during the years then ended is presented in
the table below.
2004 2003 2002
---------------------- --------------------- --------------------
WTD. WTD.
AVG. AVG.
EXERCISE SHARES WTD. AVG. SHARES EXERCISE
SHARES PRICE UNDERLYING EXERCISE UNDERLYING PRICE
UNDERLYING PER UNIT PRICE PER UNIT PER
(share amounts in thousands) UNIT OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
---------------------------- ------------ -------- ---------- --------- ---------- --------
Outstanding as of January 1, 7,127 $ 21 7,455 $ 21 6,975 $ 21
Granted 220 16 70 16 1,017 18
Exercised (54) 15 (95) 15 (338) 16
Forfeited (36) 18 (303) (1) 29 (199) 18
Canceled (1,372) 22 - - - -
------------ -------- ---------- --------- ---------- --------
Outstanding/Wtd. Avg. as of December 31, 5,885(2) $ 21 7,127 $ 21 7,455 $ 21
============ ======== ========== ========= ========== ========
Exercisable/Wtd. Avg. as of December 31, 5,033 $ 21 4,794 $ 22 3,985 $ 23
============ ======== ========== ========= ========== ========
------------------
(1) Includes 205 share options which were exchanged for 102.5 unit options
(205 common share equivalents) with a weighted average exercise price of
$34 during the year ended December 31, 2003. Excluding these share
options, the weighted average exercise price would have been $19.
(2) Includes 6 unit options (12 common shares equivalents) outstanding under
the 1994 Unit Plan.
The following table summarizes information about the 1994 and 1995 plans'
options outstanding and exercisable at December 31, 2004.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------------
WTD. AVG.
(share amounts in thousands) YEARS
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES 12/31/04 EXPIRATION EXERCISE PRICE AT 12/31/04 EXERCISE PRICE
--------------- -------------- ---------- -------------- ----------- --------------
$ 12 to 16 1,450 5.1 $ 16 1,352 $ 16
$ 16 to 21 2,384 5.8 18 1,765 18
$ 21 to 26 936 4.9 22 800 22
$ 26 to 39 1,115 3.1 $ 32 1,116 $ 32
-------------- ---------- -------------- ----------- --------------
$ 12 to 39 5,885 5.0 21 5,033 21
============== ========== ============== =========== ==============
UNIT PLANS
The Operating Partnership has three unit incentive plans, the 1995 Unit
Incentive Plan, which we refer to as the 1995 Unit Plan, the 1996 Unit Incentive
Plan, which we refer to as the 1996 Unit Plan, and the 2004 Long-Term Incentive
Plan, which we refer to as the 2004 Unit Plan.
Effective January 2, 2003, the 1995 Unit Plan was amended to make it
available to all of our employees and advisors, to provide for the grant of unit
options and to increase the number of units and common shares available for
issuance. Prior to 2003, the 1995 Unit Plan was not available to officers or
trust managers and did not provide for the grant of options. The 1995 Unit Plan
has an aggregate of 400,000 common shares reserved for issuance upon the
exchange of 200,000 units, which are available for issuance. As of December 31,
2004, an aggregate of 7,012 units had been distributed under the 1995 Unit Plan
and we granted, net of forfeitures, unexercised options to purchase, 60,197 unit
options. The unit options granted under the 1995 Unit Plan were priced at fair
market value on the date of grant, vest over five years and expire ten years
from the date of grant. Each unit that was issued, and each unit received upon
exercise of unit options that were granted, under the 1995 Unit Plan is
exchangeable for two common shares or, at the option of Crescent, an equivalent
amount of cash, except that any units issued to executive officers or trust
managers will be exchangeable only for treasury shares unless shareholder
approval is received.
110
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1996 Unit Plan provides for the grant of options to acquire up to
2,000,000 units. Through December 31, 2004, the Operating Partnership had
granted, net of forfeitures, options to acquire 1,280,122 units. Forfeited
options are available for grant. The unit options granted under the 1996 Unit
Plan were priced at fair market value on the date of grant, generally vest over
seven years, and expire ten years from the date of grant. Pursuant to the terms
of the unit options granted under the 1996 Unit Plan, because the fair market
value of Crescent's common shares equaled or exceeded $25.00 for each of ten
consecutive trading days, the vesting of an aggregate of 500,000 units was
accelerated and such units became immediately exercisable in 1996. In addition,
100,000 unit options vest 50% after three years and 50% after five years. Under
the 1996 Unit Plan, each unit that may be purchased is exchangeable, as a result
of shareholder approval in June 1997, for two common shares or, at the option of
Crescent, an equivalent amount of cash.
A summary of the status of the Operating Partnership's 1995 and 1996 Unit
Plans as of December 31, 2004, 2003 and 2002, and changes during the years then
ended is presented in the table below (assumes each unit is exchanged for two
common shares).
2004 2003 2002
---------------------- ------------------------ --------------------
WTD. WTD.
AVG. AVG.
EXERCISE SHARES WTD. AVG. SHARES EXERCISE
SHARES PRICE UNDERLYING EXERCISE UNDERLYING PRICE
UNDERLYING PER UNIT PRICE PER UNIT PER
(share amounts in thousands) UNIT OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
---------------------------- ------------ -------- ---------- --------- ---------- --------
Outstanding as of January 1, 3,144 $ 18 2,837 $ 17 2,394 $ 17
Granted 31 17 307(1) 28 443 18
Exercised - - - - - -
Forfeited - - - - - -
Canceled (494) 24 - - - -
------------ -------- ---------- --------- ---------- --------
Outstanding/Wtd. Avg. as of December 31, 2,681 $ 17 3,144 $ 18 2,837 $ 17
============ ======== ========== ========= ========== ========
Exercisable/Wtd. Avg. as of December 31, 2,581 $ 17 2,942 $ 19 2,080 $ 17
============ ======== ========== ========= ========== ========
--------------------
(1) Includes 205 share options which were exchanged for 102.5 unit options
(205 common share equivalents) with a weighted average exercise price of
$34 during the year ended December 31, 2003. Excluding these unit options,
the weighted average exercise price would have been $16.
The following table summarizes information about unit options granted
under the 1995 and 1996 Unit Plans and outstanding and exercisable at December
31, 2004.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------------
WTD. AVG.
(share amounts in thousands) YEARS
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES 12/31/04 EXPIRATION EXERCISE PRICE AT 12/31/04 EXERCISE PRICE
--------------- -------------- ---------- -------------- ----------- --------------
$ 12 to 16 235 5.4 $ 16 208 $ 16
$ 16 to 21 2,446 2.8 18 2,373 18
$ 21 to 26 - - - - -
$ 26 to 39 - - $ - - $ -
-------------- ---------- -------------- ----------- --------------
$ 12 to 39 2,681 3.0 17 2,581 17
============== ========== ============== =========== ==============
111
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 UNIT PLAN
The 2004 Unit Plan provides for the issuance by the Operating Partnership
of up to 1,802,500 restricted units (3,605,000 common share equivalents) to our
officers. Restricted units granted under the 2004 Unit Plan vest in 20%
increments when the average closing price of Crescent common shares on the New
York Stock Exchange for the immediately preceding 40 trading days equals or
exceeds $19.00, $20.00, $21.00, $22.50 and $24.00. The 2004 Unit Plan also gives
discretion to the General Partner to establish one or more alternative objective
annual performance targets for us. Any restricted unit that is not vested on or
prior to June 30, 2010 will be forfeited. Each vested restricted unit will be
exchangeable, beginning on the second anniversary of the date of grant, for cash
equal to the value of two of Crescent common shares based on the closing price
of the common shares on the date of exchange, and subject to a six-month hold
period following vesting, unless, prior to the date of the exchange, Crescent
requests and obtain shareholder approval authorizing it, in its discretion, to
deliver instead two common shares in exchange for each such restricted unit.
Regular quarterly distributions accrue on unvested restricted units and are
payable upon vesting of the restricted units. As a requirement to participate in
the plan, officers were required to cancel 2,413,815 of their existing stock or
unit options. Effective December 1, 2004, the Operating Partnership granted a
total of 1,703,750 Partnership Units (3,407,500 common share equivalents) under
the 2004 Unit Plan. We obtained a third-party valuation to determine the fair
value of the restricted units issued under the 2004 Unit Plan. The third-party,
utilizing a series of methods including binomial and trinomial lattice-based
models, probabilistic analysis and models to estimate the implied long-term
dividend growth rate, determined the fair value of the restricted units granted
to be approximately $25.1 million, which is being amortized on a straight-line
basis over the related service period. For the year ended December 31, 2004,
approximately $0.4 million was recorded as compensation expense related to this
grant.
UNIT OPTIONS GRANTED UNDER OPERATING PARTNERSHIP AGREEMENT
During the years ended December 31, 2004, 2003 and 2002, the Operating
Partnership granted options to acquire 2,761,071 units, or 5,552,142 common
share equivalents, to officers. The unit options granted were priced at fair
market value on the date of grant, vest over five years and expire ten years
from the date of grant. Each unit received upon exercise of the unit options
will be exchangeable for two common shares or, at the option of Crescent, an
equivalent amount of cash, except that the units will be exchangeable only for
treasury shares unless shareholder approval is received.
A summary of the status of the unit options granted under the Operating
Partnership Agreement as of December 31, 2004, 2003 and 2002, and changes during
the years then ended is presented in the table below (assumes each unit is
exchanged for two common shares).
2004 2003 2002
---------------------- --------------------- --------------------
WTD. WTD.
AVG. AVG.
EXERCISE SHARES WTD. AVG. SHARES EXERCISE
SHARES PRICE UNDERLYING EXERCISE UNDERLYING PRICE
UNDERLYING PER UNIT PRICE PER UNIT PER
(share amounts in thousands) UNIT OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
---------------------------- ------------ -------- ---------- --------- ---------- --------
Outstanding as of January 1, 5,697 $ 18 5,357 $ 18 300 $ 22
Granted 125 18 340 16 5,057 18
Exercised - - - - - -
Forfeited (20) - - - - -
Canceled (548) 18 - - - -
------------ -------- ---------- --------- ---------- --------
Outstanding/Wtd. Avg. as of December 31, 5,254 $ 18 5,697 $ 18 5,357 $ 18
============ ======== ========== ========= ========== ========
Exercisable/Wtd. Avg. as of December 31, 1,911 $ 18 777 $ 18 60 $ 22
============ ======== ========== ========= ========== ========
112
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the unit options granted
under the Operating Partnership Agreement that are outstanding and exercisable
at December 31, 2004.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------------
WTD. AVG.
(share amounts in thousands) YEARS
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT BEFORE WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES 12/31/04 EXPIRATION EXERCISE PRICE AT 12/31/04 EXERCISE PRICE
--------------- -------------- ---------- -------------- ----------- --------------
$ 12 to 16 120 8.4 $ 15 24 $ 15
$ 16 to 21 4,984 7.2 17 1,797 17
$ 21 to 26 150 6.2 22 90 22
$ 26 to 39 - - $ - - $ -
-------------- ---------- -------------- ----------- --------------
$ 12 to 39 5,254 7.2 18 1,911 18
============== ========== ============== =========== ==============
STOCK AND UNIT OPTION PLANS
On January 1, 2003, we adopted the expense recognition provisions of SFAS
No. 123, on a prospective basis as permitted by SFAS No. 148. We value stock and
unit options issued using the Black-Scholes option-pricing model and recognize
this value as an expense over the period in which the options vest. Under this
standard, recognition of expense for stock options is applied to all options
granted after the beginning of the year of adoption.
During the year ended December 31, 2004, we granted 220,000 stock options
under the 1995 Plan, 15,300 unit options under the 1995 Unit Plan and 62,500
unit options under no plan. We recognized compensation expense related to these
option grants which was not significant to our results of operations.
At December 31, 2004, 2003 and 2002, the weighted average fair value of
options granted was $1.05, $0.63 and $1.40, respectively. The fair value of
each option is estimated at the date of grant using the Black-Scholes
option-pricing model based on the expected weighted average assumptions in the
following calculation.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Life of options 10 years 10 years 10 years
Risk-free interest rates 4.3% 3.6% 4.0%
Dividend yields 8.8% 9.9% 8.5%
Stock price volatility 24.9% 25.1% 25.1%
16. MINORITY INTERESTS
Minority interests in the Operating Partnership represents the
proportionate share of the equity in the Operating Partnership of limited
partners other than Crescent. The ownership share of limited partners other than
Crescent is evidenced by Operating Partnership units. The Operating Partnership
pays a regular quarterly distribution to the holders of Operating Partnership
units.
Each Operating Partnership unit may be exchanged for either two common
shares of Crescent or, at the election of Crescent, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, Crescent's percentage interest in the Operating Partnership
increases. During the year ended December 31, 2004, there were 41,958 units
exchanged for 83,916 common shares of Crescent.
Minority interests in real estate partnerships represents joint venture or
preferred equity partners' proportionate share of the equity in certain real
estate partnerships. We hold a controlling interest in the real estate
partnerships and consolidate the real estate partnerships into our financial
statements. Income in the real estate partnerships is allocated to minority
interests based on weighted average percentage ownership during the year.
113
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes minority interests as of December 31, 2004
and 2003:
2004 2003
--------- ---------
(in thousands)
Limited partners in the Operating Partnership $ 113,572 $ 108,706
Development joint venture partners - Residential Development Segment 33,760 31,305
Joint venture partners - Office Segment 9,308 8,790
Joint venture partners - Resort/Hotel Segment 6,513 7,028
Other (242) -
--------- ---------
$ 162,911 $ 155,829
========= =========
The following table summarizes the minority interests' share of net income
for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
(in thousands) --------- -------- --------
Limited partners in the Operating Partnership $ 29,530 $ 4,984 $ 8,552
Development joint venture partners - Residential Development Segment 9,041 2,933 5,067
Joint venture partners - Office Segment (163) (576) 470
Joint venture partners - Resort/Hotel Segment (1,131) (902) (157)
Joint venture partners - Other (66) - -
Subsidiary preferred equity - - 5,722
--------- -------- --------
$ 37,211 $ 6,439 $ 19,654
========= ======== ========
17. SHAREHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
We commenced our Share Repurchase Program in March 2000. On October 15,
2001, our 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.
There were no share repurchases under the program for the year ended December
31, 2004. As of December 31, 2004, we 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.
All repurchased shares were recorded as treasury shares.
SERIES A PREFERRED OFFERINGS
On January 15, 2004, we completed an offering of an additional 3,400,000
Series A Convertible Cumulative 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 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 our option, by
paying $25.00 per share plus any accumulated accrued and unpaid distributions.
Dividends on the additional Series A Preferred Shares are cumulative from
November 16, 2003, and are payable quarterly in arrears on the fifteenth of
February, May, August and November, commencing February 16, 2004. The annual
fixed dividend on the Series A Preferred Shares is $1.6875 per share.
Net proceeds to us from the January 2004 Series A Preferred Offering after
underwriting discounts and other offering costs of approximately $3.7 million
were approximately $71.0 million. We used the net proceeds to pay down our
credit facility.
114
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DISTRIBUTIONS
The distributions to common shareholders and unitholders paid during the
years ended December 31, 2004, 2003 and 2002, were $175.6 million, $175.5
million and $192.7 million, respectively. These distributions represented an
annualized distribution of $1.50 per common share and equivalent unit for the
years ended December 31, 2004, 2003 and 2002. Through August 2002, we held
14,468,623 of our common shares in a wholly-owned subsidiary, Crescent SH IX,
Inc. The distribution amounts above include $16.3 million of distributions for
the year ended December 31, 2002, which were paid for common shares held by us,
and which were eliminated in consolidation. On February 16, 2005, we distributed
$43.9 million to common shareholders and unitholders.
Distributions to Series A Preferred shareholders for the years ended
December 31, 2004, 2003 and 2002, were $24.0 million, $18.2 million and $17.0
million, respectively. The distributions per Series A Preferred share were
$1.6875 per preferred share annualized for each of the three years. On February
16, 2005, we distributed $6.0 million to Series A Preferred shareholders.
Distributions to Series B Preferred shareholders for the years ended
December 31, 2004, 2003 and 2002, were $8.1 million, $8.1 million and $4.0
million, respectively. The distributions per Series B Preferred share were
$2.3750 per preferred share annualized for each of the three years. On February
16, 2005, we distributed $2.0 million to Series B Preferred shareholders.
COMMON SHARES
Following is the income tax status of distributions paid on common shares
for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------ ------ ------
Ordinary dividend -% 2.0% 4.8%
Qualified dividend eligible for 15% tax rate - 7.1 N/A
Capital gain 23.2 1.2 17.3
Return of capital 57.4 88.7 75.2
Unrecaptured Section 1250 gain 19.4 1.0 2.7
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
PREFERRED SHARES
Following is the income tax status of distributions paid for the years
ended December 31, 2004, 2003 and 2002 to preferred shareholders:
CLASS A PREFERRED CLASS B PREFERRED
---------------------------- ---------------------------
2004 2003 2002 2004 2003 2002
----- ------ ----- ------ ----- -----
Ordinary dividend -% 17.9% 19.5% -% 17.9% 19.5%
Qualified dividend eligible for 15% tax rate - 62.4 N/A - 62.4 N/A
Capital gain 54.4 10.9 69.6 54.4 10.9 69.6
Unrecaptured Section 1250 Gain 45.6 8.8 10.9 45.6 8.8 10.9
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
115
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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. During 2004 and 2003, the taxable consolidated entities were comprised
of our taxable REIT subsidiaries.
We intend to maintain our qualification as a REIT under Section 856 of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, we
generally will not be subject to federal corporate income taxes as long as we
satisfy certain technical requirements of the Code, including the requirement to
distribute 90% of REIT taxable income to our shareholders. Accordingly, we do
not believe that we will be liable for current income taxes on our REIT taxable
income at the federal level or in most of the states in which we operate. We
consolidate certain taxable REIT subsidiaries, which are subject to federal and
state income tax.
Significant components of our deferred tax liabilities and assets at
December 31, 2004 and 2003 from continuing operations are as follows:
DECEMBER 31, DECEMBER 31,
(in thousands) 2004 2003
-------------- ----------- ------------
Deferred tax liabilities:
Residential development costs $ (23,926) $ (21,854)
Depreciation (5,563) (5,196)
Minority interest (4,934) (4,782)
Land value adjustments (14,891) -
--------- ----------
Total deferred tax liabilities: $ (49,314) $ (31,832)
========= ==========
Deferred tax assets:
Deferred revenue $ 28,678 $ 31,686
Hotel lease acquisition costs 1,404 3,338
Amortization of intangible assets 11,790 9,055
Net operating loss carryforwards 7,655 5,190
Impairment of assets 5,383 4,087
Related party interest expense not currently deductible 13,056 -
Other 7,449 7,986
--------- ----------
Total deferred tax assets $ 75,415 $ 61,342
Valuation allowance for deferred tax assets (12,710) (12,004)
--------- ----------
Deferred tax assets, net of valuation allowance $ 62,705 $ 49,338
========= ==========
Net deferred tax assets $ 13,391 $ 17,506
========= ==========
In addition to the net deferred tax assets of approximately $13.4 million
at December 31, 2004, we had a current tax receivable of $0.4 million,
comprising the total Income tax asset - current and deferred, net on our
Consolidated Balance Sheets at December 31, 2004. At December 31, 2003, we had a
current income tax payable of approximately $8.0 million.
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. After consideration of all the
evidence, both positive and negative, management determined that a $12.7 million
and a $12.0 million valuation allowance at December 31, 2004 and 2003
respectively, were necessary to reduce the deferred tax assets to the amount
that will more likely than not be realized. When assessing the adequacy of the
valuation allowance, management considered both anticipated reversals of
deferred tax liabilities and other potential sources of taxable income in future
years. We have available net operating loss carryforwards of approximately $9.6
million at December 31, 2004, arising from operations of the taxable REIT
subsidiaries prior to joining the consolidated taxable REIT group. The net
operating loss carryforwards will expire between 2019 and 2023.
116
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated income (loss) from continuing operations subject to tax was
$(33.2) million, $69.4 million and $(21.2) million for the years ended December
31, 2004, 2003 and 2002 respectively. The reconciliation of (i) income tax
attributable to consolidated income (loss) subject to tax computed at the U.S.
statutory rate to (ii) income tax benefit is shown below:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- ------------------- ---------------------
(in thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------------- -------- ------- -------- ------- -------- -------
Tax at U.S. statutory rates on consolidated income
(loss) subject to tax $ 11,615 35.0% $(24,284) (35.0)% $ 7,434 35.0%
State income tax, net of federal income tax benefit 1,327 4.0 (3,045) (4.4) 809 3.8
Other 701 2.1 274 0.4 251 1.2
Increase in valuation allowance (706) (2.1) - - (3,859) (18.6)
-------- ------- -------- ------ -------- ------
$ 12,937 39.0% $(27,055) (39.0)% $ 4,635 21.4%
======== ======= ======== ====== ======== ======
(in thousands) 2004 2003 2002
------------------------------------ ------------ --------- --------
Current tax benefit (expense) $ 401 $ (12,055) $ (3,065)
Deferred tax benefit (expense) 12,536 (15,000) 7,700
------------ --------- --------
Federal income tax benefit (expense) $ 12,937 $ (27,055) $ 4,635
============ ========= ========
Our $12.9 million income tax benefit for the year ended December 31, 2004,
consists primarily of $9.2 million for the Residential Development Segment and
$8.4 million for the Resort/Hotel Segment partially offset by $2.0 million tax
expense for the Office Segment and $2.7 million expense for other taxable REIT
subsidiaries.
19. RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC.
Between June 1999 and December 2000, we contributed approximately $24.2
million to DBL. The contribution was used by DBL to make an equity contribution
to DBL-ABC, Inc., a wholly-owned subsidiary of DBL, which committed to purchase
an affiliated partnership interest representing a 12.5% interest in G2. G2 was
formed for the purpose of investing principally in commercial mortgage backed
securities and is managed and controlled by an entity that we refer to as the G2
General Partner that is owned equally by GMSPLP and GMAC Commercial Mortgage
Corporation. The G2 General Partner is entitled to an annual asset management
fee. Additionally, the G2 General Partner has a 1% interest in profits and
losses of G2 and, after payment of specified amounts to partners, a promoted
interest based on payments to unaffiliated limited partners. As an affiliated
limited partner, DBL-ABC, Inc.'s returns are not impacted by the G2 General
Partner's promoted interest. As of December 31, 2004, DBL-ABC, Inc. has received
approximately $22.4 million cumulative distributions. The investment balance as
of December 31, 2004 is approximately $13.0 million. In February 2005, we
received a cash distribution of approximately $17.9 million from DBL, bringing
the total distributions to $40.3 million on an initial investment of
$24.7 million.
The ownership structure of GMSPLP consists of an approximately 86% limited
partnership interest owned directly and indirectly by Richard E. Rainwater,
Chairman of our Board of Trust Managers, 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 our Board of Trust Managers and our Chief Executive Officer.
The remaining approximately 2% general partnership interest is owned by
unrelated parties.
117
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 2, 2003, we purchased the remaining 2.56% economic interest,
representing 100% of the voting stock, in DBL from Mr. Goff. Total consideration
paid for Mr. Goff's interest was $0.4 million. Our Board of Trust Managers,
including all of the independent trust managers, approved the transaction based
in part on an appraisal of the assets of DBL by an independent appraisal firm.
As a result of this transaction, DBL is wholly-owned by us and is consolidated
beginning as of and for the year ended December 31, 2003. Also, because DBL owns
a majority of the voting stock in MVDC and HADC, we consolidated these two
Residential Development Corporations beginning as of and for the year ended
December 31, 2003.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of December 31, 2004, we had approximately $38.0 million in loan
balances outstanding reflected in the "Additional paid-in capital" line item in
the Consolidated Balance Sheets, inclusive of current interest accrued of
approximately $0.2 million, to certain of our employees and trust managers on a
recourse basis under stock and unit incentive plans pursuant to an agreement
approved by our Board of Trust Managers and its Executive Compensation
Committee. The employees and the trust managers used the loan proceeds to
acquire common shares of Crescent pursuant to the exercise of vested stock and
unit options. The loans bear interest at 2.52% per year (based on the Applicable
Federal Rates (AFR) discussed below), payable quarterly, 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 December 31, 2004. No conditions exist at December
31, 2004 which would cause any of the loans to be in default.
Under the option to obtain loans pursuant to our stock and unit incentive
plans, we granted loans to our employees and trust managers through July 29,
2002, at which time we ceased offering such loans. The loans entered into had
interest rates equal to the applicable federal short-term, mid-term and
long-term AFR, determined and published by the IRS based upon average market
yields of specified maturities. On July 29, 2002, the loans were amended to
extend the remaining terms until July 28, 2012, to stipulate that every three
years the interest rate on the loans would be adjusted to the AFR applicable at
that time for a three-year loan, and to provide the employees and trust managers
the option, at any time, to fix the interest rate for each of the loans to the
AFR applicable at that time for a loan with a term equal to the remaining term
of the loan. On July 29, 2003, each of the employees and trust managers elected
to fix the interest rate on the loans and the interest rate on the loans, each
with a remaining term of nine years, was reduced to 2.52%. As a result of the
amendments to the terms and the interest rates which reflected below prevailing
market interest rates, we recognized $1.9 million additional compensation
expense for the year ended December 31, 2002, reflected in the "Other expenses"
line item in our Consolidated Statements of Operations.
OTHER
We have a policy which allows employees to purchase our residential
properties marketed and sold by our subsidiaries in the ordinary course of
business. This policy requires the individual to purchase the property for
personal use or investment and requires the property to be held for at least two
years. In addition this policy requires, among other things, that the prices
paid by affiliates must be equivalent to the prices paid by unaffiliated third
parties for similar properties in the same development, and that the other terms
and conditions of the transaction must be at least as beneficial to us as the
terms and conditions with respect to the other properties in the same
development. In the first quarter of 2005, two executive officers entered into
binding contracts to purchase three condominium units at two of our residential
development projects.
On June 28, 2002, we purchased the home of an executive officer 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 us. Shortly after the purchase of the home, certain changes in the
business environment in Houston resulted in a weakened housing market. In May
2004, we completed the sale of the home for proceeds, net of selling costs, of
approximately $1.8 million. We previously recorded an impairment charge of
approximately $0.6 million, net of taxes, during the year ended December 31,
2003.
118
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY FINANCIAL INFORMATION (unaudited)
FOR THE 2004 QUARTER ENDED
---------------------------------------------------
(in thousands) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- --------- --------- ------------- ------------
Total Property revenues $ 219,787 $ 227,094 $ 234,440 $ 297,440
Total Property expenses 139,356 147,866 155,628 219,140
Income (loss) from continuing operations before minority interests and
income taxes (13,457) (17,772) (20,179) 240,686
Minority interests 1,921 2,150 792 (42,074)
Income tax (provision) benefit 1,277 5,324 6,614 (278)
Income from discontinued operations, net of minority interests 1,836 3,312 2,429 2,644
Impairment charges related to real estate assets from discontinued
operations, net of minority interests (1,994) (424) (297) (263)
(Loss) gain on real estate from discontinued operations, net of minority
interests (47) (2,073) (32) 3,204
Cumulative effect of a change in accounting principle, net of minority
interests (363) - - -
Net (loss) income available to common shareholders - Basic $ (18,597) $ (17,493) $ (18,682) $ 195,910
========= ========= ========= =========
Net (loss) income available to common shareholders - Diluted $ (18,597) $ (17,493) $ (18,682) $ 202,149
========= ========= ========= =========
Per share data:
Basic Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued
operations and cumulative effect of a change in accounting principle $ (0.19) $ (0.19) $ (0.21) $ 1.92
- Income from discontinued operations, net of minority interests 0.02 0.03 0.02 0.03
- Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.02) - - -
- (Loss) gain on real estate from discontinued operations, net of
minority interests - (0.02) - 0.03
--------- --------- --------- ---------
- Net (loss) income available to common shareholders - Basic $ (0.19) $ (0.18) $ (0.19) $ 1.98
========= ========= ========= =========
Diluted Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued
operations and cumulative effect of a change in accounting principle $ (0.19) $ (0.19) $ (0.21) $ 1.81
- Income from discontinued operations, net of minority interests 0.02 0.03 0.02 0.02
- Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.02) - - -
- (Loss) gain on real estate from discontinued operations, net of
minority interests - (0.02) - 0.03
--------- --------- --------- ---------
- Net (loss) income available to common shareholders - Diluted $ (0.19) $ (0.18) $ (0.19) $ 1.86
========= ========= ========= =========
119
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 2003 QUARTER ENDED
------------------------------------------------------
(in thousands) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- --------- --------- ------------- ------------
Total Property revenues $ 215,424 $ 219,574 $ 199,022 $ 237,696
Total Property expenses 139,026 147,309 128,072 153,369
Income (loss) from continuing operations before minority interests and
income taxes (6,744) (5,043) 700 73,029
Minority interests 1,695 (1,117) (1,093) (5,924)
Income tax (provision) benefit 2,404 3,067 4,865 (37,391)
Income from discontinued operations, net of minority interests 3,603 4,496 815 3,425
Impairment charges related to real estate assets from discontinued
operations, net of minority interests (13,425) (840) (1,998) (8,789)
(Loss) gain on real estate from discontinued operations, net of minority
interests (288) (41) (19) 10,635
Net (loss) income available to common shareholders $ (19,330) $ (6,053) $ (3,305) $ 28,410
========= ========= ========= =========
Per share data:
Basic Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued
operations and cumulative effect of a change in accounting principle $ (0.09) $ (0.10) $ (0.02) $ 0.24
- Income from discontinued operations, net of minority interests 0.04 0.05 0.01 0.03
- Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.14) (0.01) (0.02) (0.09)
- (Loss) gain on real estate from discontinued operations, net of
minority interests - - - 0.11
--------- --------- --------- ---------
- Net (loss) income available to common shareholders - Basic $ (0.19) $ (0.06) $ (0.03) $ 0.29
========= ========= ========= =========
Diluted Earnings Per Common Share
-(Loss) income available to common shareholders before discontinued
operations and cumulative effect of a change in accounting principle $ (0.09) $ (0.10) $ (0.02) $ 0.24
- Income from discontinued operations, net of minority interests 0.04 0.05 0.01 0.03
- Impairment charges related to real estate assets from discontinued
operations, net of minority interests (0.14) (0.01) (0.02) (0.09)
- (Loss) gain on real estate from discontinued operations, net of
minority interests - - - 0.11
--------- --------- --------- ---------
- Net (loss) income available to common shareholders - Diluted $ (0.19) $ (0.06) $ (0.03) $ 0.29
========= ========= ========= =========
21. COPI
On February 14, 2002, we entered into an agreement with COPI pursuant to
which we and COPI agreed to jointly seek approval by the bankruptcy court of a
pre-packaged bankruptcy plan for COPI. We agreed to fund certain of COPI's
costs, claims and expenses relating to the bankruptcy and related transactions.
During the year ended December 31, 2004, we loaned to COPI, or paid directly on
COPI's behalf, approximately $2.6 million to fund these costs, claims and
expenses. We also agreed to issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders. Because we had recorded a
liability of $18.0 million in 2001 related to the COPI bankruptcy, the payment
of these amounts and the amounts attributable to the agreement to issue the
common shares had no effect on our results of operations or financial condition
for the years ended December 31, 2004, 2003, and 2002.
In addition, we 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 us. As a condition to
making the loan, Bank of America required Richard E. Rainwater, the Chairman of
our Board of Trust Managers, and John C. Goff, the Vice-Chairman of our Board of
Trust Managers and our Chief Executive Officer, 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 used the proceeds of the sale of its interest in AmeriCold
Logistics to repay Bank of America in full.
Pursuant to the agreement, the current and former directors and officers
of COPI and our current and former trust managers and officers received a
release from COPI of liability for any actions taken prior to February 14, 2002,
and received certain liability releases from COPI and its stockholders under the
COPI bankruptcy plan.
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. On November 4, 2004, COPI sold its interest in AmeriCold Logistics
to AmeriCold
120
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realty Trust 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 $4.4 million of the
proceeds to satisfy a portion of its debt obligations to us. Of the $4.4
million, $0.7 million has been recorded as a reduction of the amounts paid by us
in connection with the accrued liability recorded in 2001 relating to the COPI
bankruptcy. Because we also wrote off COPI debt obligations to us in 2001, the
remaining $3.7 million has been included in the "Interest and other income" line
item in our Consolidated Statements of Operations for the year ended December
31, 2004. In addition, approximately $2.6 million of the accrued liability
related to the COPI bankruptcy was reversed in December 2004 resulting in a
reduction in the amounts included in the "Other expenses" line item in our
Consolidated Statements of Operations.
On January 19, 2005, the bankruptcy plan became effective upon COPI's
providing notification to the bankruptcy court that all conditions to
effectiveness had been satisfied. Following the effectiveness of the bankruptcy
plan, we issued 184,075 common shares to the stockholders of COPI in
satisfaction of our final obligation under the agreement with COPI. The common
shares were valued at approximately $3.0 million in accordance with the terms of
our agreement with COPI and the provisions of the bankruptcy plan. As
stockholders of COPI, certain of our trust managers and executive officers, as a
group, received an aggregate of 25,426 common shares.
22. BEHAVIORAL HEALTHCARE PROPERTIES
On March 31, 2004, we sold our last remaining behavioral healthcare
property. The sale generated proceeds, net of selling costs, of approximately
$2.0 million and a net loss of approximately $0.3 million. This property was
wholly-owned.
This table presents the dispositions of behavioral healthcare properties
by year including the number of properties sold, net proceeds received, loss on
sales and impairments recognized. Depreciation has not been recognized since the
dates the behavioral healthcare properties were classified as held for sale.
NUMBER OF
(dollars in millions) PROPERTIES NET GAIN
YEAR SOLD PROCEEDS (LOSS) IMPAIRMENTS(2)
-------------------- ------------ -------- -------- --------------
2004 1 $ 2.0 $ (0.3) $ -
2003 6 11.2(1) - 4.8
2002 3 4.6 - 3.2
------------------
(1) The sale of one property on February 27, 2003 also generated a note
receivable in the amount of $0.7 million, with interest only payments
beginning March 2003, through maturity in February 2005. The note was
repaid in February 2005.
(2) The impairment charges represent the difference between the carrying
values and the estimated sales prices less the costs of the sales for all
properties held for sale during the respective year.
23. SUBSEQUENT EVENTS
CANYON RANCH
On January 18, 2005, we contributed the Canyon Ranch Tucson, our 50%
interest and our preferred interest in CR Las Vegas, LLC, and our 30% interest
in CR License, L.L.C., CR License II, L.L.C., CR Orlando LLC and CR Miami LLC,
to two newly formed entities, CR Spa, LLC and CR Operating, LLC. In exchange, we
received a 48% common equity interest in each new entity. The remaining 52%
interest in these entities is held by the founders of Canyon Ranch, who
contributed their interests in CR Las Vegas, LLC, CR License II, L.L.C., CR
Orlando LLC and CR Miami LLC and the resort management contracts. In addition,
we sold the Canyon Ranch Lenox Destination Resort Property to a subsidiary of CR
Operating, LLC. The founders of Canyon Ranch sold their interest in CR License,
L.L.C. to a subsidiary of CR Operating, LLC. As a result of these transactions,
the new entities own the following assets: Canyon Ranch Tucson, Canyon Ranch
Lenox, Canyon Ranch SpaClub at the Venetian Resort in Las Vegas, Canyon Ranch
SpaClub on the Queen Mary 2 ocean liner, Canyon Ranch Living Community in Miami,
Florida, Canyon Ranch SpaClub at The Gaylord Palms Resort in Kissimmee, Florida,
and the Canyon Ranch trade names and trademarks.
In addition, the newly formed entities completed a private
placement of Mandatorily Redeemable Convertible Preferred Membership Units for
aggregate gross proceeds of approximately $110.0 million. Richard E. Rainwater,
Chairman of our Board of Trust Managers, and certain of his family members
purchased approximately $27.1 million of these units. The units are convertible
into a 25% common equity interest in CR Spa, LLC and CR Operating, LLC and pay
distributions at the rate of 8.5% per year in years one through seven, and 11%
in years eight through ten. At the end of this period, the holders of the units
are entitled to receive a premium in an amount sufficient to result in a
cumulative return of 11% per year. The units are redeemable after seven years.
Also on January 18, 2005, the new entities completed a $95.0 million financing
with Bank of America. The loan has an interest-only term until maturity in
February 2015, bears interest at 5.94% and is secured by the Canyon Ranch
Tucson and Canyon Ranch Lenox Destination Resort Properties. As a result of
these transactions, we received proceeds of approximately $91.9 million, which
was used to pay down or defease debt related to our previous investment in the
Properties and to pay down our credit facility.
In connection with this transaction, we have agreed to indemnify the
founders regarding the tax treatment of this transaction, not to exceed $2.5
million, and other matters. We believe there is a remote likelihood that payment
will ever be made related to these indemnities.
121
OFFICE JOINT VENTURE
On February 24, 2005, we contributed 1301 McKinney Street and an adjacent
parking garage, subject to the Morgan Stanley Mortgage Capital, Inc. Note, to a
limited partnership in which we have a 23.85% interest, a fund advised by JPM
has a 60% interest and GE has a 16.15% interest. The property was valued at
$106.0 million and the transaction generated net proceeds to us of approximately
$33.4 million which were used to pay down our credit facility. We have no
commitment to reinvest the cash proceeds back into the joint venture. None of
the mortgage financing at the joint venture level is guaranteed by us.
OFFICE ACQUISITION
On February 7, 2005, we acquired The Exchange Building, a 295,525 square
foot Class A office property located in Seattle, Washington. We acquired the
office property for approximately $52.5 million, funded by a draw on our credit
facility. This property is wholly-owned and will be included in our Office
Segment.
OFFICE DISPOSITION
On February 7, 2005, we completed the sale of Albuquerque Plaza Office
Property in Albuquerque, New Mexico. The sale generated proceeds, net of selling
costs, of approximately $34.7 million and a gain of approximately $1.8 million.
The proceeds from the sale were used primarily to pay down the Bank of America
Fund XII Term Loan. This property was wholly-owned.
OTHER REAL ESTATE INVESTMENTS
On February 7, 2005, we completed a $34.5 million mezzanine loan in which
we immediately sold a 50% participating interest for $17.25 million. The loan is
secured by ownership interests in an entity that owns an office property in New
York, New York. The loan bears interest at LIBOR plus 775 basis points with an
interest-only term until maturity in March 2007, subject to the right of the
borrower to extend the loan pursuant to three one-year extension options.
122
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), such as this report on Form 10-K, 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 management, including our Chief Executive Officer and 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 we present the conclusions
of the Chief Executive Officer and Chief Financial Officer about the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report
INTERNAL CONTROL OVER FINANCIAL REPORTING. Internal control over financial
reporting is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, as appropriate, and effected by
our employees, including management and our 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 our 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 our receipts
and expenditures are made only in accordance with the authorization
procedures we have established; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of any of our assets
in circumstances that could have a material adverse effect on our
financial statements.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. Management, including our Chief
Executive Officer and Chief Financial Officer, do not expect that our disclosure
controls and procedures or internal control over financial reporting will
prevent all errors and fraud. In designing and evaluating our 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 our
operations 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 our design will succeed in achieving
its stated goals under all potential future conditions. Over time, our 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 EVALUATIONS. The evaluations by our Chief Executive Officer and our
Chief Financial Officer of our disclosure controls and procedures and our
internal control over financial reporting included a
123
review of procedures and our internal audit, as well as discussions with our
Disclosure Committee, independent public accountants and others in our
organization, as appropriate. In conducting the evaluation, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control -- Integrated Framework. In the
course of the evaluation, we 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 evaluation of our disclosure
controls and procedures and our internal control over financial reporting is
done on a quarterly basis, so that the conclusions concerning the effectiveness
of such controls can be reported in our Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K. Our internal control over financial reporting is
also assessed on an ongoing basis by personnel in our accounting department and
by our independent auditors in connection with their audit and review
activities.
The overall goals of these various evaluation activities are to monitor our
disclosure controls and procedures and our internal control over financial
reporting and to make modifications as necessary. Our intent in this regard is
that the disclosure controls and procedures and internal control over financial
reporting will be maintained and updated (including with improvements and
corrections) as conditions warrant. Among other matters, we sought in our
evaluation to determine whether there were any "significant deficiencies" or
"material weaknesses" in our internal control over financial reporting, or
whether we had identified any acts of fraud involving personnel who have a
significant role in our internal control over financial reporting. This
information is important both for the evaluation generally and because the
Section 302 certifications require that our Chief Executive Officer and our
Chief Financial Officer disclose that information to the Audit Committee of our
Board of Trust Managers and our independent auditors and also require us to
report on related matters in this section of the Annual Report on Form 10-K. In
the Public Company Accounting Oversight Board's Auditing Standard No. 2, a
"significant deficiency" is a "control deficiency," or a combination of control
deficiencies, that adversely affects the ability to initiate, authorize, record,
process or report external financial data reliably in accordance with GAAP such
that there is more than a remote likelihood that a misstatement of the annual or
interim financial statements that is more than inconsequential will not be
prevented or detected. A "control deficiency" exists when the design or
operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A "material weakness" is defined in Auditing
Standard No. 2 as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We also sought to deal with other control matters in the
evaluation, and in any case in which a problem was identified, we considered
what revision, improvement and/or correction was necessary to be made in
accordance with our on-going procedures.
PERIODIC EVALUATION AND CONCLUSION OF DISCLOSURE CONTROLS AND PROCEDURES. Our
Chief Executive Officer and Chief Financial Officer have conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that such controls and procedures were effective as of the end of the period
covered by this report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. We made no changes to our
internal control over financial reporting during the fourth quarter of the
fiscal year to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Crescent Real Estate Equities Company is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934.
Internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by our employees, including management and the 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. Management conducted an
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 based on the
124
framework established in Internal Control- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 our fair presentation of published financial
statements 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.
A material weakness is a control deficiency, or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
Based on our assessment, management believes that, as of December 31, 2004, our
internal control over financial reporting was not effective as a result of
material weaknesses identified at our two Canyon Ranch Resort Properties.
Canyon Ranch Resort Properties
Management has identified material weaknesses at our two Canyon Ranch Resort
Properties with respect to the internal controls in place at December 31, 2004.
These Properties are managed by a third party under separate management
agreements. As of December 31, 2004, we owned 100% of the two Canyon Ranch
Resort Properties, which represents approximately 3% of our total assets and 9%
of our total revenues. The nature of each of the material weaknesses in our
internal control over financial reporting is described below.
With respect to the financial statement close process for the Canyon Ranch
Resort Properties, management believes that certain ineffective controls at
December 31, 2004 constitute a material weakness. The ineffective controls
include (i) inadequate reviews to ensure accuracy and completeness of recorded
amounts, (ii) inadequate reconciliation of account balances to supporting
details and subledgers, and (iii) inadequate segregation of duties.
With respect to recording purchases, expenditures, accounts payable and cash
disbursements at the Canyon Ranch Resort Properties, management believes that
certain ineffective controls at December 31, 2004 constitute a material
weakness. The ineffective controls identified include (i) inadequate segregation
of duties, (ii) inadequate review and approval for purchases, (iii) inadequate
review of bank reconciliations, and (iv) inadequate controls to identify whether
liabilities and expenses are recorded or accrued in the proper period.
With respect to recording revenue, accounts receivable and cash receipts at the
Canyon Ranch Resort Properties, management believes that certain ineffective
controls at December 31, 2004 constitute a material weakness. The ineffective
controls include (i) inadequate reviews to ensure accuracy and completeness of
recorded amounts, (ii) inadequate review of bank reconciliations, and (iii)
inadequate review of reconciliation of daily sales receipts to the supporting
details.
The Company's material weaknesses described above affect all of the significant
financial statement accounts at the Canyon Ranch Resort Properties.
Ernst & Young LLP, the independent public accountants who audited the financial
statements included in this Annual Report on Form 10-K, have issued an
attestation report on management's assessment of our internal control over
financial reporting, which appears on page 127 of this Annual Report on Form
10-K.
REMEDIATION STEPS TO ADDRESS MATERIAL WEAKNESS
The two Canyon Ranch Resort Properties are managed by a third party under
separate management agreements. For the years ended December 31, 2004, 2003 and
2002, the two Canyon Ranch Resort Properties received an unqualified opinion on
their financial statements. There were no adjustments recorded in the financial
statements for these periods as a result of the material weaknesses and no
indication of fraud during these periods. Further, the Canyon Ranch Resort
Management team, which has managed the properties since 1979, had designed
their control system based on their evaluation of the relative costs and
benefits of particular controls, taking into account that they operate in a
non-Sarbanes Oxley compliance environment. On January 18, 2005, we contributed
a portion of our interests in these properties to a newly formed joint venture.
As a result, we now have a 48% interest in an entity that owns these two
properties and will no longer consolidate them. We originally expected to
complete this transaction prior to December 31, 2004; therefore, the two Canyon
Ranch Resort Properties were excluded from the original plan for compliance
testing and evaluation. When it became apparent that the transaction might not
close prior to year-end, management completed an evaluation of the
125
design of controls over significant accounts noting the material weaknesses.
The Canyon Ranch Resort Properties management team has implemented a plan to
address the ineffective controls discussed above and plan to perform the
following:
o Present a detailed plan to remediate the material weaknesses
to the newly-formed joint venture board of directors
o Hire additional accounting staff to mitigate the lack of segregation
of duties
126
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF TRUST MANAGER AND SHAREHOLDERS OF CRESCENT REAL ESTATE EQUITIES
COMPANY AND SUBSIDIARIES
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Crescent
Real Estate Equities Company and subsidiaries (the "Company") did not maintain
effective internal control over financial reporting as of December 31, 2004,
because of the effect of material weaknesses identified for the Canyon Ranch
Resort Properties, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
127
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment:
With respect to the financial statement close process for the Company's two
Canyon Ranch Resort Properties, certain ineffective controls at December 31,
2004 constitute a material weakness. The ineffective controls include (i)
inadequate reviews to ensure accuracy and completeness of recorded amounts, (ii)
inadequate reconciliation of account balances to supporting details and
subledgers, and (iii) inadequate segregation of duties.
With respect to recording purchases, expenditures, accounts payable and cash
disbursements at the Company's two Canyon Ranch Resort Properties, certain
ineffective controls at December 31, 2004 constitute a material weakness. The
ineffective controls include (i) inadequate segregation of duties, (ii)
inadequate review and approval for purchases, (iii) inadequate performance of
bank reconciliations, and (iv) inadequate controls to identify whether
liabilities and expenses are recorded or accrued in the proper period.
With respect to recording revenue, accounts receivable and cash receipts at the
Company's two Canyon Ranch Resort Properties, certain ineffective controls at
December 31, 2004 constitute a material weakness. The ineffective controls
include (i) inadequate reviews to ensure input accuracy and completeness, (ii)
inadequate performance of bank reconciliations, and (iii) inadequate performance
of reconciliation of daily sales receipts to the supporting details. The
Company's material weaknesses described above affect all of the significant
financial statement accounts at the Canyon Ranch Resort Properties. These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 financial statements, and
this report does not affect our report dated March 14, 2005 on those financial
statements.
In our opinion, management's assessment that Crescent Real Estate Equities
Company and subsidiaries did not maintain effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, because of the
effect of the material weaknesses described above on the achievement of the
objectives of the control criteria, Crescent Real Estate Equities Company and
subsidiaries has not maintained effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.
ERNST & YOUNG LLP
Dallas, Texas
March 14, 2005
128
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
Certain information required in Part III is omitted from this Report.
We will file a definitive proxy statement with the SEC not later than 120 days
after the end of the fiscal year covered by this Report, and certain information
to be included in the Proxy Statement is incorporated into this Report by
reference. Only those sections of the Proxy Statement which specifically address
the items set forth in this Report are incorporated by reference. The
Compensation Committee Report and the Performance Graph included in the Proxy
Statement are not incorporated by reference into this Report.
ITEM 10. TRUST MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information this Item requires is incorporated by reference to our
Proxy Statement to be filed with the SEC for our annual shareholders' meeting to
be held in May 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information this Item requires is incorporated by reference to our
Proxy Statement to be filed with the SEC for our annual shareholders' meeting to
be held in May 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information this Item requires is incorporated by reference to our
Proxy Statement to be filed with the SEC for our annual shareholders' meeting to
be held in May 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information this Item requires is incorporated by reference to our
Proxy Statement to be filed with the SEC for our annual shareholders' meeting to
be held in May 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information this Item requires is incorporated by reference to our
Proxy Statement to be filed with the SEC for our annual shareholders' meeting to
be held in May 2005.
129
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Crescent Real Estate Equities Company Consolidated Balance Sheets at
December 31, 2004 and 2003.
Crescent Real Estate Equities Company Consolidated Statements of
Operations for the years ended December 31, 2004, 2003 and 2002.
Crescent Real Estate Equities Company Consolidated Statements of
Shareholders' Equity for the years ended December 31, 2004, 2003 and
2002.
Crescent Real Estate Equities Company Consolidated Statements of Cash
Flows for the years ended December 31, 2004, 2003 and 2002.
Crescent Real Estate Equities Company Notes to Consolidated Financial
Statements.
(a)(2) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or-Less-Owned Persons
Financial Statement Schedules
Schedule III - Crescent Real Estate Equities Company Consolidated Real
Estate Investments and Accumulated Depreciation at December 31, 2004.
All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in
the Financial Statements and related notes included in the consolidated
statements.
Financial Statements of Subsidiaries Not Consolidated and
Fifty-Percent-or-Less-Owned Persons
The Woodlands Land Development Company, L.P., The Woodlands Commercial
Properties Company, L.P., and The Woodlands Operating Company, L.P.
Report of Independent Auditors....................................
Combined Balance Sheets at December 31, 2003 and 2002.............
Combined Statements of Earnings and Comprehensive Income for
the years ended December 31, 2003 and 2002........................
Combined Statement of Changes in Partners' Equity (Deficit)
for the years ended December 31, 2003 and 2002 ...................
Combined Statements of Cash Flows for the years ended
December 31, 2003 and 2002........................................
Notes to Combined Financial Statements............................
130
(a) (3) Exhibits
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules and Financial Statements of Subsidiaries
Not Consolidated and Fifty-Percent-or-Less-Owned Persons
The financial statement schedules and financial statements listed
in Item 15(a)(2) are included below.
131
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2004
(dollars in thousands)
Initial Costs(1)
---------------------------
Buildings and
Description Land Improvements
-----------------------------------------------------------------------------------
The Citadel, Denver, CO $ 1,803 $ 17,259
Carter Burgess Plaza, Fort Worth, TX 1,375 66,649
The Crescent Office Towers, Dallas, TX (3) 6,723 153,383
MacArthur Center I & II, Irving, TX 704 17,247
125. E. John Carpenter Freeway, Irving, TX 2,200 48,744
Regency Plaza One, Denver, CO 950 31,797
The Avallon, Austin, TX 475 11,207
Waterside Commons, Irving, TX 3,650 20,135
Two Renaissance Square, Phoenix, AZ - 54,412
Liberty Plaza I & II, Dallas, TX (4) 1,650 15,956
Denver Marriott City Center, Denver, CO (5) - 50,364
707 17th Street, Denver, CO - 56,593
Spectrum Center, Dallas, TX 2,000 41,096
Ptarmigan Place, Denver, CO (4) 3,145 28,815
Stanford Corporate Centre, Dallas, TX - 16,493
Barton Oaks Plaza One, Austin, TX 900 8,207
The Aberdeen, Dallas, TX 850 25,895
12404 Park Central, Dallas, TX (4) 1,604 14,504
Briargate Office and
Research Center, Colorado Springs, CO 2,000 18,044
Park Hyatt Beaver Creek, Avon, CO 10,882 40,789
Albuquerque Plaza, Albuquerque, NM (6) - 36,667
Hyatt Regency Albuquerque, Albuquerque, NM (7) - 32,241
Sonoma Mission Inn & Spa, Sonoma, CA 10,000 44,922
Canyon Ranch, Tucson, AZ 10,609 43,038
3333 Lee Parkway, Dallas, TX 1,450 13,177
Greenway I & IA, Richardson, TX 1,701 15,312
Frost Bank Plaza, Austin, TX - 36,019
301 Congress Avenue, Austin, TX 2,000 41,735
Chancellor Park, San Diego, CA 8,028 23,430
Canyon Ranch, Lenox, MA 4,200 25,218
Greenway Plaza Office & Hotel Portfolios,
Houston, TX 29,232 184,765
1800 West Loop South, Houston, TX (4) 4,165 40,857
55 Madison, Denver, CO 1,451 13,253
44 Cook, Denver, CO 1,451 13,253
Trammell Crow Center, Dallas, TX (3) 25,029 137,320
Greenway II, Richardson, TX 1,823 16,421
Fountain Place, Dallas, TX (3) 10,364 103,212
Behavioral Healthcare Facilities (8) 89,000 301,269
Houston Center, Houston, TX (3) 25,003 224,041
Ventana Country Inn, Big Sur, CA 2,782 26,744
5050 Quorum, Dallas, TX (4) 898 8,243
Addison Tower, Dallas, TX (4) 830 7,701
Palisades Central I, Dallas, TX 1,300 11,797
Palisades Central II, Dallas, TX 2,100 19,176
Stemmons Place, Dallas, TX - 37,537
The Addison, Dallas, TX 1,990 17,998
Sonoma Golf Course, Sonoma, CA 14,956 -
Austin Centre, Austin, TX 1,494 36,475
Omni Austin Hotel, Austin, TX 2,409 56,670
Costs
Capitalized Impairment
Subsequent to to Carrying
Acquisition Value
-------------------------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Fixtures and Fixtures and
Description Equipment Equipment
-------------------------------------------------------------------------------------------
The Citadel, Denver, CO $ 2,002 $ -
Carter Burgess Plaza, Fort Worth, TX 26,626 -
The Crescent Office Towers, Dallas, TX (3) (160,106) -
MacArthur Center I & II, Irving, TX 796 -
125. E. John Carpenter Freeway, Irving, TX 8,582 -
Regency Plaza One, Denver, CO 4,047 -
The Avallon, Austin, TX 11,090 -
Waterside Commons, Irving, TX 6,414 -
Two Renaissance Square, Phoenix, AZ 5,863 -
Liberty Plaza I & II, Dallas, TX (4) (13,306) (4,300)
Denver Marriott City Center, Denver, CO (5) 12,741 -
707 17th Street, Denver, CO 13,402 -
Spectrum Center, Dallas, TX 15,609 -
Ptarmigan Place, Denver, CO (4) (31,358) (602)
Stanford Corporate Centre, Dallas, TX 8,042 (1,200)
Barton Oaks Plaza One, Austin, TX 1,305 -
The Aberdeen, Dallas, TX 1,035 -
12404 Park Central, Dallas, TX (4) (11,458) (4,650)
Briargate Office and
Research Center, Colorado Springs, CO 2,644 -
Park Hyatt Beaver Creek, Avon, CO 21,654 -
Albuquerque Plaza, Albuquerque, NM (6) 3,369 -
Hyatt Regency Albuquerque, Albuquerque, NM (7) (32,241) -
Sonoma Mission Inn & Spa, Sonoma, CA 44,408 -
Canyon Ranch, Tucson, AZ 22,932 -
3333 Lee Parkway, Dallas, TX 2,437 -
Greenway I & IA, Richardson, TX 2,019 -
Frost Bank Plaza, Austin, TX 4,380 -
301 Congress Avenue, Austin, TX 10,184 -
Chancellor Park, San Diego, CA (4,514) -
Canyon Ranch, Lenox, MA 22,538 -
Greenway Plaza Office & Hotel Portfolios,
Houston, TX 110,815 -
1800 West Loop South, Houston, TX (4) (28,622) (16,400)
55 Madison, Denver, CO 1,831 -
44 Cook, Denver, CO 2,805 -
Trammell Crow Center, Dallas, TX (3) (162,349) -
Greenway II, Richardson, TX 6,114 -
Fountain Place, Dallas, TX (3) (113,576) -
Behavioral Healthcare Facilities (8) (260,073) (130,196)
Houston Center, Houston, TX (3) (249,044) -
Ventana Country Inn, Big Sur, CA 7,630 -
5050 Quorum, Dallas, TX (4) (8,141) (1,000)
Addison Tower, Dallas, TX (4) (8,531) -
Palisades Central I, Dallas, TX 1,542 -
Palisades Central II, Dallas, TX 3,601 -
Stemmons Place, Dallas, TX 4,750 -
The Addison, Dallas, TX 1,499 -
Sonoma Golf Course, Sonoma, CA 9,409 (4,354)
Austin Centre, Austin, TX 3,259 -
Omni Austin Hotel, Austin, TX 2,687 -
-------------------------------------
Buildings,
Improvements,
Furniture,
Fixtures and
Description Land Equipment Total
-------------------------------------------------------------------------------------------------
The Citadel, Denver, CO $ 1,803 $ 19,261 $ 21,064
Carter Burgess Plaza, Fort Worth, TX 1,375 93,275 94,650
The Crescent Office Towers, Dallas, TX (3) - - -
MacArthur Center I & II, Irving, TX 880 17,867 18,747
125. E. John Carpenter Freeway, Irving, TX 2,200 57,326 59,526
Regency Plaza One, Denver, CO 950 35,844 36,794
The Avallon, Austin, TX 1,069 21,703 22,772
Waterside Commons, Irving, TX 3,650 26,549 30,199
Two Renaissance Square, Phoenix, AZ - 60,275 60,275
Liberty Plaza I & II, Dallas, TX (4) - - -
Denver Marriott City Center, Denver, CO (5) - 63,105 63,105
707 17th Street, Denver, CO - 69,995 69,995
Spectrum Center, Dallas, TX 2,000 56,705 58,705
Ptarmigan Place, Denver, CO (4) - - -
Stanford Corporate Centre, Dallas, TX - 23,335 23,335
Barton Oaks Plaza One, Austin, TX 900 9,512 10,412
The Aberdeen, Dallas, TX 850 26,930 27,780
12404 Park Central, Dallas, TX (4) - - -
Briargate Office and
Research Center, Colorado Springs, CO 2,000 20,688 22,688
Park Hyatt Beaver Creek, Avon, CO 10,882 62,443 73,325
Albuquerque Plaza, Albuquerque, NM (6) 101 39,935 40,036
Hyatt Regency Albuquerque, Albuquerque, NM (7) - - -
Sonoma Mission Inn & Spa, Sonoma, CA 10,000 89,330 99,330
Canyon Ranch, Tucson, AZ 13,955 62,624 76,579
3333 Lee Parkway, Dallas, TX 1,468 15,596 17,064
Greenway I & IA, Richardson, TX 1,701 17,331 19,032
Frost Bank Plaza, Austin, TX - 40,399 40,399
301 Congress Avenue, Austin, TX 2,000 51,919 53,919
Chancellor Park, San Diego, CA 2,328 24,616 26,944
Canyon Ranch, Lenox, MA 4,200 47,756 51,956
Greenway Plaza Office & Hotel Portfolios,
Houston, TX 27,228 297,584 324,812
1800 West Loop South, Houston, TX (4) - - -
55 Madison, Denver, CO 1,451 15,084 16,535
44 Cook, Denver, CO 1,451 16,058 17,509
Trammell Crow Center, Dallas, TX (3) - - -
Greenway II, Richardson, TX 1,823 22,535 24,358
Fountain Place, Dallas, TX (3) - - -
Behavioral Healthcare Facilities (8) - - -
Houston Center, Houston, TX (3) - - -
Ventana Country Inn, Big Sur, CA 2,569 34,587 37,156
5050 Quorum, Dallas, TX (4) - - -
Addison Tower, Dallas, TX (4) - - -
Palisades Central I, Dallas, TX 1,300 13,339 14,639
Palisades Central II, Dallas, TX 2,100 22,777 24,877
Stemmons Place, Dallas, TX - 42,287 42,287
The Addison, Dallas, TX 1,990 19,497 21,487
Sonoma Golf Course, Sonoma, CA 15,405 4,606 20,011
Austin Centre, Austin, TX 1,494 39,734 41,228
Omni Austin Hotel, Austin, TX 2,409 59,357 61,766
Accumulated
Description Depreciation
------------------------------------------------------ ----------------
The Citadel, Denver, CO $ (13,264)
Carter Burgess Plaza, Fort Worth, TX (41,750)
The Crescent Office Towers, Dallas, TX (3) -
MacArthur Center I & II, Irving, TX (6,049)
125. E. John Carpenter Freeway, Irving, TX (15,103)
Regency Plaza One, Denver, CO (8,996)
The Avallon, Austin, TX (4,586)
Waterside Commons, Irving, TX (6,161)
Two Renaissance Square, Phoenix, AZ (15,796)
Liberty Plaza I & II, Dallas, TX (4) -
Denver Marriott City Center, Denver, CO (5) (18,342)
707 17th Street, Denver, CO (16,023)
Spectrum Center, Dallas, TX (13,600)
Ptarmigan Place, Denver, CO (4) -
Stanford Corporate Centre, Dallas, TX (6,825)
Barton Oaks Plaza One, Austin, TX (2,431)
The Aberdeen, Dallas, TX (9,571)
12404 Park Central, Dallas, TX (4) -
Briargate Office and
Research Center, Colorado Springs, CO (4,503)
Park Hyatt Beaver Creek, Avon, CO (17,413)
Albuquerque Plaza, Albuquerque, NM (6) (9,331)
Hyatt Regency Albuquerque, Albuquerque, NM (7) -
Sonoma Mission Inn & Spa, Sonoma, CA (13,278)
Canyon Ranch, Tucson, AZ (18,008)
3333 Lee Parkway, Dallas, TX (3,446)
Greenway I & IA, Richardson, TX (3,295)
Frost Bank Plaza, Austin, TX (9,435)
301 Congress Avenue, Austin, TX (12,567)
Chancellor Park, San Diego, CA (5,075)
Canyon Ranch, Lenox, MA (13,164)
Greenway Plaza Office & Hotel Portfolios,
Houston, TX (75,637)
1800 West Loop South, Houston, TX (4) -
55 Madison, Denver, CO (3,463)
44 Cook, Denver, CO (3,740)
Trammell Crow Center, Dallas, TX (3) -
Greenway II, Richardson, TX (3,973)
Fountain Place, Dallas, TX (3) -
Behavioral Healthcare Facilities (8) -
Houston Center, Houston, TX (3) -
Ventana Country Inn, Big Sur, CA (7,098)
5050 Quorum, Dallas, TX (4) -
Addison Tower, Dallas, TX (4) -
Palisades Central I, Dallas, TX (2,630)
Palisades Central II, Dallas, TX (5,011)
Stemmons Place, Dallas, TX (8,842)
The Addison, Dallas, TX (3,833)
Sonoma Golf Course, Sonoma, CA (635)
Austin Centre, Austin, TX (7,305)
Omni Austin Hotel, Austin, TX (12,385)
SCHEDULE III
Life on Which
Depreciation in
Latest Income
Date of Acquisition Statement Is
Description Construction Date Computed
------------------------------------------------------------------------------------------------------
The Citadel, Denver, CO 1987 1987 (2)
Carter Burgess Plaza, Fort Worth, TX 1982 1990 (2)
The Crescent Office Towers, Dallas, TX (3) 1985 1993 (2)
MacArthur Center I & II, Irving, TX 1982/1986 1993 (2)
125. E. John Carpenter Freeway, Irving, TX 1982 1994 (2)
Regency Plaza One, Denver, CO 1985 1994 (2)
The Avallon, Austin, TX 1986 1994 (2)
Waterside Commons, Irving, TX 1986 1994 (2)
Two Renaissance Square, Phoenix, AZ 1990 1994 (2)
Liberty Plaza I & II, Dallas, TX (4) 1981/1986 1994 (2)
Denver Marriott City Center, Denver, CO (5) 1982 1995 (2)
707 17th Street, Denver, CO 1982 1995 (2)
Spectrum Center, Dallas, TX 1983 1995 (2)
Ptarmigan Place, Denver, CO (4) 1995 (2)
Stanford Corporate Centre, Dallas, TX 1985 1995 (2)
Barton Oaks Plaza One, Austin, TX 1986 1995 (2)
The Aberdeen, Dallas, TX 1986 1995 (2)
12404 Park Central, Dallas, TX (4) 1987 1995 (2)
Briargate Office and
Research Center, Colorado Springs, CO 1988 1995 (2)
Park Hyatt Beaver Creek, Avon, CO 1989 1995 (2)
Albuquerque Plaza, Albuquerque, NM (6) 1990 1995 (2)
Hyatt Regency Albuquerque, Albuquerque, NM (7) 1990 1995 (2)
Sonoma Mission Inn & Spa, Sonoma, CA 1927 1996 (2)
Canyon Ranch, Tucson, AZ 1980 1996 (2)
3333 Lee Parkway, Dallas, TX 1983 1996 (2)
Greenway I & IA, Richardson, TX 1983 1996 (2)
Frost Bank Plaza, Austin, TX 1984 1996 (2)
301 Congress Avenue, Austin, TX 1986 1996 (2)
Chancellor Park, San Diego, CA 1988 1996 (2)
Canyon Ranch, Lenox, MA 1989 1996 (2)
Greenway Plaza Office & Hotel Portfolios,
Houston, TX 1996/1982 1996 (2)
1800 West Loop South, Houston, TX (4) 1982 1997 (2)
55 Madison, Denver, CO 1982 1997 (2)
44 Cook, Denver, CO 1984 1997 (2)
Trammell Crow Center, Dallas, TX (3) 1984 1997 (2)
Greenway II, Richardson, TX 1985 1997 (2)
Fountain Place, Dallas, TX (3) 1986 1997 (2)
Behavioral Healthcare Facilities (8) 1983/1989 1997 (2)
Houston Center, Houston, TX (3) 1974/1983 1997 (2)
Ventana Country Inn, Big Sur, CA 1975/1988 1997 (2)
5050 Quorum, Dallas, TX (4) 1980/1986 1997 (2)
Addison Tower, Dallas, TX (4) 1980/1986 1997 (2)
Palisades Central I, Dallas, TX 1980/1986 1997 (2)
Palisades Central II, Dallas, TX 1980/1986 1997 (2)
Stemmons Place, Dallas, TX 1980/1986 1997 (2)
The Addison, Dallas, TX 1980/1986 1997 (2)
Sonoma Golf Course, Sonoma, CA 1929 1998 (2)
Austin Centre, Austin, TX 1986 1998 (2)
Omni Austin Hotel, Austin, TX 1986 1998 (2)
132
Initial Costs(1)
----------------------------
Buildings and
Description Land Improvements
------------------------------------------------------------------------------------
Post Oak Central, Houston, TX (3) 15,525 139,777
Datran Center, Miami, FL - 71,091
Avallon Phase II, Austin, TX 1,102 23,401
Plaza Park Garage, Fort Worth, TX 2,032 14,125
Johns Manville Plaza, Denver, CO 9,128 74,937
The Colonnade, Coral Gables, FL 2,600 39,557
Hughes Center, Las Vegas, NV (9) 29,106 177,547
Desert Mountain Development Corp.(10) 120,907 60,487
Crescent Resort Development, Inc. (10) 367,647 23,357
Mira Vista Development Company (10) 3,059 2,234
Houston Area Development Corporation (10) 2,740 -
Crescent Plaza Phase I, Dallas, TX (10) 6,962 -
JPI Multi-family Investment Luxury Apartments,
Deedham, MA 17,095 -
Dupont Center, Irvine, CA (11) 10,000 34,661
The Alhambra Miami, FL (11) 5,500 52,316
One Live Oak, Atlanta, GA (11) 3,800 22,729
1301 McKinney, Houston, TX (11) 5,600 72,408
Peakview Tower, Denver, CO (11) 7,100 25,483
Land held for development or sale, Houston, TX (12) 49,420 -
Land held for development or sale, Dallas, TX 27,288 -
Land held for development or sale, Las Vegas, NV (13) 10,000
Crescent Real Estate Equities L.P. - -
Other 18,588 11,351
--------------------------
Total $ 1,010,375 $ 3,151,541
==========================
Costs
Capitalized Impairment
Subsequent to to Carrying
Acquisition Value
-------------------------------
Land, Buildings, Buildings,
Improvements, Improvements,
Furniture, Furniture,
Fixtures and Fixtures and
Description Equipment Equipment
-------------------------------------------------------------------------------------------
Post Oak Central, Houston, TX (3) (155,302) -
Datran Center, Miami, FL 6,210 -
Avallon Phase II, Austin, TX (11,391) -
Plaza Park Garage, Fort Worth, TX 613 -
Johns Manville Plaza, Denver, CO 3,989 -
The Colonnade, Coral Gables, FL 240 -
Hughes Center, Las Vegas, NV (9) 8,429 -
Desert Mountain Development Corp.(10) 5,890 -
Crescent Resort Development, Inc. (10) 55,789 -
Mira Vista Development Company (10) 1,471 -
Houston Area Development Corporation (10) (1,725) -
Crescent Plaza Phase I, Dallas, TX (10) 9,586 -
JPI Multi-family Investment Luxury Apartments,
Deedham, MA 3,007 -
Dupont Center, Irvine, CA (11) 344 -
The Alhambra Miami, FL (11) 1,848 -
One Live Oak, Atlanta, GA (11) - -
1301 McKinney, Houston, TX (11) - -
Peakview Tower, Denver, CO (11) - -
Land held for development or sale, Houston, TX (12) (26,581) -
Land held for development or sale, Dallas, TX (9,516) -
Land held for development or sale, Las Vegas, NV (13) - -
Crescent Real Estate Equities L.P. 23,834 (660)
Other 4,976 -
----------------------------
Total $ (751,547) $ (163,362)
============================
--------------------------
Buildings,
Improvements,
Furniture,
Fixtures and Accumulated
Description Land Equipment Total Depreciation
---------------------------------------------------------------------------------------------------------------------
Post Oak Central, Houston, TX (3) - - - -
Datran Center, Miami, FL - 77,301 77,301 (13,499)
Avallon Phase II, Austin, TX 640 12,472 13,112 (1,106)
Plaza Park Garage, Fort Worth, TX 2,032 14,738 16,770 (2,484)
Johns Manville Plaza, Denver, CO 9,128 78,926 88,054 (4,821)
The Colonnade, Coral Gables, FL 2,600 39,797 42,397 (1,540)
Hughes Center, Las Vegas, NV (9) 29,106 185,976 215,082 (7,632)
Desert Mountain Development Corp.(10) 114,611 72,673 187,284 (38,051)
Crescent Resort Development, Inc. (10) 396,647 50,146 446,793 (4,672)
Mira Vista Development Company (10) 2,051 4,713 6,764 (887)
Houston Area Development Corporation (10) 1,015 - 1,015 -
Crescent Plaza Phase I, Dallas, TX (10) 6,962 9,586 16,548 -
JPI Multi-family Investment Luxury Apartments,
Deedham, MA 20,102 - 20,102 -
Dupont Center, Irvine, CA (11) 10,000 35,005 45,005 (959)
The Alhambra Miami, FL (11) 5,500 54,164 59,664 (704)
One Live Oak, Atlanta, GA (11) 3,800 22,729 26,529 -
1301 McKinney, Houston, TX (11) 5,600 72,408 78,008 -
Peakview Tower, Denver, CO (11) 7,100 25,483 32,583 -
Land held for development or sale, Houston, TX (12) 22,839 - 22,839 -
Land held for development or sale, Dallas, TX 17,772 - 17,772 -
Land held for development or sale, Las Vegas, NV (13) 10,000 - 10,000 -
Crescent Real Estate Equities L.P. - 23,174 23,174 (6,608)
Other 12,512 22,403 34,915 (2,871)
------------ -------------------------------------------
Total $ 803,549 $2,443,458 $3,247,007 $(506,398)
===========================================================
SCHEDULE III
Life on Which
Depreciation in
Latest Income
Date of Acquisition Statement Is
Description Construction Date Computed
------------------------------------------------------------------------------------------------------
Post Oak Central, Houston, TX (3) 1974-1981 1998 (2)
Datran Center, Miami, FL 1986-1992 1998 (2)
Avallon Phase II, Austin, TX 1997 - (2)
Plaza Park Garage, Fort Worth, TX 1998 - (2)
Johns Manville Plaza, Denver, CO 1978 2002 (2)
The Colonnade, Coral Gables, FL 1989 2003 (2)
Hughes Center, Las Vegas, NV (9) 1986-1999 2003 (2)
Desert Mountain Development Corp.(10) - 2002 (2)
Crescent Resort Development, Inc. (10) - 2002 (2)
Mira Vista Development Company (10) - 2003 (2)
Houston Area Development Corporation (10) - 2003 (2)
Crescent Plaza Phase I, Dallas, TX (10) - 2002
JPI Multi-family Investment Luxury Apartments,
Deedham, MA - 2004 (2)
Dupont Center, Irvine, CA (11) 1986 2004 (2)
The Alhambra Miami, FL (11) 1961-1987 2004 (2)
One Live Oak, Atlanta, GA (11) 1981 2004 (2)
1301 McKinney, Houston, TX (11) 1982 2004 (2)
Peakview Tower, Denver, CO (11) 2001 2004 (2)
Land held for development or sale, Houston, TX (12) - - (2)
Land held for development or sale, Dallas, TX - - (2)
Land held for development or sale, Las Vegas, NV (13) - 2004 (2)
Crescent Real Estate Equities L.P. - - (2)
Other - - (2)
Total
(1) Initial costs include purchase price, excluding any purchase price
adjustments related to SFAS 141 intangibles, and any costs associated
with closing of the Property.
(2) Depreciation of the real estate assets is calculated over the following
estimated useful lives using the straight-line method:
Building and improvements 5 to 46 years
Tenant improvements Terms of leases
Furniture, fixtures, and equipment 3 to 5 years
(3) We contributed this property into a partnership in which we retained a
24% equity interest.
(4) This Office Property was sold during the year ended December 31, 2004.
(5) As of April 1, 2004, Denver Marriott was held for sale, and is included
in Discontinued Operations in the Company's consolidated financial
statements. Depreciation expense has not been recognized since the date
this Property was held for sale.
(6) As of December 31, 2004, Albuquerque Plaza was held for sale, and is
included in Discontinued Operations in the Company's consolidated
financial statements.
(7) This Hotel Property was sold during the year ended December 31, 2004.
(8) This Behavioral Healthcare Property was sold on March 31, 2004.
(9) These Office Properties were acquired in during the years ended December
31, 2003 and 2004.
(10) Land and cost capitalized subsequent to acquisition includes property
under development and is net of residential development cost of sales.
(11) This Office Property was acquired during the year ended December 31,
2004.
(12) On August 16, 2004, the Company sold 2.5 acres of land located in
Houston, Texas. On December 17, 2004, the Company sold 5.3 acres also
located in Houston, Texas.
(13) This Land was acquired during the year ended December 31, 2004.
133
A summary of combined real estate investments and accumulated depreciation is
as follows:
2004 2003 2002
-------------- ------------ ------------
Real estate investments:
Balance, beginning of year $ 3,842,819 $ 3,841,882 $ 3,428,757
Acquisitions 437,359 93,239 92,542
Improvements 153,636 184,884 625,203
Dispositions (1,178,941) (247,122) (301,390)
Impairments (7,866) (30,064) (3,230)
-------------- ------------ ------------
Balance, end of year $ 3,247,007 $ 3,842,819 $ 3,841,882
============== ============ ============
Accumulated Depreciation:
Balance, beginning of year $ 689,618 $ 743,046 $ 648,834
Depreciation 141,354 137,536 129,122
Dispositions (322,574) (190,964) (34,910)
-------------- ------------ ------------
Balance, end of year $ 508,398 $ 689,618 $ 743,046
============== ============ ============
134
COMBINED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Years ended December 31, 2003 and 2002
135
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combined Financial Statements and Other Financial Information
Years ended December 31, 2003 and 2002
CONTENTS
Report of Independent Auditors....................................................137
Audited Combined Financial Statements
Combined Balance Sheets...........................................................138
Combined Statements of Earnings and Comprehensive Income..........................139
Combined Statements of Changes in Partners' Equity (Deficit)......................140
Combined Statements of Cash Flows.................................................141
Notes to Combined Financial Statements............................................142
Other Financial Information
Report of Independent Auditors on Other Financial Information.....................166
Combining Balance Sheets..........................................................167
Combining Statements of Earnings (Loss) and Comprehensive Income (Loss)...........169
Combining Statements of Changes in Partners' Equity (Deficit).....................171
Combining Statements of Cash Flows................................................172
136
Report of Independent Auditors
To the Executive Committee of
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
We have audited the accompanying combined balance sheets of The Woodlands Land
Development Company, L.P., The Woodlands Commercial Properties Company, L.P.,
and The Woodlands Operating Company, L.P., Texas limited partnerships,
(collectively, the "Companies"), as of December 31, 2003 and 2002, and the
related combined statements of earnings and comprehensive income, changes in
partners' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Companies at
December 31, 2003 and 2002, and the combined results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
February 9, 2004
137
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combined Balance Sheets
DECEMBER 31
2003 2002
---------- ----------
(Dollars in Thousands)
ASSETS
Cash and cash equivalents $ 14,045 $ 24,995
Trade receivables 9,186 12,721
Receivables from affiliates 625 101
Inventory 2,231 1,986
Prepaid and other current assets 3,843 4,570
Notes and contracts receivable 31,254 29,414
Real estate 491,552 517,424
Properties held for sale -- 8,882
Other assets 11,939 11,672
---------- ----------
$ 564,675 $ 611,765
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 30,001 $ 51,317
Payables to affiliates 5,353 5,249
Credit facility 280,000 285,000
Debt related to properties held for sale -- 8,001
Other debt 59,882 57,932
Deferred revenue 27,792 23,601
Other liabilities 14,666 15,021
Notes payable to partners 25,000 25,000
---------- ----------
442,694 471,121
Commitments and contingencies
Partners' equity 121,981 140,644
---------- ----------
$ 564,675 $ 611,765
========== ==========
See accompanying notes.
138
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combined Statements of Earnings and Comprehensive Income
YEAR ENDED DECEMBER 31
2003 2002
---------- ----------
(Dollars in Thousands)
Revenues:
Residential lot sales $ 78,708 $ 84,429
Commercial land sales 27,331 59,713
Gain on sale of properties 1,415 48,920
Hotel and country club operations 68,470 55,614
Other 24,365 26,274
---------- ----------
200,289 274,950
Costs and expenses:
Residential lot cost of sales 34,841 38,607
Commercial land cost of sales 10,993 19,579
Hotel and country club operations 67,597 48,950
Operating expenses 44,686 41,668
Depreciation and amortization 14,232 12,804
---------- ----------
172,349 161,608
---------- ----------
Operating earnings 27,940 113,342
Other (income) expense:
Interest expense 19,476 21,127
Interest capitalized (9,749) (12,458)
Amortization of debt costs 2,270 2,248
Net gain on involuntary conversion (659) --
Other (104) 2,333
---------- ----------
11,234 13,250
---------- ----------
Earnings from continuing operations 16,706 100,092
Discontinued operations:
Gain on disposal of discontinued operations 8,098 --
Gain from discontinued operations 1,202 2,271
---------- ----------
Net earnings 26,006 102,363
Other comprehensive income:
Gain on interest rate swap 1,534 392
---------- ----------
Comprehensive income $ 27,540 $ 102,755
========== ==========
See accompanying notes.
139
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combined Statements of Changes in Partners' Equity (Deficit)
THE CRESCENT REAL TWC
WOODLANDS ESTATE EQUITIES CRESWOOD WOCOI TWC LAND COMMERCIAL
LAND LIMITED DEVELOPMENT, INVESTMENT DEVELOPMENT PROPERTIES,
COMPANY, INC. PARTNERSHIP L.L.C. COMPANY L.P. L.P.
------------- --------------- ------------ ---------- ------------ -----------
(Dollars in Thousands)
Balance, December 31, 2001 $ 42,939 $ 26,006 $ 627 $ (4,158) $ -- $ --
Distributions (37,687) (18,675) (4,950) -- -- --
Net earnings (loss) 29,138 20,323 5,287 (1,672) -- --
Comprehensive income 206 -- -- -- -- --
------------- --------------- ------------ ---------- ------------ -----------
Balance, December 31, 2002 34,596 27,654 964 (5,830) -- --
Distributions (19,386) (4,150) (1,100) -- -- --
Net earnings (loss) 11,001 5,105 1,353 (3,805) -- --
Comprehensive income 644 127 34 -- -- --
Sale of Crescent's interest to Rouse
(Note 1) (26,855) (28,736) (1,251) 9,635 26,855 29,987
------------- --------------- ------------ ---------- ------------ -----------
Balance, December 31, 2003 $ -- $ -- $ -- $ -- $ 26,855 $ 29,987
============= =============== ============ ========== ============ ===========
TWC
OPERATING MS/TWC JOINT
L.P. VENTURE MS TWC, INC. TOTAL
--------- ------------ ------------ -----------
Balance, December 31, 2001 $ -- $ 86,963 $ 1,540 $ 153,917
Distributions -- (53,556) (1,160) (116,028)
Net earnings (loss) -- 48,266 1,021 102,363
Comprehensive income -- 183 3 392
--------- ------------ ------------ -----------
Balance, December 31, 2002 -- 81,856 1,404 140,644
Distributions -- (21,105) (462) (46,203)
Net earnings (loss) -- 12,092 260 26,006
Comprehensive income -- 714 15 1,534
Sale of Crescent's interest to Rouse
(Note 1) (9,635) -- -- --
--------- ------------ ------------ -----------
Balance, December 31, 2003 $ (9,635) $ 73,557 $ 1,217 $ 121,981
========= ============ ============ ===========
See accompanying notes.
140
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combined Statements of Cash Flows
YEAR ENDED DECEMBER 31
2003 2002
---------- ----------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net earnings $ 26,006 $ 102,363
Adjustments to reconcile net earnings to cash provided by
operating activities:
Other comprehensive income 1,534 392
Cost of land sold 45,834 58,186
Land development capital expenditures (39,503) (39,412)
Depreciation and amortization 14,741 13,340
Amortization of debt costs 2,270 2,248
Gain on discontinued operations (8,098) --
Gain on sale of properties (1,415) (48,920)
Increase in notes and contracts receivable (1,840) (3,546)
Other liabilities and deferred revenue 3,836 6,456
Other 7,538 4,492
Changes in operating assets and liabilities:
Trade receivables, inventory, and prepaid assets 4,017 (6,909)
Other assets (2,127) (5,593)
Accounts payable, accrued liabilities, and net
payables with affiliates (21,736) 9,816
---------- ----------
Cash provided by operating activities 31,057 92,913
INVESTING ACTIVITIES
Capital expenditures (13,618) (67,800)
Proceeds from sale of property 20,940 53,031
---------- ----------
Cash provided by (used in) investing activities 7,322 (14,769)
FINANCING ACTIVITIES
Distributions to partners (46,203) (116,028)
Debt borrowings 5,268 93,769
Debt repayments (8,394) (40,462)
---------- ----------
Cash used in financing activities (49,329) (62,721)
---------- ----------
(Decrease) increase in cash and cash equivalents (10,950) 15,423
Cash and cash equivalents, beginning of year 24,995 9,572
---------- ----------
Cash and cash equivalents, end of year $ 14,045 $ 24,995
========== ==========
See accompanying notes.
141
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements
December 31, 2003 and 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTROL
The Woodlands Land Development Company, L.P. ("Woodlands Development"), The
Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial"), and The
Woodlands Operating Company, L.P. ("Woodlands Operating"), Texas limited
partnerships (together "The Woodlands Partnerships"), are owned by entities
controlled by The Rouse Company ("Rouse") and Morgan Stanley Real Estate Fund
II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial are
successors to The Woodlands Corporation. Prior to July 31, 1997, The Woodlands
Corporation was a wholly owned subsidiary of Mitchell Energy & Development Corp.
On July 31, 1997, The Woodlands Corporation was acquired by Crescent Real Estate
Equities Limited Partnership ("Crescent") and Morgan Stanley. On December 31,
2003, Crescent sold its interest in The Woodlands Partnerships to Rouse.
Woodlands Operating and its subsidiary, WECCR General Partnership ("WECCR GP"),
manage assets owned by Woodlands Commercial and Woodlands Development as
described in Note 8. In July 2000, Woodlands Development and Woodlands
Commercial established subsidiaries, Woodlands VTO 2000 Land, L.P. ("VTO Land"),
and Woodlands VTO 2000 Commercial, L.P. ("VTO Commercial"), to own and operate
certain commercial properties in The Woodlands. These subsidiaries purchased
certain commercial properties owned by Woodlands Development and Woodlands
Commercial. In June 2001, Woodlands Development established a subsidiary, The
Woodlands Hotel, L.P. ("the Hotel"), to construct and operate a hotel in The
Woodlands.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of The Woodlands
Partnerships and are combined due to common ownership in certain cases and
management. All significant transactions and accounts between The Woodlands
Partnerships are eliminated in combination. The Woodlands Partnerships follow
the equity method of accounting for their investments in 20% to 50% owned
entities.
142
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS
The Woodlands Partnerships' real estate activities are concentrated in The
Woodlands, a planned community located north of Houston, Texas. Consequently,
these operations and the associated credit risks may be affected, either
positively or negatively, by changes in economic conditions in this geographical
area. Activities associated with The Woodlands Partnerships include residential
and commercial land sales and the construction, operation, and management of
office and industrial buildings, apartments, golf courses, and two hotel
facilities.
REAL ESTATE
Costs associated with the acquisition and development of real estate, including
holding costs consisting principally of interest and ad valorem taxes, are
capitalized as incurred. Capitalization of such holding costs is limited to
properties for which active development continues. Capitalization ceases upon
completion of a property or cessation of development activities. Where
practicable, capitalized costs are specifically assigned to individual assets;
otherwise, costs are allocated based on estimated values of the affected assets.
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the years ended
December 31, 2003 and 2002, there were no impairments recognized.
REVENUE RECOGNITION
Staff Accounting Bulletin No. 104 ("SAB 104") provides interpretive guidance on
the proper revenue recognition, presentation, and disclosure in financial
statements. The Woodlands Partnerships have reviewed their revenue recognition
policies and determined that they are in compliance with accounting principles
generally accepted in the United States and the related interpretive guidance
set forth in SAB 104.
143
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND SALES
Earnings from sales of real estate are recognized when a third-party buyer has
made an adequate cash down payment and has attained the attributes of ownership.
Notes received in connection with land sales are discounted when the stated
purchase prices are significantly different from those that would have resulted
from similar cash transactions. The cost of land sold is generally determined as
a specific percentage of the sales revenues recognized for each land development
project. The percentages are based on total estimated development costs and
sales revenues for each 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 cost.
SALES OF COMMERCIAL PROPERTIES
Sales of commercial properties are accounted for under the accrual method when
certain criteria are met. Gains or losses are recognized when a significant down
payment has been made, the earnings process is complete, and the collection of
any remaining receivables is reasonably assured.
LEASE REVENUE
Commercial properties are leased to third-party tenants generally involving
multi-year terms. These leases are accounted for as operating leases. See Note 3
for further discussion.
DEPRECIATION
Depreciation of operating assets is recorded on the straight-line method over
the estimated useful lives of the assets. Useful lives range predominantly from
15 to 40 years for land improvements and buildings, 3 to 20 years for leasehold
improvements, and 3 to 10 years for furniture, fixtures, and equipment. Property
and equipment are carried at cost less accumulated depreciation. Costs incurred
for computer software developed for internal use are capitalized for application
development activities.
144
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are charged to operations when incurred. For the years ended
December 31, 2003 and 2002, advertising costs totaled $4,407,000 and $5,686,000,
respectively.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related debt using the interest method.
INCOME TAXES
Woodlands Development, Woodlands Commercial, and Woodlands Operating are not
income tax-paying entities, and all income and expenses are reported by the
partners for tax reporting purposes. No provision for federal income taxes is
included in the accompanying combined financial statements for these entities.
Effective March 1, 2002, WECCR GP elected to be classified as an association
taxable as a corporation for federal income tax purposes. Accordingly, federal
income tax has been provided. For state purposes, WECCR GP is a partnership, and
no state tax has been provided for. WECCR GP had no foreign operations.
The tax returns, the qualification of The Woodlands Partnerships for tax
purposes, and the amount of distributable partnership income or loss are subject
to examination by federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.
INVENTORY
Inventory is carried at the lower of cost or market and consists primarily of
golf-related clothing and equipment sold at golf course pro shops and food and
beverages sold at the hotel facilities in The Woodlands. Cost is determined
based on a first-in, first-out method.
145
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
Short-term investments with maturities of three months or less when purchased
are considered to be cash equivalents. Debt borrowings and repayments with
initial terms of three months or less are reported net. For the years ended
December 31, 2003 and 2002, The Woodlands Partnerships paid interest totaling
$19,760,000 and $20,827,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior year's combined financial
statements to conform with classifications used in the current year.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of Others. This
Interpretation requires a guarantor to recognize, at the inception of a
guarantee issued or modified after December 31, 2002, a liability for the fair
value of the obligation undertaken for issuing the guarantee. Adoption of this
Interpretation did not have a material impact on The Woodlands Partnerships'
results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities. This Interpretation requires the consolidation of
entities in which an enterprise absorbs a majority of the entity's losses,
receives a majority of the entity's expected residual returns, or both, as a
result of ownership, contractual, or other financial interests in the entity.
146
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to the issuance of this Interpretation, entities were generally
consolidated by an enterprise when it had a controlling interest through
ownership of a majority voting interest. This Interpretation applies immediately
to entities created after January 31, 2003, and with respect to variable
interests held prior to that date, The Woodlands Partnerships will apply the
Interpretation beginning in 2005, when required for nonpublic entities. The
Woodlands Partnerships do not have any variable interests with entities created
after January 31, 2003, and are in the process of evaluating their investments
in variable interest entities created prior to that date. Adoption of this
Interpretation is not expected to have a material impact on The Woodlands
Partnerships' results of operations or financial position.
2. NOTES AND CONTRACTS RECEIVABLE
Notes receivable are carried at cost, net of discounts. At December 31, 2003 and
2002, Woodlands Development held notes and contracts receivable totaling
$31,054,000 and $29,048,000, respectively, including amounts related to utility
district receivables totaling $27,746,000 and $27,904,000, respectively. During
2003 and 2002, Woodlands Development sold $7,000,000 and $13,885,000,
respectively, of its utility district receivables to a financial institution
under a factoring agreement and recorded a retained interest related to these
receivables of $324,000 and $1,305,000, respectively, which is included in the
utility district receivables. The retained interest was calculated using a
discount rate of 5% and assumes the receivables are collected in three years.
Woodlands Development recorded a discount of $215,000 and $600,000 on these
factorings during the years ended December 31, 2003 and 2002, respectively.
Utility district receivables, the collection of which is dependent on the
ability of utility districts in The Woodlands to sell bonds, have a market
interest rate of approximately 4.75% at December 31, 2003. Other notes
receivable totaling $3,308,000 bear interest at an average rate of 6.1%.
Maturities for 2004 through 2008 and thereafter are $186,000, $201,000,
$217,000, $230,000, $-0-, and $2,474,000, respectively.
At December 31, 2003 and 2002, Woodlands Commercial held notes receivable
totaling $200,000 and $366,000, respectively. The notes receivable have stated
interest rates between prime plus .5% and prime plus 1.5%, with a yield of
approximately 5.5% at December 31, 2003. The remaining $200,000 note at December
31, 2003, has no stated maturity.
147
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
3. REAL ESTATE
The following is a summary of real estate (in thousands):
DECEMBER 31
2003 2002
---------- ----------
Land $ 276,756 $ 284,452
Commercial properties 260,749 248,586
Equity investments 4,331 9,781
Other assets 6,586 20,510
---------- ----------
548,422 563,329
Accumulated depreciation (56,870) (45,905)
---------- ----------
$ 491,552 $ 517,424
========== ==========
LAND
The principal land development is The Woodlands, a mixed-use, master-planned
community located north of Houston, Texas. Residential land is divided into
eight villages in various stages of development. Each village has or is planned
to contain a variety of housing, neighborhood retail centers, schools, parks,
and other amenities. Woodlands Development controls the development of the
residential communities and produces finished lots for sale to qualified
builders. Housing is constructed in a wide range of pricing and product styles.
Commercial land is divided into distinct centers that serve or are planned to
serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties or for its own building development activities.
148
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
3. REAL ESTATE (CONTINUED)
COMMERCIAL PROPERTIES
Commercial and industrial properties owned or leased by The Woodlands
Partnerships are leased to third-party tenants. At December 31, 2003 and 2002,
the net book value of assets under operating leases totaled $24,722,000 and
$34,379,000, respectively. Lease terms, including renewal periods, range from 1
to 26 years with an average remaining term of 3 years. Contingent rents include
pass-throughs of incremental operating costs. Minimum future lease revenues from
noncancelable operating leases and subleases exclude contingent rentals that may
be received under certain lease agreements. Tenant rents include rent for
noncancelable operating leases, cancelable leases, and month-to-month rents and
are included in other revenue. For the years ended December 31, 2003 and 2002,
tenant rents totaled $8,589,000 and $9,180,000, respectively. For the years
ended December 31, 2003 and 2002, contingent rents totaled $2,315,000 and
$2,496,000, respectively. Minimum future lease rentals for 2004 through 2008 and
thereafter total $6,616,000, $3,560,000, $2,962,000, $2,438,000, $1,586,000, and
$1,013,000, respectively.
During 2002, The Woodlands Partnerships sold commercial properties for
$37,000,000 and recognized as other revenue a gain on sale of properties of
$11,507,000.
PROPERTIES HELD FOR SALE AND DISCONTINUED OPERATIONS
In December 2002, a subsidiary of Woodlands Commercial acquired the limited
partner interests in two partnerships for which Woodlands Commercial is the
general partner. These properties, with a carrying value of $8,882,000, were
classified as properties held for sale on the combined balance sheet at December
31, 2002. Woodlands Commercial sold these properties in July 2003 for $16.2
million and recognized a gain of $6,186,000. Other partnerships in which
Woodlands Commercial holds an equity interest sold their assets during 2003.
Woodlands Commercial recognized $2,774,000 as its share of the gain from the
sales. In December 2003, Woodlands Development sold a commercial property for
$8.4 million and recognized a loss of $862,000 on the sale.
149
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
3. REAL ESTATE (CONTINUED)
In October 2003, The Woodlands Partnerships contracted with third parties to
provide property management, leasing and related functions that were previously
provided by in-house staff. The Woodlands Partnerships recorded termination
benefits of $505,000 that are included in "operating expenses" in the summary of
discontinued operations below for the year ended December 31, 2003.
A summary of the gain from discontinued operations for the years ended December
31, 2003 and 2002, follows (in thousands):
2003 2002
---------- ----------
Revenues $ 10,189 $ 10,790
Operating expenses 8,187 7,983
Depreciation 509 536
---------- ----------
Operating earnings 1,493 2,271
Interest expense (based on direct debt) 291 --
---------- ----------
Net gain $ 1,202 $ 2,271
========== ==========
4. EQUITY INVESTMENTS
During 2003, The Woodlands Partnerships' principal partnership and corporation
interests included the following:
OWNERSHIP NATURE OF OPERATIONS
--------- ---------------------------------
Woodlands Development:
Stewart Title of Montgomery County, Inc. 50% Title company
Woodlands Commercial:
The Woodlands Mall Associates (sold in
December 2002) 50% Regional mall in The Woodlands
Woodlands Office Equities -'95 Limited 25% Office buildings in The Woodlands
150
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
4. EQUITY INVESTMENTS (CONTINUED)
Other partnerships own various commercial properties, all of which are located
in The Woodlands. Woodlands Operating provides various management and leasing
services to these affiliated entities on the same terms and conditions as those
of unrelated third parties. The Woodlands Partnerships' net investment in each
of these entities is included in the real estate caption on the combined balance
sheets and their shares of these entities' pretax earnings is included in other
revenues on the combined statements of earnings and comprehensive income. A
summary of The Woodlands Partnerships' net investment as of December 31, 2003
and 2002 and their share of pretax earnings for the years then ended follows (in
thousands):
2003 2002
---------- ----------
Net investment:
Stewart Title of Montgomery County, Inc. $ 1,109 $ 1,350
Woodlands Office Equities - '95 Limited 2,908 6,681
Others, that own properties in The Woodlands 314 1,750
---------- ----------
$ 4,331 $ 9,781
========== ==========
2003 2002
---------- ----------
Equity in pretax earnings:
Stewart Title of Montgomery County, Inc. $ 584 $ 609
Woodlands Mall Associates (sold in December 2002) -- 1,677
Woodlands Office Equities - '95 Limited 185 711
Others, that own properties in The Woodlands 245 294
---------- ----------
$ 1,014 $ 3,291
========== ==========
151
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
4. EQUITY INVESTMENTS (CONTINUED)
Summarized financial statement information for partnerships and a corporation in
which The Woodlands Partnerships' have an equity ownership interest at December
31, 2003 and 2002, and for the years then ended follows (in thousands):
2003 2002
---------- ----------
Assets $ 49,503 $ 72,758
Debt payable to third parties:
The Woodlands Partnerships' proportionate share:
Recourse to The Woodlands Partnerships 3,314 4,024
Nonrecourse to The Woodlands Partnerships 2,429 4,911
Other parties' proportionate share, of which $9,595 combined
was guaranteed by The Woodlands Partnerships 21,135 25,939
Notes payable to The Woodlands Partnerships -- 116
Accounts payable and deferred credits 2,695 1,675
Owners' equity 19,930 36,093
Revenues 23,190 52,256
Operating earnings 12,968 26,886
Pretax earnings 10,974 17,466
The Woodlands Partnerships' share of pretax earnings 1,014 3,291
Woodlands Commercial has guaranteed mortgage debt of its unconsolidated
affiliates totaling $12,909,000 and $14,733,000 at December 31, 2003 and 2002,
respectively. These guarantees reduce in varying amounts through 2017 and would
require payments only in the event of default on payment by the respective
debtors. Woodlands Commercial believes that the likelihood is remote that
payments will be required under these guarantees.
152
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
4. EQUITY INVESTMENTS (CONTINUED)
In December 2002, Woodlands Commercial sold its interest in The Woodlands Mall
Associates for $43,400,000 and recognized as gain on sale of properties of
$33,628,000.
5. DEBT
A summary of The Woodlands Partnerships' outstanding debt at December 31, 2003
and 2002, follows (in thousands):
2003 2002
---------- ----------
Bank credit agreement $ 280,000 $ 285,000
Subsidiaries' credit agreements 46,443 42,823
Debt related to properties held for sale -- 8,001
Mortgages payable 13,439 15,109
---------- ----------
$ 339,882 $ 350,933
========== ==========
BANK CREDIT AGREEMENT
In November 2002, Woodlands Development and Woodlands Commercial renegotiated
their existing bank credit agreement. The new bank credit agreement consists of
a $300 million term loan and a $100 million revolving credit loan. The credit
agreement has a three-year term expiring in November 2005 with two one-year
extension options for the term loan and a one year extension option for the
revolving loan. At December 31, 2003 and 2002, $100,000,000 was available to be
borrowed under the revolving credit agreement. The interest rate, based on the
London Interbank Offered Rate plus a margin, is approximately 4.4% at December
31, 2003. Interest is paid monthly. Commitment fees, based on .25% of the unused
commitment, totaled $109,000 and $126,000 for the years ended December 31, 2003
and 2002, respectively. The credit agreement contains certain restrictions that,
among other things, require the maintenance of specified financial ratios,
restrict indebtedness and sale, lease or transfer of certain assets, and limit
the right of Woodlands Development and Woodlands Commercial to merge with other
companies and make distributions to their partners. At December 31, 2003,
Woodlands Development and Woodlands Commercial were
153
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
5. DEBT (CONTINUED)
in compliance with their debt covenants. Certain assets of Woodlands Development
and Woodlands Commercial, including cash, receivables, commercial properties and
equity investments in joint ventures and partnerships, secure the credit
agreement. Mandatory debt maturities for 2004 and 2005 are $22,500,000 and
$257,500,000, respectively. Payments may be made by Woodlands Development or
Woodlands Commercial or both at their option. In addition to stipulated
principal payments, principal payments are also required based on distributions
to Rouse and Morgan Stanley and certain covenant tests. Prepayments can also be
made at the discretion of Woodlands Development and Woodlands Commercial.
Prepayments on the term loan are subject to a prepayment penalty of up to 1%.
At December 31, 2003, Woodlands Development and Woodlands Commercial had
interest rate swap agreements with two commercial banks to reduce the impact of
increases in interest rates on their bank credit agreement. The interest swap
agreements effectively limits their interest rate exposure on the notional
amount of $100,000,000 to LIBOR rates of 1.735%. The interest swap agreements
expire July 3, 2006. Woodlands Development and Woodlands Commercial are exposed
to credit loss in the event of nonperformance by the other parties. However,
management does not anticipate nonperformance by the other parties.
SUBSIDIARIES' CREDIT AGREEMENTS
VTO Land and VTO Commercial entered into a $67,500,000 credit agreement that had
a three-year term expiring in October 2003 with two one-year extension options.
The first one-year extension option was exercised. The interest rate, based on
the London Interbank Offered Rate plus a margin, is approximately 3.2% and 3.4%
at December 31, 2003 and 2002, respectively. Interest is paid monthly. At
December 31, 2003 and 2002, the outstanding balance was $5,836,000 and
$6,944,000, respectively, for VTO Land and $2,845,000 and $3,385,000,
respectively, for VTO Commercial. The credit agreement contains certain
restrictions that, among other things, require the maintenance of specified
financial ratios and restrict indebtedness and leasing. At December 31, 2003,
VTO Land and VTO Commercial were in compliance with their debt covenants.
Certain assets of the subsidiaries secure the agreement. Debt maturities for
2004 are $8,681,000. VTO Land, VTO Commercial or both may make payments at their
option.
154
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
5. DEBT (CONTINUED)
Prior to 2002, VTO Land and VTO Commercial had entered into an interest rate cap
agreement with a commercial bank to reduce the impact of increases in interest
rates on their credit agreement. The interest cap effectively limited the
interest rate exposure on a notional amount of $33,750,000 to a maximum rate of
1%. The interest cap agreement matured in October 2003 and was not renewed.
The Woodlands Hotel, L.P., a subsidiary of Woodlands Development, has a
$39,000,000 revolving credit agreement to finance the construction of a hotel.
This agreement matures in December 2005. At December 31, 2003 and 2002, the
outstanding balance was $37,762,000 and $32,494,000, respectively. The interest
rate, based on the London Interbank Offered Rate plus a margin, is approximately
4.1% at December 31, 2003. Interest is paid monthly. No principal payments are
due until 2005. The credit agreement contains certain restrictions that, among
other things, restrict indebtedness and leasing. At December 31, 2003, The
Woodlands Hotel, L.P., was in compliance with its debt covenants. Certain assets
of the subsidiary secure the agreement, and Woodlands Development and Woodlands
Commercial have guaranteed repayment of the loan.
DERIVATIVES
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133, and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, establish accounting and
reporting standards for derivative instruments and hedging activities.
Derivative instruments are recorded on the balance sheet at fair value by
"marking-to-market" all derivatives at period-end. Changes in fair value are
recorded as an increase or decrease in partners' equity through either
comprehensive income or net earnings, depending on the facts and circumstances
with respect to the derivatives and their documentation. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document and assess the effectiveness of transactions that receive
hedge accounting. To the extent that changes in market values are initially
recorded in other comprehensive income, such changes reverse out and are
recorded in net earnings in the same period in which the hedged item affects
earnings. During 2003, The Woodlands
155
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
5. DEBT (CONTINUED)
Partnerships recorded a $1,534,000 gain in other comprehensive income related to
hedges. During 2002, The Woodlands Partnerships recorded a $119,000 loss in net
earnings and a $392,000 gain in other comprehensive income related to hedges.
DEBT RELATED TO PROPERTIES HELD FOR SALE
The debt consisted of two mortgages related to the properties held for sale
discussed in Note 3. The mortgages had an average interest rate of 6.8%. The
mortgages were repaid when the two apartment properties were sold in July 2003.
MORTGAGES PAYABLE
The mortgages payable have an average interest rate of 5.9%. Debt maturities for
2004 through 2008 and thereafter total $646,000, $1,676,000, $636,000,
$3,556,000, $6,824,000, and $101,000, respectively. Mortgages payable are all
secured by certain tracts of land.
6. NOTES PAYABLE TO PARTNERS
Woodlands Development has notes payable to its partners totaling $25,000,000.
The notes bear interest at 15%. Interest is payable quarterly. All outstanding
balances are due in 2007. These notes are subordinate to the bank credit
agreement and mortgages payable described above.
7. COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITIES
The Woodlands Partnerships had contingent liabilities consisting of letters of
credit and guarantees at December 31, 2003 and 2002, totaling approximately
$9,694,000 and $12,559,000, and $7,721,000 and $7,869,000, respectively. The
letters of credit act as guarantee of payment to third parties in accordance
with specified terms and conditions. The guarantees consist primarily of loan
guarantees and would require payment only in the event of default by the
debtors.
156
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
The Woodlands Partnerships have various noncancelable facilities and equipment
lease agreements that provide for aggregate future payments of approximately
$36,965,000. Included in this amount is $9,650,000 for a capital lease of a
convention center facility adjoining a hotel owned by a subsidiary of Woodlands
Development. The lease has a 99-year term expiring in 2101. The present value of
the lease payments, $1,755,000, is included in other liabilities in the
accompanying combining balance sheet at December 31, 2003. Other lease terms
extend to 2009 and have an average remaining term of six years. Minimum rentals
for the years subsequent to December 31, 2003, total approximately (in
thousands):
CAPITAL
LEASES OPERATING LEASES TOTAL
-------- --------------------- --------
2004 $ 151 $ 4,735 $ 613 $ 5,499
2005 144 5,006 665 5,815
2006 142 4,745 660 5,547
2007 100 4,113 460 4,673
2008 100 2,869 460 3,429
Thereafter 9,400 2,243 359 12,002
-------- -------- -------- --------
$ 10,037 $ 23,711 $ 3,217 $ 36,965
======== ======== ======== ========
Rental expense for operating leases for the years ended December 31, 2003 and
2002, were $4,979,000 and $4,922,000, respectively.
157
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL ACTIONS
The Woodlands Partnerships are a party to claims and legal actions arising in
the ordinary course of their business and to recurring examinations by the
Internal Revenue Service and other regulatory agencies. Management believes,
after consultation with outside counsel, that adequate financial statement
accruals have been provided for all known litigation contingencies where losses
are deemed probable. Based on the status of other cases, The Woodlands
Partnerships are unable to determine a range of such possible additional losses,
if any, that might be incurred. The Woodlands Partnerships believe it is not
probable that the ultimate resolution of these actions will have a material
adverse effect on their financial position, results of operations, and cash
flows.
8. RELATED-PARTY TRANSACTIONS
Woodlands Operating provides services to Woodlands Development and Woodlands
Commercial under management and advisory services agreements. These agreements
are automatically renewed annually. Woodlands Development and Woodlands
Commercial pay Woodlands Operating a management and advisory fee equal to cost
plus 3%. In addition, they reimburse Woodlands Operating for all costs and
expenses incurred on their behalf. For the years ended December 31, 2003 and
2002, Woodlands Operating recorded revenues of $12,496,000 and $13,337,000,
respectively, for services provided to Woodlands Development and $4,212,000 and
$4,795,000, respectively, for services provided to Woodlands Commercial. These
revenues are eliminated in the accompanying combined financial statements.
Woodlands Operating, through WECCR GP, leases The Woodlands Conference Center
and Country Club ("the Facilities") from Woodlands Commercial. The Facilities
are operated by WECCR GP and consist of a 416-room hotel, conference center,
country clubs, and golf and tennis facilities. The lease agreement has an
eight-year term ending July 31, 2005. WECCR GP operates the Facilities and pays
Woodlands Commercial a base rent of $750,000 per month and a quarterly
percentage rent based on the gross receipts of the Facilities. For the years
ended December 31, 2003 and 2002, rent under the lease agreement totaled
$12,453,000 and $14,315,000, respectively, which has been eliminated in the
accompanying combined financial statements. In 2002, WECCR GP contracted with an
affiliate of Morgan
158
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
Stanley to manage the Facilities for a management fee equal to 2.5% of cash
receipts, as defined in the agreement. During 2003 and 2002, the management fee
totaled $1,232,000 and $1,089,000, respectively.
In 1999, Woodlands Development purchased approximately 1,000 acres of land in
The Woodlands from Woodlands Commercial for $33,090,000, the then-current fair
market value, which approximated the carrying cost. The transaction consisted of
cash and a $26,000,000 note. The remaining balance was repaid in 2002. For the
year ended December 31, 2002, interest totaled $80,000. Interest is eliminated
in the accompanying combined financial statements.
9. PARTNERS' EQUITY
Rouse's ownership interests in The Woodlands Partnerships are through TWC Land
Development L.P., TWC Commercial Properties L.P., and TWC Operating L.P. Morgan
Stanley's ownership interests are through MS/TWC Joint Venture and MS TWC, Inc.
The partners' percentage interests are summarized below:
GENERAL PARTNER INTEREST LIMITED PARTNER INTEREST
------------------------ ------------------------
Woodlands Development:
TWC Land Development L.P. 42.5% --
MS/TWC Joint Venture -- 56.5%
MS TWC, Inc. 1.0% --
Woodlands Commercial:
TWC Commercial Properties L.P. 1.0% 41.5%
MS/TWC Joint Venture -- 56.5%
MS TWC, Inc. 1.0% --
Woodlands Operating:
TWC Operating L.P. 42.5% --
MS/TWC Joint Venture -- 56.5%
MS TWC, Inc. 1.0% --
159
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
9. PARTNERS' EQUITY (CONTINUED)
The partnership agreements for each of the partnerships provide, among other
things, the following:
(i) Woodlands Development, Woodlands Commercial, and Woodlands Operating
are each governed by an Executive Committee composed of equal
representation from their respective general partners.
(ii) Net income and losses from operations are currently allocated based on
the payout percentages discussed below. A reclassification of
approximately $730,000 has been made to the 2002 income allocation for
Woodlands Operating between the Morgan Stanley and Crescent partners to
reflect the achievement in 2001 of the payout percentages discussed
below.
(iii) Distributions are made by The Woodlands Partnerships to the partners
based on specified payout percentages and include cumulative preferred
returns to Morgan Stanley's affiliates. The payout percentage to Morgan
Stanley's affiliates is 57.5% until the affiliates receive
distributions on a combined basis equal to their capital contributions
and a 12% cumulative preferred return compounded quarterly. Then, the
payout percentage to Morgan Stanley's affiliates is 50.5% until the
affiliates receive distributions equal to their capital contributions
and an 18% cumulative preferred return compounded quarterly.
Thereafter, the payout percentage to Morgan Stanley's affiliates is
47.5%. During 2001, Morgan Stanley's affiliates received sufficient
cumulative distributions from The Woodlands Partnerships to exceed
Morgan Stanley's affiliates' capital contributions plus cumulative
returns of 18%. Accordingly, Morgan Stanley's affiliates are currently
receiving a payout percentage of 47.5%, and Rouse's affiliates are
receiving 52.5% from The Woodlands Partnerships.
(iv) The Woodlands Partnerships will continue to exist until December 31,
2040, unless terminated earlier due to specified events.
160
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
9. PARTNERS' EQUITY (CONTINUED)
(v) No additional partners may be admitted to The Woodlands Partnerships
unless specific conditions in the partnership agreements are met.
Partnership interests may be transferred to affiliates of Rouse or
Morgan Stanley. Rouse has the right of first refusal to buy the
partnership interests of the Morgan Stanley affiliates at the same
terms and conditions offered to a third-party purchaser or sell its
affiliates' interests to the same third-party purchaser.
(vi) Rouse and Morgan Stanley have the right to offer to purchase the other
partner's affiliates' partnership interests in the event of failure to
make specified capital contributions or a specified default by the
other. Specified defaults include bankruptcy, breach of partnership
covenants, transfer of partnership interests except as permitted by the
partnership agreements, and fraud or gross negligence.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of The Woodlands Partnerships' financial instruments
as of December 31, 2003 and 2002, approximated their carrying amounts, with the
exception of the notes payable to partners for Woodlands Development, which had
an estimated fair value of $31,000,000 and $33,000,000, respectively.
Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to The Woodlands Partnerships for debt with similar remaining
maturities. For floating-rate debt obligations, carrying amounts and fair values
were assumed to be equal because of the nature of these obligations. The
carrying amounts of The Woodlands Partnerships' other financial instruments
approximate their fair values.
161
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
11. EMPLOYEE PLANS
DEFINED CONTRIBUTION PLAN
Woodlands Operating has a 401(k) defined contribution plan that is available to
all full-time employees who meet specified service requirements. The plan is
administered by a third party. Contributions to the plan are based on a match of
employee contributions up to a specified limit. For the years ended December 31,
2003 and 2002, Woodlands Operating contributions totaled approximately $700,000
each year.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Woodlands Operating has deferred compensation arrangements for a select group of
management employees that provide the opportunity to defer a portion of their
cash compensation. Woodlands Operating's obligations under this plan are
unsecured general obligations to pay in the future the value of the deferred
compensation adjusted to reflect the performance of its investments, whether
positive or negative, of selected measurement options, chosen by each
participant, during the deferral period. Woodlands Operating has established
trust accounts on behalf of the participating employees totaling $2,233,000 and
$1,822,000 that are included in other assets at December 31, 2003 and 2002,
respectively.
INCENTIVE PLANS
Woodlands Operating instituted an incentive compensation plan for certain
employees in 2001. The plan is unfunded and while certain payments are made
currently, a portion of these payments is deferred and will be paid based on a
vesting period of up to three years. For the years ended December 31, 2003 and
2002, expenses recognized by The Woodlands Partnerships under this plan totaled
$2,026,000 and $3,883,000, respectively.
162
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
12. INCOME TAXES
The income tax benefit for the years ended December 31, 2003 and 2002, is as
follows (in thousands):
2003 2002
---------- ----------
Current federal income tax benefit $ -- $ --
Deferred federal income tax benefit (7,176) (4,371)
---------- ----------
Total federal income tax benefit (7,176) (4,371)
Valuation allowance 7,176 4,371
---------- ----------
Total tax benefit $ -- $ --
========== ==========
The income tax benefit reflected in the statements of earnings and comprehensive
income differs from the amounts computed by applying the federal statutory rate
of 35% to income before income taxes as follows (in thousands):
2003 2002
-------- --------
Federal income tax benefit at statutory rate $ (2,827) $ (629)
Woodlands Operating income not subject to tax -- (496)
WECCR GP partnership income not subject to tax -- (167)
Meals and entertainment 22 22
Change in tax status -- (3,101)
Change in valuation allowance 2,805 4,371
-------- --------
$ -- $ --
======== ========
163
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Notes to Combined Financial Statements (continued)
12. INCOME TAXES (CONTINUED)
Deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of WECCR GP's assets and liabilities and for
operating loss carryforwards. Significant components of WECCR GP's net deferred
tax asset are as follows (in thousands):
DECEMBER 31
2003 2002
---------- ----------
Deferred tax asset:
Deferred initiation fees $ 3,044 $ 3,441
Net operating loss 4,062 792
Other 149 206
---------- ----------
7,255 4,439
Deferred tax liabilities 79 68
---------- ----------
Gross deferred tax asset 7,176 4,371
Valuation allowance (7,176) (4,371)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
WECCR GP has net operating loss carryforwards of $3,270,000 and $792,000 at
December 31, 2003 and 2002, respectively, which begin to expire in the year
2022.
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. Accordingly, management has provided a valuation allowance
of $7,176,000 and $4,371,000 at December 31, 2003 and 2002, respectively, due to
uncertainties regarding the realizations of certain deferred tax assets in
future periods.
164
OTHER FINANCIAL INFORMATION
165
Report of Independent Auditors on Other Financial Information
To the Executive Committee of
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Our audits were conducted for the purpose of forming an opinion on the combined
financial statements taken as a whole. The accompanying combining balance sheets
as of December 31, 2003 and 2002, and the related combining statements of
earnings (loss) and comprehensive income (loss), changes in partners' equity
(deficit), and cash flows for the years then ended, are presented for purposes
of additional analysis and are not a required part of the combined financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the combined financial statements, and in our opinion,
is fairly stated in all material respects in relation to the combined financial
statements taken as a whole.
/s/ Ernst & Young LLP
February 9, 2004
166
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Balance Sheets as of December 31, 2003
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. ELIMINATIONS COMBINED
------------- ------------- ------------- ------------ --------
(Dollars in Thousands)
ASSETS
Cash and cash equivalents $ 5,033 $ 4,988 $ 4,024 $ -- $ 14,045
Trade receivables 2,730 515 5,941 -- 9,186
Receivables from affiliates -- 15,011 2,953 17,339 625
Inventory 485 -- 1,746 -- 2,231
Prepaid and other current assets 1,284 1,249 1,310 -- 3,843
Notes and contracts receivable 31,054 200 -- -- 31,254
Real estate 374,523 115,079 1,950 -- 491,552
Properties held for sale -- -- -- -- --
Other assets 7,573 1,976 2,390 -- 11,939
------------- ------------- ------------- ------------ --------
$ 422,682 $ 139,018 $ 20,314 $ 17,339 $564,675
============= ============= ============= ============ ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued liabilities $ 16,173 $ 1,953 $ 11,875 $ -- $ 30,001
Payables to affiliates 1,568 6,464 14,660 17,339 5,353
Credit facility 225,000 55,000 -- -- 280,000
Debt related to properties held for sale -- -- -- -- --
Other debt 57,037 2,845 -- -- 59,882
Deferred revenue 17,663 -- 10,129 -- 27,792
Other liabilities 8,679 3,512 2,475 -- 14,666
Notes payable to partners 25,000 -- -- -- 25,000
------------- ------------- ------------- ------------ --------
351,120 69,774 39,139 17,339 442,694
Commitments and contingencies
Partners' equity (deficit) 71,562 69,244 (18,825) -- 121,981
------------- ------------- ------------- ------------ --------
$ 422,682 $ 139,018 $ 20,314 $ 17,339 $564,675
============= ============= ============= ============ ========
167
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Balance Sheets as of December 31, 2002
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. ELIMINATIONS COMBINED
------------- ------------- ------------- ------------ --------
(Dollars in Thousands)
ASSETS
Cash and cash equivalents $ 15,289 $ 5,816 $ 3,890 $ -- $ 24,995
Trade receivables 2,455 4,683 5,583 -- 12,721
Receivables from affiliates 6,785 4,561 7,051 18,296 101
Inventory 212 -- 1,774 -- 1,986
Prepaid and other current assets 1,399 1,272 1,899 -- 4,570
Notes and contracts receivable 29,048 366 -- -- 29,414
Real estate 388,587 126,257 2,580 -- 517,424
Properties held for sale -- 8,882 -- -- 8,882
Other assets 7,035 2,617 2,020 -- 11,672
------------- ------------- ------------- ------------ --------
$ 450,810 $ 154,454 $ 24,797 $ 18,296 $611,765
============= ============= ============= ============ ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued liabilities $ 29,008 $ 4,706 $ 17,603 $ -- $ 51,317
Payables to affiliates 6,675 10,893 5,977 18,296 5,249
Credit facility 230,000 55,000 -- -- 285,000
Debt related to properties held for sale -- 8,001 -- -- 8,001
Other debt 54,547 3,385 -- -- 57,932
Deferred revenue 12,927 -- 10,674 -- 23,601
Other liabilities 7,068 5,832 2,121 -- 15,021
Notes payable to partners 25,000 -- -- -- 25,000
------------- ------------- ------------- ------------ --------
365,225 87,817 36,375 18,296 471,121
Commitments and contingencies
Partners' equity (deficit) 85,585 66,637 (11,578) -- 140,644
------------- ------------- ------------- ------------ --------
$ 450,810 $ 154,454 $ 24,797 $ 18,296 $611,765
============= ============= ============= ============ ========
168
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
Year Ended December 31, 2003
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. ELIMINATIONS COMBINED
------------- ------------- ------------- ------------ ---------
(Dollars in Thousands)
Revenues:
Residential lot sales $ 78,708 $ -- $ -- $ -- $ 78,708
Commercial land sales 27,331 -- -- -- 27,331
Gain on sale of properties -- 1,415 -- -- 1,415
Hotel and country club operations 20,089 -- 48,381 -- 68,470
Other 9,283 22,320 24,542 31,780 24,365
------------- ------------- ------------- ------------ ---------
135,411 23,735 72,923 31,780 200,289
Costs and expenses:
Residential lot cost of sales 34,841 -- -- -- 34,841
Commercial land cost of sales 10,993 -- -- -- 10,993
Hotel and country club operations 23,592 -- 56,458 12,453 67,597
Operating expenses 30,087 11,569 22,357 19,327 44,686
Depreciation and amortization 5,156 8,266 810 -- 14,232
------------- ------------- ------------- ------------ ---------
104,669 19,835 79,625 31,780 172,349
------------- ------------- ------------- ------------ ---------
Operating earnings (loss) 30,742 3,900 (6,702) -- 27,940
Other (income) expense:
Interest expense 16,740 2,727 9 -- 19,476
Interest capitalized (9,749) -- -- -- (9,749)
Amortization of debt costs 1,579 691 -- -- 2,270
Net gain on involuntary conversion -- (659) -- -- (659)
Other 492 (626) 30 -- (104)
------------- ------------- ------------- ------------ ---------
9,062 2,133 39 -- 11,234
------------- ------------- ------------- ------------ ---------
Earnings (loss) from continuing operations 21,680 1,767 (6,741) -- 16,706
Discontinued operations:
Gain (loss) on disposal of discontinued
operations (862) 8,960 -- -- 8,098
Gain (loss) from discontinued
operations 135 1,573 (506) -- 1,202
------------- ------------- ------------- ------------ ---------
Net earnings (loss) 20,953 12,300 (7,247) -- 26,006
Other comprehensive income:
Gain on interest rate swap 1,227 307 -- -- 1,534
------------- ------------- ------------- ------------ ---------
Comprehensive income (loss) $ 22,180 $ 12,607 $ (7,247) $ -- $ 27,540
============= ============= ============= ============ =========
169
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Statement of Earnings (Loss) and Comprehensive Income (Loss) for the
Year Ended December 31, 2002
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. ELIMINATIONS COMBINED
------------- ------------- ------------- ------------ ---------
(Dollars in Thousands)
Revenues:
Residential lot sales $ 84,429 $ -- $ -- $ -- $ 84,429
Commercial land sales 59,713 -- -- -- 59,713
Gain on sale of properties 645 48,275 -- -- 48,920
Hotel and country club operations 1,904 -- 53,710 -- 55,614
Other 8,547 28,073 23,357 33,703 26,274
------------- ------------- ------------- ------------ ---------
155,238 76,348 77,067 33,703 274,950
Costs and expenses:
Residential lot cost of sales 38,607 -- -- -- 38,607
Commercial land cost of sales 19,579 -- -- -- 19,579
Hotel and country club operations 6,340 -- 56,925 14,315 48,950
Operating expenses 25,577 14,251 21,228 19,388 41,668
Depreciation and amortization 1,806 9,935 1,063 -- 12,804
------------- ------------- ------------- ------------ ---------
91,909 24,186 79,216 33,703 161,608
------------- ------------- ------------- ------------ ---------
Operating earnings (loss) 63,329 52,162 (2,149) -- 113,342
Other expense:
Interest expense 17,385 3,822 -- 80 21,127
Interest capitalized (12,253) (205) -- -- (12,458)
Amortization of debt costs 1,495 753 -- -- 2,248
Other 1,609 457 187 (80) 2,333
------------- ------------- ------------- ------------ ---------
8,236 4,827 187 -- 13,250
------------- ------------- ------------- ------------ ---------
Earnings (loss) from continuing operations 55,093 47,335 (2,336) -- 100,092
Gain from discontinued operations 94 1,638 539 -- 2,271
------------- ------------- ------------- ------------ ---------
Net earnings (loss) 55,187 48,973 (1,797) -- 102,363
Other comprehensive income:
Gain on interest rate swap 392 -- -- -- 392
------------- ------------- ------------- ------------ ---------
Comprehensive income (loss) $ 55,579 $ 48,973 $ (1,797) $ -- $ 102,755
============= ============= ============= ============ =========
170
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Statements of Changes in Partners' Equity (Deficit) for the Years
Ended December 31, 2003 and 2002
DECEMBER 31, EARNINGS COMPREHENSIVE DECEMBER 31,
2001 DISTRIBUTIONS (LOSS) INCOME 2002 DISTRIBUTIONS
------------ ------------- --------- ------------- ------------ -------------
(Dollars in Thousands)
The Woodlands Land Development
Company, L.P.:
The Woodlands Land Company, Inc. $ 42,939 $ (37,687) $ 29,138 $ 206 $ 34,596 $ (19,386)
TWC Land Development L.P. -- -- -- -- -- --
MS/TWC Joint Venture 57,084 (32,631) 25,498 183 50,134 (16,455)
MS TWC, Inc. 1,011 (710) 551 3 855 (362)
------------ ------------- --------- ------------- ------------ -------------
101,034 (71,028) 55,187 392 85,585 (36,203)
The Woodlands Commercial Properties
Company, L.P.:
Crescent Real Estate Equities Limited
Partnership 26,006 (18,675) 20,323 -- 27,654 (4,150)
TWC Commercial Properties L.P. -- -- -- -- -- --
MS/TWC Joint Venture 35,405 (20,925) 22,873 -- 37,353 (4,650)
CresWood Development, L.L.C 627 (4,950) 5,287 -- 964 (1,100)
MS TWC, Inc. 626 (450) 490 -- 666 (100)
------------ ------------- --------- ------------- ------------ -------------
62,664 (45,000) 48,973 -- 66,637 (10,000)
The Woodlands Operating Company, L.P.:
WOCOI Investment Company (4,158) -- (1,672) -- (5,830) --
TWC Operating L.P. -- -- -- -- -- --
MS/TWC Joint Venture (5,526) -- (105) -- (5,631) --
MS TWC, Inc. (97) -- (20) -- (117) --
------------ ------------- --------- ------------- ------------ -------------
(9,781) -- (1,797) -- (11,578) --
------------ ------------- --------- ------------- ------------ -------------
Combined $ 153,917 $ (116,028) $ 102,363 $ 392 $ 140,644 $ (46,203)
============ ============= ========= ============= ============ =============
SALE OF
CRESCENT'S
EARNINGS COMPREHENSIVE INTEREST TO DECEMBER 31,
(LOSS) INCOME ROUSE (NOTE 1) 2003
--------- ------------- -------------- ------------
The Woodlands Land Development
Company, L.P.:
The Woodlands Land Company, Inc. $ 11,001 $ 644 $ (26,855) $ --
TWC Land Development L.P. -- -- 26,855 26,855
MS/TWC Joint Venture 9,743 571 -- 43,993
MS TWC, Inc. 209 12 -- 714
--------- ------------- -------------- ------------
20,953 1,227 -- 71,562
The Woodlands Commercial Properties
Company, L.P.:
Crescent Real Estate Equities Limited
Partnership 5,105 127 (28,736) --
TWC Commercial Properties L.P. -- -- 29,987 29,987
MS/TWC Joint Venture 5,719 143 -- 38,565
CresWood Development, L.L.C 1,353 34 (1,251) --
MS TWC, Inc. 123 3 -- 692
--------- ------------- -------------- ------------
12,300 307 -- 69,244
The Woodlands Operating Company, L.P.:
WOCOI Investment Company (3,805) -- 9,635 --
TWC Operating L.P. -- -- (9,635) (9,635)
MS/TWC Joint Venture (3,370) -- -- (9,001)
MS TWC, Inc. (72) -- -- (189)
--------- ------------- -------------- ------------
(7,247) -- -- (18,825)
--------- ------------- -------------- ------------
Combined $ 26,006 $ 1,534 $ -- $ 121,981
========= ============= ============== ============
171
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Statements of Cash Flows for the Year Ended
December 31, 2003
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. COMBINED
------------- ------------- ------------- ---------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ 20,953 $ 12,300 $ (7,247) $ 26,006
Adjustments to reconcile net earnings (loss) to cash
provided by operating activities:
Other comprehensive income 1,227 307 -- 1,534
Cost of land sold 45,834 -- -- 45,834
Land development capital expenditures (39,503) -- -- (39,503)
Depreciation and amortization 5,579 8,275 887 14,741
Amortization of debt costs 1,579 691 -- 2,270
Loss (gain) on disposal of discontinued
operations 862 (8,960) -- (8,098)
Gain on sale of properties -- (1,415) -- (1,415)
(Increase) decrease in notes and contracts
receivable (2,006) 166 -- (1,840)
Other liabilities and deferred revenue 6,347 (2,320) (191) 3,836
Other 3,038 4,832 (332) 7,538
Changes in operating assets and liabilities:
Trade receivables, inventory, and prepaid
assets (433) 4,191 259 4,017
Other assets (2,117) (50) 40 (2,127)
Accounts payable, accrued liabilities, and net
payables with affiliates (11,157) (17,632) 7,053 (21,736)
------------- ------------- ------------- --------
Cash provided by operating activities 30,203 385 469 31,057
INVESTING ACTIVITIES
Capital expenditures (9,882) (3,401) (335) (13,618)
Proceeds from sale of property 8,136 12,804 -- 20,940
------------- ------------- ------------- --------
Cash (used in) provided by investing activities (1,746) 9,403 (335) 7,322
FINANCING ACTIVITIES
Distributions to partners (36,203) (10,000) -- (46,203)
Debt borrowings 5,268 -- -- 5,268
Debt repayments (7,778) (616) -- (8,394)
------------- ------------- ------------- --------
Cash used in financing activities (38,713) (10,616) -- (49,329)
------------- ------------- ------------- --------
(Decrease) increase in cash and cash equivalents (10,256) (828) 134 (10,950)
Cash and cash equivalents, beginning of year 15,289 5,816 3,890 24,995
------------- ------------- ------------- --------
Cash and cash equivalents, end of year $ 5,033 $ 4,988 $ 4,024 $ 14,045
============= ============= ============= ========
172
The Woodlands Land Development Company, L.P.,
The Woodlands Commercial Properties Company, L.P., and
The Woodlands Operating Company, L.P.
Combining Statements of Cash Flows for the Year Ended December 31, 2002
THE WOODLANDS THE WOODLANDS
LAND COMMERCIAL THE WOODLANDS
DEVELOPMENT PROPERTIES OPERATING
COMPANY, L.P. COMPANY, L.P. COMPANY, L.P. COMBINED
------------- ------------- ------------- ---------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ 55,187 $ 48,973 $ (1,797) $ 102,363
Adjustments to reconcile net earnings (loss) to cash
provided by operating activities:
Other comprehensive income 392 -- -- 392
Cost of land sold 58,186 -- -- 58,186
Land development capital expenditures (39,412) -- -- (39,412)
Depreciation and amortization 2,208 9,989 1,143 13,340
Amortization of debt costs 1,495 753 -- 2,248
Gain on sale of properties (645) (48,275) -- (48,920)
Increase in notes and contracts receivable (3,350) (196) -- (3,546)
Other liabilities and deferred revenue 941 4,276 1,239 6,456
Other 4,492 345 (345) 4,492
Changes in operating assets and liabilities:
Trade receivables, inventory, and prepaid
assets (881) (3,399) (2,629) (6,909)
Other assets (4,777) (1,062) 246 (5,593)
Accounts payable, accrued liabilities, and net
payables with affiliates 1,239 3,559 5,018 9,816
------------- ------------- ------------- ---------
Cash provided by operating activities 75,075 14,963 2,875 92,913
INVESTING ACTIVITIES
Capital expenditures (48,079) (19,188) (533) (67,800)
Proceeds from sale of property -- 53,031 -- 53,031
------------- ------------- ------------- ---------
Cash (used for) provided by investing activities (48,079) 33,843 (533) (14,769)
FINANCING ACTIVITIES
Distributions to partners (71,028) (45,000) -- (116,028)
Debt borrowings 78,630 15,139 -- 93,769
Debt repayments (19,346) (21,116) -- (40,462)
Change in affiliated company note (2,651) 2,651 -- --
------------- ------------- ------------- ---------
Cash used for financing activities (14,395) (48,326) -- (62,721)
------------- ------------- ------------- ---------
Increase in cash and cash equivalents 12,601 480 2,342 15,423
Cash and cash equivalents, beginning of year 2,688 5,336 1,548 9,572
------------- ------------- ------------- ---------
Cash and cash equivalents, end of year $ 15,289 $ 5,816 $ 3,890 $ 24,995
============= ============= ============= =========
173
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 11th day of
March, 2005.
CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)
By /s/John C. Goff
----------------------------------
John C. Goff
Trust Manager and Chief Executive
Officer
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard E. Rainwater Trust Manager and Chairman of the Board March 11, 2005
-------------------------------
Richard E. Rainwater
/s/ John C. Goff Trust Manager and Chief Executive March 11, 2005
------------------------------- Officer (Principal Executive Officer)
John C. Goff
/s/ Jerry R. Crenshaw Jr. Executive Vice President, Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer) March 11, 2005
Jerry R. Crenshaw Jr.
/s/ Dennis H. Alberts Trust Manager, President and March 11, 2005
------------------------------- Chief Operating Officer
Dennis H. Alberts
/s/ Anthony M. Frank Trust Manager March 11, 2005
-------------------------------
Anthony M. Frank
/s/ William F. Quinn Trust Manager March 11, 2005
-------------------------------
William F. Quinn
/s/ Paul E. Rowsey, III Trust Manager March 11, 2005
-------------------------------
Paul E. Rowsey, III
/s/ Robert W. Stallings Trust Manager March 11, 2005
-------------------------------
Robert W. Stallings
/s/ Terry N. Worrell Trust Manager March 11, 2005
-------------------------------
Terry N. Worrell
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.01 Restated Declaration of Trust of Crescent Real Estate
Equities Company, as amended (filed as Exhibit No. 3.1 to
the Registrant's Current Report on Form 8-K filed April 25,
2002 (the "April 2002 8-K") and incorporated herein by
reference)
3.02 Second Amended and Restated Bylaws of Crescent Real Estate
Equities Company (filed as Exhibit No. 3.02 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 and incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No. 4.03
to the Registrant's Registration Statement on Form S-3 (File
No. 333-21905) and incorporated herein by reference)
4.02 Statement of Designation of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate Equities
Company dated February 13, 1998 (filed as Exhibit No. 4.07
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 10-K") and
incorporated herein by reference)
4.03 Form of Certificate of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate Equities
Company (filed as Exhibit No. 4 to the Registrant's
Registration Statement on Form 8-A/A filed on February 18,
1998 and incorporated by reference)
4.04 Statement of Designation of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate Equities
Company dated April 25, 2002 (filed as Exhibit No. 4.1 to
the April 2002 8-K and incorporated herein by reference)
4.05 Statement of Designation of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate Equities
Company dated January 14, 2004 (filed as Exhibit No. 4.1 to
the Registrant's Current Report on Form 8-K filed January
15, 2004 (the "January 2004 8-K") and incorporated herein by
reference)
4.06 Form of Global Certificate of 6-3/4% Series A Convertible
Cumulative Preferred Shares of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.2 to the January 2004 8-K
and incorporated herein by reference)
4.07 Statement of Designation of 9.50% Series B Cumulative
Redeemable Preferred Shares of Crescent Real Estate Equities
Company dated May 13, 2002 (filed as Exhibit No. 2 to the
Registrant's Form 8-A dated May 14, 2002 (the "Form 8-A")
and incorporated herein by reference)
4.08 Form of Certificate of 9.50% Series B Cumulative Redeemable
Preferred Shares of Crescent Real Estate Equities Company
(filed as Exhibit No. 4 to the Form 8-A and incorporated
herein by reference)
4* Pursuant to Regulation S-K Item 601 (b) (4) (iii), the
Registrant by this filing agrees, 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 Registrant
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.01 Third Amended and Restated Agreement of Limited Partnership
of Crescent Real Estate Equities Limited Partnership, dated
as of January 2, 2003, as amended (filed herewith)
10.02 Noncompetition Agreement of Richard E. Rainwater, as
assigned to Crescent Real Estate Equities Limited
Partnership on May 5, 1994 (filed as Exhibit No. 10.02 to
the 1997 10-K and incorporated herein by reference)
10.03 Noncompetition Agreement of John C. Goff, as assigned to
Crescent Real Estate Equities Limited Partnership on May 5,
1994 (filed as Exhibit No. 10.03 to the 1997 10-K and
incorporated herein by reference)
10.04 Employment Agreement by and between Crescent Real Estate
Equities Limited Partnership, Crescent Real Estate Equities
Company and John C. Goff, dated as of February 19, 2002
(filed as Exhibit No. 10.01 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002
(the "1Q 2002 10-Q) and incorporated herein by reference)
10.05 Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Registrant and each of
its executive officers and trust managers (filed as Exhibit
No. 10.07 to the Registration Statement on Form S-4 (File
No. 333-42293) of Crescent Real Estate Equities Limited
Partnership and incorporated herein by reference)
10.06 Crescent Real Estate Equities Company 1994 Stock Incentive
Plan (filed as Exhibit No. 10.07 to the Registrant's
Registration Statement on Form S-11 (File No. 33-75188) (the
"Form S-11") and incorporated herein by reference)
10.07 Third Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as Exhibit No.
10.01 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 and incorporated herein by
reference)
10.08 Amendment dated as of November 4, 1999 to the Crescent Real
Estate Equities Company 1994 Stock Incentive Plan (filed as
Exhibit No. 10.10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 (the "2000
10-K") and incorporated herein by reference)
10.09 Amendment dated as of November 1, 2001 to the Crescent Real
Estate Equities Company 1994 Stock Incentive Plan and the
Third Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as Exhibit No.
10.11 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 and incorporated herein
by reference)
10.10 Second Amended and Restated 1995 Crescent Real Estate
Equities Limited Partnership Unit Incentive Plan (filed as
Exhibit No. 10.10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference)
10.11 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan, as amended (filed as Exhibit No. 10.14 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 and incorporated herein by
reference)
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.12 Amendment dated as of November 5, 1999 to the 1996 Crescent
Real Estate Equities Limited Partnership Unit Incentive Plan
(filed as Exhibit No. 10.13 to the 2000 10-K and
incorporated herein by reference)
10.13 Crescent Real Estate Equities, Ltd. Dividend Incentive Unit
Plan (filed as Exhibit No. 10.14 to the 2000 10-K and
incorporated herein by reference)
10.14 Annual Incentive Compensation Plan for select Employees of
Crescent Real Estate Equities, Ltd. (filed as Exhibit No.
10.15 to the 2000 10-K and incorporated herein by reference)
10.15 Form of Registration Rights, Look-Up and Pledge Agreement
(filed as Exhibit No. 10.05 to the Form S-11 and
incorporated herein by reference)
10.16 Restricted Stock Agreement by and between Crescent Real
Estate Equities Company and John C. Goff, dated as of
February 19, 2002 (filed as Exhibit No. 10.02 to the 1Q 2002
10-Q and incorporated herein by reference)
10.17 Unit Option Agreement Pursuant to the 1996 Plan by and
between Crescent Real Estate Equities Limited Partnership
and John C. Goff, dated as of February 19, 2002 (filed as
Exhibit No. 10.01 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 and
incorporated herein by reference)
10.18 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and John C. Goff, dated as of
February 19, 2002 (filed as Exhibit No. 10.04 to the 1Q 2002
10-Q and incorporated herein by reference)
10.19 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Dennis H. Alberts, dated as
of February 19, 2002 (filed as Exhibit No. 10.05 to the 1Q
2002 10-Q and incorporated herein by reference)
10.20 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Kenneth S. Moczulski, dated
as of February 19, 2002 (filed as Exhibit No. 10.06 to the
1Q 2002 10-Q and incorporated herein by reference)
10.21 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and David M. Dean, dated as of
February 19, 2002 (filed as Exhibit No. 10.07 to the 1Q 2002
10-Q and incorporated herein by reference)
10.22 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Jane E. Mody, dated as of
February 19, 2002 (filed as Exhibit No. 10.08 to the 1Q 2002
10-Q and incorporated herein by reference)
10.23 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Jerry R. Crenshaw, Jr.,
dated as of February 19, 2002 (filed as Exhibit No. 10.09 to
the 1Q 2002 10-Q and incorporated herein by reference)
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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10.24 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Jane B. Page, dated as of
February 19, 2002 (filed as Exhibit No. 10.10 to the 1Q 2002
10-Q and incorporated herein by reference)
10.25 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and John L. Zogg, Jr., dated as
of February 19, 2002 (filed as Exhibit No. 10.11 to the 1Q
2002 10-Q and incorporated herein by reference)
10.26 Unit Option Agreement by and between Crescent Real Estate
Equities Limited Partnership and Dennis H. Alberts, dated as
of March 5, 2001 (filed as Exhibit No. 10.12 to the 1Q 2002
10-Q and incorporated herein by reference)
10.27 2004 Crescent Real Estate Equities Limited Partnership
Long-Term Incentive Plan (filed herewith)
10.28 Revolving Credit Agreement of Crescent Real Estate Funding
VIII, L.P., dated February 8, 2005, and Unconditional
Guaranty of Payment and Performance of Crescent Real Estate
Equities Limited Partnership (filed herewith)
10.29 Contribution Agreement effective as of November 10, 2004
relating to the contribution by Crescent Real Estate Funding
I, L.P. of The Crescent Officer Property to Crescent Big Tex
I, L.P. (filed herewith)
10.30 Purchase and Sale Agreement effective as of November 10,
2004 relating to the sale by Crescent Real Estate Equities
Limited Partnership of Houston Center Office Property to
Crescent Big Tex I, L.P. (filed herewith)
10.31 Purchase and Sale Agreement effective as of November 10,
2004 relating to the sale by Crescent Real Estate Funding X,
L.P. of Post Oak Central Office Property to Crescent Big Tex
I, L.P. (filed herewith)
21.01 List of Subsidiaries (filed herewith)
23.01 Consent of Ernst & Young LLP (filed herewith)
23.02 Consent of Ernst & Young LLP (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)