<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 SEPTEMBER 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
- - --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 (Audited) .................................................. 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and 1997 (Unaudited)........................................ 4
Consolidated Statement of Partners' Capital for the nine months ended
September 30, 1998 (Unaudited)................................................. 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited) ....................................... 6
Notes to Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Historical Results of Operations................................. 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 37
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 37
Item 2. Changes in Securities.......................................................... 39
Item 3. Defaults Upon Senior Securities................................................ 39
Item 4. Submission of Matters to a Vote of Security Holders............................ 39
Item 5. Other Information.............................................................. 39
Item 6. Exhibits and Reports on Form 8-K............................................... 39
</TABLE>
2
<PAGE> 3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Land $ 385,487 $ 353,374
Land held for development or sale 105,387 94,954
Building and improvements 3,549,869 2,923,097
Furniture, fixtures and equipment 61,463 51,705
Less - accumulated depreciation (356,675) (278,194)
----------- -----------
Net investment in real estate 3,745,531 3,144,936
Cash and cash equivalents 89,404 66,063
Restricted cash and cash equivalents 37,516 41,528
Accounts receivable, net 24,801 30,049
Deferred rent receivable 63,383 39,588
Investments in real estate mortgages and
equity of unconsolidated companies 746,211 601,770
Notes receivable , net 175,380 159,843
Other assets, net 102,402 99,098
----------- -----------
Total assets $ 4,984,628 $ 4,182,875
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 750,000 $ 350,000
Notes payable 1,523,554 1,360,124
Accounts payable, accrued expenses and other liabilities 114,830 127,220
----------- -----------
Total liabilities 2,388,384 1,837,344
----------- -----------
FORWARD SHARE PURCHASE AGREEMENT: 151,013 --
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: 26,841 28,178
PARTNERS' CAPITAL:
Series A Preferred Units, 8,000,000 Units issued and outstanding
at September 30, 1998 200,000 --
Series B Preferred Units, 6,948,734 Units issued and outstanding
at September 30, 1998 225,000 --
Units of Partnership Interests issued 67,022,260 and 63,692,633
outstanding and 3,329,627 held in treasury at September 30, 1998 and
65,386,026 issued and outstanding at December 31, 1997:
General partner -- outstanding 571,430 and 589,890 3,873 4,324
Limited partners' -- outstanding 63,121,203 and 64,796,136 1,998,649 2,313,029
Accumulated other comprehensive income (9,132) --
----------- -----------
Total partners' capital 2,418,390 2,317,353
----------- -----------
Total liabilities and partners' capital $ 4,984,628 $ 4,182,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(NOTES 1, 2 and 3)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
(UNAUDITED) (UNAUDITED)
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Office and retail properties $ 146,037 $ 92,014 $ 409,937 $ 247,333
Hotel properties 12,798 9,032 38,350 26,453
Behavioral healthcare properties 13,824 13,824 41,471 15,966
Interest and other income 7,134 5,187 20,288 10,364
------------ ------------ ------------ ------------
Total revenues 179,793 120,057 510,046 300,116
------------ ------------ ------------ ------------
EXPENSES:
Real estate taxes 18,531 10,607 51,937 28,229
Repairs and maintenance 10,379 6,301 28,181 17,244
Other rental property operating 33,338 22,500 93,003 59,100
Corporate general and administrative 4,335 2,372 11,036 9,855
Interest expense 39,148 23,075 111,275 54,687
Amortization of deferred financing costs 2,315 937 4,565 2,157
Depreciation and amortization 29,770 20,549 84,602 50,840
Write-off of costs associated with
terminated acquisitions 18,435 -- 18,435 --
------------ ------------ ------------ ------------
Total expenses 156,251 86,341 403,034 222,112
------------ ------------ ------------ ------------
Operating income 23,542 33,716 107,012 78,004
OTHER INCOME:
Equity in net income of unconsolidated
companies 9,253 1,119 21,215 6,262
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS 32,795 34,835 128,227 84,266
Minority interests (199) (390) (1,006) (1,192)
------------ ------------ ------------ ------------
NET INCOME 32,596 34,445 127,221 83,074
------------ ------------ ------------ ------------
PREFERRED DISTRIBUTIONS (3,375) -- (8,325) --
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO PARTNERS' $ 29,221 $ 34,445 $ 118,896 $ 83,074
============ ============ ============ ============
UNIT OF PARTNERSHIP INTEREST DATA:
Net income - Basic $ 0.44 0.61 $ 1.79 1.65
============ ============ ============ ============
UNIT OF PARTNERSHIP INTEREST DATA:
Net income - Diluted $ 0.42 $ 0.59 $ 1.72 $ 1.59
============ ============ ============ ============
WEIGHTED AVERAGE UNIT OF PARTNERSHIP INTERESTS - BASIC 66,981,932 56,517,050 66,305,338 50,296,287
============ ============ ============ ============
WEIGHTED AVERAGE UNIT OF PARTNERSHIP INTERESTS - DILUTED 73,658,148 58,698,376 70,057,767 52,198,982
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(NOTES 1, 2 and 8)
<TABLE>
<CAPTION>
PREFERRED LIMITED GENERAL TOTAL
PARTNERS' PARTNERS' PARTNER'S PARTNERS'
CAPITAL CAPITAL CAPITAL CAPITAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Partners' capital, December 31, 1997 $ -- $ 2,313,029 $ 4,324 $ 2,317,353
Contributions 425,000 (269,713) -- 155,287
Distributions -- (148,413) (1,499) (149,912)
Net income -- 117,707 1,189 118,896
Reclassification of forward share purchase
agreement -- (5,580) (56) (5,636)
Settlement of equity swap agreement -- (8,381) (85) (8,466)
Unrealized loss on available-for-sale securities -- (9,041) (91) (9,132)
------------ ------------ ------------ ------------
Partners' capital, September 30, 1998 (unaudited) $ 425,000 $ 1,989,608 $ 3,782 $ 2,418,390
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1, 2 AND 4)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
(UNAUDITED)
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 127,221 $ 83,074
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 89,167 52,997
Minority interests 1,006 1,192
Non-cash compensation 155 157
Equity in earnings net of distributions
received from unconsolidated companies -- (252)
Distributions received in excess of equity in
earnings from unconsolidated companies 11,881 --
Decrease (increase) in accounts receivable 5,248 (8,650)
Increase in deferred rent receivable (23,795) (14,432)
Increase in other assets (21,556) (24,068)
Decrease in restricted cash and cash equivalents 4,560 4,944
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (12,390) 39,768
------------ ------------
Net cash provided by operating activities 181,497 134,730
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (527,076) (1,347,902)
Development of investment properties (14,796) (8,364)
Capital expenditures - rental properties (35,073) (14,497)
Tenant improvement and leasing costs - rental properties (53,700) (27,121)
Increase in restricted cash and cash equivalents (548) (524)
Investment in unconsolidated companies (120,537) (328,468)
Decrease (increase) in escrow deposits -
acquisition of investment properties 5,360 (4,190)
Increase in notes receivable (15,537) (134,918)
------------ ------------
Net cash used in investing activities (761,907) (1,865,984)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (3,436) (11,329)
Borrowings under credit facility 672,150 612,500
Payments under credit facility (272,150) (336,000)
Debt proceeds 158,100 990,696
Debt payments (250,903) (158,100)
Capital distributions - joint venture partner (2,343) (2,061)
Capital contributions to the Operating Partnership 460,570 761,826
Distributions from the Operating Partnership (158,237) (93,215)
------------ ------------
Net cash provided by financing activities 603,751 1,764,317
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 23,341 33,063
CASH AND CASH EQUIVALENTS,
Beginning of period 66,063 25,535
------------ ------------
CASH AND CASH EQUIVALENTS,
End of period $ 89,404 $ 58,598
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
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 approximately 1% general partner interest
(equivalent, for purposes of this presentation, to 571,430 units of partnership
interest) in the Operating Partnership. In addition, the Company owns
approximately 89% limited partner interest (equivalent, for purposes of this
presentation, to 56,571,574 units of partnership interest) in the Operating
Partnership, with the remaining approximately 10% limited partner interest
(equivalent, for purposes of this presentation, to 6,549,629 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), with the remaining interests owned indirectly by the Company
through seven separate corporations, each of which is a wholly owned subsidiary
of CREE, Ltd. and a general partner of one of the seven limited partnerships.
The term "Operating Partnership" includes, unless the context otherwise
requires, CREELP and the other subsidiaries of CREELP.
As of September 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, 90 behavioral healthcare properties (the
"Behavioral Healthcare Properties"), seven full-service hotels with a total of
2,257 rooms and two destination health and fitness resorts that can accommodate
up to 462 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 September 30, 1998, owned or operated 97
refrigerated storage properties with an aggregate of approximately 515 million
cubic feet (the "Refrigerated Storage Properties"). The Operating Partnership
also has a 42.5% partnership interest in a partnership, the primary holdings of
which 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 September 30, 1998:
Operating Partnership: 62 Office Properties, six Hotel Properties and five
Retail Properties
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P.: Continental Plaza, The Crescent Atrium,
("Funding I") The Crescent Office Towers, Regency Plaza One, and
Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate
Funding II, L.P.: Office and Research Center, Hyatt Regency Albuquerque,
("Funding II") Hyatt Regency Beaver Creek, Las Colinas Plaza, Liberty
Plaza I & II, MacArthur Center I & II, Ptarmigan Place,
Stanford Corporate Centre, Two Renaissance Square, and
12404 Park Central
7
<PAGE> 8
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")
- - ----------------
(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 contained in
the Operating Partnership's Registration Statement on Form S-4 (File No.
333-57954) (the "S-4 Registration Statement"), which includes information for
the year ended December 31, 1997.
Certain reclassifications have been made to previously reported amounts
to conform with the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
On January 1, 1998, the Operating Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. As a result of the adoption of SFAS No. 130,
comprehensive income has been displayed as part of the statement of partners'
capital. During the nine months ended September 30, 1998, the Operating
Partnership held securities classified as available-for-sale which had
unrealized losses during the period of $9,132.
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 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.
8
<PAGE> 9
3. EARNINGS PER SHARE:
The Operating Partnership adopted SFAS No. 128, "Earnings Per Share"
("EPS"), for the year ended December 31, 1997, which superseded APB Opinion No.
15 for periods ending after December 15, 1997. SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
Primary EPS and Fully Diluted EPS are replaced by Basic EPS and Diluted EPS,
respectively. Basic EPS, unlike Primary EPS, excludes all dilution while Diluted
EPS, like Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
into common shares.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------
Net Wtd. Avg. Per Unit Net Wtd. Avg. Per Unit
Income Units Amount Income Units Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per unit of partnership
interest -
Net income available
to partners $ 29,221 66,982 $ 0.44 $ 34,445 56,517 $ 0.61
========= =========
Effect of Dilutive Securities:
Unit options -- 1,783 -- 2,181
Assumed conversion of
preferred units -- 4,155 -- --
Additional units obligation
relating to:
Forward share purchase
agreement 1,579 374 -- --
Equity swap agreement -- 364 -- --
--------- --------- --------- ---------
Diluted Earnings per unit of partnership
interest -
Net income available
to partners $ 30,800 73,658 $ 0.42 $ 34,445 58,698 $ 0.59
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------
Net Wtd. Avg. Per Unit Net Wtd. Avg. Per Unit
Income Units Amount Income Units Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per unit of partnership
interest -
Net income available
to partners $ 118,896 66,305 $ 1.79 $ 83,074 50,296 $ 1.65
========= =========
Effect of Dilutive Securities:
Unit options -- 2,122 -- 1,903
Assumed conversion of
preferred units -- 1,385 -- --
Additional units obligation
relating to:
Forward share purchase
agreement 1,579 125 -- --
Equity swap agreement -- 121 -- --
--------- --------- --------- ---------
Diluted Earnings per unit of partnership
interest -
Net income available
to partners $ 120,475 70,058 $ 1.72 $ 83,074 52,199 $ 1.59
========= ========= ========= ========= ========= =========
</TABLE>
9
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4. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 110,067 $ 52,594
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of limited partnership interests in settlement
of obligation $ 8,522 $ --
Issuance of limited partnership interests in conjunction
with investments $ 11,450 $ --
Unit obligation in conjunction with
an investment $ 21,000 $ --
Mortgage note assumed in conjunction with property
acquisitions $ 46,934 $ --
Debt incurred in conjunction with termination of equity
swap agreement $ 209,299 $ --
Reclassification of forward share purchase agreement
from equity to liability in conjunction with the term
extension $ 151,013 $ --
Unrealized loss on available-for-sale securities $ 9,132 $ --
</TABLE>
5. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED
COMPANIES:
The following is a summary of the Operating Partnership's ownership in
significant unconsolidated companies:
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP'S OWNERSHIP
ENTITY CLASSIFICATIONS AS OF SEPTEMBER 30, 1998
- - -------------------------------------------- ------------------------------------- -----------------------------------
<S> <C> <C>
Desert Mountain Development Corporation Residential Development Corporation 95%(1)
Houston Area Development Corp. Residential Development Corporation 94%(1)
The Woodlands Land Development Company, Inc. Residential Development Corporation 95%(1)
Crescent Development Management Corp. Residential Development Corporation 90%(1)
Mira Vista Development Corp. Residential Development Corporation 94%(1)
Crescent CS Holdings Corp. Crescent Refrigerated Storage Corporation 95%(2)
Crescent CS Holdings II Corp. Crescent Refrigerated Storage Corporation 95%(2)
The Woodlands Commercial
Properties Company, L.P. Other (various commercial properties) 42.5%
Main Street Partners, L.P. Other (office property - Bank One Center) 50%
</TABLE>
10
<PAGE> 11
- - ---------------------
(1) See Item 2. the Residential Development Properties Table for the
Residential Development Corporation's ownership interest in
Residential Development Properties.
(2) Each of the Crescent Refrigerated Storage Corporations has a 40%
interest in a partnership that owns one of the Refrigerated Storage
Corporations. Accordingly, each of the Crescent Refrigerated Storage
Corporations has an indirect 40% interest in certain of the
Refrigerated Storage Properties.
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," "Refrigerated Storage Corporations," and "Other," as applicable,
as of September 30, 1998.
BALANCE SHEETS AT SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
RESIDENTIAL REFRIGERATED
DEVELOPMENT STORAGE
CORPORATIONS CORPORATIONS OTHER
------------ ------------ ------------
<S> <C> <C> <C>
Real estate, net ................................ $ 618,830 $ 1,440,196 $ 462,631
Cash ............................................ 20,239 12,230 30,873
Other assets .................................... 164,456 362,777 63,910
------------ ------------ ------------
Total Assets ................................ $ 803,525 $ 1,815,203 $ 557,414
============ ============ ============
Notes payable ................................... $ 308,399 $ 630,098 $ 250,000
Notes payable to the Operating
Partnership ................................. 190,240 -- 9,341
Other liabilities ............................... 74,913 464,904 49,254
Equity .......................................... 229,973 720,201 248,819
------------ ------------ ------------
Total Liabilities and Equity ............... $ 803,525 $ 1,815,203 $ 557,414
============ ============ ============
Operating Partnership's investments
in real estate mortgages and equity of
unconsolidated companies.....................
$ 312,619 $ 275,192 $ 158,400
============ ============ ============
</TABLE>
SUMMARY STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998
-----------------------------------------------
RESIDENTIAL REFRIGERATED
DEVELOPMENT STORAGE
CORPORATIONS CORPORATIONS OTHER
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues ................. $ 206,566 $ 395,413 $ 55,930
Total expenses ................. 182,316 396,745 47,302
------------ ------------ ------------
Net income (loss) .............. $ 24,250 $ (1,332) $ 8,628
============ ============ ============
Operating Partnership's equity in
net income (loss)
of unconsolidated companies . $ 18,375 $ (1,032) $ 3,872
============ ============ ============
</TABLE>
11
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6. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
<TABLE>
<CAPTION>
Following is a summary of the Operating Partnership's debt financing at Balance at
September 30, 1998: September 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
Merrill Lynch Promissory Note due December 14, 1998(2), bears interest at 30-day
LIBOR plus 75 basis, points (at September 30, 1998, the rate was 6.09%) with an
interest-only term, secured by the Houston Center mixed-use Property complex........ 209,299
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(3), 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 September 30, 1998 the rate was 7.79% subject to a
rate cap of 10%) with an interest-only term, secured by the Funding III, IV and
V Properties ....................................................................... 115,000
Chase Manhattan Note due September 30, 2001, bears interest at 30-day LIBOR plus
an average rate of 1.75% (at September 30, 1998, the rate was 7.41%) with an
interest-only term, secured by Fountain Place Office Property ...................... 97,123
CIGNA Note due December 2002, bears interest at 7.47% with an interest-only
term, secured by the MCI Tower Office Property and Denver Marriott City Center
Hotel Property ..................................................................... 63,500
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 ............................. 44,541
Metropolitan Life Note III, due December 1999, bears interest at 7.74% with an
interest-only term, secured by the Datran Center Office Property ................... 40,000
Northwestern Note due January 2003, bears interest at 7.65% with an 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 ....................... 11,893
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(4), secured by
the Funding VI property............................................................. 8,614
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Balance at
September 30,
1998
-----------------
<S> <C>
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 ............................. 6,821
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 ..................................................................... 763
UNSECURED DEBT
Line of Credit with BankBoston, N.A. ("BankBoston") ("Credit Facility") (see
description of Credit Facility below) .............................................. 750,000
Short-term BankBoston Note II due October 30, 1998, bears interest at Eurodollar
rate plus 120 basis points (at September 30, 1998, the rate was 6.83%) with an
interest-only term ................................................................. 100,000(5)
2007 Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only
term, due September 2007(6) ........................................................ 250,000
2002 Notes bear interest at a fixed rate of 7.00% with a five-year interest-only
term, due September 2002(6) ........................................................ 150,000
----------
Total Notes Payable ................................................................ $2,273,554
==========
</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 $220,000.
(2) On November 11, 1998, the Operating Partnership and Merrill Lynch
agreed in principle, subject to negotiation of final documentation, to
modify the note (i) to provide for a payment of $25,000 of principal on
December 14, 1998, (ii) to extend its term to September 14, 1999 and
(iii) to increase the interest rate to approximately 200 basis points
above 30-day LIBOR. In connection with this extension, the Operating
Partnership expects to pay an extension fee of approximately $1,500.
(3) 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.
(4) 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.
(5) Prior to the maturity date of the note, the Operating Partnership
repaid the note with proceeds from a new $260,000 secured variable-rate
loan with a three-year interest-only term.
(6) 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 were also
subject to adjustment in the event that the Notes were assigned a
rating that was not an investment grade 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 level below
investment grade) from Standard & Poor's ("S&P"). Because of the rating
from S&P, the interest rates on the Notes increased 37.5 basis points
on July 28, 1998.
13
<PAGE> 14
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 September 30, 1998, the Operating Partnership was in
compliance with all covenants. As of September 30, 1998, the interest rate was
6.83%.
7. FORWARD SHARE PURCHASE AGREEMENT:
On August 12, 1997, the Company entered into two transactions with
affiliates of the predecessor of UBS AG ("UBS"). In one transaction, the Company
sold 4,700,000 common shares to UBS for approximately $148,000 and received
approximately $145,000 in net proceeds. In the other transaction, the Company
entered into a forward share purchase agreement with UBS. On August 11, 1998,
the Company paid a fee of approximately $3,000 to UBS in connection with the
exercise by the Company and UBS of the right to extend the term of the forward
share purchase agreement until August 12, 1999. In connection with the extension
of the forward share purchase agreement, the Company for financial accounting
purposes will account for the forward share purchase agreement as a liability
rather than as equity commencing on August 12, 1998, the date of the extension.
Under the forward share purchase agreement, the Company is committed to
settle its obligations under the agreement by purchasing 4,700,000 common shares
from UBS by August 12, 1999. The price to be paid by the Company for the
4,700,000 common shares (the "Settlement Price") will be determined on the date
the Company settles the forward share purchase agreement and will be calculated
based on the gross proceeds received by Company from the original issuance of
common shares to UBS, plus a forward accretion component equal to LIBOR plus 75
basis points, minus an adjustment for the Company's distributions paid to UBS.
The forward accretion component represents a guaranteed rate of return to UBS.
The Company may fulfill its settlement obligations under the forward
share purchase agreement in cash or common shares, at its option, on or before
August 12, 1999. In the event that the Company elects to fulfill its settlement
obligations in common shares, UBS will sell, on behalf of the Company, a
sufficient number of common shares to realize the Settlement Price. If, as a
result of an increase in the market price of the common shares, the number of
common shares required to be sold to achieve the Settlement Price is less than
the number of common shares previously issued to UBS, UBS will deliver common
shares to the Company. In contrast, if, as a result of a decrease in the market
price of the common shares, such number of common shares is greater than the
number of common shares previously issued to UBS, the Company will deliver
additional common shares to UBS.
On a quarterly basis, if the number of common shares previously
delivered to UBS is not sufficient to permit UBS to realize the Settlement Price
through the sale of such common shares, the Company is obligated to deliver
additional common shares to UBS. The Operating Partnership included, in the
calculation of diluted earnings per unit for the quarter ended September 30,
1998, approximately 373,500 contingently issuable units. The Operating
Partnership calculated this number of contingently issuable units using the
Company's average share price for the quarter ended September 30, 1998 of
$28.31. According to the terms of the forward share purchase agreement, had the
closing share price of $25.25 on September 30, 1998 been used, approximately
700,000 additional units would have been contingently issuable. In that event,
the Operating Partnership's net income-diluted per unit would have been $0.41
and $1.70, respectively, for the three and nine months ended September 30, 1998
and the net book value per unit outstanding at September 30, 1998 would have
been $33.30.
On November 12, 1998, the Company was obligated under the forward share
purchase agreement, based on the $22.75 closing price of the common shares on
the New York Stock Exchange on November 11, 1998, to issue approximately
2,100,000 additional common shares. If the obligation to issue such additional
common shares had existed as of September 30, 1998, the Operating Partnership
would have been obligated to issue approximately 1,050,000 additional units. In
that event, the Operating Partnership's net income-diluted per unit would have
been $0.41 and $1.69, respectively, for the three and nine months ended
September 30, 1998 and the net book value per unit outstanding at September 30,
1998 would have been $33.12. To the extent that the Company and the Operating
Partnership are obligated, as a result of a decline in the market price of the
Company's common shares, to issue additional common shares and units in the
future under the terms of the forward share purchase agreement, the issuance
will reduce the Company's net income per common share and the net book value per
common share and the Operating Partnership's net income per unit and net book
value per unit.
14
<PAGE> 15
8. PARTNERS' CAPITAL:
COMMON SHARE OFFERINGS
On April 23, 1998, the Company completed an offering of 1,365,138
common shares at $32.27 per share (the "April 1998 Unit Investment Trust
Offering") to Merrill Lynch. Net proceeds contributed to the Operating
Partnership from the April 1998 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.
On September 4, 1998, the Company announced a planned rights offering.
Under the proposed rights offering by the Company and the proposed rights
offering by the Operating Partnership, the Company's shareholders and the
Operating Partnership's unitholders will receive rights to purchase the
Company's common shares and the Operating Partnership's units at an exercise
price of $22 per common share and $44 per unit in an aggregate amount of
approximately $215,000. The Company and the Operating Partnership currently are
assessing their needs for short-term capital and, based on their evaluation,
will determine the appropriate timing and terms of the rights offerings. In the
event that the Company and the Operating Partnership proceed with their rights
offerings and the exercise price for the common share rights and the unit rights
is less than the then-current market price for the common shares and units,
respectively, partners who do not exercise their rights in full will experience
a decrease in their percentage ownership and economic interests in the Operating
Partnership. It is expected that the Company would contribute the proceeds of
the rights offerings to the Operating Partnership in exchange for an increased
limited partner interest.
PREFERRED SHARE 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. In connection with the
February 1998 Preferred Offering, the Operating Partnership created a comparable
class of preferred units which are owned by the Company. 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 30, 1998, the Company completed an offering (the "June 1998
Preferred Offering") of 6,948,734 Series B convertible preferred shares at
$32.38 per share (the "Series B Preferred Shares") in an aggregate principal
amount of approximately $225,000 to The Prudential Insurance Company of America
and certain of its affiliates. In connection with the June 1998 Preferred
Offering, the Operating Partnership created a comparable class of preferred
units which are owned by the Company. The proceeds, net of professional fees,
contributed to the Operating Partnership from the offering were approximately
$224,750. The proceeds, net of professional fees, from the June 1998 Preferred
Offering were used by the Operating Partnership to repay approximately $170,000
of short-term indebtedness and to make an indirect investment of approximately
$54,750 in five additional Refrigerated Storage Properties. Based on the
underwriting fees the Company has typically paid in connection with past
underwritten public offerings, management estimates that if the shares had been
sold in an underwritten public offering, the Company would have incurred
approximately $12,000 in underwriting fees and offering costs. In that case, the
Company would have been required to sell approximately 372,000 additional shares
(based on the $32.38 per share price on the date of the offering) to raise the
same amount of net proceeds. Holders of the Series B Preferred Shares will not
be entitled to regular quarterly cash distributions, but will be entitled to
receive certain extraordinary cash distributions, and stock and other non-cash
distributions, if any are made. On October 7, 1998, the Series B Preferred
Shares became convertible at any time, at the option of the holder. Upon the
election of the holder, the Series B Preferred Shares will convert into the
Company's common shares at a conversion rate which is calculated by comparing
the investment return produced by the common shares of the Company and an
15
<PAGE> 16
investment return of a portfolio of equity REITs as computed by The National
Association of Real Estate Investment Trusts ("NAREIT Return"). The Company has
calculated that, as of September 30, 1998, the Series B Preferred Shares would
have been convertible into approximately 8,300,000 common shares. The Series B
Preferred Shares rank senior to the common shares and rank on a parity with the
outstanding Series A Preferred Shares as to rights to receive distributions and
to participate in distributions or payments upon any liquidation, dissolution or
winding up of the Company. The Operating Partnership will estimate quarterly
non-cash dividends, for the purposes of calculating net income available to
partners, based on the NAREIT Return. This non-cash dividend will be recorded as
an adjustment to retained earnings and partners' capital.
EQUITY SWAP AGREEMENT
On February 20, 1998 and June 25, 1998, the Company issued 525,000
common shares and 759,254 common shares, respectively, to Merrill Lynch,
pursuant to the terms of the equity swap agreement dated December 12, 1997, as a
result of the decline in market price of the common shares from 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 Company's net income per
share or net book value per common share or the Operating Partnership's net
income per unit or net book value per unit.
Effective September 30, 1998, the Company terminated the equity swap
agreement with Merrill Lynch. As of that date, the Company repurchased the
6,659,254 common shares held by Merrill Lynch and terminated the additional
contingent share obligation provided for under that agreement by issuing a
$209,299 promissory note due December 14, 1998. This note, which bears interest
at the rate of 75 basis points above 30-day LIBOR is secured by a first mortgage
lien on the Houston Center mixed-use Property complex. On November 11, 1998, the
Operating Partnership and Merrill Lynch agreed in principle, subject to
negotiation of final documentation, to modify the note (i) to provide for a
payment of $25,000 of principal on December 14, 1998, (ii) to extend its term to
September 14, 1999 and (iii) to increase the interest rate to approximately 200
basis points above 30-day LIBOR. In connection with this extension, the
Operating Partnership expects to pay an extension fee of approximately
$1,500.
DISTRIBUTIONS
COMMON SHARES
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 August 4, 1998, the Operating Partnership paid a cash distribution
of $50,908 to its partners.
PREFERRED SHARES
On May 15, 1998, the Operating Partnership paid a cash distribution of
$3,264 to the Company, as the sole holder of Series A preferred units. The
initial quarterly distribution was from the issue date (February 19,
1998) of the Series A preferred units to May 15, 1998.
On August 14, 1998, the Operating Partnership paid a cash distribution
of $3,376 to the Company, as the sole holder of Series A preferred units.
9. ACQUISITIONS AND RECENT INVESTMENT DEVELOPMENTS:
OFFICE, RETAIL AND HOTEL PROPERTIES
During the nine months ended September 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 a short-term note with
BankBoston, which has subsequently been repaid.
16
<PAGE> 17
<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 $ 79,100 N/A N/A 561,000
</TABLE>
On September 10, 1998, the Operating Partnership and The Prudential
Insurance Company of America ceased negotiations regarding the purchase of
Woodfield Corporate Center, Two Town Center and 6701 Tower office properties.
REFRIGERATED STORAGE PROPERTIES
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%.
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 $163,000. These Properties contain approximately 90 million cubic
feet of refrigerated storage space. The Operating Partnership's cash investment
in connection with the acquisitions from Freezer Services, Inc. and Carmar Group
was approximately $36,700 and $55,900 respectively.
BEHAVIORAL HEALTHCARE PROPERTIES
On March 3, 1998, Crescent Operating, Inc. ("COI") entered into an
agreement to acquire Magellan's 50% interest in Charter Behavioral Health
Systems, LLP ("CBHS") in exchange for $30,000 in common stock of COI. However,
on August 19, 1998, Magellan and COI each announced that negotiations for the
sale of Magellan's interest in CBHS to COI had been terminated.
10. PENDING INVESTMENT
On July 9, 1998, the Company announced that, together with Reckson
Associates Realty Corporation ("Reckson"), it had entered into a merger
agreement (as amended and restated, the "Merger Agreement") pursuant to which
Metropolitan Partners, LLC ("Metropolitan"), a newly formed limited liability
company owned equally by the Operating Partnership and Reckson (collectively,
the "Buying Entities"), would acquire Tower Realty Trust ("Tower") for an
aggregate purchase price of approximately $733,000 (the "Merger"). The Merger
Agreement provides for payment of the purchase price in a combination of cash,
common shares of the Company and Reckson, and assumption of debt by
Metropolitan.
On November 2, 1998, Tower filed suit against the Buying Entities for
declaratory and other relief, including damages of not less than $75,000,
arising out of the alleged anticipatory repudiation by the Buying Entities of
the Merger Agreement. Tower's lawsuit followed meetings in which representatives
of the Buying Entities had questioned, among other things, whether certain
conditions to closing could be met by Tower. The Buying Entities have advised
Tower that they have not terminated the Merger Agreement and consider the Merger
Agreement to be in full force and effect, subject to its terms and conditions.
The Company intends to contest Tower's claims vigorously. As with any
litigation, however, it is not possible to predict the outcome of the pending
action. The Operating Partnership believes, however, that the pending action
will not have a material adverse effect on the Operating Partnership's financial
condition or results of operations.
17
<PAGE> 18
11. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information for the nine months ended September
30, 1998 assumes the completion, in each case as of January 1, 1998, of (i) the
February 1998 Preferred Offering; (ii) the April 1998 Unit Investment Trust
Offering, (iii) the June 1998 Preferred Offering; (iv) the 1998 completed
investments (see Note 9), subsequent events (see Note 13), and related financing
and share and unit issuances; (v) the termination of the equity swap agreement
with Merrill Lynch; and (vi) the reclassification, for financial accounting
purposes, of the forward share purchase agreement with UBS as a liability rather
than as equity. Due to the pending suit by Tower and because the Buying Entities
believe that Tower may be unable to satisfy certain conditions to closing, the
Operating Partnership has presented the pro forma financial information below to
include, and in the alternative to exclude the Pending Investment (see Note 10).
The pro forma information assumes, as of January 1, 1998, that all offering
proceeds were used for repayment of indebtedness incurred for investments.
<TABLE>
<CAPTION>
For the nine months ended
September 30, 1998
For the nine months ended (Excluding Pending
September 30, 1998 Investment)
--------------------------------- ------------------------------
<S> <C> <C>
Total revenues $ 522,094 $ 522,094
Operating income $ 87,004 $ 91,144
Income before minority interests $ 116,931 $ 113,508
Net income available to partners $ 105,800 $ 102,377
Per unit of partnership interest data:
Net income - Basic $ 1.63 $ 1.61
Net income - Diluted $ 1.49 $ 1.46
</TABLE>
The pro forma operating results combine the Operating Partnership's
consolidated historical statement of operations for the nine months ended
September 30, 1998 with the following adjustments:
(i) Adjustment to rental income and operating expenses for the
1998 acquired office properties;
(ii) Adjustment to depreciation based on acquisition prices
associated with the 1998 acquired office, hotel and golf
course properties;
(iii) Adjustment to rental income for the 1998 acquired hotel and
golf course properties to reflect the lease payment (base rent
and percentage rent) from the hotel and golf course lessee to
the Operating Partnership as calculated by applying the rent
provisions (as defined in the lease agreements) to the
historical revenues of the hotel and golf course properties;
(iv) Adjustment to equity in net income of unconsolidated companies
for the Refrigerated Storage Corporations 1998 acquired
Refrigerated Storage Properties;
(v) Adjustment to increase interest expense as a result of
interest costs for long and short-term financing for
investments; and
(vi) Adjustment to reflect prorated preferred distributions 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.
18
<PAGE> 19
12. COMMITMENTS AND CONTINGENCIES:
The Company was 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 have merged 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. The Company subsequently
notified Station that it was exercising its termination rights under the Merger
Agreement based on Station's 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. The Company subsequently notified Station that the
Merger Agreement had been terminated in accordance with its terms. 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
$115,000 of a class of Station's redeemable preferred stock.
The Company has stated that it intends to contest Station's 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.
See Note 10 for a description of pending litigation to which the
Company and Tower are parties.
13. SUBSEQUENT EVENTS:
DISTRIBUTION
On November 3, 1998, the Operating Partnership paid a cash distribution
of $70,045 to its partners.
ACQUISITION
On October 13, 1998, the Operating Partnership acquired Sonoma Golf
Course, an 18-hole golf course located in Sonoma County, California, for
approximately $15,250. The course is near the Sonoma Mission Inn and Spa and has
a 4,000 square foot club house with a banquet facility. The Operating
Partnership simultaneously entered into an 8-year lease of the property with
COI. The Operating Partnership believes that golf course will enhance the
amenities provided to the Sonoma Mission Inn and Spa hotel guests.
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 S-4 Registration Statement, which includes information for the
year ended December 31, 1997. Capitalized terms used but not otherwise defined
herein, shall have the meanings ascribed to those terms in the footnotes to the
financial statements.
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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. Among the factors that might cause such a difference are the following:
changes in real estate conditions (including rental rates and competing
properties) or in industries in which the Operating Partnership's principal
tenants compete; the Operating Partnership's ability to timely lease
19
<PAGE> 20
unoccupied square footage and timely release occupied square footage upon
expiration; the Operating Partnership's ability to generate revenues sufficient
to meet debt service payments and other operating expenses; 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 concentration of a
significant percentage of the Operating Partnership's assets in Texas and
Colorado; 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; changes in general economic conditions; risks related to
certain ongoing litigation with Station and Tower; 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; and other risks detailed from time to time in
the Operating Partnership's and the 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 SEPTEMBER 30, 1998 AND 1997
Total revenues increased approximately $59.7 million, or 49.7%, to
$179.8 million for the three months ended September 30, 1998, as compared to
$120.1 million for the three months ended September 30, 1997. The increase in
Office and Retail Property revenues of $54.0 million is primarily attributable
to: (i) the acquisition of nine Office Properties in 1998, which resulted in
$18.2 million of incremental revenues; (ii) the acquisition of 26 Office
Properties and one Retail Property in 1997, which resulted in $28.7 million of
incremental revenues; and (iii) an increase in Office and Retail Property
revenues of $7.1 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 $3.8 million is primarily attributable to
the acquisition of three full-service Hotel Properties in 1997, which resulted
in $3.4 million of incremental revenues. The increase in interest and other
income of $1.9 million is primarily attributable to (i) a $23.9 million increase
in notes receivable as a result of loans to Crescent Operating, Inc. ("COI") and
(ii) interest earned on available cash.
Total expenses increased $70.0 million, or 81.1%, to $156.3 million for
the three months ended September 30, 1998, as compared to $86.3 million for the
three months ended September 30, 1997. The increase in rental property operating
expenses of $22.8 million is primarily attributable to: (i) the acquisition of
nine Office Properties in 1998, which resulted in $7.4 million of incremental
expenses; (ii) the acquisition of 26 Office Properties and one Retail Property
in 1997, which resulted in $12.6 million of incremental expenses; and (iii) an
increase in Office and Retail Property expenses of $2.8 million from Properties
owned as of January 1, 1997, which is primarily due to occupancy increases at
these Properties. Depreciation and amortization expense increased $9.2 million
primarily due to the acquisitions of Office, Retail and Hotel Properties in 1997
and 1998. The increase in interest expense of $16.1 million is primarily
attributable to: (i) $6.6 million of interest payable under the Notes due 2002
and Notes due 2007, which were issued in a private offering in September 1997;
(ii) $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) $.8 million of interest payable under the Metropolitan Life Note I, which
was assumed in connection with the acquisition of Energy Centre in December
1997; (iv) $.9 million of interest payable under the Metropolitan Life Notes III
and IV, which were assumed in connection with the acquisition of Datran Center
in May of 1998; (v) $1.2 million of incremental interest associated with the
reclassification of the UBS forward share purchase agreement to a liability
following an extension of the term on August 12, 1998; and (vi) $3.9 million of
incremental interest payable due to draws under the Credit Facility and
short-term borrowings with BankBoston (average balance outstanding for third
quarter 1998 and 1997 was $728.5 million and $510.3 million, respectively). All
of these financing arrangements were used to fund investments and working
capital. The increase in corporate general and administrative expense of $2.0
million is primarily attributable to incremental costs associated with the
operations of the Operating Partnership as a result of property additions to the
Operating Partnership's portfolio and the implementation in May 1998, of EITF
97-11, "Accounting for Internal Costs Relating to Real Estate Property
Acquisitions", by the Operating Partnership. An additional increase in total
expenses of $18.4 million is due to a non-recurring write-off of costs
associated with terminated acquisitions.
20
<PAGE> 21
Equity in net income of unconsolidated companies increased $8.2
million, or 745.5%, to $9.3 million for the three months ended September 30,
1998, as compared to $1.1 million for the three months ended September 30, 1997.
The increase is primarily attributable to: (i) an increase in equity in net
income of Residential Development Corporations of $4.8 million which is
primarily attributable to: (a) the investment in The Woodlands Land Development
Company, Inc. in July 1997, and Desert Mountain Development Corporation in
August 1997, which resulted in $2.7 million of incremental net income; and (b)
an increase in sales of lots by Mira Vista Development Corporation, which
resulted in $1.4 million of incremental net income; (ii) an increase in equity
in net income of Refrigerated Storage Corporations of $.5 million, which is
primarily attributable to the incremental net income as a result of the
investment in the Crescent Refrigerated Storage Corporations in October 1997;
and (iii) an increase in equity in net income of other unconsolidated companies
of $2.9 million is primarily attributable to the investment in The Woodlands
Commercial Properties Company, L.P. in July 1997.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues increased approximately $209.9 million, or 69.9%, to
$510.0 million for the nine months ended September 30, 1998, as compared to
$300.1 million for the nine months ended September 30, 1997. An increase in
Office and Retail Property revenues of $162.6 million is primarily attributable
to: (i) the acquisition of nine Office Properties in 1998, which resulted in
$37.0 million of incremental revenues; (ii) the acquisition of 26 Office
Properties and one Retail Property in 1997, which resulted in $103.4 million of
incremental revenues; and (iii) an increase in Office and Retail Property
revenues of $22.2 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 $11.9 million is primarily attributable
to the acquisition of three full-service Hotel Properties in 1997, which
resulted in $10.1 million of incremental revenues. The increase in Behavioral
Healthcare Property revenues of $25.5 million is attributable to the acquisition
of the Behavioral Healthcare Properties in June 1997. The increase in interest
and other income of $9.9 million is primarily attributable to (i) the sale of
marketable securities and (ii) the $112.9 million increase in notes receivable
as a result of (a) the May 1997 acquisition of certain notes included in the
Carter-Crowley portfolio and (b) loans to COI.
Total expenses increased $180.9 million, or 81.4%, to $403.0 million
for the nine months ended September 30, 1998, as compared to $222.1 million for
the nine months ended September 30, 1997. The increase in rental property
operating expenses of $68.5 million is primarily attributable to: (i) the
acquisition of nine Office Properties in 1998, which resulted in $14.1 million
of incremental expenses; (ii) the acquisition of 26 Office Properties and one
Retail Property in 1997, which resulted in $48.2 million of incremental
expenses; and (iii) an increase in Office and Retail Property expenses of $6.2
million from Properties owned as of January 1, 1997, which is primarily due to
occupancy increases at these Properties. Depreciation and amortization expense
increased $33.8 million primarily due to the acquisitions of Office, Retail,
Hotel and the Behavioral Healthcare Properties in 1997 and 1998. The increase in
interest expense of $56.6 million is primarily attributable to: (i) $21.2
million of interest payable under the Notes due 2002 and Notes due 2007, which
were issued in a private offering in September 1997; (ii) $5.6 million of
interest payable under the Chase Manhattan Note, which was assumed in connection
with the acquisition of Fountain Place in November 1997; (iii) $3.9 million of
interest payable on the BankBoston Note II, which the Operating Partnership
entered into in August 1997; (iv) $2.3 million of interest payable under the
Metropolitan Life Note I, which was assumed in connection with the acquisition
of Energy Centre in December 1997; (v) $1.5 million of interest payable under
the Metropolitan Life Notes III and IV, which were assumed in connection with
the acquisition of Datran Center in May 1998; (vi) $1.2 million of incremental
interest associated with the reclassification of the UBS forward share purchase
agreement to a liability following an extension of the terms on August 11, 1998;
and (vii) $21.3 million of incremental interest payable due to draws under the
Credit Facility and short-term borrowings with BankBoston (average balance
outstanding for nine months ended September 30, 1998 and 1997 was $769.8 million
and $352.8 million, respectively). All of these financing arrangements were used
to fund investments and working capital. The increase in corporate general and
administrative expense of $1.2 million is primarily attributable to the
incremental costs associated with the operations of the Operating Partnership as
a result of property additions to the Operating Partnership's portfolio and the
implementation in May 1998, of EITF 97-11, "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions" by the Operating Partnership. An
additional increase in total expenses of $18.4 million is due to a non-recurring
write-off of costs associated with terminated acquisitions.
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<PAGE> 22
Equity in net income of unconsolidated companies increased $14.9
million, or 236.5%, to $21.2 million for the nine months ended September 30,
1998, as compared to $6.3 million for the nine months ended September 30, 1997.
The increase is primarily attributable to: (i) an increase in net income of
Residential Development Corporations of $14.6 million which is primarily
attributable to the investment in The Woodlands Land Development Company, Inc.
in July 1997, and Desert Mountain Development Corporation in August 1997, which
resulted in $10.9 million of incremental net income and (ii) an increase in
equity in net income of other unconsolidated companies of $1.4 million is
primarily attributable to the investment in The Woodlands Commercial Properties
Company, L.P. in July 1997, which resulted in $4.0 million of incremental net
income partially offset by the 1997 distributions received of $3.1 million from
the Operating Partnership's investment in HBCLP, Inc. (the primary asset of
which is the investment in Hudson Bay Partners, L.P., an investment partnership
in which the Operating Partnership holds an effective 95% economic interest).
The increase in equity in net income of Residential Development Corporations and
other unconsolidated companies is partially offset by an incremental loss of
$1.0 million from investments in the Crescent Refrigerated Storage
Corporations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $89.4 million and $66.1 million at
September 30, 1998 and December 31, 1997, respectively. The increase is
attributable to $603.8 million and $181.4 million of cash provided by financing
and operating activities, respectively, offset by $761.9 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 ($400.0 million), net proceeds from the February and June 1998
Preferred Offerings ($416.0 million) and net proceeds from the April 1998 Unit
Investment Trust Offering ($44.0 million). The inflow from cash provided by
financing activities is partially offset by (i) distributions paid to common
shareholders and unitholders ($149.9 million); (ii) net payments under the
short-term $250 million BankBoston Note due July 1998 ($92.8 million); and (iii)
distributions paid to preferred shareholders ($8.3 million). The inflow from
operating activities is primarily attributable to property operations, and 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 $761.9 million of cash flow primarily in the following
investing activities: (i) the acquisition of nine Office Properties and one
Hotel Property ($527.1 million); (ii) recurring and non-recurring tenant
improvement and leasing costs for the Office and Retail Properties ($53.7
million); (iii) capital expenditures for rental properties ($35.1 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 ($14.8 million);
(v) increased investment in unconsolidated companies ($120.5 million), which is
primarily attributable to the additional investment in the Crescent
Refrigerated Storage Corporations and (vi) increased notes receivable ($15.5
million) which is primarily due to loans to COI.
On February 19, 1998, the Company completed the February 1998 Preferred
Offering, which was an offering of 8,000,000 shares of 6 3/4% Series A
convertible cumulative 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 shares per Series A Preferred Share), subject to adjustment in
certain circumstances. In connection with the February 1998 Preferred Offering,
the Operating Partnership created a comparable class of preferred units which
are owned by the Company. 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 $191.2 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 issuance 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. Net proceeds contributed to
the Operating Partnership from the April 1998 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.
On June 30, 1998, the Company completed the June 1998 Preferred
Offering which was an offering of 6,948,734 Series B convertible preferred
shares in an aggregate principal amount of approximately $225.0 million to The
Prudential Insurance Company of America and
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<PAGE> 23
certain of its affiliates. In connection with the June 1998 Preferred
Offering, the Operating Partnership created a comparable class of preferred
units which are owned by the Company. The proceeds, net of professional fees,
contributed to the Operating Partnership from the June 1998 Preferred Offering
were approximately $224.8 million. The proceeds, net of professional fees, from
the June 1998 Preferred Offering were used by the Operating Partnership to repay
approximately $170.0 million of short-term indebtedness and to make an indirect
investment of approximately $54.8 million in five additional Refrigerated
Storage Properties. Based on the underwriting fees the Company has typically
paid in connection with past underwritten public offerings, management estimates
that if the shares had been sold in an underwritten public offering, the Company
would have incurred approximately $12 million in underwriting fees and offering
costs. In that case, the Company would have been required to sell approximately
372,000 additional shares (based on the $32.38 per share price on the date of
the offering) to raise the same amount of net proceeds. Holders of the Series B
Preferred Shares will not be entitled to regular quarterly cash distributions,
but will be entitled to receive certain extraordinary cash distributions, and
stock and other non-cash distributions, if any are made. On October 7, 1998, the
Series B Preferred Shares became convertible at any time, at the option of the
holder. Upon the election of the holder, the Series B Preferred Shares will
convert into the Company's common shares at a conversion rate which is
calculated by comparing the investment return produced by the common shares of
the Company and an investment return of a portfolio of equity REIT's as computed
by NAREIT. The Company has calculated that, as of September 30, 1998, the Series
B Preferred Shares would have been convertible into approximately 8.3 million
common shares. The Series B Preferred Shares rank senior to the common shares
and rank on a parity with the outstanding Series A Preferred Shares as to rights
to receive distributions and to participate in distributions or payments upon
any liquidation, dissolution or winding up of the Company. The Operating
Partnership will estimate quarterly non-cash dividends, for the purposes of
calculating net income available to partners, based on the NAREIT Return. This
non-cash dividend will be recorded as an adjustment to retained earnings and
partners' capital.
On August 12, 1997, the Company entered into two transactions with
affiliates of UBS. In one transaction, the Company sold 4,700,000 common shares
to UBS for approximately $148 million and received approximately $145 million in
net proceeds. In the other transaction, the Company entered into a forward share
purchase agreement with UBS. On August 11, 1998, the Company paid a fee of
approximately $3 million to UBS in connection with the exercise by the Company
and UBS of the right to extend the term of the forward share purchase agreement
until August 12, 1999. In connection with the extension of the forward share
purchase agreement, the Operating Partnership for financial accounting purposes
will account for the forward share purchase agreement as the issuance of a
liability rather than as equity commencing on August 12, 1998, the date of the
extension.
Under the forward share purchase agreement, the Company is committed to
settle its obligations under the agreement by purchasing 4,700,000 common shares
from UBS by August 12, 1999. The price to be paid by the Company for the
4,700,000 common shares (the "Settlement Price") will be determined on the date
the Company settles the forward share purchase agreement and will be calculated
based on the gross proceeds received by Company from the original issuance of
common shares to UBS, plus a forward accretion component equal to LIBOR plus 75
basis points, minus an adjustment for the Company's distributions paid to UBS.
The forward accretion component represents a guaranteed rate of return to UBS.
The Company may fulfill its settlement obligations under the forward
share purchase agreement in cash or common shares, at its option, at any time on
or before August 12, 1999.
In the event that the Company elects to fulfill its settlement
obligations in cash, it will decrease the Operating Partnership's liquidity.
Accordingly, the Company will evaluate its sources of capital and the potential
uses of its capital at the time that settlement is required under the forward
share purchase agreement or at such earlier time as it determines to settle the
agreement.
In the event that the Company elects to fulfill its settlement
obligations in common shares, UBS will sell, on behalf of the Company, a
sufficient number of common shares to realize the Settlement Price. If, as a
result of an increase in the market price of the common shares, the number of
common shares required to be sold to achieve the Settlement Price is less than
the number of common shares previously issued to UBS, UBS will deliver common
shares to the Company. In contrast, if, as a result of a decrease in the market
price of the common shares, such number of common shares is greater than the
number of common shares previously issued to UBS, the Company will deliver
additional common shares to UBS.
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<PAGE> 24
On a quarterly basis, if the number of common shares previously
delivered to UBS is not sufficient to permit UBS to realize the Settlement Price
through the sale of such common shares, the Company is obligated to deliver
additional common shares to UBS. The Operating Partnership included, in the
calculation of diluted earnings per unit for the quarter ended September 30,
1998, approximately 373,500 contingently issuable units. The Operating
Partnership calculated this number of contingently issuable units using the
Company's average share price for the quarter ended September 30, 1998 of
$28.31. According to the terms of the forward share purchase agreement, had the
closing share price of $25.25 on September 30, 1998 been used, approximately
700,000 additional units would have been contingently issuable. In that event,
the Operating Partnership's net income-diluted per unit would have been $0.41
and $1.70, respectively, for the three and nine months ended September 30, 1998
and the net book value per unit outstanding at September 30, 1998 would have
been $33.30.
On November 12, 1998, the Company was obligated under the forward share
purchase agreement, based on the $22.75 closing price of the common shares on
the New York Stock Exchange on November 11, 1998, to issue approximately
2,100,000 additional common shares. If the obligation to issue such additional
common shares had existed as of September 30, 1998, the Operating Partnership
would have been obligated to issue approximately 1,050,000 additional units. In
that event, the Operating Partnership's net income-diluted per unit would have
been $0.41 and $1.69, respectively, for the three and nine months ended
September 30, 1998 and the net book value per unit outstanding at September 30,
1998 would have been $33.12. To the extent that the Company and the Operating
Partnership are obligated, as a result of a decline in the market price of the
Company's common shares, to issue additional common shares and units in the
future under the terms of the forward share purchase agreement, the issuance
will reduce the Company's net income per common share and net book value per
common share and the Operating Partnership's net income per unit and net book
value per unit.
The Company currently is evaluating various alternatives that would
result in the settlement of the agreement prior to the expiration date on August
12, 1999.
On February 20, 1998 and June 25, 1998, the Company issued 525,000
common shares and 759,254 common shares, respectively, to Merrill Lynch,
pursuant to the terms of the equity swap agreement dated December 12, 1997, as a
result of the decline in market price of the common shares from 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 Company's net income per
common share or net book value per common share or the Operating Partnership's
net income per unit or net book value per unit.
Effective September 30, 1998, the Company terminated the equity swap
agreement with Merrill Lynch. As of that date, the Company repurchased the
6,659,254 common shares held by Merrill Lynch and terminated the additional
contingent share obligation provided for under that arrangement by issuing a
$209.3 million promissory note due December 14, 1998. This note, which bears
interest at the rate of 75 basis points above 30-day LIBOR is secured by a first
mortgage lien on the Houston Center mixed-use Property complex. On November 11,
1998, the Operating Partnership and Merrill Lynch agreed in principle, subject
to negotiation of final documentation, to modify the note (i) to provide for a
payment of $25 million of principal on December 14, 1998, (ii) to extend its
term to September 14, 1999 and (iii) to increase the interest rate to
approximately 200 basis points above 30-day LIBOR. In connection with this
extension, the Operating Partnership expects to pay an extension fee of
approximately $1.5 million.
On September 4, 1998, the Company announced a planned rights offering.
Under the proposed rights offering by the Company and the proposed rights
offering by the Operating Partnership, the Company's shareholders and the
Operating Partnership's unitholders will receive rights to purchase the
Company's common shares and the Operating Partnership's units at an exercise
price of $22 per common share and $44 per unit in an aggregate amount of
approximately $215,000. The Company and the Operating Partnership currently are
assessing their needs for short-term capital and, based on their evaluation,
will determine the appropriate timing and terms of the rights offerings. In the
event that the Company and the Operating Partnership proceed with their rights
offerings and the exercise price for the common share rights and the unit rights
is less than the then-current market price for the common shares and units,
respectively, partners who do not exercise their rights in full will experience
a decrease in their percentage ownership and economic interests in the Operating
Partnership. It is expected that the Company would contribute the proceeds of
the rights offering to the Operating Partnership in exchange for an increased
limited partner interest.
The Company was a party to the Merger Agreement between the Company and
Station. Pursuant to the Merger Agreement, Station would have merged 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
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<PAGE> 25
common and preferred stockholders were to vote on the Merger. The Company
subsequently notified Station that it was exercising its termination rights
under the Merger Agreement based on Station's 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. The Company subsequently notified Station that
the Merger Agreement had been terminated in accordance with its terms. 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 intends to contest Station's claims vigorously. As with any
litigation, however, it is not possible to predict the resolution of the pending
actions. The Operating Partnership believes, however, that the pending action
will not have a material adverse effect on the Operating Partnership's financial
condition or results of operations.
The Company is a party to the Merger Agreement pursuant to which
Metropolitan (a newly formed limited liability company owned equally by the
Operating Partnership and Reckson) would merge with Tower. On November 2, 1998,
Tower filed suit against Reckson, the Company and the general partner of
Metropolitan for declaratory and other relief, including damages of not less
than $75 million, arising out of the alleged anticipatory repudiation by
Reckson, the Company and the general partner of Metropolitan of the Merger
Agreement. The Company has advised Tower that it has not terminated the Merger
Agreement and considers the Merger Agreement to be in full force and effect,
subject to its terms and conditions.
The Company intends to contest Tower's claims vigorously. As with any
litigation, however, it is not possible to predict the outcome of the pending
action. The Operating Partnership believes, however, that the pending action
will not have a material adverse effect on the Operating Partnership's
financial condition or results of operations.
As of November 12, 1998, the Operating Partnership had no commitments
for investment property acquisition or development costs or for other material
capital expenditures except as described above.
The Operating Partnership expects to meet its short-term liquidity
requirements primarily through cash flow provided by operating activities. The
Operating Partnership believes that cash flow provided by operating activities
will be adequate to fund normal recurring operating expenses, debt service
requirements, recurring capital expenditures and distributions to shareholders
and unitholders, as well as non-recurring capital expenditures, such as tenant
improvement and leasing costs related to previously unoccupied space. To the
extent the Operating Partnership's cash flow from operating activities is not
sufficient to finance non-recurring capital expenditures, the Operating
Partnership expects to finance such activities with available cash reserves or
additional debt financing.
The Operating Partnership expects to meet its long-term liquidity
requirements through long-term secured and unsecured borrowings and other debt
and equity financing alternatives. As of November 12, 1998, the Operating
Partnership's long-term liquidity requirements consisted primarily of maturities
under the Operating Partnership's fixed and variable rate debt.
Debt and equity financing alternatives currently available to the
Operating Partnership to satisfy its liquidity requirements and commitments for
material capital expenditures include additional proceeds from the refinancing
of existing secured and unsecured debt, obtaining additional debt secured by
existing investment properties or by investment property acquisitions or
developments and from issuances by the Operating Partnership of units or by the
Company of common shares to existing holders or in exchange for contributions of
investment properties.
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<PAGE> 26
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 9/30/98 DATE 9/30/98
- - ----------------------------------------------------------------------------------------------------------------
<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 11,893 8.88 September 2001 11,893
Metropolitan Life Note II 44,541 6.93 December 2002 44,541
Metropolitan Life Note III 40,000 7.74 December 1999 40,000
Metropolitan Life Note IV 6,821 7.11 December 1999 6,821
Northwestern Life Note 26,000 7.65 January 2003 26,000
Nomura Funding VI Note 8,614 10.07 July 2020(3) 8,614
Rigney Promissory Note 763 8.50 November 2012 763
------------ ---------- --------------
Subtotal/Weighted Average $ 602,132 7.75% $ 602,132
============ ========== ==============
Secured Capped Variable Rate Debt:
LaSalle Note III $ 115,000 7.79% July 1999 $ 115,000
============ ========== ==============
Secured Variable Rate Debt:
Merrill Lynch Note $ 209,299 6.09% December 1998(4) $ 209,299
Chase Manhattan Note 97,123 7.41 September 2001 97,123
------------ ---------- --------------
Subtotal/Weighted Average $ 306,422 6.51% $ 306,422
============ ========== ==============
Unsecured Fixed Rate Debt:
Notes due 2007(5) $ 250,000 7.50% September 2007 $ 250,000
Notes due 2002(5) 150,000 7.00 September 2002 150,000
------------ ---------- --------------
Subtotal/Weighted Average $ 400,000 7.31% $ 400,000
============ ========== ==============
Unsecured Variable Rate Debt:
Line of Credit $ 750,000 6.83% June 2000 $ 750,000
BankBoston Note II 100,000 6.83 October 1998 100,000(6)
------------ ---------- --------------
Subtotal/Weighted Average $ 850,000 6.83% $ 850,000
============ ========== ==============
TOTAL/WEIGHTED AVERAGE $ 2,273,554 7.16% $ 2,273,554
============ ========== ==============
</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) 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) On November 11, 1998, the Operating Partnership and Merrill Lynch
agreed in principle, subject to negotiation of final documentation, to
modify the note (i) to provide for a payment of $25 million of
principal on December 14, 1998, (ii) to extend its term to September
14, 1999 and (iii) to increase the interest rate to approximately 200
basis points above 30-day LIBOR. In connection with this extension, the
Operating Partnership expects to pay an extension fee of approximately
$1.5 million.
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<PAGE> 27
(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 were also
subject to adjustment in the event that the Notes were assigned a
rating that was not an investment grade rating, by certain rating
agencies. In September 1997, the Notes received a Baa3 rating
(investment grade) from Moody's. On July 28, 1998, the Notes received a
BB+ rating (one level below investment grade) from S&P. Because of the
rating from S&P, the interest rates on the Notes increased 37.5 basis
points on July 28, 1998.
(6) Prior to the maturity date of the note, the Operating Partnership
repaid the note with proceeds from a new $260 million secured
variable-rate loan with a three-year interest-only term.
Based on the Company's total market capitalization of $5.9 billion and
$5.8 billion at September 30, 1998 and November 9, 1998, respectively, (at a
share price of $25.25 and $23.625 which were the closing prices of the common
shares on the New York Stock Exchange on September 30, 1998 and November 9,
1998, respectively, and including the full conversion of all units of minority
interest in the Operating Partnership plus total indebtedness), the Operating
Partnership's debt (which was $2.3 billion at both September 30, 1998 and
November 9, 1998 represented 38% and 40% of the Company's total market
capitalization at September 30, 1998 and November 9, 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 re-evaluation and modification.
The Company's debt service coverage ratio for both the three months
and the nine months ended September 30, 1998 was approximately 3.2. Debt
service coverage for the particular period is generally calculated as net
income plus depreciation and amortization plus interest expense plus
extraordinary or non-recurring losses minus extraordinary or non-recurring
gains, divided by debt service (including principal and interest payable during
the period of calculation). The most restrictive debt service coverage ratio
the Operating Partnership is required to maintain as stipulated by the
Company's debt arrangements is 2.5.
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 Operating
Partnership 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 Operating Partnership'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 shareholders and unitholders for the
nine months ended September 30, 1998 and 1997 were $149.9 million and $93.2
million, respectively. An increase in FFO does not necessarily result in an
increase in aggregate distributions because CREE, Ltd. 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.
27
<PAGE> 28
STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interests $ 32,795 $ 34,835 $ 128,227 $ 84,266
Adjustments:
Depreciation and amortization of real
estate assets 29,204 20,214 82,919 49,434
Write-off of costs associated with terminated
acquisitions 18,435 -- 18,435 --
Adjustment for investments in real estate
mortgages and equity of
unconsolidated companies 13,237 1,434 40,735 2,107
Minority interest in joint ventures (200) (390) (1,006) (1,192)
Interest expense and amortization of deferred
financing costs related to the
forward share purchase agreement(1) 1,579 -- 1,579 --
Preferred stock dividends (3,375) -- (8,325) --
----------- ----------- ----------- -----------
Funds from operations $ 91,675 $ 56,093 $ 262,564 $ 134,615
=========== =========== =========== ===========
Investment Segments:
Office and retail properties $ 85,118 $ 51,612 $ 241,237 $ 141,057
Hotel properties 12,567 8,818 37,677 25,816
Behavioral healthcare properties 13,824 13,824 41,471 15,966
Refrigerated storage properties 7,729 -- 19,267 --
Residential development properties 12,446 3,199 36,533 5,871
Corporate general & administrative (4,335) (2,372) (11,036) (9,855)
Interest expense (37,569) (23,075) (109,696) (54,687)
Preferred stock dividends (3,375) -- (8,325) --
Other(2) 5,270 4,087 15,436 10,447
----------- ----------- ----------- -----------
Funds from operations $ 91,675 $ 56,093 $ 262,564 $ 134,615
=========== =========== =========== ===========
</TABLE>
- - --------------------------
(1) Includes the interest and amortization of deferred financing costs for the
UBS forward share purchase agreement commencing August 12, 1998, because
the diluted shares and units outstanding include the Company's obligation
to issue common shares pursuant to the forward share purchase agreement.
(2) Includes interest and other income less depreciation and amortization of
non-real assets and amortization of deferred financing costs.
28
<PAGE> 29
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Funds From Operations $ 262,564 $ 134,615
Adjustments:
Depreciation and amortization of non-real estate assets 1,108 905
Write-off of costs associated with terminated acquisitions (18,435) --
Amortization of deferred financing costs 4,565 2,157
Minority interest in joint ventures profit and depreciation
and amortization of real estate assets 1,581 1,693
Interest expense and amortization of deferred financing costs
related to the forward share purchase agreement (1,579) --
Adjustment for investments in real estate mortgages and equity
of unconsolidated companies (40,735) (2,107)
Change in deferred rent receivable (23,795) (14,432)
Change in current assets and liabilities (24,138) 11,994
Equity in earnings in excess of distributions received from
unconsolidated companies -- (252)
Distributions received in excess of equity in earnings from
unconsolidated companies 11,881 --
Preferred distributions 8,325 --
Non-cash compensation 155 157
----------- -----------
Net Cash Provided by Operating Activities $ 181,497 $ 134,730
=========== ===========
</TABLE>
29
<PAGE> 30
OFFICE PROPERTIES
The following table sets forth certain information about the Office
Properties as of September 30, 1998.
<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 75% $ 21.79
The Crescent Office Towers.. 1 Uptown/Turtle Creek 1985 1,204,720 100 29.09
Fountain Place.............. 1 CBD 1986 1,200,266 96 18.37
Trammell Crow Center(3)..... 1 CBD 1984 1,128,331 92 24.90
Stemmons Place.............. 1 Stemmons Freeway 1983 634,381 91 14.19
Spectrum Center(4).......... 1 Far North Dallas 1983 598,250 80(5) 21.11
Waterside Commons........... 1 Las Colinas 1986 458,739 100 17.81
Caltex House................ 1 Las Colinas 1982 445,993 96 27.39
Reverchon Plaza............. 1 Uptown/Turtle Creek 1985 374,165 95 17.73
The Aberdeen................ 1 Far North Dallas 1986 320,629 100 18.19
MacArthur Center I & II..... 1 Las Colinas 1982/1986 294,069 92(5) 19.33
Stanford Corporate Centre... 1 Far North Dallas 1985 265,507 100 17.00
The Amberton................ 1 Central Expressway 1982 255,052 84 11.56
Concourse Office Park....... 1 LBJ Freeway 1972-1986 244,879 91 13.70
12404 Park Central.......... 1 LBJ Freeway 1987 239,103 100 20.79
Palisades Central II........ 1 Richardson/Plano 1985 237,731 90 19.37
3333 Lee Parkway............ 1 Uptown/Turtle Creek 1983 233,769 98 19.40
Liberty Plaza I & II........ 1 Far North Dallas 1981/1986 218,813 98 13.31
The Addison................. 1 Far North Dallas 1981 215,016 100 17.67
The Meridian................ 1 LBJ Freeway 1984 213,915 92 15.54
Palisades Central I......... 1 Richardson/Plano 1980 180,503 94 15.25
Walnut Green................ 1 Central Expressway 1986 158,669 94 17.18
Greenway II................. 1 Richardson/Plano 1985 154,329 99 19.48
Addison Tower............... 1 Far North Dallas 1987 145,886 95 13.86
Greenway I & IA............. 2 Richardson/Plano 1983 146,704 100 21.95
5050 Quorum................. 1 Far North Dallas 1981 133,594 88(5) 15.67
Cedar Springs Plaza......... 1 Uptown/Turtle Creek 1982 110,923 84 17.28
Valley Centre............... 1 Las Colinas 1985 74,861 99 15.63
One Preston Park............ 1 Far North Dallas 1980 40,525 84 16.10
---- ------------ ------- ------------
Subtotal/Weighted Average. 30 11,460,279 92% $ 20.38
---- ------------ ------- ------------
FORT WORTH
Continental Plaza........... 1 CBD 1982 954,895 41% (5) $ 15.44
---- ------------ ------- ------------
HOUSTON
Greenway Plaza Office
Portfolio..................... 10 Richmond-Buffalo 1969-1982 4,286,277 90% $ 15.62
Speedway
Houston Center............... 3 CBD 1974-1983 2,764,418 95 15.40
Post Oak Central............. 3 West Loop/Galleria 1974-1981 1,277,516 95 16.45
The Woodlands Office
Properties(6) ........... 12 The Woodlands 1980-1996 810,630 99 15.36
BP Plaza..................... 1 Katy Freeway 1992 561,065 100 18.26
Three Westlake Park(7)....... 1 Katy Freeway 1983 414,251 99 13.45
U.S. Home Building........... 1 West Loop/Galleria 1982 399,777 80 14.96
---- ------------ ------- ------------
Subtotal/Weighted Average. 31 10,513,934 93% $ 15.68
---- ------------ ------- ------------
Austin
Frost Bank Plaza............ 1 CBD 1984 433,024 84%(5) $ 18.84
301 Congress Avenue(8)...... 1 CBD 1986 418,338 89 21.28
Bank One Tower.............. 1 CBD 1974 389,503 96 16.95
Austin Centre............... 1 CBD 1986 343,665 96 20.25
The Avallon................. 1 Northwest 1993/1997 232,301(9) 89(5) 19.23
Barton Oaks Plaza One....... 1 Southwest 1986 99,895 100 19.92
---- ------------ ------- ------------
Subtotal/Weighted Average 6 1,916,726 91% $ 19.31
---- ------------ ------- ------------
</TABLE>
30
<PAGE> 31
<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 99% $ 18.08
Ptarmigan Place............. 1 Cherry Creek 1984 418,630 93 16.34
Regency Plaza One........... 1 DTC 1985 309,862 98 21.20
AT&T Building............... 1 CBD 1982 184,581 80 14.91
The Citadel................. 1 Cherry Creek 1987 130,652 97(5) 20.72
55 Madison.................. 1 Cherry Creek 1982 137,176 85(5) 17.29
44 Cook..................... 1 Cherry Creek 1984 124,174 87(5) 17.86
--- ---------- ------- ------------
Subtotal/Weighted Average 7 1,855,882 94% $ 18.10
--- ---------- ------- ------------
COLORADO SPRINGS
Briargate Office and 1 Colorado Springs 1988 252,857 100 $ 15.56
--- ---------- ------- ------------
Research Center
LOUISIANA
NEW ORLEANS
Energy Centre............... 1 CBD 1984 761,500 77% $ 15.16
1615 Poydras................ 1 CBD 1984 508,741 82 15.04
--- ---------- ------- ------------
Subtotal/Weighted Average 2 1,270,241 79% $ 15.11
--- ---------- ------- ------------
FLORIDA
MIAMI
Miami Center................ 1 CBD 1983 782,686 79% $ 23.60
Datran Center............... 2 South Dade/Kendall 1986/1988 472,236 91 21.00
--- ---------- ------- ------------
Subtotal/Weighted Average 3 1,254,922 83% $ 22.52
--- ---------- ------- ------------
ARIZONA
PHOENIX
Two Renaissance Square...... 1 Downtown/CBD 1990 476,373 94%(5) $ 23.27
6225 North 24th Street...... 1 Camelback Corridor 1981 86,451 83 21.53
--- ---------- ------- ------------
Subtotal/Weighted Average 2 562,824 92% $ 23.03
--- ---------- ------- ------------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour........ 2 Georgetown 1986 536,206 91%(5) $ 36.03
--- ---------- ------- ------------
NEBRASKA
OMAHA
Central Park Plaza.......... 1 CBD 1982 409,850 100% $ 15.38
--- ---------- ------- ------------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza........... 1 CBD 1990 366,236 96% $ 18.91
--- ---------- ------- ------------
CALIFORNIA
SAN FRANCISCO
160 Spear Street............. 1 South of Market/CBD 1984 276,420 99% $ 25.31
--- ---------- ------- ------------
SAN DIEGO
Chancellor Park (10)........ 1 UTC 1988 195,733 88%(5) $ 21.11
--- ---------- ------- ------------
TOTAL/WEIGHTED AVERAGE.... 89 31,827,005 90%(5) $ 18.63
=== ========== ======= ============
</TABLE>
-------------------------------------------
(1) Calculated based on base rent payable as of September 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.
31
<PAGE> 32
(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 September 30, 1998. If such leases had commenced as of
September 30, 1998, the percent leased for Office Properties would
have been 93%. The total percent leased for such Properties would have
been as follows: Spectrum Center - 86%; MacArthur Centers I & II -
97%; 5050 Quorum - 94%; Continental Plaza - 98%; Frost Bank Plaza -
92%; The Avallon - 100%; The Citadel - 100%; 55 Madison - 90%; 44 Cook
- 96%; Two Renaissance Square - 97%; Washington Harbour - 94%; and
Chancellor Park - 91%.
(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 10 months.
(10) 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 September 30, 1998, 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 3,389,395 square feet of unleased space.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF TOTAL ANNUAL
NET RENTABLE OF LEASED ANNUAL FULL-SERVICE
NUMBER OF AREA NET RENTABLE ANNUAL FULL-SERVICE RENT PER
TENANTS WITH REPRESENTED AREA FULL-SERVICE RENT NET
EXPIRING BY EXPIRING REPRESENTED RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRATION LEASES LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
(SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998.............. 241 882,634 3.2% $ 15,703,604 2.8% $17.79
1999.............. 434 3,539,998 12.4 63,585,141 11.1 17.96
2000 ............. 402 3,369,645 11.8 64,291,001 11.3 19.08
2001.............. 394 3,896,729 13.7 70,341,653 12.3 18.05
2002.............. 305 3,568,679 12.5 72,494,834 12.7 20.31
2003.............. 238 2,441,882 8.6 45,761,373 8.0 18.74
2004 ............. 103 2,907,549 10.2 58,322,593 10.2 20.06
2005.............. 67 2,217,071 7.8 47,283,863 8.3 21.33
2006.............. 27 645,670 2.3 13,466,561 2.4 20.86
2007.............. 31 1,172,105 4.2 26,020,047 4.6 22.20
2008 and thereafter 58 3,795,648 13.3 93,479,035 16.3 24.63
</TABLE>
- - --------------------------
(1) 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.
32
<PAGE> 33
BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE PROPERTIES TABLE
The following chart sets forth the locations of the 90 Behavioral
Healthcare Properties by state:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
State Facilities Beds State Facilities Beds
----- ---------- ---- ----- ---------- ----
<S> <C> <C> <C> <C> <C>
Alabama 1 70 Mississippi 2 217
Arkansas 2 109 North Carolina 4 410
Arizona 2 170 New Hampshire 2 100
California 8 649 New Jersey 1 150
Delaware 1 72 Nevada 1 84
Florida 12 648 Ohio 1 42
Georgia 15 986 Pennsylvania 1 169
Indiana 8 577 South Carolina 3 248
Kansas 2 160 Tennessee 1 204
Kentucky 3 251 Texas 9 816
Louisiana 1 0 Utah 2 196
Maryland 1 0 Virginia 3 285
Minnesota 1 40 Wisconsin 2 160
Missouri 1 96 ----- -------
Total 90(1) 6,909
===== =======
</TABLE>
- - ----------------------
(1) Because of the Company's status as a REIT for federal income tax
purposes, it does not operate the Behavioral Healthcare
Properties and has leased the Behavioral Healthcare Properties to
Charter Behavioral Health Systems, LLC pursuant to a long-term
lease.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the nine months ended September 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 nine months ended September 30,
-------------------------------------------------------
Revenue
Average Average Per
Year Occupancy Daily Available
Completed/ Rate Rate Room
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 81% 82% $ 126 $ 118 $ 102 $ 96
Four Seasons Hotel-Houston Houston, TX 1982 399 65 68 179 159 116 108
Hyatt Regency Albuquerque Albuquerque,NM 1990 395 70 75 102 99 71 74
Omni Austin Hotel Austin, TX 1986 314 80 78 114 102 90 81
Hyatt Regency Beaver Creek Avon, CO 1989 276(2) 72 70 240 231 173 162
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(3) 84 90 230 205 193 183
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 58(4) 86 380 329 221(4) 284
------ ------ ----- ------ ------ ----- ----
TOTAL/WEIGHTED AVERAGE 2,257 74% 77% $ 158 $ 147 $ 118 $113
====== ====== ===== ====== ====== ===== ====
<CAPTION>
Destination Health & Fitness Guest Nights
- - ---------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Resorts:
Canyon-Ranch - Tucson Tucson, AZ 1980 250(5)
Canyon Ranch - Lenox Lenox, MA 1989 212(5)
------
TOTAL/WEIGHTED AVERAGE 462 87%(6) 83%(6) $ 493(7) $ 466(7) $ 414(8) $370(8)
====== ====== ===== ====== ===== ===== ====
</TABLE>
33
<PAGE> 34
- - ----------------
(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 1998, the number of available rooms at Hyatt Regency Beaver Creek has
been reduced to 276 due to 19 rooms being converted into a 20,000 square
foot spa.
(3) In July 1997, 30 additional rooms were completed.
(4) Temporarily closed from February 1, 1998 through May 1, 1998 due to
flooding in the region affecting the roadway passage to the hotel.
(5) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(6) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(7) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(8) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
REFRIGERATED STORAGE PROPERTIES
The Operating Partnership owns an indirect 38% interest in each of the
two Refrigerated Storage Corporations, that, as of September 30, 1998, owned or
operated 97 Refrigerated Storage Properties with an aggregate of approximately
515 million cubic feet.
The following table shows the location and size of facility for each of
the Refrigerated Storage Properties as of September 30, 1998:
<TABLE>
<CAPTION>
TOTAL CUBIC TOTAL CUBIC
NUMBER OF FOOTAGE NUMBER OF FOOTAGE
STATE PROPERTIES (IN MILLIONS) STATE PROPERTIES (IN MILLIONS)
----- ---------- ------------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Alabama 6 9.9 Mississippi 1 4.7
Arizona 1 2.9 Missouri 2 37.2
Arkansas 6 31.3 Nebraska 2 4.4
California 11 45.3 New York 1 11.8
Colorado 2 3.3 North Carolina 3 8.5
Florida 5 7.8 Oklahoma 2 2.1
Georgia 7 41.3 Oregon 6 40.4
Idaho 2 18.7 Pennsylvania 4 51.6
Illinois 2 11.6 South Carolina 1 1.6
Indiana 1 9.1 South Dakota 2 6.3
Iowa 2 12.6 Tennessee 3 10.6
Kansas 3 41.2 Texas 3 24.3
Kentucky 1 2.7 Utah 1 8.6
Maine 1 1.8 Virginia 1 1.9
Massachusetts 6 15.2 Washington 6 28.7
Minnesota 1 3.8 Wisconsin 2 14.0
------------ ---------------
TOTAL
97 515.2
============ ==============
</TABLE>
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.
34
<PAGE> 35
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table sets forth certain information as of September 30,
1998, relating to the Residential Development Properties.
<TABLE>
<CAPTION>
Total Total
Residential Residential Total Lots/Units Lots/Units
Residential Development Development Lots/ Developed Closed
Development Properties Type of Corporation's Units Since Since
Corporation(1) (RDP) RDP(2) Location Ownership % Planned Inception Inception
- - -------------- ----- ------ -------- ----------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.00% 710 677 524
Development The Highlands SF Breckenridge,CO 12.25% 750 270 227
Corp. ------- ------- -------
Total Mira Vista Development Corp. 1,460 947 751
------- ------- -------
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 556 329
Development Spring Lakes SF Houston, TX 100.0% 536 93 34
Corp. ------- ------- -------
Total Houston Area Development Corp. 1,741 649 363
------- ------- -------
Crescent The Reserve at
Development Frisco SF Frisco, CO 60.0% 134 134 107
Management Villa Montane
Corp. Townhomes TH Avon, CO 30.0% 27(4) - -
Villa Montane
Club TS Avon, CO 30.0% 746(4) - -
Villas at Beaver
Creek TH Avon, CO 30.0% 10(4) 7 7
Deer Trail SFH Avon, CO 60.0% 16(4) - -
Buckhorn
Townhomes TH Avon, CO 60.0% 24(4) - -
Bear Paw Lodge CO Avon, CO 60.0% 43(4) - -
------- ------- -------
Total Crescent Development Management Corp. 1,000 141 114
------- ------- -------
The Woodlands The Woodlands SF The Woodlands, TX 42.5% 38,313 19,365 18,502
Land Company
Inc.
Desert Mountain Desert Mountain SF Scottsdale, AZ 93.0% 2,543 2,000 1,715
Development ------- ------- -------
Corp.
Total 45,057 23,102 21,445
======= ======= =======
<CAPTION>
Average
Residential Closed Range of
Residential Development Sale Price Proposed
Development Properties Type of Per Lot/ Sale Prices
Corporation(1) (RDP) RDP(2) Location Unit ($) Per Lot/Unit($)(3)
- - -------------- ----- ------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 96,000 50,000 - 265,000
Development The Highlands SF Breckenridge,CO 140,000 55,000 - 250,000
Corp.
Total Mira Vista Development Corp.
Houston Area Falcon Point SF Houston, TX 31,000 22,000 - 60,000
Development Spring Lakes SF Houston, TX 31,000 22,000 - 33,000
Corp.
Total Houston Area Development Corp.
Crescent The Reserve at
Development Frisco SF Frisco, CO 95,000 60,000 - 165,000
Management Villa Montane
Corp. Townhomes TH Avon, CO N/A 515,000 - 1,700,000
Villa Montane
Club TS Avon, CO N/A 18,000 - 150,000
Villas at Beaver
Creek TH Avon, CO 2,070,000 1,625,000 - 3,245,000
Deer Trail SFH Avon, CO N/A 2,560,000 - 3,325,000
Buckhorn
Townhomes TH Avon, CO N/A 945,000 - 1,850,000
Bear Paw Lodge CO Avon, CO N/A 1,495,000 - 1,895,000
Total Crescent Development Management Corp.
The Woodlands The Woodlands SF The Woodlands, TX 40,000 14,500 - 500,000
Land Company
Inc.
Desert Mountain Desert Mountain SF Scottsdale, AZ 300,000(5) 150,000 - 2,500,000(5)
Development
Corp.
Total
</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 September 30, 1998, 17 units were under contract at Villa Montane
Townhomes representing $17.2 million in sales proceeds, 703 contracts
were pre-sold at Villa Montane Club representing $42.2 million in sales
proceeds, two units were under contract at Villas at Beaver Creek
representing $4.9 million in sales proceeds, nine units were under
contract at Deer Trail representing $26.6 million in sales, 15 units
were under contract at Buckhorn Townhomes representing $20.1 million in
sales, and five units were under contract at Bear Paw Lodge
representing $8.9 million in sales.
(5) Excludes golf membership which are approximately $125,000.
35
<PAGE> 36
YEAR 2000 COMPLIANCE
The year 2000 issue relates to whether computer systems will properly
recognize date-sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
year 2000 issue relates to whether non-Information Technology (IT) systems that
depend on embedded computer technology will recognize the year 2000. Systems
that do not properly recognize such information could generate erroneous
information or fail.
In early 1998, the Operating Partnership assigned a group of
individuals with the task of creating a program to identify, understand and
address the myriad of issues associated with the year 2000 problem. The group's
initial step in assessing the Operating Partnership's year 2000 readiness
consists of a comprehensive review of IT and non-IT systems at the Operating
Partnership's principal executive offices and at the Operating Partnership's
Properties to identify any systems that are date sensitive and, accordingly,
could have potential year 2000 problems.
The Operating Partnership is in the process of conducting such
comprehensive review of all mission critical IT systems, such as in-house
accounting and property management systems, network operating systems,
telecommunication systems and desktop software systems, and determining whether
they are year 2000 compliant. The Operating Partnership believes that such
review is approximately 60% completed and it is expected that the review will be
completed on or before June 30, 1999. In addition, as a result of the Operating
Partnership's normal upgrade and replacement process, most network and desktop
equipment currently meets the requirements for year 2000 compliance. Although
the initial assessment and testing is not yet complete, management has not
identified any significant problem areas and believes that the mission critical
systems -AS/400 and accounting system, local network servers, WAN equipment, and
the majority of desktop PC's are, or can be, made compliant with minor software
upgrades.
For non-IT systems, the Operating Partnership is also in the process of
conducting such comprehensive review of computer hardware and software in
mechanical systems and developing a program to repair or replace non-IT systems
that are not year 2000 compliant. The Operating Partnership believes that such
review is approximately 60% completed and it is expected that the review will be
completed on or before June 30, 1999. The Operating Partnership's non-IT systems
or embedded technology are primarily property-related and include escalator and
elevator service, building automation (e.g. energy management and HVAC systems),
security access systems, fire and life safety systems, etc.
The Operating Partnership believes that the greatest exposure lies with
third parties such as its tenants, vendors, financial institutions and transfer
agent and unaffiliated joint venture partners. The Operating Partnership depends
on its tenants for rents and cash flows, its financial institutions for
availability of cash, its transfer agent to maintain and track investor
information, its vendors for day-to-day services and its unaffiliated joint
venture partners for operations and management of certain of the Operating
Partnership's Properties. If any of these third parties are unable to meet their
obligations to the Operating Partnership because of the year 2000 problem, such
a failure may have a material adverse effect on the financial condition or
results of operations of the Operating Partnership. Although the Operating
Partnership is in the process of working with such third parties in order to
attempt to eliminate its year 2000 concerns, the cost and timing of the third
party year 2000 compliance is not within the Operating Partnership's control and
no assurance can be given with respect to the cost and timing of such efforts or
the potential effects of any failure to comply.
The majority of the work performed to date has been performed by
employees of the Operating Partnership without significant additional costs to
the Operating Partnership. Although the program has not yet been fully developed
and the total cost to specifically remediate IT and non-IT systems, therefore,
has not fully been quantified, the Operating Partnership currently estimates
that the total cost to repair and replace IT and non-IT systems that are not
year 2000 compliant (not including costs associated with the Operating
Partnership's normal upgrade and replacement process) will be approximately $1.2
million. Management does not believe that such estimated total cost will have a
material adverse effect on the Operating Partnership's financial condition or
results of operations.
The Operating Partnership currently believes that it will have
performed all year 2000 compliance testing and completed its remedial measures
on its IT and non-IT systems prior to September 30, 1999. Based on the progress
the
36
<PAGE> 37
Operating Partnership has made in addressing the Operating Partnership's year
2000 issues and its plan and timeline to complete its compliance program, the
Operating Partnership does not currently foresee significant risks associated
with the Operating Partnership's year 2000 compliance at this time. Management
does not believe that the year 2000 issue will pose significant problems in its
IT or non-IT systems, or that resolution of any potential problems with respect
to these systems will have a material adverse effect on the Operating
Partnership's financial condition or results of operations. Management believes
that the year 2000 risks to the Operating Partnership's financial condition or
results of operation associated with a failure of non-IT systems is immaterial
due to the fact that each of the Operating Partnership's Properties has, for the
most part, separate non-IT systems. Accordingly, in general a year 2000 problem
that is experienced at one Property should have no effect on the other Operating
Partnership Properties. In addition, management believes that the Operating
Partnership will have sufficient time to correct those system problems within
its control before the year 2000. Since the Operating Partnership's major source
of income is rental payments under long-term leases, the failure of the
Operating Partnership's mission critical IT systems is not expected to have a
material adverse effect on the Operating Partnership's financial condition or
results of operations. Even if the Operating Partnership were to experience
problems with its IT systems, the payment of rent under the leases would not be
excused. In addition, the Operating Partnership expects to correct those IT
system problems within its control before the year 2000, thereby minimizing or
avoiding the increased cost of correcting problems after the fact.
Because the Operating Partnership is still evaluating the status of its
systems and those of third parties with which it conducts business, the
Operating Partnership has not yet developed a comprehensive contingency plan and
it is very difficult to identify "the most reasonably likely worst-case
scenario" at this time. As the Operating Partnership identifies significant
risks related to the Operating Partnership's year 2000 compliance or if the
Operating Partnership's year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the Operating Partnership will
develop appropriate contingency plans.
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 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
judgement 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
37
<PAGE> 38
not true and correct in all material respects. The action seeks (i) compensatory
damages, including expenses, (ii) a declaratory judgement that Station's alleged
breaches under the Merger Agreement excuse the Company from any further
obligations under the Merger Agreement, and (iii) a declaratory judgement that
the Company 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 million. 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 million of the
redeemable preferred stock, (ii) damages consisting of compensatory damages
(which Station states it believes to be in excess of $400 million), costs
associated with Station's obtaining capital needed to replace the $115 million
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 judgement 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 intends to contest Station's claims vigorously. As with any
litigation, however, it is not possible to predict the resolution of the pending
actions. The Company has stated it believes however, that the pending action
against the Company will not have a material adverse effect on the Company's
financial condition or results of operations.
On July 9, 1998, the Company announced that, together with Reckson
Associates Realty Corporation ("Reckson"), it had entered into a merger
agreement (as amended and restated on August 11, 1998, the "Merger Agreement")
pursuant to which Metropolitan Partners, LLC ("Metropolitan"), a newly formed
limited liability company owned equally by the Operating Partnership and
Reckson, would acquire Tower Realty Trust ("Tower") for an aggregate purchase
price of approximately $733 million (the "Merger"). On November 2, 1998, Tower
filed an action in the Supreme Court of the State of New York, County of New
York, against Reckson, the Company and Metropolitan (collectively, the
"Defendants"), for declaratory and other relief, including damages of not less
than $75 million, arising out of the alleged anticipatory repudiation by
Reckson, the Company and the general partner of Metropolitan of the Merger
Agreement.
The Company has advised Tower that it has not terminated the Merger
Agreement and considers the Merger Agreement to be in full force and effect,
subject to its terms and conditions. The Company intends to contest Tower's
claims vigorously. As with any litigation, it is not possible to predict the
outcome of the pending action. 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.
38
<PAGE> 39
Item 2. Changes in Securities and Use of Proceeds
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 September 30, 1998 (filed as Exhibit 10.01 to the
Quarterly Report on Form 10-Q for the quarter ended September 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 10-Q and incorporated herein
by reference)
4.04 -- 6 5/8% Note due 2002 of the Registrant (filed as Exhibit 4.07
to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (the "Company 2Q 10-Q") of the Company and
incorporated herein by reference)
4.05 -- 7 1/8% Note due 2007 of the Registrant (filed as Exhibit 4.08
to the Company 2Q 10-Q and incorporated herein by reference)
10.01 -- Noncompetition Agreement (Rainwater) (filed as Exhibit
10.02 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (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>
39
<PAGE> 40
<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, as amended (filed as Exhibit 10.11 to the
Company 10-Q 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)
27.01 -- Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K.
None
40
<PAGE> 41
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: November 16, 1998 Gerald W. Haddock, President and
----------------- Chief Executive Officer
/s/ Jerry R. Crenshaw, Jr.
------------------------------------------
Date: November 16, 1998 Jerry R. Crenshaw Jr., Vice President,
----------------- Controller and Co-Chief Financial Officer
/s/ Bruce A. Picker
------------------------------------------
Date: November 16, 1998 Bruce A. Picker, Vice President,
------------------ Treasurer and Co-Chief Financial Officer
41
<PAGE> 42
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
27.01 Financial Data Schedule (filed herewith).
<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 OPERATING PARTNERSHIP'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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 89,404
<SECURITIES> 0
<RECEIVABLES> 88,184
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,061,509
<PP&E> 4,102,206
<DEPRECIATION> (356,675)
<TOTAL-ASSETS> 4,984,628
<CURRENT-LIABILITIES> 265,843
<BONDS> 2,273,554
0
0
<COMMON> 0
<OTHER-SE> 2,418,390
<TOTAL-LIABILITY-AND-EQUITY> 4,984,628
<SALES> 0
<TOTAL-REVENUES> 510,046
<CGS> 0
<TOTAL-COSTS> 291,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,275
<INCOME-PRETAX> 118,896
<INCOME-TAX> 0
<INCOME-CONTINUING> 118,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,896
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.72
</TABLE>
