<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NO 1-13038
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2531304
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
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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 report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [ ] NO [X]
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December
31, 1997 (Audited) ................................................................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1997 (Unaudited) ................................................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1497 (Unaudited) ................................................... 5
Notes to Financial Statements ........................................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Historical Results of Operations ....................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 30
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 30
Item 2. Changes in Securities ................................................................ 30
Item 3. Defaults Upon Senior Securities ...................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders .................................. 30
Item 5. Other Information .................................................................... 30
Item 6. Exhibits and Reports on Form 8-K ..................................................... 31
</TABLE>
2
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(NOTE 1)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS:
Investments in Real Estate:
Land $ 392,482 $ 353,374
Land held for development or sale 103,135 94,954
Building and improvements 3,521,973 2,923,097
Furniture, fixtures and equipment 58,208 51,705
Less - accumulated depreciation (329,192) (278,194)
------------ ------------
Net investment in real estate 3,746,606 3,144,936
Cash and cash equivalents 121,050 66,063
Restricted cash and cash equivalents 28,368 41,528
Accounts receivable, net 20,746 30,049
Deferred rent receivable 55,648 39,588
Investments in real estate mortgages and
equity of unconsolidated companies 664,765 601,770
Notes receivable , net 145,342 159,843
Other assets, net 131,719 99,098
------------ ------------
Total assets $ 4,914,244 $ 4,182,875
============ ============
LIABILITIES:
Borrowings under credit facility $ 610,000 $ 350,000
Notes payable 1,394,596 1,360,124
Accounts payable, accrued expenses and other liabilities 94,741 127,220
------------ ------------
Total liabilities 2,099,337 1,837,344
------------ ------------
Minority interests 27,390 28,178
COMMITMENTS AND CONTINGENCIES (Note 10):
PARTNERS' CAPITAL:
Units of Partnership Interests issued and outstanding 67,015,498 and
65,386,026 at June 30, 1998 and December 31, 1997:
General partner -- outstanding 604,386 and 589,890 4,224 4,324
Limited partners' -- outstanding 66,411,112 and 64,796,136 2,783,293 2,313,029
------------ ------------
Total partners' capital 2,787,517 2,317,353
------------ ------------
Total liabilities and partners' capital $ 4,914,244 $ 4,182,875
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per unit data)
(Note 1)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
(unaudited) (unaudited)
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Office and retail properties $ 137,472 $ 84,904 $ 263,900 $ 155,319
Hotel properties 12,678 8,436 25,552 17,421
Behavioral healthcare properties 13,824 2,142 27,647 2,142
Interest and other income 5,130 3,647 13,154 5,178
------------ ------------ ------------ ------------
Total revenues 169,104 99,129 330,253 180,060
------------ ------------ ------------ ------------
EXPENSES:
Real estate taxes 17,309 9,697 33,406 17,622
Repairs and maintenance 9,102 5,792 17,802 10,943
Other rental property operating 29,774 19,080 59,665 36,600
Corporate general and administrative 3,554 2,638 6,701 7,483
Interest expense 37,844 16,868 72,127 31,612
Amortization of deferred financing costs 1,110 571 2,250 1,220
Depreciation and amortization 28,250 16,339 54,832 30,291
------------ ------------ ------------ ------------
Total expenses 126,943 70,985 246,783 135,771
------------ ------------ ------------ ------------
Operating income 42,161 28,144 83,470 44,289
OTHER INCOME:
Equity in net income of unconsolidated
companies 6,117 1,042 11,962 5,142
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS 48,278 29,186 95,432 49,431
Minority interests (407) (386) (807) (802)
------------ ------------ ------------ ------------
NET INCOME $ 47,871 $ 28,800 $ 94,625 $ 48,629
PREFERRED DISTRIBUTIONS (3,375) -- (4,950) --
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO PARTNERS' $ 44,496 $ 28,800 $ 89,675 $ 48,629
============ ============ ============ ============
PER UNIT OF PARTNERSHIP INTEREST DATA:
Net income - Basic $ 0.67 $ 0.56 $ 1.36 $ 1.04
============ ============ ============ ============
Net income - Diluted $ 0.64 $ 0.54 $ 1.31 $ .99
============ ============ ============ ============
WEIGHTED AVERAGE UNIT OF PARTNERSHIP INTERESTS - BASIC 66,386,580 51,428,806 65,961,444 47,134,723
============ ============ ============ ============
WEIGHTED AVERAGE UNIT OF PARTNERSHIP INTERESTS - DILUTED 68,683,790 53,143,434 68,281,918 48,881,102
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTE 1 AND 3)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------------
(unaudited)
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,625 $ 48,629
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 57,082 31,511
Minority interests 807 802
Non-cash compensation 135 131
Equity in earnings net of distributions
received from unconsolidated companies 441 (390)
Decrease (increase) in accounts receivable 9,303 (1,995)
Increase in deferred rent receivable (16,060) (7,049)
Increase in other assets (25,716) (23,130)
Decrease in restricted cash and cash equivalents 13,185 9,549
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (32,479) 13,744
------------ ------------
Net cash provided by operating activities 101,323 71,802
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (582,036) (876,903)
Development of investment properties (11,498) --
Capital expenditures - rental properties (24,930) (8,169)
Tenant improvement and leasing costs - rental properties (34,316) (18,519)
Increase in restricted cash and cash equivalents (25) (1,096)
Investment in unconsolidated companies (51,986) (19,598)
Escrow deposits - acquisition of investment properties (2,160) (5,665)
Decrease (increase) in notes receivable 14,501 (94,629)
------------ ------------
Net cash used in investing activities (692,450) (1,024,579)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (2,293) (2,948)
Borrowings under credit facility 532,150 430,700
Payments under credit facility (272,150) (131,000)
Debt proceeds 205,034 315,174
Debt payments (170,562) (150,186)
Capital distributions - joint venture partner (1,596) (1,698)
Capital contributions to the Operating Partnership 460,143 593,997
Distribution of Crescent Operating, Inc. shares to
limited partners of the Operating Partnership -- (11,907)
Distributions from the Operating Partnership (104,612) (59,576)
------------ ------------
Net cash provided by financing activities 646,114 982,556
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 54,987 29,779
CASH AND CASH EQUIVALENTS,
Beginning of period 66,063 25,535
------------ ------------
CASH AND CASH EQUIVALENTS,
End of period $ 121,050 $ 55,314
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP," together with its direct and indirect interests in
limited partnerships, the "Operating Partnership") was formed under the terms of
the Limited Partnership Agreement dated February 9, 1994. The Operating
Partnership is controlled by Crescent Real Estate Equities Company, a Texas real
estate investment trust (the "Company"), through the Company's ownership of all
of the outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware
corporation ("CREE, Ltd.") which owns an approximate 1% general partner interest
(equivalent, for purposes of this presentation, to 604,386 units of partnership
interest) in the Operating Partnership. In addition, the Company owns an
approximate 89% limited partner interest (equivalent, for purposes of this
presentation, to 59,834,261 units of partnership interest) in the Operating
Partnership, with the remaining approximate 10% limited partner interest
(equivalent, for purposes of this presentation, to 6,576,851 units of
partnership interest) held by other partners. The Operating Partnership owns
substantially all of the economic interest directly or indirectly of seven
single purpose limited partnerships (all formed for the purpose of obtaining
securitized debt). The term "Operating Partnership" includes, unless the context
otherwise requires, CREELP and the other limited partnerships ("subsidiaries")
of CREELP.
As of June 30, 1998, the Operating Partnership directly or indirectly
owned a portfolio of real estate assets (the "Properties") located primarily in
17 metropolitan submarkets in Texas. The Properties include 89 office properties
(the "Office Properties") with an aggregate of approximately 31.8 million net
rentable square feet (including pending investments, see Note 8, the Office
Properties would include an additional 10 properties with an aggregate of 2.6
million net rentable square feet), 89 behavioral healthcare properties (the
"Behavioral Healthcare Properties"), seven full-service hotels with a total of
2,276 rooms and two destination health and fitness resorts that can accommodate
up to 452 guests daily (the "Hotel Properties"), real estate mortgages and
non-voting common stock representing interests ranging from 40% to 95% in five
unconsolidated residential development corporations (the "Residential
Development Corporations"), which in turn, through joint venture or partnership
arrangements, own interests in 13 residential development properties (the
"Residential Development Properties"), and seven retail properties (the "Retail
Properties") with an aggregate of approximately .8 million net rentable square
feet. In addition, the Operating Partnership owns an indirect 38% interest in
each of two corporations (collectively referred to as the "Refrigerated Storage
Corporations"), that, as of June 30, 1998, owned or operated 89 refrigerated
storage properties with an aggregate of approximately 419 million cubic feet
(the "Refrigerated Storage Properties"). On July 1, 1998, one of the
Refrigerated Storage Corporations acquired an additional five refrigerated
storage properties with an aggregate of approximately 61 million cubic feet. The
Operating Partnership also has a 42.5% partnership interest in a partnership
whose primary holdings consist of a 364-room executive conference center and
general partner interests ranging from one to 50%, in additional office, retail,
multi-family and industrial properties.
The following table sets forth, by subsidiary, the Properties owned by
such subsidiary as of June 30, 1998:
<TABLE>
<S> <C>
Operating Partnership: 62 Office Properties, six Hotel Properties and five Retail Properties
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel, Continental Plaza, The Crescent Atrium,
Funding I, L.P.: The Crescent Office Towers, Regency Plaza One, and Waterside Commons
("Funding I")
</TABLE>
6
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<TABLE>
<S> <C>
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office and Research Center, Hyatt Regency
Funding II, L.P.: Albuquerque, Hyatt Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I & II, MacArthur
("Funding II") Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance Square, and 12404
Park Central
Crescent Real Estate Greenway Plaza Portfolio(1)
Funding III, IV, and V, L.P.:
("Funding III, IV and V")
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")
Crescent Real Estate Behavioral Healthcare Properties
Funding VII, L.P.:
("Funding VII")
</TABLE>
- ----------
(1) Funding III owns the Greenway Plaza Portfolio, except for the central
heated and chilled water plant building and Coastal Tower Office property,
both located within Greenway Plaza, which are owned by Funding IV and
Funding V, respectively.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements have been included. Operating results for
interim periods reflected are not necessarily indicative of the results that may
be expected for a full fiscal year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1997.
Certain reclassifications have been made to previously reported amounts
to conform with current presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
In March 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 97-11, "Accounting for Internal
Costs Relating to Real Estate Property Acquisitions", which provides that
internal costs of identifying and acquiring operating property should be
expensed as incurred. This pronouncement is effective March 19, 1998, and has no
material impact on the Operating Partnership's financial statements.
In May 1998, the EITF issued EITF 98-9, "Accounting for Contingent Rent
in Interim Financial Periods", which provides that the lessor should defer
recognition of contingent rental income in interim periods until the specified
target that triggers the contingent rental income is achieved. This
pronouncement is effective May 22, 1998, and has no material impact on the
Operating Partnership's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which provides that all derivative instruments should be recognized
as either assets or liabilities depending on the rights or obligations under the
contract and that all derivative instruments be measured at fair value. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 and has no material impact on the Operating Partnership's
financial statements.
7
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3. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1998 1997
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $70,834 $30,648
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of limited partnership interests in the Operating
Partnership in settlement of obligation $ 8,522 $ --
Issuance of limited partnership interests in the Operating
Partnership in conjunction with investments $11,450 $ --
</TABLE>
4. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED
COMPANIES:
The Operating Partnership reports its share of income and losses based on
its ownership interest in the respective equity investments. The following
summarized information for all unconsolidated companies has been presented on an
aggregated basis and classified under the captions "Residential Development
Corporations" and "Refrigerated Storage Corporations and Other," as applicable,
as of June 30, 1998.
<TABLE>
<CAPTION>
BALANCE SHEET AT JUNE 30, 1998: REFRIGERATED
RESIDENTIAL STORAGE
DEVELOPMENT CORPORATIONS
CORPORATIONS AND OTHER
-------------- --------------
<S> <C> <C>
Real estate, net $ 601,466 $ 1,746,196
Cash 30,960 40,674
Other assets 119,937 391,786
-------------- --------------
Total Assets $ 752,363 $ 2,178,656
============== ==============
Notes payable $ 292,414 $ 895,829
Notes payable to the Company 192,985 --
Other liabilities 75,877 475,982
Equity 191,087 806,845
-------------- --------------
Total Liabilities and Equity $ 752,363 $ 2,178,656
============== ==============
Operating Partnership's investment in
real estate mortgages and equity of
unconsolidated companies $ 297,687 $ 367,078
============== ==============
</TABLE>
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<TABLE>
<CAPTION>
SUMMARY STATEMENTS OF OPERATIONS: FOR THE SIX MONTHS ENDED
JUNE 30, 1998
-------------------------------
REFRIGERATED
RESIDENTIAL STORAGE
DEVELOPMENT CORPORATIONS
CORPORATIONS AND OTHER
-------------- --------------
<S> <C> <C>
Total revenues $ 158,708 $ 276,226
Total expenses 137,485 275,782
-------------- --------------
Net income $ 21,223 $ 444
============== ==============
Operating Partnership's equity in net of
unconsolidated companies $ 11,825 $ 137
============== ==============
</TABLE>
On June 1, 1998, one of the Refrigerated Storage Corporations acquired nine
refrigerated storage properties from Freezer Services, Inc. for approximately
$134,000. On July 1, 1998, one of the Refrigerated Storage Corporations acquired
five refrigerated storage properties from Carmar Group for approximately
$158,000. These properties contain approximately 90 million cubic feet of
refrigerated storage space.
In April 1998, the Refrigerated Storage Corporations refinanced $607,000
of secured and unsecured debt with a weighted average rate of approximately
12%, with a $550,000 non-recourse, ten-year loan secured by 58 Refrigerated
Storage Properties with an interest rate of 6.89%.
5. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
<TABLE>
<CAPTION>
Following is a summary of the Operating Partnership's debt financing: June 30, 1998
-------------
<S> <C>
SECURED DEBT
LaSalle Note I bears interest at 7.83% with an initial seven-year interest-only
term (through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity in August 2027(1), secured by the
Funding I properties ..................................................................... $ 239,000
LaSalle Note II bears interest at 7.79% with an initial seven-year interest-only
term (through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity in March 2028(2), secured by the Funding
II properties ............................................................................ 161,000
LaSalle Note III due July 1999, bears interest at 30-day LIBOR plus a weighted
average rate of 2.135% (at June 30, 1998 the rate was 7.79% subject to a rate
cap of 10%) with a five-year interest-only term, secured by the Funding III, IV
and V properties.......................................................................... 115,000
Chase Manhattan Note due September 2001, bears interest at 30-day LIBOR plus 175
basis points (at June 30, 1998 the rate was 7.41%), and requires payments of
interest only during its term, secured by the Fountain Place Office Property ............. 97,123
CIGNA Note due December 2002, bears interest at 7.47% with a seven-year
interest-only term, secured by the MCI Tower Office Property and Denver
Marriott City Center Hotel Property ...................................................... 63,500
</TABLE>
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<TABLE>
<CAPTION>
June 30, 1998
--------------
<S> <C>
Metropolitan Life Note II due December 2002, bears interest at 6.93% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Energy Centre Office Property ................................... 44,716
Metropolitan Life Note III due December 1999, bears interest at 7.74% and
requires monthly payments of interest only based on a 25-year amortization
schedule, secured by the Datran Center Office Property ................................... 40,000
Northwestern Note due January 2003, bears interest at 7.65% with a seven-year
interest-only term, secured by the 301 Congress Avenue Office Property ................... 26,000
Metropolitan Life Note I due September 2001, bears interest at 8.88% with
monthly principal and interest payments based on a 20-year amortization
schedule, secured by five of The Woodlands Office Properties ............................. 11,948
Nomura Funding VI Note bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through July 2020(3),
secured by the Funding VI property ....................................................... 8,649
Metropolitan Life Note IV due December 1999, bears interest at 7.11% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Datran Center Office Property ................................... 6,890
Rigney Note due November 2012, bears interest at 8.50% with quarterly principal
and interest payments based on a 15-year amortization schedule, secured by a
parcel of land ........................................................................... 770
UNSECURED DEBT
Line of Credit with BankBoston, N.A. ("BankBoston") ("Credit Facility") (see
description of Credit Facility below) .................................................... 610,000
Short-term BankBoston Note due July 1998, bears interest at Eurodollar rate plus
120 basis points (at June 30, 1998, the rate was 6.83%)(4) ............................... 80,000
Short-term BankBoston Note II due August 1998, bears interest at Eurodollar rate
plus 120 basis points (at June 30, 1998, the rate was 6.83%) ............................. 100,000
2007 Notes bear interest at a fixed rate of 7.13% with a ten-year interest-only
term, due September 2007(5) .............................................................. 250,000
2002 Notes bear interest at a fixed rate of 6.63% with a five-year interest-only
term, due September 2002(5) .............................................................. 150,000
--------------
Total Notes Payable ...................................................................... $ 2,004,596
==============
</TABLE>
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- -------------------
(1) In August 2007, the interest rate increases, and the Operating Partnership
is required to remit, in addition to the monthly debt service payment,
excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Operating Partnership's intention to
repay the note in full at such time (August 2007) by making a final payment
of approximately $220,000.
(2) In March 2006, the interest rate increases, and the Operating Partnership
is required to remit, in addition to the monthly debt service payment,
excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Operating Partnership's intention to
repay the note in full at such time (March 2006) by making a final payment
of approximately $154,000.
(3) Beginning in July 1998, the Operating Partnership has the option to defease
the note by purchasing Treasury obligations to pay the note without
penalty. In July 2010, the interest rate due under the note will change to
a 10-year Treasury yield plus 500 basis points or, if the Operating
Partnership so elects, it may repay the note without penalty.
(4) Repaid on July 1, 1998 with a borrowing under the Credit Facility.
(5) The interest rates on the Notes were subject to temporary increase by 50
basis points in the event that a registered offer to exchange the Notes for
notes of the Operating Partnership with terms identical in all material
respects to the Notes was not consummated or a shelf registration statement
with respect to the resale of the Notes was not declared effective by the
Securities and Exchange Commission (the "SEC") on or before March 21, 1998.
The interest rates on the Notes were temporarily increased by 50 basis
points, since the exchange offer was not completed by March 21, 1998. The
interest rates on the Notes returned to the original rates in July 1998,
when the registered offer to exchange the Notes became effective. As of
July 2, 1998, all of the Notes had been exchanged. The interest rates on
the Notes are also subject to adjustment in the event that the Notes are
assigned a rating that is not an investment grade rating, do not continue
to be assigned a rating or are not assigned a rating by certain rating
agencies. In September 1997, the Notes received a Baa3 rating (investment
grade) from Moody's Investors Service, Inc. ("Moody's"). On July 28, 1998,
the Notes received a BB+ rating (one notch below investment grade) from
Standard & Poor's ("S&P"). Since the Notes are split rated, the interest
rates on the Notes increased 37.5 basis points on July 28, 1998. Should
the Notes become investment grade rated from both Moody's and S&P by
September 22, 1998, the 37.5 basis point increase would be eliminated.
CREDIT FACILITY
On June 30, 1998, the Credit Facility was increased to $850,000 (currently
limited to $750,000 of borrowing capacity, subject to increase based upon
certain events) to enhance the Operating Partnership's financial flexibility in
making new real estate investments. The interest rate on advances under the
Credit Facility is the Eurodollar rate plus 120 basis points. The Credit
Facility is unsecured and expires in June 2000. The Credit Facility requires the
Operating Partnership to maintain compliance with a number of customary
financial and other covenants on an ongoing basis, including leverage ratios
based on book value and debt service coverage ratios, limitations on additional
secured and total indebtedness and distributions, and a minimum net worth
requirement. As of June 30, 1998, the Operating Partnership was in compliance
with all covenants. As of June 30, 1998, the interest rate was 6.83% and
$140,000 was available under the Credit Facility.
6. PARTNER'S CAPITAL:
COMMON SHARES OFFERING
On April 23, 1998, the Company completed an offering of 1,365,138 common
shares at $32.27 per share (the "Unit Investment Trust Offering") to Merrill
Lynch & Co. Net proceeds contributed to the Operating Partnership from the Unit
Investment Trust Offering were approximately $43,959. The net proceeds were used
by the Operating Partnership to reduce borrowings outstanding under the Credit
Facility.
11
<PAGE> 12
PREFERRED SHARES OFFERINGS
On February 19, 1998, the Company completed an offering (the "February 1998
Preferred Offering") of 8,000,000 shares of 6 3/4% Series A convertible
cumulative preferred shares (the "Series A Preferred Shares") with a liquidation
preference of $25 per share. Series A Preferred Shares are convertible at any
time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common share per Series A Preferred
Share), subject to adjustment in certain circumstances. Net proceeds contributed
to the Operating Partnership from the February 1998 Preferred Offering after
underwriting discounts of $8,000 and other offering costs of $750 were
approximately $191,250. The net proceeds from the February 1998 Preferred
Offering were used by the Operating Partnership to repay borrowings under the
Credit Facility. Dividends on the Series A Preferred Shares are cumulative from
the date of original issue and are payable quarterly in arrears commencing on
May 15, 1998.
On June 29, 1998, the Company completed an offering (the "June 1998
Preferred Offering") of 6,948,734 shares of Series B convertible preferred
shares with a liquidation preference of $32.38 per share (the "Series B
Preferred Shares") in an aggregate principal amount of approximately $225,000.
The Series B Preferred Shares will have equal priority with the Series A
Preferred Shares. Holders of the Series B Preferred Shares will not be entitled
to regular quarterly cash dividends but will be entitled to receive certain
extraordinary cash dividends, and stock and other non-cash dividends, excluding
dividends of common shares of the Company, that may be made from time to time to
the common shareholders. On June 30, 2001, the Series B Preferred Shares will
convert automatically into the common shares of the Company at a conversion rate
which is calculated based on a comparison of the investment return produced by
the common shares of the Company and the investment return of a portfolio of
equity REITs as computed by the National Association of Real Estate Investment
Trusts ("NAREIT Return"). The Series B Preferred Shares will also be
convertible, at the option of the holder thereof, at any time from and after
June 30, 2000 or upon the occurrence of certain events. Net proceeds contributed
to the Operating Partnership from the June 1998 Preferred Offering after
offering costs of $250 were approximately $224,750. The net proceeds from the
June 1998 Preferred Offering were used by the Operating Partnership to repay
approximately $170,000 of the amounts outstanding under the Operating
Partnership's short-term BankBoston Note, and to make an indirect investment of
approximately $54,750 in five additional refrigerated storage properties. The
Operating Partnership will estimate the quarterly non-cash dividends, for the
purpose of calculating net income applicable to partners, based on the NAREIT
Return. This non-cash dividend will be recorded as an adjustment to retained
earnings and partners' capital.
DISTRIBUTIONS
On February 3, 1998, the Operating Partnership paid a cash distribution of
$49,697 to its partners.
On May 5, 1998, the Operating Partnership paid a cash distribution of
$49,965 to its partners.
On May 15, 1998, the Operating Partnership paid a cash distribution of
$3,264 to its partners. The initial quarterly distribution was prorated from
the share issue date (February 19, 1998) to May 15, 1998, for the Series A
Preferred Shares.
12
<PAGE> 13
7. INVESTMENTS:
During the six months ended June 30, 1998, the Operating Partnership
acquired the following Properties from unrelated third parties. The Properties
are owned in fee simple or pursuant to a lessee's interest under a ground lease.
The Operating Partnership funded these acquisitions through borrowings under the
Credit Facility and borrowings under the BankBoston Note.
<TABLE>
<CAPTION>
Office
Property
Net
Operating Rentable
Partnership's Hotel Area
Property Name Acq. Date City, State Ownership % Acq. Price Rooms Apartments (In Sq. Ft.)
------------- --------- ----------- ----------- ---------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Austin Centre/Omni
Austin Hotel 1/23/98 Austin, TX 100 $ 96,400 314 61 344,000
Post Oak Central 2/13/98 Houston, TX 100 $ 155,250 N/A N/A 1,278,000
Washington Harbour 2/25/98 Washington, D.C. 100 $ 161,000 N/A N/A 536,000
Datran Center 5/1/98 Miami, FL 100 $ 70,550 N/A N/A 472,000
BP Plaza 6/30/98 Houston, TX 100 $ 83,000 N/A N/A 561,000
</TABLE>
8. PENDING INVESTMENTS:
During the month of June, the Operating Partnership entered into
agreements and related amendments to acquire fee simple title to the office
properties/complexes of Woodfield Corporate Center, Two Town Center and 6701
Tower (collectively referred to as the "Prudential Portfolio") from unrelated
third parties that include The Prudential Insurance Company of America, for an
aggregate purchase price of approximately $464,600. Completion of the
investments are scheduled to occur in third quarter 1998, subject to various
closing conditions.
<TABLE>
<CAPTION>
Office
Property
Operating Net
Partnership's Rentable
Intended Area
Property Name City, State Ownership % (In Sq. Ft.)
------------- ----------- ----------- ------------
<S> <C> <C> <C>
Woodfield Corporate Center Chicago, IL 100 1,628,000
Two Town Center Costa Mesa, CA 100 732,000
6701 Tower Los Angeles, CA 100 321,000
</TABLE>
13
<PAGE> 14
9. PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information for the six months ended June 30,
1998 assumes the completion, in each case as of January 1, 1998, of (i) the
February 1998 Preferred Offering; (ii) the Unit Investment Trust Offering, (iii)
the June 1998 Preferred Offering; (iv) the 1998 completed investments (see Note
7), pending investments (see Note 8), subsequent events (see Note 11), and
related financing and share and unit issuances. Pro Forma information assumes as
of January 1, 1998, all offering proceeds were used for repayment of
indebtedness incurred for investments.
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998
------------------------
<S> <C>
Total revenues $367,686
Operating income $ 74,468
Income before minority interests $ 89,937
Net income applicable to
partners $ 82,380
Per unit of partner interest data:
Net income - Basic $ 1.20
Net income - Diluted $ 1.11
</TABLE>
The pro forma operating results combine the Operating Partnership's
consolidated historical statement of operations for the six months ended June
30, 1998 with the following adjustments:
(i) Adjustment to rental income and operating expenses for the
1998 acquired and pending office properties
(ii) Adjustment to depreciation based on acquisition price
associated with the 1998 acquired and pending office and hotel
properties
(iii) Adjustment to rental income for the 1998 acquired hotel
property to reflect the lease payment (base rent and
percentage rent) from the hotel lessee to the Operating
Partnership as calculated by applying the rent provisions (as
defined in the lease agreement) to the historical revenues of
the hotel property
(iv) Adjustment to equity in net income of unconsolidated companies
for the Refrigerated Storage Corporations 1998 acquired
Refrigerated Storage Properties
(v) Adjustment to equity in net income of unconsolidated companies
for the pending investment in Tower Realty Trust (see Note 11)
(vi) Adjustment to increase interest expense as a result of
interest costs for long and short-term financing for
investments
(vii) Adjustment to reflect prorated preferred dividends in
connection with the February 1998 Preferred Offering
These pro forma amounts are not necessarily indicative of what the
actual financial position or results of operations of the Operating Partnership
would have been assuming the above investments had been consummated as of the
beginning of the period, nor do they purport to represent the future financial
position or results of operations of the Operating Partnership.
10. COMMITMENTS AND CONTINGENCIES:
The Company is a party to an Agreement and Plan of Merger, dated
January 16, 1998, as amended (the "Merger Agreement"), between the Company and
Station Casinos, Inc. ("Station"). Pursuant to the Merger Agreement, Station
would merge with and into the Company (the "Merger"). On July 27, 1998, Station
canceled its joint annual and special meeting of its common and preferred
stockholders scheduled for August 4, 1998, at which the common and preferred
stockholders were to vote on the Merger. Station and the Company have since
become involved in litigation relating to the Merger Agreement. Each of Station
and the Company are seeking damages from the other and declaratory relief. In
addition, the action by Station seeks, among other matters, an order of specific
performance requiring the Company to purchase $115,000 of a class of
Station's redeemable preferred stock.
The Company believes that Station's claims are without merit and
intends to contest the claims vigorously. As with any litigation, however, it
is not possible to predict the resolution of the pending actions. The Company
believes, however, that the pending action will not have a material adverse
effect on the Company's financial condition or results of operations.
14
<PAGE> 15
11. SUBSEQUENT EVENTS:
On August 4, 1998, the Operating Partnership paid a cash distribution
of $50,908 to its partners.
On July 9, 1998, the Company announced that, together with Reckson
Associates Realty Corporation, ("Reckson"), it had entered into an agreement to
acquire Tower Realty Trust ("Tower") for approximately $733 million of cash and
common shares of the Company and Reckson, and assumption of debt. The Company's
estimated funding requirement consisting of cash and common shares is
anticipated to be $168,400. The acquiring entity ("Metropolitan Partners"),
which will be newly formed, will be owned equally by the Operating Partnership
and the Reckson operating partnership. Tower owns 2.3 million square feet of
office building space in New York City, New York and 2.0 million square feet in
Phoenix, Arizona and Orlando, Florida. The Operating Partnership will account
for its investment in Metropolitan Partners under the equity method.
On July 21, 1998, the Operating Partnership declared a cash
distribution of $.422 per share for the Series A Preferred Shares. The dividend
is payable August 14, 1998, to shareholders of record on July 31, 1998.
On August 7, 1998, the Company notified Station that it was exercising
its termination rights under the Merger Agreement based on Station's alleged
material breaches of the Merger Agreement. Under the Merger Agreement, the
Company has the right to terminate the Merger Agreement if a material breach by
the other party is not cured within 10 business days after notice. As described
in Note 10, Station and the Company are currently involved in litigation
relating to the Merger Agreement. As a result of these developments, the Company
has stated that it no longer considers the Merger to be probable and intends to
cancel its previously announced common share rights offerings and the increase
in quarterly dividend to $.63 per common share, which were dependent on the
consummation of the Merger. The Company's board of trust managers will conduct
its regular annual evaluation of the Company's dividend policy in September
1998. In addition, the Company has stated that it does not intend to proceed
with the formation of a new partnership that would have owned the real estate
assets acquired from Station and invested in casinos, gaming properties and
other real estate properties.
On August 11, 1998, affiliates of Union Bank, AG and the Company
exercised the right provided under the forward share purchase agreement dated
August 12, 1997 to extend the term of the agreement for one year. In connection
with the exercise of the right to extend the forward share purchase agreement,
the Company paid a fee of approximately $3.0 million to one of the Union Bank
affiliates. Under the forward share purchase agreement, the Company has agreed
to purchase 4,700,000 common shares from such Union Bank affiliate by August 12,
1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
HISTORICAL RESULTS OF OPERATIONS
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal and recurring nature. The information
herein should be read in conjunction with the more detailed information
contained in the Operating Partnership's Registration Statement on Form S-4
(File No. 333-57945), which includes information for the year ended December 31,
1997. Capitalized terms used but not otherwise defined therein, shall have the
meanings ascribed to those terms in the footnotes to the financial statements.
15
<PAGE> 16
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Operating Partnership
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, the Operating Partnership's actual results
could differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are set forth in the
Company's Current Report on Form 8-K/A dated April 17, 1998 and filed August 13,
1998 and include the following: changes in real estate conditions (including
rental rates and competing properties) or industries in which the Operating
Partnership's principal tenants compete; changes in general economic conditions;
the ability to identify acquisitions and investment opportunities meeting the
Operating Partnership's investment strategy; timely leasing of unoccupied square
footage; timely releasing of occupied square footage upon expiration; the
Operating Partnership's ability to generate revenues sufficient to meet debt
service payments and other operating expenses; the Operating Partnership's
inability to control the management and operation of its residential development
properties, its tenants and the businesses associated with its investment in
refrigerated storage properties; financing risks, such as the availability of
funds sufficient to service existing debt, changes in interest rates associated
with its variable rate debt, the availability of equity and debt financing terms
acceptable to the Operating Partnership, the possibility that the Operating
Partnership's outstanding debt (which requires so-called "balloon" payments of
principal) may be refinanced at higher interest rates or otherwise on terms less
favorable to the Operating Partnership and the fact that interest rates under
the Credit Facility and certain of the Operating Partnership's other financing
arrangements may increase; the existence of complex regulations relating to the
Company's status as a real estate investment trust and the adverse consequences
of the failure to qualify as such; risks related to certain ongoing litigation
between the Company and Station relating to termination of a proposed merger
agreement and other risks detailed from time to time in the Operating
Partnership and Company's filings with the SEC. Given these uncertainties,
readers are cautioned not to place undue reliance on such statements. The
Operating Partnership undertakes no obligation to update these forward-looking
statements to reflect any future events or circumstances.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Total revenues increased approximately $70.0 million, or 70.6%, to
$169.1 million for the three months ended June 30, 1998, as compared to $99.1
million for the three months ended June 30, 1997. An increase in Office and
Retail Property revenues of $52.6 million is primarily attributable to: (i) the
acquisition of nine Office Properties in 1998, which resulted in $13.1 million
of incremental revenues; (ii) the acquisition of 26 Office Properties and one
Retail Property in 1997 which resulted in $31.6 million of incremental revenues;
and (iii) an increase in Office and Retail Property revenues of $7.9 million
from the properties owned as of January 1, 1997, which is primarily due to
rental rate and occupancy increases at these Properties. The increase in Hotel
Property revenues of $4.2 million is primarily attributable to $3.4 million from
three full-service Hotel Properties acquired subsequent to January 1, 1997. The
increase in Behavioral Healthcare Property revenues of $11.7 million is
attributable to the acquisition of the Properties in June 1997. The increase in
interest and other income of $1.5 million for the three months ended June 30,
1998, is primarily attributable to the $104.7 million increase in notes
receivable as a result of the May 1997 acquisition of certain notes included in
the Carter-Crowley portfolio, and the loans to Crescent Operating, Inc. ("COI").
16
<PAGE> 17
Total expenses increased $55.9 million, or 78.7%, to $126.9 million for
the three months ended June 30, 1998, as compared to $71.0 million for the three
months ended June 30, 1997. An increase in rental property operating expenses of
$21.6 million is primarily attributable to: (i) the acquisition of nine Office
Properties in 1998, which resulted in $4.8 million of incremental expenses, (ii)
the acquisition of 26 Office Properties and one Retail Property in 1997 which
resulted in $14.5 million of incremental expenses; and (iii) an increase in
expenses of $2.3 million from the Office and Retail Properties owned as of
January 1, 1997, which is primarily due to occupancy increases at these
Properties. Depreciation and amortization increased $11.9 million primarily due
to the acquisitions of Office, Retail, Hotel and Behavioral Healthcare
Properties. An increase in interest expense of $21.0 million is primarily
attributable to: (i) $7.5 million of interest payable under the Notes due 2002
and Notes due 2007, which were issued in a private offering in September 1997;
(ii) $1.8 million of interest payable under the Chase Manhattan Note, which was
assumed in connection with the acquisition of Fountain Place in November 1997;
(iii) $1.7 million of interest payable on the BankBoston Note II which the
Operating Partnership entered into in August 1997; (iv) $.8 million of interest
payable under the Metropolitan Life Note I, which was assumed in connection with
the acquisition of Energy Center in December 1997; and (v) $9.1 million of
incremental interest payable due to draws under the Credit Facility and
short-term borrowings with BankBoston (average balance outstanding for second
quarter 1998 and 1997 was $759.2 million and $211.1 million, respectively), all
of which financing arrangements were used to fund investments and working
capital.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total revenues increased approximately $150.2 million, or 83.4%, to
$330.3 million for the six months ended June 30, 1998, as compared to $180.1
million for the six months ended June 30, 1997. An increase in Office and Retail
Property revenues of $108.6 million is primarily attributable to: (i) the
acquisition of nine Office Properties in 1998 which resulted in $18.8 million of
incremental revenues; (ii) the acquisition of 26 Office Properties and one
Retail Property in 1997, which resulted in $74.7 million of incremental
revenues; and (iii) an increase in Office and Retail Property revenues of $15.1
million from Properties owned as of January 1, 1997, which is primarily due to
rental rate and occupancy increases at these Properties. The increase in Hotel
Property revenues of $8.1 million is primarily attributable to the acquisition
of three full-service Hotel Properties subsequent to January 1, 1997, which
resulted in $6.7 million of incremental revenues. The increase in Behavioral
Healthcare Property revenues of $25.5 is attributable to the acquisition of the
Properties in June 1997. The increase in interest and other income of $8.0
million for the six months ended June 30, 1998, is primarily attributable to the
sale of marketable securities and the $104.7 million increase in notes
receivable as a result of the May 1997 acquisition of certain notes included in
the Carter-Crowley portfolio, and the loans to COI.
Total expenses increased $111.0 million, or 81.7%, to $246.8 million
for the six months ended June 30, 1998, as compared to $135.8 million for the
six months ended June 30, 1997. An increase in rental property operating
expenses of $45.7 million is primarily attributable to: (i) the acquisition of
nine Office Properties in 1998 which resulted in $6.7 million of incremental
expenses; (ii) the acquisition of 26 Office Properties and one Retail Property
in 1997, which resulted in $35.6 million of incremental expenses; and (iii) an
increase in Office and Retail Property expenses of $3.4 million from Properties
owned as of January 1, 1997, which is primarily due to occupancy increases at
these Properties. Depreciation and amortization increased $24.5 million
primarily due to the acquisitions of Office, Retail, Hotel and the Behavioral
Healthcare Properties. An increase in interest expense of $40.5 million is
primarily attributable to: (i) $14.6 million of interest payable under the Notes
due 2002 and Notes due 2007, which were issued in a private offering in
September 1997 ; (ii) $3.6 million of interest payable under the Chase Manhattan
Note, which was assumed in connection with the acquisition of Fountain Place in
November 1997; (iii) $3.4 million of interest payable on the BankBoston Note II,
which the Operating Partnership entered into in August 1997; (iv) $1.5 million
of interest payable under the Metropolitan Life Note I, which was assumed in
connection with the acquisition of Energy Center in December 1997; and (v) $17.4
million of incremental interest payable due to draws under the Credit Facility
and short-term borrowings with BankBoston (average balance outstanding for six
months ended June 30, 1998 and 1997 was $680.7 million and $200.4 million,
respectively), all of which financing arrangements were used to fund investments
and working capital.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $121.1 million and $66.1 million at
June 30, 1998 and December 31, 1997, respectively. The increase is attributable
to $646.1 million and $101.3 million of cash provided by financing and
operating activities, respectively, offset by $692.5 million used in investing
activities. The Operating Partnership's inflow of cash provided by financing
activities is primarily attributable to net borrowings under the Credit
Facility ($260.0 million), net borrowings under the BankBoston Note ($34.5
million), and capital contributions to the Operating Partnership ($460.1
million). The inflow from cash provided by financing activities was partially
offset by distributions paid to general and limited partners of the Operating
Partnership ($104.6 million). The inflow from operating activities is primarily
attributable to property operations, but is partially offset by the decrease in
accounts payable due to the payment of real estate taxes and increased
investment in marketable securities. The Operating Partnership utilized $692.5
million of cash flow primarily in the following investing activities: (i) the
acquisition of nine Office Properties and one Hotel Property ($582.0 million);
(ii) recurring and non-recurring tenant improvement and leasing costs for the
Office and Retail Properties ($34.3 million); (iii) capital expenditures for
rental properties ($24.9 million) primarily attributable to non-recoverable
building improvements for the Office and Retail Properties, and replacement of
furniture, fixtures and equipment for the Hotel Properties; (iv) development of
investment properties ($11.5 million); and (v) increased investment in
unconsolidated companies ($52.0 million), which is primarily attributable to
the additional investment in the Refrigerated Storage Corporations which
included the acquisition of nine additional Refrigerated Storage Properties
($66.6 million) offset by distributions from the Residential Development
Corporations. The outflow of cash used in investing activities was partially
offset by a decrease in notes receivable ($14.5 million) which is primarily due
to the repayment of a mortgage note secured by an office property.
On February 19, 1998, the Company completed an offering (the "February
1998 Preferred Offering") of 8,000,000 shares of 6 3/4% Series A convertible
cumulative preferred shares (the "Series A Preferred Shares") with a liquidation
preference of $25.00 per share. Series A Preferred Shares are convertible at any
time, in whole or in part, at the option of the holders thereof into common
shares of the Company at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common shares per Series A Preferred
Share), subject to adjustment in certain circumstances. Net proceeds contributed
to the Operating Partnership from the February 1998 Preferred Offering after
underwriting discounts of $8.0 million and other offering costs of approximately
$.8 million were approximately $191.3 million. The net proceeds from the
February 1998 Preferred Offering were used by the Operating Partnership to repay
borrowings under the Credit Facility. Dividends on the Series A Preferred Shares
are cumulative from the date of original issue and are payable quarterly in
arrears commencing on May 15, 1998. The dividend represents an annualized
dividend of $1.69 per share, or $.42 per share quarterly.
On April 23, 1998, the Company completed an offering of 1,365,138
common shares at $32.27 per share to Merrill Lynch & Co. Net proceeds to the
Operating Partnership from the Unit Investment Trust Offering were approximately
$44.0 million. The net proceeds were used by the Operating Partnership to reduce
borrowings outstanding under the Credit Facility.
18
<PAGE> 19
On June 29, 1998, the Company completed the June 1998 Preferred
Offering of 6,948,734 Series B Preferred Shares with a liquidation preference
of $32.38 per share in an aggregate principal amount of approximately $225
million. The Series B Preferred Shares have equal priority with the Series A
Preferred Shares. Holders of the Series B Preferred Shares will not be entitled
to regular quarterly cash dividends, but will be entitled to receive certain
extraordinary cash dividends, and stock and other non-cash dividends, excluding
dividends of common shares of the Company, that may be made from time to time to
the common shareholders. On June 30, 2001, the Series B Preferred Shares will
convert automatically into the Company's common shares at a conversion rate
which is calculated based on a comparison of the investment return produced by
the common shares of the Company and the NAREIT Return. The Series B Preferred
Shares will also be convertible, at the option of the holder thereof, at any
time from and after June 30, 2000 or upon the occurrence of certain events. Net
proceeds contributed to the Operating Partnership from the June 1998 Preferred
Offering after offering costs of $.2 million were approximately $224.8 million.
The net proceeds from the June 1998 Preferred Offering were used by the
Operating Partnership to repay approximately $170.0 million of the amounts
outstanding under the Operating Partnership's short-term BankBoston Note, and to
make an indirect investment of approximately $54.8 million in five additional
refrigerated storage properties. The Operating Partnership will estimate
quarterly non-cash dividends, for purposes of calculating net income applicable
to partners', based on the NAREIT Return. This non-cash dividend will be
recorded as an adjustment to retained earnings and partners' capital.
On February 20, 1998 and June 25, 1998, the Company issued an
additional 525,000 common shares and 759,254 common shares, respectively, to
Merrill Lynch International as a result of the decline in market price of the
common shares from the date of issuance on December 12, 1997 through,
respectively, February 12, 1998 and June 12, 1998. The issuance of these shares
did not have a material impact on the Operating Partnership's net income per
unit share or net book value per unit.
On August 11, 1998, affiliates of Union Bank, AG and the Company
exercised the right provided under the forward share purchase agreement dated
August 12, 1997 to extend the term of the agreement for one year. In connection
with the exercise of the right to extend the forward share purchase agreement,
the Company paid a fee of approximately $3.0 million to one of the Union Bank
affiliates. Under the forward share purchase agreement, the Company has agreed
to purchase 4,700,000 common shares from such Union Bank affiliate by August 12,
1999.
The Company is a party to the Merger Agreement, between the Company
and Station. Pursuant to the Merger Agreement, Station would merge with and
into the Company. On July 27, 1998, Station canceled its joint annual and
special meeting of its common and preferred stockholders scheduled for August
4, 1998, at which the common and preferred stockholders were to vote on the
Merger. On August 7, 1998, the Company notified Station that it was exercising
its termination rights under the Merger Agreement based on Station's alleged
material breaches of the Merger Agreement. Under the Merger Agreement, the
Company has the right to terminate the Merger Agreement if a material breach by
the other party is not cured within 10 business days after notice. Station and
the Company are currently involved in litigation relating to the Merger
Agreement. Each of Station and the Company are seeking damages from the other
and declaratory relief. In addition, the action by Station seeks, among other
matters, an order of specific performance requiring the Company to purchase
$115 million of a class of Station's redeemable preferred stock.
The Company has stated that it believes that Station's claims are
without merit and intends to contest the claims vigorously. As with any
litigation, however, it is not possible to predict the resolution of the pending
actions. The Company believes, however, that the pending action will not have a
material adverse effect on the Company's financial condition or results of
operations.
As a result of the developments relating to Station, the Company has
stated that it no longer considers the Merger to be probable and intends to
cancel its previously announced common share rights offerings and the increase
in quarterly dividend to $.63 per common share, which were dependent on the
consummation of the Merger. The Company's board of trust managers will conduct
its regular annual evaluation of the Company's dividend policy in September
1998. In addition, the Company has stated that it does not intend to proceed
with the formation of a new partnership that would have owned the real estate
assets acquired from Station and invested in casinos, gaming properties and
other real estate properties.
19
<PAGE> 20
As of August 12, 1998, with the exception of the pending investment in
the Prudential Portfolio and the Tower Realty Trust transaction, the Operating
Partnership had no commitments for material capital expenditures.
The Operating Partnership expects to meet its short-term liquidity
requirements primarily through cash flow provided by operating activities, which
the Operating Partnership believes will be adequate to fund normal recurring
operating expenses, debt service requirements, recurring capital expenditures
and distributions to unitholders. To the extent the Operating Partnership's cash
flow from operating activities is not sufficient to finance non-recurring
capital expenditures, such as tenant improvement and leasing costs related to
previously unoccupied space, or investment property acquisition and development
costs, the Operating Partnership expects to finance such activities with
available cash reserves and other debt and equity financing alternatives which
are available to the Operating Partnership. These alternatives include but are
not limited to unit and common share issuances, obtaining new debt instruments
secured by investment property acquisitions and developments, additional
proceeds from the refinancing of existing secured debt and additional unsecured
short-term borrowings. The Company will analyze the various alternatives as
needed, in order to maintain the most appropriate capital structure to execute
upon its strategy.
The Operating Partnership expects to meet its long-term liquidity
requirements, consisting primarily of maturities under the Operating
Partnership's fixed and variable rate debt through long-term secured and
unsecured borrowings and the issuance of additional debt securities of the
Operating Partnership or additional equity securities of the Company.
20
<PAGE> 21
The significant terms of the Operating Partnership's primary debt
financing arrangements are shown below (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST BALANCE
RATE OUTSTANDING
MAXIMUM AT EXPIRATION AT
DESCRIPTION BORROWINGS 6/30/98 DATE 6/30/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Secured Fixed Rate Debt:
LaSalle Note I $ 239,000 7.83% August 2027(1) $ 239,000
LaSalle Note II 161,000 7.79 March 2028(2) 161,000
CIGNA Note 63,500 7.47 December 2002 63,500
Metropolitan Life Note I 11,948 8.88 September 2001 11,948
Metropolitan Life Note II 44,716 6.93 December 2002 44,716
Metropolitan Life Note III 40,000 7.74 December 1999 40,000
Metropolitan Life Note IV 6,890 7.11 December 1999 6,890
Northwestern Life Note 26,000 7.65 January 2003 26,000
Nomura Funding VI Note 8,649 10.07 July 2020(3) 8,649
Rigney Promissory Note 770 8.50 November 2012 770
-------------- -------------- --------------
Subtotal/Weighted Average $ 602,473 7.75% $ 602,473
============== ============== ==============
Secured Capped Variable Rate Debt:
LaSalle Note III $ 115,000 7.79% July 1999 $ 115,000
============== ============== ==============
Secured Variable Rate Debt:
Chase Manhattan Note $ 97,123 7.41% September 2001 $ 97,123
============== ============== ==============
Unsecured Fixed Rate Debt:
Notes due 2007(4) $ 250,000 7.13% September 2007 $ 250,000
Notes due 2002(4) 150,000 6.63 September 2002 150,000
-------------- -------------- --------------
Subtotal/Weighted Average $ 400,000 6.94% $ 400,000
============== ============== ==============
Unsecured Variable Rate Debt:
Line of Credit $ 750,000 6.83% June 2000 $ 610,000
BankBoston Note 80,000 6.83 July 1998(5) 80,000
BankBoston Note II 100,000 6.83 August 1998 100,000
-------------- -------------- --------------
Subtotal/Weighted Average $ 930,000 6.83% $ 790,000
============== ============== ==============
TOTAL/WEIGHTED AVERAGE $ 2,144,596 7.21% $ 2,004,596
============== ============== ==============
</TABLE>
(1) In August 2007, the interest rate increases, and the Operating
Partnership is required to remit, in addition to the monthly debt
service payment, excess property cash flow, as defined, to be applied
first against principal until the note is paid in full and thereafter,
against accrued excess interest, as defined. It is the Operating
Partnership's intention to repay the note in full at such time (August
2007) by making a final payment of approximately $220 million.
(2) In March 2006, the interest rate increases, and the Operating
Partnership is required to remit, in addition to the monthly debt
service payment, excess property cash flow, as defined, to be applied
first against principal until the note is paid in full and thereafter,
against accrued excess interest, as defined. It is the Operating
Partnership's intention to repay the note in full at such time (March
2006) by making a final payment of approximately $154 million.
(3) Beginning in July 1998, the Operating Partnership has the option to
defease the note by purchasing Treasury obligations to pay the note
without penalty. In July 2010, the interest rate due under the note
will change to a 10-year Treasury yield plus 500 basis points or, if
the Operating Partnership so elects, it may repay the note without
penalty.
(4) The interest rates on the Notes were subject to temporary increase by
50 basis points in the event that a registered offer to exchange the
Notes for notes of the Operating Partnership with terms identical in
all material respects to the Notes was not consummated or a shelf
registration statement with respect to the resale of the Notes was not
declared effective by the Securities and Exchange Commission (the
"SEC") on or before March 21, 1998. The interest rates on the Notes
were temporarily increased by 50 basis points, since the exchange offer
was not completed by March 21, 1998. The interest rates on the Notes
returned to the original rates in July 1998, when the registered offer
to exchange the Notes became effective. As of July 2, 1998, all of the
Notes had been exchanged. The interest rates on the Notes are also
subject to adjustment in the event that the Notes are assigned a rating
that is not an investment grade rating, do not continue to be assigned
a rating or are not assigned a rating by certain rating agencies. In
September 1997, the Notes received a Baa3 (investment grade) rating
from Moody's. On July 28, 1998, the Notes received a BB+ rating (one
notch below investment grade) from S&P. Since the Notes are split
rated, the interest rates on the Notes increased 37.5 basis points on
July 28, 1998. Should the Notes become investment grade rated from S&P
by September 22, 1998, the 37.5 basis point increase would be
eliminated.
(5) Repaid on July 1, 1998 with a borrowing under the Credit Facility.
21
<PAGE> 22
Based on the Company's total market capitalization of $6.9 billion and
$6.5 billion at June 30 and August 11, 1998, respectively (at a share price of
$33.625 and $29.750 which were the closing prices of the common shares on the
New York Stock Exchange on June 30 and August 11, 1998, respectively, plus total
indebtedness), the Operating Partnership's debt represented 29% and 32% of the
Company's total market capitalization at June 30 and August 11, 1998,
respectively. It is the Operating Partnership's current policy to pursue a
strategy of conservative use of leverage, generally with a ratio of debt to
total market capitalization of the Company targeted at approximately 40 percent,
although this policy is subject to reevaluation and modification and could be
increased above 40 percent.
FUNDS FROM OPERATIONS
Funds from Operations ("FFO"), based on the definition adopted by the
Board of Governors of the NAREIT and as used herein, means net income (loss)
(determined in accordance with generally accepted accounting principles or
"GAAP"), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. FFO was
developed by NAREIT as a relative measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. The Company considers
FFO an appropriate measure of performance of an equity REIT. However, FFO (i)
does not represent cash generated from operating activities determined in
accordance with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net income),
(ii) is not necessarily indicative of cash flow available to fund cash needs and
(iii) should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of the Operating Partnership's operating
performance, or to cash flow from operating activities determined in accordance
with GAAP as a measure of either liquidity or the Company's ability to make
distributions. The Operating Partnership has historically distributed an amount
less than FFO, primarily due to reserves required for capital expenditures,
including leasing costs. The aggregate distributions paid to Partners for the
six months ended June 30, 1998 and 1997 were $104.6 and $59.6 million,
respectively. An increase in FFO does not necessarily result in an increase in
aggregate distributions because the General Partner is not required to increase
distributions on a quarterly basis unless necessary in order to enable the
Company to maintain REIT status. Because the Company must distribute 95% of its
real estate investment trust taxable income (as defined in the Code), however, a
significant increase in FFO will generally require an increase in distributions
to shareholders and unitholders although not necessarily on a proportionate
basis. Accordingly, the Operating Partnership believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Operating Partnership, FFO should be considered in conjunction
with the Operating Partnership's net income (loss) and cash flows as reported in
the consolidated financial statements and notes thereto. However, the Operating
Partnership's measure of FFO may not be comparable to similarly titled measures
of other REIT's because these REIT's may not apply the definition of FFO in the
same manner as the Operating Partnership.
22
<PAGE> 23
STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before minority interests $ 48,278 $ 29,186 $ 95,432 $ 49,431
Adjustments:
Depreciation and amortization of real
estate assets 27,664 15,724 53,715 29,220
Adjustment for investments in real estate
mortgages and equity of
unconsolidated companies 15,184 407 27,498 673
Minority interest in joint ventures (406) (386) (806) (802)
Preferred stock dividends (3,375) -- (4,950) --
---------- ---------- ---------- ----------
Funds from operations $ 87,345 $ 44,931 $ 170,889 $ 78,522
========== ========== ========== ==========
Investment Segments:
Office and retail properties $ 82,894 $ 50,036 $ 156,940 $ 89,446
Hotel properties 12,486 8,183 25,110 16,997
Behavioral healthcare properties 13,824 2,142 27,647 2,142
Refrigerated storage properties 5,576 -- 11,538 --
Residential development properties 13,712 1,449 23,266 2,673
Corporate general & administrative (3,554) (2,638) (6,701) (7,483)
Interest expense (37,844) (16,868) (72,127) (31,612)
Preferred dividend (3,375) -- (4,950) --
Other(1) 3,626 2,627 10,166 6,359
---------- ---------- ---------- ----------
Funds from operations $ 87,345 $ 44,931 $ 170,889 $ 78,522
========== ========== ========== ==========
</TABLE>
(1) Includes interest and other income less depreciation and amortization
of non-real assets and amortization of deferred financing costs.
23
<PAGE> 24
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Funds From Operations $ 170,889 $ 78,522
Adjustments:
Depreciation and amortization of non-real estate assets 739 743
Amortization of deferred financing costs 2,250 1,220
Minority interest in joint ventures profit and depreciation
and amortization of real estate assets 1,184 1,130
Adjustment for investments in real estate mortgages and equity
of unconsolidated companies (27,498) (673)
Change in deferred rent receivable (16,060) (7,049)
Change in current assets and liabilities (35,707) (1,832)
Equity in earnings in excess of distributions received from
unconsolidated companies 441 (390)
Preferred distributions 4,950 --
Non-cash compensation 135 131
--------- ---------
Net Cash Provided by Operating Activities $ 101,323 $ 71,802
========= =========
</TABLE>
24
<PAGE> 25
OFFICE PROPERTIES
The following table sets forth certain information about the Office
Properties as of June 30, 1998, assuming completion of the pending investment
(see Note 8-financial statements).
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- ---------- --------- --------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Bank One Center(2) .................. 1 CBD 1987 1,530,957 73% $ 21.71
The Crescent Office Towers .......... 1 Uptown/Turtle Creek 1985 1,210,949 99 28.75
Fountain Place ...................... 1 CBD 1986 1,200,266 96 18.22
Trammell Crow Center(3) ............. 1 CBD 1984 1,128,331 91 24.98
Stemmons Place ...................... 1 Stemmons Freeway 1983 634,381 91 14.14
Spectrum Center(4) .................. 1 Far North Dallas 1983 598,250 77 (5) 20.75
Waterside Commons ................... 1 Las Colinas 1986 458,739 100 16.76
Caltex House ........................ 1 Las Colinas 1982 445,993 96 25.47
Reverchon Plaza ..................... 1 Uptown/Turtle Creek 1985 374,165 94 17.55
The Aberdeen ........................ 1 Far North Dallas 1986 320,629 100 18.19
MacArthur Center I & II ............. 1 Las Colinas 1982/1986 294,069 96 18.81
Stanford Corporate Centre ........... 1 Far North Dallas 1985 265,507 100 16.42
The Amberton ........................ 1 Central Expressway 1982 255,052 81 (5) 11.24
Concourse Office Park ............... 1 LBJ Freeway 1972-1986 244,879 92 13.07
12404 Park Central .................. 1 LBJ Freeway 1987 239,103 46 (5) 19.73
Palisades Central II ................ 1 Richardson/Plano 1985 237,731 95 16.63
3333 Lee Parkway .................... 1 Uptown/Turtle Creek 1983 233,769 98 19.39
Liberty Plaza I & II ................ 1 Far North Dallas 1981/1986 218,813 100 13.45
The Addison ......................... 1 Far North Dallas 1981 215,016 100 17.64
The Meridian ........................ 1 LBJ Freeway 1984 213,915 92 15.48
Palisades Central I ................. 1 Richardson/Plano 1980 180,503 88 (5) 14.31
Walnut Green ........................ 1 Central Expressway 1986 158,669 96 14.03
Greenway II ......................... 1 Richardson/Plano 1985 154,329 99 19.45
Addison Tower ....................... 1 Far North Dallas 1987 145,886 98 13.43
Greenway I & IA ..................... 2 Richardson/Plano 1983 146,704 100 21.95
5050 Quorum ......................... 1 Far North Dallas 1981 133,594 95 15.01
Cedar Springs Plaza ................. 1 Uptown/Turtle Creek 1982 110,923 90 17.04
Valley Centre ....................... 1 Las Colinas 1985 74,861 99 15.73
One Preston Park .................... 1 Far North Dallas 1980 40,525 86 15.63
-- ---------- ---- ------------
Subtotal/Weighted Average ......... 31 11,466,508 90% $ 19.96
---------- ---- ------------
FORT WORTH
Continental Plaza ................... 1 CBD 1982 954,895 48%(5) $ 15.76
-- ---------- ---- ------------
HOUSTON
Greenway Plaza Office Portfolio ...... 10 Richmond-Buffalo 1969-1982 4,286,277 89% $ 15.40
Speedway
Houston Center ....................... 3 CBD 1974-1983 2,764,418 94 (5) 15.18
Post Oak Central ..................... 3 West Loop/Galleria 1974-1981 1,277,516 95 15.42
The Woodlands Office
Properties(6) ...................... 12 The Woodlands 1980-1996 810,630 96 (5) 15.34
BP Plaza ............................. 1 Katy Freeway 1992 561,065 100 17.94
Three Westlake Park(7) ............... 1 Katy Freeway 1983 414,251 99 13.45
U.S. Home Building ................... 1 West Loop/Galleria 1982 399,777 85 14.87
-- ---------- ---- ------------
Subtotal/Weighted Average ......... 31 10,513,934 92% $ 15.38
-- ---------- ---- ------------
AUSTIN
Frost Bank Plaza .................... 1 CBD 1984 433,024 75%(5) $ 18.31
301 Congress Avenue(8) .............. 1 CBD 1986 418,338 98 22.98
Bank One Tower ...................... 1 CBD 1974 389,503 96 16.94
Austin Centre ....................... 1 CBD 1986 343,665 92 19.90
The Avallon ......................... 1 Northwest 1993/1997 232,301(9) 79 (5) 18.95
Barton Oaks Plaza One ............... 1 Southwest 1986 99,792 100 19.91
-- ---------- ---- ------------
Subtotal/Weighted Average ....... 6 1,916,623 89% $ 19.58
-- ---------- ---- ------------
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Weighted
Average
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- ---------- --------- --------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
COLORADO
DENVER
MCI Tower ................................ 1 CBD 1982 550,807 98% $17.96
Ptarmigan Place .......................... 1 Cherry Creek 1984 418,630 93 16.29
Regency Plaza One ........................ 1 DTC 1985 309,862 90 (5) 21.17
AT&T Building ............................ 1 CBD 1982 184,581 83 15.07
The Citadel .............................. 1 Cherry Creek 1987 130,652 100 19.75
55 Madison ............................... 1 Cherry Creek 1982 137,176 84 (5) 17.11
44 Cook .................................. 1 Cherry Creek 1984 124,174 96 17.75
-- ---------- ---- ------
Subtotal/Weighted Average ............ 7 1,855,882 93% $17.92
-- ---------- ---- ------
COLORADO SPRINGS
Briargate Office and Research Center...... 1 Colorado Springs 1988 252,857 100 $15.51
-- ---------- ---- ------
ILLINOIS
CHICAGO
Woodfield Corporate Center(10) .......... 6 Schaumburg 1978-1986 1,627,769 94 $23.74
-- ---------- ---- ------
LOUISIANA
NEW ORLEANS
Energy Centre ............................ 1 CBD 1984 761,500 78% $14.85
1615 Poydras ............................. 1 CBD 1984 508,741 80 15.10
-- ---------- ---- ------
Subtotal/Weighted Average ............ 2 1,270,241 79% $14.95
-- ---------- ---- ------
FLORIDA
MIAMI
Miami Center ............................. 1 CBD 1983 782,686 80% $23.52
Datran Center ............................ 2 South Dade/Kendall 1986/1988 472,236 92 20.29
-- ---------- ---- ------
Subtotal/Weighted Average .............. 3 1,254,922 84% $22.18
-- ---------- ---- ------
ARIZONA
PHOENIX
Two Renaissance Square ................... 1 Downtown/CBD 1990 476,373 91%(5) $23.30
6225 North 24th Street ................... 1 Camelback Corridor 1981 86,451 67 (5) 21.66
-- ---------- ---- ------
Subtotal/Weighted Average ............ 2 562,824 88% $23.10
-- ---------- ---- ------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour ..................... 2 Georgetown 1986 536,206 94% $36.47
-- ---------- ---- ------
NEBRASKA
OMAHA
Central Park Plaza ....................... 1 CBD 1982 409,850 100% $15.23
-- ---------- ---- ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza ........................ 1 CBD 1990 366,236 96% $18.45
-- ---------- ---- ------
CALIFORNIA
SAN FRANCISCO
160 Spear Street ......................... 1 South of Market/CBD 1984 276,420 99% $24.93
-- ---------- ---- ------
SAN DIEGO
Chancellor Park(11) ...................... 1 UTC 1988 195,733 87% $20.35
-- ---------- ---- ------
COSTA MESA
Two Town Center(10) ...................... 3 South Coast Metro 1979-1983 731,969 77% $22.61
-- ---------- ---- ------
LOS ANGELES
6701 Tower(10) ........................... 1 Culver City-West LA 1987 320,982 81% $23.38
-- ---------- ---- ------
TOTAL/WEIGHTED AVERAGE ................. 99 34,513,851 89%(5) $18.75
== ========== ==== ======
</TABLE>
26
<PAGE> 27
(1) Calculated based on base rent payable as of June 30, 1998, without
giving effect to free rent or scheduled rent increases that would be
taken into account under generally accepted accounting principles and
including adjustments for expenses payable by or reimbursable from
tenants.
(2) The Operating Partnership has a 50% general partner interest in the
partnership that owns Bank One Center.
(3) The Operating Partnership owns the principal economic interest in
Trammell Crow Center through its ownership of fee simple title to the
Property (subject to a ground lease and a leasehold estate regarding
the building) and two mortgage notes encumbering the leasehold
interests in the land and building.
(4) The Operating Partnership owns the principal economic interest in
Spectrum Center through an interest in Spectrum Mortgage Associates
L.P., which owns both a mortgage note secured by Spectrum Center and
the ground lessor's interest in the land underlying the office
building.
(5) Leases have been executed at certain Office Properties but had not
commenced as of June 30, 1998. If such leases had commenced as of June
30, 1998, the percent leased for Office Properties would have been 92%.
The total percent leased for such Properties would have been as
follows: Spectrum Center - 88%; The Amberton - 85%; 12404 Park Central
- 100%; Palisades Central I - 99%; Continental Plaza - 100%; Houston
Center - 97%; The Woodlands Office Properties - 99%; Frost Bank Plaza -
92%; The Avallon - 100%; Regency Plaza One - 97%; 55 Madison - 89%; Two
Renaissance Square - 96%; and 6225 North 24th Street - 83%.
(6) The Operating Partnership has a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnership
that owns the 12 Office Properties that comprise The Woodlands Office
Properties.
(7) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by Three
Westlake Park.
(8) The Operating Partnership has a 1% general partner and a 49% limited
partner interest in the partnership that owns 301 Congress Avenue.
(9) In August 1997, construction was completed on a 106,342 square foot
office property. The entire building is leased to BMC Software, Inc.,
which is expected to occupy in stages over the next 13 months.
(10) Pending investment as of June 30, 1998.
(11) The Operating Partnership owns Chancellor Park through its ownership of
a mortgage note secured by the building and through its direct and
indirect interests in the partnership which owns the building.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of the lease expirations for
leases in place as of June 30, 1998, assuming completion of the pending
investment (see Note 8-financial statements), for the Operating Partnership's
Office Properties for each of the 10 years beginning with the remainder of 1998,
assuming that none of the tenants exercises renewal options and excluding an
aggregate of 6,360,666 square feet of unleased space.
<TABLE>
<CAPTION>
ANNUAL
PERCENTAGE PERCENTAGE OF FULL-
OF LEASED TOTAL ANNUAL SERVICE
NET RENTABLE NET RENTABLE ANNUAL FULL- FULL- RENT PER
NUMBER OF AREA AREA SERVICE SERVICE RENT NET
TENANTS WITH REPRESENTED REPRESENTED RENT UNDER REPRESENTED RENTABLE
EXPIRING BY EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET)(1) LEASES LEASES(2) LEASES EXPIRING(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 .................... 382 1,496,733 5.3% $25,710,906 4.6% $ 17.18
1999 .................... 432 3,542,650 12.6 62,702,859 11.3 17.70
2000 .................... 401 3,401,333 12.1 64,247,299 11.6 18.89
2001 .................... 370 3,798,275 13.5 67,612,166 12.2 17.80
2002 .................... 299 3,518,162 12.5 71,042,105 12.8 20.19
2003 .................... 181 2,161,069 7.7 39,886,788 7.2 18.46
2004 .................... 94 2,825,922 10.0 55,890,884 10.0 19.78
2005 .................... 60 2,100,930 7.5 44,203,041 7.9 21.04
2006 .................... 26 583,247 2.1 11,994,078 2.2 20.56
2007 .................... 29 1,156,506 4.1 25,345,686 4.6 21.92
2008 and thereafter ..... 48 3,568,358 12.6 87,569,838 15.6 24.54
</TABLE>
(1) Includes a pending investment (see Note 8 - financial statements).
(2) Calculated based on base rent payable as of the expiration date of the
lease for net rentable square feet expiring, without giving effect to
free rent or scheduled rent increases that would be taken into account
under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants based
on current levels.
27
<PAGE> 28
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1998 and 1997. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure performance based on available guest nights.
<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------------------------------
Revenue
Average Average Per
Occupancy Daily Available
Year Rate Rate Room
Completed/ ------------- -------------- ---------------
Hotel Property(1) Location Renovated Rooms 1998 1997 1998 1997 1998 1997
- ----------------- -------- --------- ----- ---- ---- ---- ---- ---- ----
Full-Service/Luxury Hotels:
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Denver Marriott City Center Denver, CO 1982/1994 613 78% 80% $125 $116 $ 97 $ 92
Four Seasons Hotel-Houston Houston, TX 1982 399 66 69 179 158 119 110
Hyatt Regency Albuquerque Albuquerque,NM 1990 395 68 74 103 99 70 74
Omni Austin Hotel Austin, TX 1986 314 80 80 117 106 94 85
Hyatt Regency Beaver Creek Avon, CO 1989 295 68 69 279 270 190 186
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(2) 80 89 211 160 168 161
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 40 (7) 82 327 309 132(7) 252
----- --- --- ---- ---- ---- ----
Total/Weighted Average 2,276 72% 76% $159 $148 $115 $113
===== === === ==== ==== ==== ====
Destination Health & Fitness Resorts: Guest Nights
- ------------------------------------- ------------
Canyon-Ranch - Tucson Tucson, AZ 1980 250(3)
Canyon Ranch - Lenox Lenox, MA 1989 202(3)
---
TOTAL/WEIGHTED AVERAGE 452 89%(4) 83%(4) $504(5) $476(5) $436(6) $382(6)
===== === === ==== ==== ==== ====
</TABLE>
- -------------
(1) Because of the Company's status as a REIT for federal income tax
purposes, it does not operate the Hotel Properties and has leased the
Hotel Properties to subsidiaries of Crescent Operating, Inc. pursuant
to long-term leases.
(2) In July 1997, 30 additional rooms were completed.
(3) Represents available guest nights, which is the maximum number of
guests that the resort can accommodate per night.
(4) Represents the number of paying and complimentary guests for the
period, divided by the maximum number of available guest nights for the
period.
(5) Represents the average daily "all-inclusive" guest package charges for
the period, divided by the average daily number of paying guests for
the period.
(6) Represents the total "all-inclusive" guest package charges for the
period, divided by the maximum number of available guest nights for the
period.
(7) Temporarily closed from February 1, 1998 through May 1, 1998 due to
flooding in the region affecting the roadway passage to the hotel.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Operating Partnership owns economic interests in five Residential
Development Corporations through the Residential Development Property Mortgages
relating to and the non-voting common stock in these Residential Development
Corporations. The Residential Development Corporations in turn, through joint
ventures or partnership arrangements, own interests in the 13 Residential
Development Properties. The Residential Development Corporations are responsible
for the continued development and the day-to-day operations of the Residential
Development Properties.
28
<PAGE> 29
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table sets forth certain information as of June 30, 1998,
relating to the Residential Development Properties.
<TABLE>
<CAPTION>
Total Total Average
Residential Residential Total Lots/Units Lots/Units Closed Range of
Residential Development Development Lots/ Developed Closed Sale Price Proposed
Development Properties Type of Corporation's Units Since Since Per Lot/ Sale Prices
Corporation (1) (RDP) RDP(2) Location Ownership % Planned Inception Inception Unit ($) Per Lot/Unit ($)(3)
- --------------- --------------- ------- -------------- ----------- ------- --------- --------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.00% 710 581 541 95,000 50,000-265,000
Development The Highlands SF Breckenridge,CO 12.25% 750 249 215 140,000 55,000-250,000
Corp. ------ ------ ------
Total Mira Vista Development Corp. 1,460 830 756
------ ------ ------
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 556 294 31,000 22,000-60,000
Development Spring Lakes SF Houston, TX 100.0% 536 93 8 32,200 21,000-45,000
Corp. ------ ------ ------
Total Houston Area Development Corp. 1,741 649 302
------ ------ ------
Crescent The Reserve at
Development Frisco SF Frisco, CO 60.0% 134 134 90 95,000 60,000-165,000
Management Villa Montane
Corp. Townhomes TH Avon, CO 30.0% 27(4) - - N/A 515,000-1,700,000
Villa Montane
Club TS Avon, CO 30.0% 746(4) - - N/A 18,000-150,000
Villas at Beaver
Creek TH Avon, CO 30.0% 10(4) - - N/A 1,625,000-3,245,000
Deer Trail SFH Avon, CO 60.0% 16(4) - - N/A 2,560,000-3,325,000
Buckhorn
Townhomes TH Avon, CO 60.0% 24(4) - - N/A 945,000-1,850,000
Bear Paw Lodge CO Avon, CO 60.0% 43(4) - - N/A 1,495,000-1,895,000
------ ------ ------
Total Crescent Development Management Corp. 1,000 134 90
------ ------ ------
The Woodlands The Woodlands SF The Woodlands, TX 42.5% 38,313 18,949 18,087 40,000 13,000-250,000
Land Company Inc. ------ ------ ------
Desert Mountain Desert Mountain SF Scottsdale, AZ 93.0% 2,543 1,877 1,689 305,000(5) 150,000-
Development ------ ------ ------ 2,500,000(5)
Corp.
Total 45,057 22,439 20,924
====== ====== ======
</TABLE>
- ------------------------
(1) The Operating Partnership has an approximately 94%, 94%, 90%, 95% and
95% ownership interest in Mira Vista Development Corp., Houston Area
Development Corp., Crescent Development Management Corp., The Woodlands
Land Company, Inc., and Desert Mountain Development Corp.,
respectively, through ownership of non-voting common stock in each of
these Residential Development Corporations.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); TS
(Timeshare); and SFH (Single Family Homes).
(3) Based on existing inventory of developed lots and lots to be developed.
(4) As of June 30, 1998, 15 units were under contract at Villa Montane
Townhomes representing $14.5 million in sales proceeds, 638 contracts
were pre-sold at Villa Montane Club representing $38.7 million in sales
proceeds, eight units were under contract at Villas at Beaver Creek
representing $17.9 million in sales proceeds, seven units were under
contract at Deer Trail representing $20.2 million in sales, 14 units
were under contract at Buckhorn Townhomes representing $18.4 million in
sales, and five units were under contract at Bear Paw Lodge
representing $8.9 million in sales.
(5) Excludes golf membership which is approximately $125,000.
29
<PAGE> 30
YEAR 2000 COMPLIANCE
The Operating Partnership has reviewed its in-house computer software
programs and operating systems, which consist primarily of the accounting and
property management systems, to assess the impact of the Year 2000 on these
systems. These programs and systems are Year 2000 compliant.
Based on current information, the Operating Partnership believes that
it will be able to achieve Year 2000 compliance for its property-specific
computer systems, such as energy management and security access systems, through
a combination of the modification and replacement of systems within its Office
Property portfolio. The Operating Partnership anticipates that the costs
associated with achieving Year 2000 compliance will not have a material impact
on the Operating Partnership's financial results. The implementation will take
place over the next 12 months with the assistance of full-time employees and
independent contractors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This item is inapplicable to the Operating Partnership because the
Company's market capitalization was less than $2.5 billion on January 28, 1997,
therefore the Operating Partnership is not required to respond to this item
until its Form 10-K for the fiscal year ended December 31, 1998.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to an Agreement and Plan of Merger, dated January
16, 1998, as amended (the "Merger Agreement"), between the Company and Station
Casinos, Inc. ("Station"). On July 27, 1998, Station canceled the joint annual
and special meeting of its common and preferred stockholders scheduled for
August 4, 1998, at which the common and preferred stockholders were to vote on
the Merger.
On July 30, 1998, Station filed a complaint in Clark County District Court,
State of Nevada seeking declaratory relief in connection with the Merger
Agreement. The complaint alleges that the Company consented to Station's
cancellation of its meeting of stockholders. The action seeks a declaratory
judgment that (i) Station has complied in all material respects with its
obligations under the Merger Agreement, (ii) Station is not obligated to
reschedule immediately a meeting of its common and preferred stockholders,
(iii) the Company has no right to terminate the Merger Agreement, and (iv) the
Company is obligated to purchase up to $115 million in redeemable preferred
stock of Station in accordance with certain provisions of the Merger Agreement.
On August 7, 1998, the Company filed a complaint in the United States
District Court, Northern District of Texas seeking damages and declaratory
relief as a result of Station's alleged breaches of the Merger Agreement. The
complaint alleges that Station breached the Merger Agreement by unilaterally
canceling its scheduled stockholders meeting and refusing to reschedule and
conduct the meeting and that Station's representations and warranties were not
true and correct in all material respects. The action seeks (i) compensatory
damages, including expenses, (ii) a declaratory judgment that Station's alleged
breaches under the Merger Agreement excuse the Company from any further
obligations under the Merger Agreement, and (iii) a declaratory judgment that
Crescent is not required to purchase shares of Station's redeemable
preferred stock due to Station's material breaches of the Merger
Agreement.
On August 11, 1998, Station amended its complaint to expand the matters as
to which declaratory relief was sought and to add claims for damages and for
specific performance relating to the purchase of Station's redeemable preferred
stock. The amended complaint alleges that the Company breached its obligations
under the Merger Agreement by failing to use all reasonable efforts to
consummate the Merger and by refusing to provide Station with access to
additional information concerning the Company. The amended complaint also
alleges that the Company had no right to terminate the Merger Agreement or to
refuse to purchase 115,000 shares of Station's redeemable preferred stock for
an aggregate purchase price of $115,000,000. As amended, the action by Station
seeks, in addition to the prior requests for declaratory relief, (i) an order of
specific performance requiring the Company to purchase $115,000,000 of the
redeemable preferred stock, (ii) damages consisting of compensatory damages
(which Station states it believes to be in excess of $400,000,000), costs
associated with Station's obtaining capital needed to replace the $115,000,000
that was to have been paid by the Company to purchase the redeemable preferred
stock, and expenses incurred by Station in connection with the proposed Merger,
and (iii) a declaratory judgment that the Company was in breach of its
representations, warranties, and covenants at the time that the Company
exercised its termination rights under the Merger Agreement and that the
Company's breach and exercise of termination rights excuses Station from any
further performance obligation under the Merger Agreement.
The Company has stated that it believes that Station's claims are without
merit and intends to contest the claims vigorously. As with any litigation,
however, it is not possible to predict the resolution of the pending actions.
The Company has stated, however, that it believes that the pending action
against the Company will not have a material adverse effect on the Company's
financial condition or results of operations.
30
<PAGE> 31
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
3.01 -- Second Amended and Restated Agreement of Limited
Partnership of the Registrant dated as of November 1, 1997, as
amended through June 30, 1998 (filed as Exhibit 10.01 to the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (the "Company 10-Q") of Crescent Real Estate Equities
Company (the "Company") and incorporated herein by reference)
4.01 -- Indenture, dated as of September 22, 1997, between the
Registrant and State Street Bank and Trust Company of Missouri,
N.A. (filed as Exhibit 4.01 to the Registration Statement on
Form S-4 (File No. 333-42293) of the Registrant (the "1997 S-4")
and incorporated herein by reference)
4.02 -- Restated Declaration of Trust of the Company (filed as
Exhibit 4.01 to the Company's Registration Statement on Form S-3
(File No. 333-21905) (the "1997 S-3") and incorporated herein by
reference)
4.03 -- Amended and Restated Bylaws of the Company, as amended (filed
as Exhibit 4.02 to the Company's Registration Statement on Form
S-3) (File No. 333-56809) and incorporated herein by reference)
4.04 -- 6 5/8% Note due 2002 of the Registrant (filed as Exhibit 4.07
to the Company 10-Q and incorporated herein by reference)
4.05 -- 7 1/8% Note due 2007 of the Registrant (filed as Exhibit 4.08
to the Company 10-Q and incorporated herein by reference)
10.01 -- Noncompetition Agreement (Rainwater) (filed as Exhibit
10.02 to the 1997 10-K and incorporated herein by
reference)
10.02 -- Noncompetition Agreement (Goff) (filed as Exhibit 10.03
to the 1997 10-K and incorporated herein by reference)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.03 -- Noncompetition Agreement (Haddock) (filed as Exhibit
10.04 to the 1997 10-K and incorporated herein by
reference)
10.04 -- Employment Agreement (Goff) (the "Goff Employment
Agreement") (filed as Exhibit 10.05 to the 1997 10-K and
incorporated herein by reference)
10.05 -- Amendment No. 5 to the Goff Employment Agreement, dated
March 10, 1998 (filed as Exhibit 10.29 to the 1997 S-4
and incorporated herein by reference)
10.06 -- Employment Agreement (Haddock) (the "Haddock Employment
Agreement") (filed as Exhibit 10.06 to the 1997 10-K and
incorporated herein by reference)
10.07 -- Amendment No. 4 to the Haddock Employment Agreement,
dated March 10, 1998 (filed as Exhibit 10.30 to the 1997
S-4 and incorporated herein by reference)
10.08 -- Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Company and each
of its executive officers and trust managers (filed as
Exhibit 10.07 to the 1997 S-4 and incorporated herein by
reference)
10.09 -- Crescent Real Estate Equities Company 1994 Stock Incentive
Plan (filed as Exhibit 10.07 to the Company's Registration
Statement on Form S-11 (File No. 33-75188) and incorporated
herein by reference)
10.10 -- Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan (filed as Exhibit 10.10 to the 1997
10-K and incorporated herein by reference)
10.11 -- Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as Exhibit
10.13 to the 1997 S-4 and incorporated herein by
reference)
10.12 -- 1995 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit 99.01 to the
Company's Registration Statement on Form S-8 (File No.
333-3452) and incorporated herein by reference)
10.13 -- 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit 10.01 to the
Company's Current Report on Form 8-K dated and filed
September 27, 1996 and incorporated herein by reference)
10.14 -- Master Lease Agreement, dated June 16, 1997, as amended,
between Crescent Real Estate Funding VII, L.P. and
Charter Behavioral Health Systems, LLC and its
subsidiaries, relating to the Magellan Facilities (filed
as Exhibit 10.27 to the 1997 10-K and incorporated herein
by reference)
10.15 -- Fifth Amended and Restated Revolving Credit Agreement, dated
June 30, 1998 among the Registrant, BankBoston, N.A. and the
other banks named therein (filed as Exhibit 10.16 of the Company
10-Q and incorporated herein by reference)
10.16 -- Intercompany Agreement, dated June 3, 1997, between the
Registrant and Crescent Operating, Inc. (filed as Exhibit
10.2 to the Registration Statement on Form S-1 (File No.
333-25223) of Crescent Operating, Inc. and incorporated
herein by reference)
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
27.01 -- Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K.
None
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
By: CRESCENT REAL ESTATE EQUITIES, LTD.,
its general partner
/s/ Gerald W. Haddock
----------------------------------------------
Date: August 14, 1998 Gerald W. Haddock, President and Chief
---------------------- Executive Officer
/s/ Dallas E. Lucas
----------------------------------------------
Date: August 14, 1998 Dallas E. Lucas, Senior Vice President, Chief
---------------------- Financial Officer and Accounting Officer
32
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENT OF OPERATIONS FOUND ON PAGE 3 AND 4 OF
THE COMPANY'S FORM 10-Q FOR THE YEAR TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 121,050
<SECURITIES> 0
<RECEIVABLES> 76,394
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 970,194
<PP&E> 4,075,798
<DEPRECIATION> (329,192)
<TOTAL-ASSETS> 4,914,244
<CURRENT-LIABILITIES> 94,741
<BONDS> 2,004,596
0
0
<COMMON> 0
<OTHER-SE> 2,787,517
<TOTAL-LIABILITY-AND-EQUITY> 4,914,244
<SALES> 0
<TOTAL-REVENUES> 330,253
<CGS> 0
<TOTAL-COSTS> 174,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,172
<INCOME-PRETAX> 95,432
<INCOME-TAX> 0
<INCOME-CONTINUING> 94,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,675
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.31
</TABLE>
