<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 MARCH 31, 1999
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
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
- --------------------------------------------------------------------------------
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 [ ]
<PAGE> 2
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and December 31,
1998 (audited)................................................................... 3
Consolidated Statements of Operations for the three months ended March 31,
1999 and 1998 (Unaudited)........................................................ 4
Consolidated Statement of Partner's Capital for the three months ended
March 31, 1999 (Unaudited)....................................................... 5
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 (Unaudited)........................................................ 6
Notes to Financial Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 42
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 42
Item 2. Changes in Securities............................................................ 42
Item 3. Defaults Upon Senior Securities.................................................. 42
Item 4. Submission of Matters to a Vote of Security Holders.............................. 42
Item 5. Other Information................................................................ 42
Item 6. Exhibits and Reports on Form 8-K................................................. 42
</TABLE>
2
<PAGE> 3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Notes 1 and 2)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Land $ 396,491 $ 400,690
Land held for development or sale 95,282 95,282
Building and improvements 3,585,847 3,569,774
Furniture, fixtures and equipment 66,465 63,626
Less - accumulated depreciation (418,434) (387,457)
------------ ------------
Net investment in real estate 3,725,651 3,741,915
Cash and cash equivalents 76,066 109,828
Restricted cash and cash equivalents 35,870 46,841
Accounts receivable, net 27,558 32,585
Deferred rent receivable 81,164 73,635
Investments in real estate mortgages and
equity of unconsolidated companies 742,698 743,516
Notes receivable, net 185,259 187,063
Other assets, net 124,008 110,566
------------ ------------
Total assets $ 4,998,274 $ 5,045,949
============ ============
LIABILITIES:
Borrowings under Credit Facility $ 634,480 $ 660,000
Notes payable 1,717,792 1,658,156
Accounts payable, accrued expenses and other liabilities 109,556 149,442
------------ ------------
Total liabilities 2,461,828 2,467,598
------------ ------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: 26,209 26,727
PARTNERS' CAPITAL:
Series A Preferred Units, 8,000,000 Units issued and outstanding
at March 31, 1999 200,000 200,000
Units of Partnership Interests, 68,858,500 and 68,823,252 issued
and outstanding at March 31, 1999 and December 31, 1998,
respectively:
General partner -- outstanding 623,551 and 622,777 3,418 3,815
Limited partners' -- outstanding 68,234,949 and 68,200,475 2,314,534 2,352,846
Accumulated other comprehensive income (7,715) (5,037)
------------ ------------
Total partners' capital 2,510,237 2,551,624
------------ ------------
Total liabilities and partners' capital $ 4,998,274 $ 5,045,949
============ ============
</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 and 3)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
(UNAUDITED)
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Office and retail properties $ 150,022 $ 126,428
Hotel properties 15,404 12,874
Behavioral healthcare properties 13,823 13,823
Interest and other income 6,498 8,024
------------ ------------
Total revenues 185,747 161,149
------------ ------------
EXPENSES:
Real estate taxes 20,746 16,097
Repairs and maintenance 11,024 8,700
Other rental property operating 32,612 29,891
Corporate general and administrative 4,114 3,147
Interest expense 42,481 34,283
Amortization of deferred financing costs 3,069 1,140
Depreciation and amortization 33,647 26,582
Settlement of merger dispute 15,000 --
------------ ------------
Total expenses 162,693 119,840
------------ ------------
Operating income 23,054 41,309
OTHER INCOME:
Equity in net income of unconsolidated
companies 16,606 5,845
------------ ------------
INCOME BEFORE MINORITY INTERESTS 39,660 47,154
Minority interests (245) (400)
------------ ------------
NET INCOME 39,415 46,754
PREFERRED UNIT DIVIDENDS (3,375) (1,575)
FORWARD SHARE PURCHASE
AGREEMENT RETURN (2,152) --
------------ ------------
NET INCOME AVAILABLE TO PARTNERS $ 33,888 $ 45,179
============ ============
PER UNIT DATA:
Net Income - Basic $ 0.49 $ 0.69
============ ============
Net Income - Diluted $ 0.48 $ 0.67
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 9)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED GENERAL LIMITED OTHER TOTAL
PARTNERS' PARTNER'S PARTNERS' COMPREHENSIVE PARTNERS'
CAPITAL CAPITAL CAPITAL INCOME CAPITAL
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Partners' capital, December 31, 1998 $ 200,000 $ 3,815 $ 2,352,846 $ (5,037) $ 2,551,624
Contributions -- -- 992 -- 992
Distributions -- (757) (74,984) -- (75,741)
Net income -- 360 35,680 -- 36,040
Accumulated other comprehensive income -- -- -- (2,678) (2,678)
----------- ----------- ----------- -------------- -----------
Partners' capital, March 31, 1999 $ 200,000 $ 3,418 $ 2,314,534 $ (7,715) $ 2,510,237
=========== =========== =========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1, 2 AND 4)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
(UNAUDITED)
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,415 $ 46,754
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 36,716 27,722
Minority interests 245 400
Non-cash compensation 20 24
Distributions received in excess of equity in earnings
from unconsolidated companies -- 6,905
Equity in earnings in excess of distributions received
from unconsolidated companies (9,019) --
Decrease in accounts receivable 5,027 6,064
Increase in deferred rent receivable (7,529) (8,809)
Decrease (increase) in other assets 2,635 (18,538)
Decrease in restricted cash and cash equivalents 12,485 11,140
Decrease in accounts payable, accrued
expenses and other liabilities (39,886) (48,056)
---------- ----------
Net cash provided by operating activities 40,109 23,606
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties -- (421,354)
Development of investment properties (2,471) (5,416)
Capital expenditures - rental properties (3,267) (8,481)
Tenant improvement and leasing costs - rental properties (14,744) (14,241)
(Increase) decrease in restricted cash and cash equivalents (1,514) 3,869
Investment in unconsolidated companies (7,421) (2,289)
Investment in residential development companies 13,980 13,892
Escrow deposits - acquisition of investment properties -- (80)
Decrease in notes receivable 1,804 8,132
---------- ----------
Net cash used in investing activities (13,633) (425,968)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (741) 127
Forward Share Purchase Agreement (14,740) --
Borrowings under Credit Facility 26,400 335,050
Payments under Credit Facility (51,920) (228,050)
Debt proceeds 60,000 158,100
Debt payments (364) (297)
Capital distributions - joint venture partner (763) (763)
Capital contributions to the Operating Partnership 972 191,328
Distributions from the Operating Partnership (79,082) (51,272)
---------- ----------
Net cash (used in) provided by financing activities (60,238) 404,223
---------- ----------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (33,762) 1,861
CASH AND CASH EQUIVALENTS,
Beginning of period 109,828 66,063
---------- ----------
CASH AND CASH EQUIVALENTS,
End of period $ 76,066 $ 67,924
========== ==========
</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 UNIT DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company"), through the Company's ownership of all of the
outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation
("CREE, Ltd."), which owns an approximately 1% general partner interest in the
Operating Partnership. In addition, the Company owns an approximately 89%
limited partner interest in the Operating Partnership, with the remaining
approximately 10% limited partner interest held by other limited partners. The
Operating Partnership directly or indirectly owns substantially all of the
economic interests in 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.
All of the limited partners of the Operating Partnership other than the
Company own, in addition to limited partner interests, units. Each unit entitles
the holder to exchange the unit (and the related limited partner interest) for
two common shares of the Company or, at the Company's option, an equivalent
amount of cash. For purposes of this report, the term "unit" or "unit of
partnership interest" refers to the limited partner interest and, if applicable,
related units held by a limited partner. Accordingly, the Company's
approximately 89% limited partner interest has been treated as equivalent, for
purposes of this report, to 62,355,069 units, and the remaining approximately
10% limited partner interest has been treated as equivalent, for purposes of
this report, to 6,503,431 units. In addition, the Company's 1% general partner
interest has been treated as equivalent, for purposes of this report, to 623,551
units.
As of March 31, 1999, the Operating Partnership directly or indirectly
owned a portfolio of real estate assets (the "Properties"). The Properties
include 89 office properties (collectively referred to as the "Office
Properties") located primarily in 17 metropolitan submarkets in Texas with an
aggregate of approximately 31.8 million net rentable square feet, seven retail
properties (collectively referred to as the "Retail Properties") with an
aggregate of approximately 0.8 million net rentable square feet, seven
full-service hotels with a total of 2,247 rooms and two destination health and
fitness resorts that can accommodate up to 462 guests daily (collectively
referred to as the "Hotel Properties") real estate mortgages and non-voting
common stock representing interests ranging from 40% to 95% in five
unconsolidated residential development corporations (collectively referred to
as the "Residential Development Corporations"), which in turn, through joint
venture or partnership arrangements, own interests in 13 residential
development properties (collectively referred to as the "Residential
Development Properties"), and 88 behavioral healthcare properties (collectively
referred to as the "Behavioral Healthcare Properties"). As of March 31, 1999,
the Operating Partnership, through two subsidiaries (the "Crescent
Subsidiaries"), owned an indirect 39.6% interest in three partnerships
(collectively referred to as the "Refrigerated Storage Partnerships") each of
which owned one or more corporations or limited liability companies
(collectively referred to as the "Refrigerated Storage Corporations") which
directly or indirectly owned 92 refrigerated storage properties (collectively
referred to as the "Refrigerated Storage Properties") with an aggregate of
approximately 463.4 million cubic feet (19.2 million square feet). 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 Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that
all of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
7
<PAGE> 8
The following table sets forth, by subsidiary, the Properties owned by
such subsidiary as of March 31, 1999:
<TABLE>
<S> <C>
Operating Partnership: 62 Office Properties, six Hotel Properties and five Retail Properties
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel, The Crescent Atrium, The Crescent
Funding I, L.P.: Office Towers, Regency Plaza One, UPR Plaza and Waterside Commons
("Funding I")
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office and Research Center, Hyatt
Funding II, L.P.: Regency Albuquerque, Hyatt Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I &
("Funding II") II, MacArthur Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two
Renaissance Square and 12404 Park Central
Crescent Real Estate Greenway Plaza Portfolio(1)
Funding III, IV and V,
L.P.:
("Funding III, IV and V")
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")
Crescent Real Estate Behavioral Healthcare Properties
Funding VII, L.P."
("Funding VII")
</TABLE>
- -------------------------------------------
(1) Funding III owns the Greenway Plaza Portfolio, except for the central
heated and chilled water plant building and Coastal Tower Office
Property, both located within Greenway Plaza, which are owned by
Funding IV and Funding V, respectively.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements have been included. Operating results
for interim periods reflected are not necessarily indicative of the results
that may be expected for a full fiscal year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Operating Partnership's Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made to previously reported
amounts to conform with the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 would have
had no material impact on the Operating Partnership's financial statements for
the quarter ended March 31, 1999.
8
<PAGE> 9
3. EARNINGS PER UNIT OF PARTNERSHIP INTEREST:
SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Basic EPS excludes all dilution, while
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 March 31,
--------------------------------------------------------------------
1999 1998
---- ----
Wtd. Avg. Per Unit Wtd. Avg. Per Unit
Income Units Amount Income Units Amount
------ ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS -
Net income available
to partners........... $ 33,888 68,850 $ 0.49 $ 45,179 65,532 $ 0.69
========= ========
Effect of dilutive
securities:
Unit options........... -- 1,071 -- 2,344
Diluted EPS -
Net income available
to partners........... $ 33,888 69,921 $ 0.48 $ 45,179 67,876 $ 0.67
======== ====== ========= ======== ====== ========
</TABLE>
4. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ............................................. $ 48,793 $ 39,854
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of operating partnership units in conjunction with
settlement of an obligation ............................ -- 8,522
Unrealized loss on available-for-sale securities .......... 2,678 --
Forward Share Purchase Agreement Return ................... 2,152 --
</TABLE>
5. SEGMENT REPORTING:
Beginning with the year ended December 31, 1998, the Operating
Partnership adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." The Operating Partnership currently has five major
operating segments: the Office and Retail Segment; the Hospitality Segment; the
Refrigerated Storage Segment; the Residential Development Segment and the
Behavioral Healthcare Segment. Therefore, operating segments for SFAS No. 131
were determined on the same basis. Management organizes the segments within the
Operating Partnership based on property type for making operating decisions and
assessing performance.
The Operating Partnership uses Funds from Operations ("FFO") as the
measure of segment profit or loss. FFO, based on the definition adopted by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and as used herein, means net income (loss) (determined in accordance
with Generally Accepted Accounting Principles, "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. NAREIT developed FFO 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 and its operating partnership, and
therefore for the operating segments contained therein. However, the Operating
Partnership's measure of FFO may not be comparable to similarly titled measures
of REITs (other than the Company) or other partnerships because these REITs or
partnerships may not apply the definition of FFO in the same manner as the
Operating Partnership.
9
<PAGE> 10
Selected financial information related to each segment for the three
months ended March 31, 1999 and 1998 is presented below.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Office and Retail Segment $ 150,022 $ 126,428
Hospitality Segment 15,404 12,874
Behavioral Healthcare Segment 13,823 13,823
Refrigerated Storage Segment -- --
Residential Development Segment -- --
Corporate and other 6,498 8,024
------------ ------------
TOTAL CONSOLIDATED REVENUE $ 185,747 $ 161,149
============ ============
FUNDS FROM OPERATIONS:
Office and Retail Segment $ 89,107 $ 74,046
Hospitality Segment 15,198 12,625
Behavioral Healthcare Segment 13,823 13,823
Refrigerated Storage Segment 8,280 5,962
Residential Development Segment 13,300 9,554
Corporate and other adjustments:
Interest expense (42,481) (34,283)
Preferred unit dividends (3,375) (1,575)
Other 3,179 6,539
Corporate G & A (4,114) (3,147)
------------ ------------
TOTAL FUNDS FROM OPERATIONS $ 92,917 $ 83,544
------------ ------------
ADJUSTMENTS TO RECONCILE FUNDS FROM OPERATIONS TO
CONSOLIDATED NET INCOME BEFORE MINORITY INTEREST:
Depreciation and amortization of real estate assets $ (32,877) $ (26,051)
Settlement of merger dispute (15,000) --
Minority interests 245 400
Adjustment for investments in real estate
mortgages and equity of unconsolidated companies:
Office and Retail Segment (1,732) (1,425)
Refrigerated Storage Segment (2,571) (5,893)
Residential Development Segment (4,671) (4,979)
Corporate and other (26) (17)
Preferred unit dividends 3,375 1,575
------------ ------------
CONSOLIDATED NET INCOME BEFORE MINORITY INTEREST $ 39,660 $ 47,154
============ ============
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES:
Office and Retail Segment $ 1,961 $ 1,201
Hospitality Segment -- --
Behavioral Healthcare Segment -- --
Refrigerated Storage Segment 5,709 69
Residential Development Segment 8,629 4,575
Corporate and other 307 --
------------ ------------
TOTAL EQUITY IN NET INCOME OF UNCONSOLIDATED
COMPANIES $ 16,606 $ 5,845
============ ============
IDENTIFIABLE ASSETS:
Office and Retail Segment $ 3,212,881 $ 3,019,977
Hospitality Segment 452,362 411,861
Behavioral Healthcare Segment 383,389 384,870
Refrigerated Storage Segment 281,436 155,012
Residential Development Segment 275,720 298,821
Corporate and other 392,486 324,059
------------ ------------
TOTAL IDENTIFIABLE ASSETS $ 4,998,274 $ 4,594,600
============ ============
</TABLE>
10
<PAGE> 11
Crescent Operating, Inc. and its subsidiaries ("COI") and Charter
Behavioral Health Systems, LLC ("CBHS") are the largest single lessees of the
Operating Partnership in terms of total rental revenues derived through their
leases. Total rental revenues from each of COI and CBHS for the quarter ended
March 31, 1999 were approximately 8% of the Operating Partnership's total
rental revenues. COI was the primary lessee of the Hotel Properties for the
quarter ended March 31, 1999, and CBHS was the sole lessee of the Behavioral
Healthcare Properties during that period.
6. 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 OWNERSHIP
ENTITY CLASSIFICATIONS AS OF MARCH 31, 1999
- ---------------------------------------- --------------------------------------- -----------------------------------
<S> <C> <C>
Desert Mountain Development Corporation Residential Development Corporation 95%(1)
Houston Area Development Corp. Residential Development Corporation 94%(1)
The Woodlands Land 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 Subsidiary 99%(2)
Crescent CS Holdings II Corp. Crescent Subsidiary 99%(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>
- ---------------------
(1) See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Residential Development
Properties Table included in that section for the Residential
Development Corporation's ownership interest in the Residential
Development Properties.
(2) The Crescent Subsidiaries have a 40% interest in three partnerships
each of which owns one or more corporations or limited liability
companies. Accordingly, each of the Crescent Subsidiaries has an
indirect 40% interest in the Refrigerated Storage Properties. This
percentage reflects the restructuring, effective March 12, 1999, of
the Operating Partnership's investment in the Refrigerated Storage
Properties, as described in Note 10.
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 aggregate basis and classified under the captions "Residential Development
Corporations," "Refrigerated Storage Corporations," and "Other," as applicable,
as of March 31, 1999.
11
<PAGE> 12
BALANCE SHEETS AT MARCH 31, 1999:
<TABLE>
<CAPTION>
RESIDENTIAL REFRIGERATED
DEVELOPMENT STORAGE
CORPORATIONS CORPORATIONS OTHER
-------------- -------------- ----------
<S> <C> <C> <C>
Real estate, net .......................... $ 633,113 $ 1,275,459 $ 472,264
Cash ...................................... 17,573 -- 28,661
Other assets .............................. 162,179 138,964 62,691
-------------- -------------- ----------
Total Assets .......................... $ 812,865 $ 1,414,423 $ 563,616
============== ============== ==========
Notes payable ............................. $ 321,121 $ 602,298 $ 273,291
Notes payable to the Operating
Partnership................................ 157,335 -- 15,668
Other liabilities ......................... 116,444 154,539 14,940
Equity .................................... 217,965 657,586 259,717
-------------- -------------- ----------
Total Liabilities and Equity ......... $ 812,865 $ 1,414,423 $ 563,616
============== ============== ==========
Operating Partnership's investments in real
estate mortgages and equity of
unconsolidated companies ................... $ 275,720 $ 281,436 $ 185,542
============== ============== ==========
</TABLE>
SUMMARY STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
----------------------------------------------
RESIDENTIAL REFRIGERATED
DEVELOPMENT STORAGE
CORPORATIONS CORPORATIONS OTHER
------------- ------------ ----------
<S> <C> <C> <C>
Total revenues ...................... $ 90,213 $ 140,454 $ 25,289
Expenses:
Operating expense ................ 69,887 99,632 9,719
Interest expense ................. 711 11,335 4,431
Depreciation & Amortization ...... 2,424 15,178 4,216
Taxes ............................ 5,254 419 (12)
------------- ------------ ----------
Total expenses ..................... 78,276 126,564 18,354
------------- ------------ ----------
Net income .......................... $ 11,937 $ 13,890 $ 6,935
============= ============ ==========
Operating Partnership's equity in net
income of unconsolidated companies $ 7,608 $ 5,709 $ 3,289
============= ============ ==========
</TABLE>
7. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
<TABLE>
<CAPTION>
The following is a summary of the Operating Partnership's debt financing at March 31, 1999: BALANCE AT
MARCH 31,
1999
--------------
<S> <C>
SECURED DEBT
BankBoston Term Note due October 30, 2001, bears interest at the Eurodollar rate plus 325
basis points or the Base Rate (as defined in the Note) plus 100 basis points (at March 31,
1999, the rate was 8.19% based on the Eurodollar rate) with a three-year interest-only term
secured by Greenway I and IA, BP Plaza, Washington Harbour, Bank One Tower, Frost Bank Plaza,
Central Park Plaza, 3333 Lee Parkway, The Addison and Reverchon Plaza Office Properties... $ 320,000
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
BALANCE AT
MARCH 31,
1999
---------------
<S> <C>
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 September 14, 1999, bears interest at an initial rate of
30-day LIBOR plus 200 basis points (at March 31, 1999, the rate was 6.94%) with an interest-
only term, secured by the Houston Center mixed-use Property complex and the Four Seasons
Hotel - Houston................................................................................ 184,299
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(2), secured by the Funding II Properties................ 161,000
LaSalle Note III due July 1999, bears interest at 30-day LIBOR plus a weighted average rate
of 2.135% (at March 31, 1999 the rate was 7.07%), 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 March 31, 1999, the rate was 6.69%) with an interest-only term, secured by
the 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........................................................................................ 44,183
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............................................................................... 11,692
Nomura Funding VI Note bears interest at 10.07% with monthly principal and interest payments
based on a 25-year amortization schedule through maturity in July 2020(3), secured by the
Funding VI Property............................................................................. 8,567
Metropolitan Life Note IV due December 1999, bears interest at 7.11% with monthly principal and
interest payments based on a 15-year amortization schedule, secured by the Datran Center Office
Property........................................................................................ 6,681
Rigney Note due June 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.................. 747
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
BALANCE AT
MARCH 31,
1999
-----------
UNSECURED DEBT
<S> <C>
Line of Credit with BankBoston, N.A. ("BankBoston") ("Credit Facility") (see
description of Credit Facility below)........................................................... 634,480
2007 Notes bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due
September 2007(4)............................................................................... 250,000
2002 Notes bear interest at a fixed rate of 7.00% with a five-year interest-only term, due
September 2002(4)............................................................................... 150,000
-----------
Total Notes Payable........................................................................ $ 2,352,272
===========
</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) In March 2006, the interest rate increases, and the Operating Partnership
is required to remit, in addition to the monthly debt service payment,
excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Operating Partnership's intention
to repay the note in full at such time (March 2006) by making a final
payment of approximately $154,000.
(3) The Operating Partnership has the option to defease the note, by
purchasing Treasury obligations in an amount sufficient to pay the note,
without penalty. In July 2010, the interest rate due under the note will
change to a 10-year Treasury yield plus 500 basis points or, if the
Operating Partnership so elects, it may repay the note without penalty.
(4) The notes were issued in an offering registered with the Securities and
Exchange Commission ("SEC").
The combined aggregate principal amounts, either at maturity or in the
form of scheduled principal installments due pursuant to borrowings under the
Credit Facility and other indebtedness of the Operating Partnership, are as
follows:
<TABLE>
(In Thousands)
<S> <C> <C>
1999...................................................... $346,928
2000...................................................... 635,839
2001...................................................... 429,181
2002...................................................... 215,655
2003...................................................... 72,201
Thereafter................................................ 652,468
-------------
$ 2,352,272
=============
</TABLE>
14
<PAGE> 15
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 137 basis
points. As of March 31, 1999, the interest rate was 6.31%. The Credit Facility
is unsecured and expires in June 2000. In connection with the refinancing of a
BankBoston term note, the Operating Partnership used $90,000 of the net
proceeds of the refinancing to purchase a 12% participation interest from
BankBoston in the Credit Facility. As a result, the Operating Partnership's
borrowing capacity under the Credit Facility is currently limited to $660,000.
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,
limitations on additional investments and the incurrence of additional liens,
restrictions on real estate development activity and a minimum net worth
requirement. As of March 31, 1999, the Operating Partnership was in compliance
with all covenants.
8. MINORITY INTEREST:
Minority interest represents joint venture interests held by third
parties.
9. PARTNERS' CAPITAL:
In connection with its issuances of securities, the Company
contributes the net proceeds of these issuances to the Operating Partnership
for its use in exchange for an increase in its limited partner interest in the
Operating Partnership.
UNITS EXCHANGED
Each unit may be exchanged for either two common shares or, at the
election of the Company, cash equal to the fair market value of two common
shares at the time of the exchange. When a unitholder exchanges a unit, the
Company's percentage interest in the Operating Partnership increases. During the
three months ended March 31, 1999, there were 42,097 units exchanged for 84,194
common shares of the Company.
COMMON SHARE ISSUANCE
On March 25, 1999, the Company issued an additional 12,356 common
shares to the former holder of the Series B Preferred Shares in settlement of a
dispute regarding the calculation of the conversion rate used in the
conversion, on November 30, 1998, of the Series B Preferred Shares into the
Company's common shares.
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 the
Operating Partnership received approximately $145,000 in net proceeds. In the
other transaction, the Company entered into a forward share purchase agreement
(the "Forward Share Purchase Agreement") with UBS. On August 11, 1998, the
Operating Partnership 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.
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 the Operating Partnership received from the original
issuance of common shares to UBS, plus a forward accretion component equal to
90-day 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.
15
<PAGE> 16
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 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. If the Company issues
additional common shares, the Company will receive an additional limited
partner interest. If UBS delivers common shares to the Company, the Operating
Partnership will repurchase a portion of the Company's limited partner
interest.
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. On November 20, 1998, the Company
issued 1,852,162 additional common shares to UBS under the Forward Share
Purchase Agreement as a result of the decline in the market price of the
Company's common shares.
On February 18, 1999, the Company delivered cash collateral of
approximately $14,700 in lieu of the issuance of additional common shares, as
permitted under the Forward Share Purchase Agreement, as a result of a decline
in the market price of the common shares. (See Note 12, Subsequent Events).
At March 31, 1999, this instrument was anti-dilutive using both the
Company's average share price for the quarter and the closing price on March
31, 1999. Therefore, no additional common shares were included in the
calculation of diluted earnings per share for the three months ended March 31,
1999.
To the extent that the Company is obligated, as a result of a further
decline in the market price of the common shares, to issue additional common
shares in the future under the terms of the Forward Share Purchase Agreement,
the issuance will result in a reduction of the Company's net income per common
share and net book value per common share. In connection with the issuance of
additional common shares, the Company will receive an additional limited
partner interest, which will result in a reduction of the Operating
Partnership's net income per unit and net book value per unit.
DISTRIBUTIONS
Units
On February 17, 1999, the Operating Partnership paid a distribution on
its units of $75,707, or $1.10 per unit to holders of record on January 27,
1999. The distribution represented an annualized distribution of $4.40 per unit.
Preferred Units
On February 16, 1999, the Operating Partnership paid a distribution on
its Series A Preferred units of $3,375, or $.422 per unit, to the Company, which
was the sole holder of record of Series A Preferred units on January 29, 1999.
The dividend represented an annualized dividend of $1.69 unit.
10. INVESTMENTS
Effective March 12, 1999, the Company, Vornado Realty Trust
("Vornado"), the Refrigerated Storage Partnerships, the Refrigerated Storage
Corporations (including all affiliated entities that owned any portion of the
business operations of the Refrigerated Storage Properties at that time) and
COI restructured their investment in the Refrigerated Storage Properties (the
"Restructuring"). In the Restructuring, the Refrigerated Storage Corporations
(including all affiliated entities that owned any portion of the business
operations of the Refrigerated Storage Properties) sold their ownership of the
business operations to a newly formed partnership (the "Refrigerated Storage
16
<PAGE> 17
Operating Partnership") owned 60% by Vornado Operating L.P. and 40% by a newly
formed subsidiary of COI, in consideration of the payment of $48,700 by the
Refrigerated Storage Operating Partnership. The Refrigerated Storage Operating
Partnership, as lessee, entered into triple-net master leases of the
Refrigerated Storage Properties with certain of the Refrigerated Storage
Corporations. Each of the Refrigerated Storage Properties is subject to one or
more of the leases, each of which has an initial term of 15 years, subject to
two, five-year renewal options. The leases provide for an aggregate annual base
rental rate of $123,000 for the first through fifth lease years, $126,000 for
the sixth through 10th lease years and $130,500 for the 11th through 15th lease
years, plus percentage rent based on the gross revenues received from customers
at the Refrigerated Storage Properties above a specified amount.
As a result of the Restructuring, the Refrigerated Storage
Partnerships and the Refrigerated Storage Corporations directly or indirectly
own the real estate assets associated with the Refrigerated Storage Properties.
The business operations associated with the Refrigerated Storage Properties are
owned by the Refrigerated Storage Operating Partnership, in which the Operating
Partnership has no interest.
In addition, in connection with the Restructuring and also effective
in March 1999, the Operating Partnership purchased from COI an additional 4%
nonvoting interest in each of the Crescent Subsidiaries for an aggregate
purchase price of $13,200. As a result, the Operating Partnership holds an
indirect 39.6% interest in the Refrigerated Storage Partnerships and COI holds
an indirect .4% interest in the Refrigerated Storage Partnerships. The
Operating Partnership also granted COI an option to require the Operating
Partnership to purchase COI's remaining 1% interest in each of the Crescent
Subsidiaries at such time as the purchase would not, in the opinion of counsel
to the Operating Partnership, adversely affect the status of the Company as a
REIT, for an aggregate price, payable by the Operating Partnership, of
approximately $3,300.
In connection with these transactions, the Operating Partnership
established a new line of credit in the principal amount of $19,500 available
to COI at an interest rate of 9% per annum.
11. PENDING INVESTMENT
On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates
Realty Corporation ("Reckson"), and Metropolitan Partners, LLC ("Metropolitan")
entered into a revised agreement and plan of merger that superseded the merger
agreement to which the Company was a party at that time, under which
Metropolitan has agreed to acquire Tower for a combination of cash and Reckson
exchangeable Class B common shares. The Company, Reckson and Metropolitan have
agreed that the Operating Partnership's investment in Metropolitan will be an
$85,000 preferred member interest in Metropolitan. The investment will have a
cash flow preference of 7.5% for a two-year period and may be redeemed by
Metropolitan within the two-year period for $85,000, plus an amount sufficient
to provide a 9.5% internal rate of return to the Operating Partnership. If
Metropolitan does not redeem the preferred interest upon expiration of the
two-year period, the Operating Partnership may convert the interest either into
(i) a common equity interest in Metropolitan or (ii) shares of common stock of
Reckson at a conversion price of $24.61.
In connection with the revised agreement, the Operating Partnership
contributed $10,000 of the $85,000 required capital contribution to
Metropolitan in December 1998 and agreed to make the additional $75,000 capital
contribution to Metropolitan when all of the conditions to the funding have
been met, which is expected to occur in the second quarter of 1999.
17
<PAGE> 18
12. SUBSEQUENT EVENTS:
DISTRIBUTIONS
Units
On April 5, 1999, the Operating Partnership declared a distribution on
its units of $76,494, or $1.10 per unit to holders of record on April 27, 1999.
The distribution represents an annualized distribution of $4.40 per unit and is
payable on May 18, 1999.
Preferred Units
On April 15, 1999, the Operating Partnership declared a distribution
on its Series A Preferred units of $3,376 or $.422 per unit to the Company,
which was the sole holder of record of Series A preferred units on April 30,
1999. The distribution represents an annualized distribution of $1.69 per unit
and is payable on May 14, 1999.
STATION CASINOS, INC. ("STATION")
On April 14, 1999, the Company and Station entered into an agreement
(the "Settlement Agreement") for the mutual settlement and release of all claims
between the Company and Station arising out of the Agreement and Plan of Merger
between the Company and Station, which the Company terminated in August 1998. As
part of the Settlement Agreement, the Company paid $15,000 to Station on April
22, 1999, which had been accrued by the Operating Partnership at March 31, 1999.
FORWARD SHARE PURCHASE AGREEMENT
On April 29, 1999, the Company issued 747,598 common shares to UBS, in
substitution for the $14,700 cash collateral which the Company delivered on
February 18, 1999 in lieu of common shares. In connection with the issuance of
the additional shares, the Company received an additional limited partner
interest in the Operating Partnership.
INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
On April 29, 1999, a partnership in which Crescent Development
Management Corp. ("CDMC") has a 64% economic interest, finalized the purchase
of "The Commons", a master planned residential development on 23 acres in the
Central Platte Valley near downtown Denver, Colorado. Currently, it is
contemplated that the project will include both sale and rental units at
multiple price points. An adjacent 28 acres is expected to be commercially
developed by another firm, thus providing a major mixed-use community adjacent
to the lower downtown area of Denver. The acreage connects with several major
entertainment and recreational facilities including Coors Field (home to the
Major League Baseball's Colorado Rockies), Elitch Gardens (an amusement park)
and the new Pepsi Center (home to the National Hockey League's Colorado
Avalanche and the National Basketball Association's Denver Nuggets).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal and recurring nature. The information
herein should be read in conjunction with the more detailed information
contained in the Operating Partnership's Form 10-K for the year ended December
31, 1998. Capitalized terms used but not otherwise defined herein, shall have
the meanings ascribed to those terms in the footnotes to the financial
statements.
18
<PAGE> 19
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements generally are
characterized by the use of terms such as "believe", "expect" and "may".
Although the Operating Partnership believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Operating Partnership's actual results could differ materially from those 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 May 14, 1999. Among the factors that might cause such
a difference are the following: changes in real estate conditions (including
rental rates and competing properties); changes in industries in which the
Operating Partnership's principal tenants compete; changes in the financial
condition of existing tenants; the Operating Partnership's ability to timely
lease 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 line of credit held by BankBoston ("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; the existence of complex regulations
relating to the Company's status as a REIT and the adverse consequences of the
failure to qualify as such; changes in general economic conditions; the
Operating Partnership's inability to control its tenants and the management and
operation of its Residential Development Properties and the Refrigerated
Storage Properties; and other risks detailed from time to time in the Operating
Partnership's and the Company's filings with the Securities and Exchange
Commission ("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.
OFFICE AND RETAIL SEGMENT
Office Property net operating income increased by approximately 10%
for the three months ended March 31, 1999, compared to the three months ended
March 31, 1998, for the 27.1 million square feet of office properties owned as
of January 1, 1998. For these properties, the weighted average occupancy for
the three months ended March 31, 1999 was approximately 92%, and the weighted
average occupancy for the three months ended March 31, 1998 was approximately
89%.
For the three months ended March 31, 1999, leases were executed (all
of which have commenced or will commence during the next twelve months)
renewing or re-leasing 665,000 net rentable square feet of office space at a
weighted average full-service rental rate (including expense recoveries) and a
funds from operations ("FFO") annual net effective rate (calculated as weighted
average full-service rental rate minus operating expenses paid by the Operating
Partnership) of $22.61 and $14.07 per square foot, respectively, compared to
expiring leases with a weighted average full-service rental rate and an FFO
annual net effective rate of $18.79 and $10.29 per square foot, a 20% and 37%
increase, respectively. Weighted average full-service rental rates represent
base rent after giving effect to free rent and scheduled rent increases that
would be taken into account under GAAP and including adjustments for the
tenant's share of expenses payable by or reimbursed to the Operating
Partnership ("expense recoveries").
The leases executed for the three months ended March 31, 1999, all of
which have commenced or will commence during the next twelve months, required
tenant improvement and leasing costs of $6.61 and $3.09 per square foot,
respectively, or $1.41 and $.65 per square foot per year, respectively. The
overall office portfolio was approximately 93% leased (based on executed
leases) and 91% leased (based on commenced leases) at March 31, 1999.
19
<PAGE> 20
HOSPITALITY SEGMENT
Hotel Property rental income increased by approximately 11%, including
weighted average base rent and percentage rent for the three months ended March
31, 1999, compared to the three months ended March 31, 1998, for the seven
full-service hotel properties and two destination health and fitness resorts
owned as of January 1, 1998 (weighted average base rent includes scheduled rent
increases that would be taken into account under GAAP).
For the three months ended March 31, 1999, weighted average occupancy,
average daily rate and revenue per available room for all Hotel Properties was
79%, $250 and $196, respectively, compared to 76%, $238 and $179, respectively,
for the same period of 1998.
RESIDENTIAL DEVELOPMENT SEGMENT
The Operating Partnership owns economic interests in five Residential
Development Corporations through the residential development property mortgages
and the non-voting common stock of these Residential Development Corporations.
The Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in 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. Management plans to maintain the Residential
Development Segment at its current investment level and reinvest returned
capital into residential development projects that it expects to achieve
comparable rates of return.
The Woodlands Land Company, Inc., The Woodlands, Texas. For the three
months ended March 31, 1999, 511 lots with an average sales price of $49,393 per
lot and 8.2 acres of commercial land were sold, compared to 417 lots with an
average sales price of $51,569 per lot and 80.4 acres of commercial land were
sold, for the same period of 1998.
Desert Mountain Development Corporation ("Desert Mountain"),
Scottsdale, Arizona. For the three months ended March 31, 1999, Desert Mountain
sold 36 lots with an average sales price of $435,000 per lot (including club
memberships), compared to 52 lots with an average sales price of $329,000 per
lot (including club memberships), for the same period of 1998. In the first
quarter of 1999, Desert Mountain opened three new villages in Saguaro Forest, an
exclusive enclave of approximately 380 residential lots, 105 of which were
available for sale at an average asking price of $847,000. Currently, the effort
has provided Desert Mountain with 51 lot reservations for which contracts are
being processed. Approximately 50% of these lots are expected to be sold during
the second quarter of 1999.
Crescent Development Management Corp. ("CDMC"), Beaver Creek,
Colorado. For the three months ended March 31, 1999, CDMC's sales from its five
active projects were six residential lots, 13 townhomes, two single-family
homes, and 4.4 time share units, compared to sales from its one active project
of three residential lots for the same period of 1998.
On April 29, 1999, a partnership in which CDMC has a 64% economic
interest, finalized the purchase of "The Commons", a master planned residential
development on 23 acres in the Central Platte Valley near downtown Denver,
Colorado. Currently, it is contemplated that the project will include both sale
and rental units at multiple price points. An adjacent 28 acres is expected to
be commercially developed by another firm, thus providing a major mixed-use
community adjacent to the lower downtown area of Denver. The acreage connects
with several major entertainment and recreational facilities including Coors
Field (home to the Major League Baseball's Colorado Rockies), Elitch Gardens (an
amusement park) and the new Pepsi Center (home to the National Hockey League's
Colorado Avalanche and the National Basketball Association's Denver Nuggets).
Mira Vista Development Corp. ("Mira Vista"), Fort Worth, Texas. For
the three months ended March 31, 1999, Mira Vista sold eight lots with an
average sales price of $132,000 per lot, compared to 11 lots with an average
sales price of $93,000 per lot, for the same period of 1998.
20
<PAGE> 21
Houston Area Development Corp. ("Houston Area Development"), Houston,
Texas. For the three months ended March 31, 1999, Houston Area Development sold
46 lots with an average sales price of $27,000 per lot, compared to 24 lots
with an average sales price of $28,000 per lot, for the same period of 1998.
REFRIGERATED STORAGE SEGMENT
Earnings before interest, taxes, depreciation and amortization
("EBITDA") for the Refrigerated Storage Corporations for the three months ended
March 31, 1999 increased approximately 1% compared to the same period of 1998
for the 459.0 million cubic feet (19.0 million square feet) of comparable
properties. Effective March 12, 1999, pursuant to the Restructuring, the
Company ceased to own any interest in the business operations associated with
the Refrigerated Storage Properties, although the Company continues to own the
related real estate asses directly or indirectly. See Note 10 to the Financial
Statements included in Item 1. In connection with the Restructuring, the
Company purchased an additional 4% nonvoting interest in each of the Crescent
Subsidiaries for an aggregate purchase price of $13.2 million. Management
believes that in addition to cash flows and net income, EBITDA is a useful
financial performance measurement for assessing the operating performance of
the Refrigerated Storage Properties. EBITDA does not represent net income or
cash flows from operating, financing and investing activities as defined by
GAAP.
BEHAVIORAL HEALTHCARE SEGMENT
For the three months ended March 31,1999, the Operating Partnership
received rental payments of $11.0 million from CBHS as required under its lease
with CBHS. The Operating Partnership recognizes rent on a straight-line basis,
resulting in a deferred rent receivable balance due from CBHS of approximately
$22.7 million at March 31, 1999. Management will continue to evaluate the
business, financial condition and results of operations of CBHS in connection
with the collectibility of the deferred rent receivable balance.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provided 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 should be measured at fair value. This pronouncement will be
effective for all fiscal quarters of fiscal years beginning after June 15,
1999, and would have had no material impact on the Operating Partnership's
financial statements for the quarter ended March 31, 1999.
21
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth the Operating Partnership's financial
data as a percent of total revenues for the three months ended March 31, 1999
and 1998. See Item 1. Financial Statements, Note 5 to the Operating
Partnership's Consolidated Financial Statements for financial information about
industry segments.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Office and retail properties 80.8% 78.5%
Hotel properties 8.3% 8.0%
Behavioral healthcare properties 7.4% 8.5%
Interest and other income 3.5% 5.0%
-------- --------
TOTAL REVENUES 100.0% 100.0%
-------- --------
EXPENSES
Operating expenses 34.7% 33.9%
Corporate general and administrative 2.2% 2.0%
Interest expense 22.9% 21.3%
Amortization of deferred financing costs 1.7% 0.7%
Depreciation and amortization 18.1% 16.5%
Settlement of merger dispute 8.0% --
-------- --------
TOTAL EXPENSES 87.6% 74.4%
-------- --------
Operating income 12.4% 25.6%
OTHER INCOME
Equity in net income of unconsolidated companies:
Refrigerated storage corporations 3.1% 0.2%
Residential development corporations 4.1% 2.8%
Other 1.8% 0.7%
-------- --------
TOTAL OTHER INCOME 9.0% 3.7%
-------- --------
INCOME BEFORE MINORITY INTERESTS 21.4% 29.3%
Minority interests (0.2%) (.3%)
-------- --------
NET INCOME 21.2% 29.0%
PREFERRED UNIT DIVIDENDS (1.8%) (1.0%)
FORWARD SHARE PURCHASE
AGREEMENT RETURN (1.2%) --
-------- --------
NET INCOME AVAILABLE TO PARTNERS 18.2% 28.0%
======== ========
</TABLE>
22
<PAGE> 23
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED
MARCH 31, 1998
REVENUES
Total revenues increased $24.6 million, or 15.3%, to $185.7 million
for the three months ended March 31, 1999, as compared to $161.1 million for
the three months ended March 31, 1998.
The increase in Office and Retail Property revenues of $23.6 million,
or 18.7%, compared to the three months ended March 31, 1998, is attributable
to:
o the acquisition of three Office Properties subsequent to March
31, 1998, resulting in $5.4 million of incremental revenues;
o the acquisition of six Office Properties during the first
quarter of 1998, which contributed revenues for a full quarter
in 1999, as compared to a partial quarter in 1998, resulting in
$6.2 million in incremental revenues; and
o increased revenues of $12.0 million from the 80 Office and
Retail Properties acquired prior to January 1, 1998, primarily
as a result of rental rate and occupancy increases at these
Properties.
The increase in Hotel Property revenues of $2.5 million, or 19.4%,
compared to the three months ended March 31, 1998, is attributable to:
o the acquisition of one golf course affiliated with one of the
Hotel Properties subsequent to March 31, 1998, resulting in $0.5
million of incremental revenues;
o the acquisition of one Hotel Property during the first quarter
of 1998, which contributed revenues for a full quarter in 1999,
as compared to a partial quarter in 1998, resulting in $0.6
million in incremental revenues; and
o increased revenues of $1.4 million from the eight Hotel
Properties acquired prior to January 1, 1998, primarily as a
result of an increase in base rents of $.6 million pursuant to
lease amendments entered into in connection with contributions
made by the Company for capital improvements at some of the
Hotel Properties and an increase in percentage rent of $.8
million.
The decrease in interest and other income of $1.5 million, or 18.8%,
compared to the three months ended March 31, 1998, is primarily attributable to
the sale of marketable securities in the first quarter of 1998. No such sales
were made during the three months ended March 31, 1999.
EXPENSES
Total expenses increased $42.9 million, or 35.8%, to $162.7 million
for the three months ended March 31, 1999, as compared to $119.8 million for
the three months ended March 31, 1998.
The increase in rental property operating expenses of $9.7 million, or
17.8%, compared to the three months ended March 31, 1998, is attributable to:
o the acquisition of three Office Properties subsequent to March
31, 1998, resulting in $2.3 million of incremental expenses;
o the acquisition of six Office Properties during the first
quarter of 1998, which incurred expenses for a full quarter in
1999, as compared to a partial quarter in 1998, resulting in
$2.2 million of incremental expenses; and
o increased expenses of $5.2 million from the 80 Office and Retail
Properties acquired prior to January 1, 1998, primarily as a
result of occupancy increases at these Properties.
The increase in depreciation and amortization expense of $7.0 million,
or 26.3%, compared to the three months ended March 31, 1998, is primarily
attributable to the acquisition during 1998 of nine Office Properties.
23
<PAGE> 24
The increase in interest expense of $8.2 million, or 23.9%, compared
to the three months ended March 31, 1998, is primarily attributable to:
o $0.9 million of interest payable under the Metropolitan Life
Notes III and IV, which were assumed in connection with the
acquisition of the Datran Center Office Property in May 1998;
o $3.2 million of interest payable under the promissory note
payable to Merrill Lynch International issued in conjunction
with the termination of the equity swap agreement with Merrill
Lynch International on September 30, 1998; and
o $3.5 million of incremental interest payable due to draws under
the Credit Facility and term loans with BankBoston (average
balance outstanding on the Credit Facility for the three months
ended March 31, 1999 and 1998 was $642.1 million and $439.8
million, respectively).
All of these financing arrangements were used to fund investments and
provide working capital.
An additional increase in expenses of $15.0 million is attributable to
non-recurring costs associated with the settlement of litigation relating to
the merger agreement entered into in January 1998 between the Company and
Station.
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES
Equity in net income of unconsolidated companies increased $10.8
million, or 186.2%, to $16.6 million for the three months ended March 31, 1999,
as compared to $5.8 million for the three months ended March 31, 1998.
The increase is primarily attributable to:
o an increase in equity in net income of the Refrigerated Storage
Corporations of $5.6 million, or 100%, compared to 1998,
primarily as a result of the acquisitions by one of the
Refrigerated Storage Partnerships of 9 and 5 Refrigerated
Storage Properties and the associated operations in June 1998
and July 1998, respectively.
o an increase in equity in net income of the Residential
Development Corporations of $3.0 million, or 66.3%, compared to
the three months ended March 31, 1998, primarily as a result of
increased sales activity at CDMC, which resulted in $2.2 million
of incremental equity in net income to the Operating Partnership;
and
o an increase in equity in net income of other unconsolidated
companies of $2.1 million, or 173.8%, compared to 1998,
primarily as a result of the increased operating income at The
Woodlands Commercial Properties Company, L.P. ("Woodlands CPC"),
which resulted in $1.5 million of incremental equity in net
income to the Operating Partnership. The Woodlands CPC operating
income increase is primarily attributable to a sale of land
assets and an increase in operating income attributable to the
acquisition of one office building and development of one office
building subsequent to March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $76.0 million and $109.8 million at
March 31, 1999 and December 31, 1998, respectively. This 30.8% decrease is
attributable to $60.2 million and $13.6 million used in financing and investing
activities, respectively, partially offset by $40.1 million of cash provided by
operating activities.
FINANCING ACTIVITIES
The Operating Partnership's use of cash for financing activities of
$60.2 million is primarily attributable to:
o net payments under the Credit Facility of $25.5 million;
o distributions paid to unitholders of $75.7 million;
o distributions paid to preferred unitholders of $3.4 million; and
o posting of cash collateral in connection with the Forward Share
Purchase Agreement of $14.7 million.
24
<PAGE> 25
The use of cash for financing activities is partially offset by:
o net borrowings under short-term facilities of $59.6 million.
INVESTING ACTIVITIES
The Operating Partnership's use of cash for investing activities of
$13.6 million is primarily attributable to:
o $14.7 million for recurring and non-recurring tenant improvement
and leasing costs for the Office and Retail Properties;
o $3.3 million for capital expenditures on rental properties,
primarily attributable to non-recoverable building improvements
for the Office and Retail Properties, and replacement of
furniture, fixtures and equipment for the Hotel Properties;
o $2.5 million for the development of investment properties;
o $7.4 million for increased investments in unconsolidated
companies; and
o $1.5 million attributable to increased restricted cash and
cash equivalents.
The use of cash for investing activities is partially offset by:
o $14.0 million in return of investment received from the
Residential Development Corporations and
o $1.8 million inflow from a decrease in notes receivable primarily
due to payment of principal on notes receivable from COI.
OPERATING ACTIVITIES
The Operating Partnership's inflow of cash provided by operating
activities of $40.1 million is primarily attributable to:
o $73.7 million from Property operations;
o $.2 million from minority interests;
o $12.5 million from increases in restricted cash and cash
equivalents; and
o $2.6 from a decrease in other assets.
The cash provided by operating activities is partially offset by:
o $39.9 million from decreases in accounts payable, accrued
liabilities and other liabilities and
o $9.0 million from equities in earnings in excess of distribution
received from unconsolidated companies.
SHELF REGISTRATION STATEMENT
On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC for an aggregate of $1.5
billion of common shares, preferred shares and warrants exercisable for common
shares. Management believes the Shelf Registration Statement will provide the
Company with more efficient and immediate access to capital markets at such
time as it is considered appropriate. As of March 31, 1999, approximately
$782.7 million was available under the Shelf Registration Statement for the
issuance of securities. In connection with the issuances of securities pursuant
to the Shelf Registration Statement, the Company contributes the net proceeds
of these issuances to the Operating Partnership for its use in exchange for an
increase in its limited partner interest in the Operating Partnership.
25
<PAGE> 26
COMMON SHARE ISSUANCE
On March 25, 1999, the Company issued an additional 12,356 common
shares to the former holder of the Series B Preferred Shares in settlement of a
dispute regarding the calculation of the conversion rate used in the conversion
on November 30, 1998, of the Series B Preferred Shares into the Company's
common shares. In connection with the issuance, the Company received an
additional limited partner interest.
FORWARD SHARE PURCHASE AGREEMENT
On August 12, 1997, the Company entered into two transactions with
UBS. In one transaction, the Company sold 4,700,000 common shares to UBS for
approximately $148 million and the Operating Partnership received approximately
$145 million in net proceeds. In the other transaction, the Company entered
into a forward share purchase agreement (the "Forward Share Purchase
Agreement") with UBS. On August 11, 1998, the Operating Partnership 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. The Forward Share Purchase Agreement with UBS
is not considered a debt instrument.
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 that the Operating Partnership received from the
original issuance of common shares to UBS, plus a forward accretion component
equal to 90-day 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.
The Company currently intends to fulfill its settlement obligations in
cash, which will decrease the Company's liquidity and result in an increase in
the Company's net income per common share and net book value per common share.
The Company has signed a loan application commitment with a group of lenders
that provides for the refinancing of the Greenway Plaza office complex. The
Company intends to use the excess proceeds of this refinancing to settle the
Agreement prior to the expiration date on August 12, 1999. The Company,
however, will continue to evaluate its sources of capital and the potential
uses of its capital until the time that settlement is required under the
Forward Share Purchase Agreement or until 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. If the Company issues additional common
shares, the Company will receive an additional limited partner interest. If UBS
delivers common shares to the Company, the Operating Partnership will
repurchase a portion of the Company's limited partner interest.
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. On November 20, 1998, the Company
issued 1,852,162 additional common shares to UBS under the Forward Share
Purchase Agreement, as a result of the decline in the market price of the
Company's common shares.
On February 18, 1999, the Company delivered cash collateral of $14.7
million in lieu of the issuance of additional common shares, as permitted under
the Forward Share Purchase Agreement as a result of a decline in the market
price of the common shares. On April 29, 1999, the Company issued 747,598
common shares to UBS in substitution of the $14.7 million cash collateral.
26
<PAGE> 27
At March 31, 1999, the Company had a contingent obligation to issue
approximately 804,443 common shares. The Company calculated this number of
common shares using the Company's average share price for the quarter ended
March 31, 1999 of $21.30. According to the terms of the Forward Share Purchase
Agreement, had the Forward Share Purchase Agreement Loan been settled and the
closing share price of $21.50 on March 31, 1999 been used, the Company would
have had a contingent liability to issue approximately 778,457 common shares,
and the Company would have received an additional limited partner interest in
the Operating Partnership. In that event, the Company's net income - diluted per
common share would have been $0.24 for the three months ended March 31, 1999 and
the net book value per common share outstanding at March 31, 1999 would have
been $17.42. Correspondingly, the Operating Partnership's net income-diluted per
unit would have been $.48 for the three months ended March 31, 1999 and the net
book value per common unit outstanding at March 31, 1999 would have been $33.36.
To the extent that the Company is obligated, as a result of a further
decline in the market price of the common shares, to issue additional common
shares in the future under the terms of the Forward Share Purchase Agreement,
the issuance will result in a reduction of the Company's net income per common
share and net book value per common share. In connection with the issuance of
additional common shares, the Company will receive an additional limited
partner interest, which will result in a reduction of the Operating
Partnership's net income per unit and net book value per unit.
STATION CASINOS, INC.
On April 14, 1999, the Company and Station entered into the Settlement
Agreement providing for the mutual settlement and release of all claims between
the Company and Station arising out of the merger agreement between the Company
and Station, which the Company terminated in August 1998. As part of the
Settlement Agreement, the Company paid $15 million to Station on April 22,
1999.
CAPITAL COMMITMENTS
As of December 8, 1998, Tower, Reckson and Metropolitan entered into a
revised agreement and plan of merger that superseded the merger agreement to
which the Company was a party at that time. In connection with the revised
agreement, the Operating Partnership made a $10 million capital contribution to
Metropolitan in December 1998 and agreed to make an additional $75 million
capital contribution to Metropolitan in exchange for an $85 million preferred
member interest in Metropolitan. The investment will have a cash flow preference
of 7.5% for a two-year period and may be redeemed by Metropolitan within the
two-year period for $85,000, plus an amount sufficient to provide a 9.5%
internal rate of return to the Operating Partnership. If Metropolitan does not
redeem the preferred interest upon expiration of the two-year period, the
Operating Partnership may convert the interest either into (i) a common equity
interest in Metropolitan or (ii) shares of common stock of Reckson at a
conversion price or $24.61.
The funding by the Operating Partnership of the additional $75 million
capital contribution to Metropolitan and the merger of Tower with Metropolitan
are expected to occur in the second quarter of 1999. The Operating Partnership
expects to fund this obligation through cash flow provided by operating
activities and additional borrowings.
LIQUIDITY REQUIREMENTS
The Operating Partnership has approximately $347 million of secured
debt expiring in 1999, consisting primarily of two components. The first
component is the $115 million LaSalle Note III maturing in July 1999, which is
secured by the Greenway Plaza office complex. The Operating Partnership has
signed a loan application commitment with a group of lenders that provides for
the refinancing of Greenway Plaza pursuant to a $280 million, 10-year loan with
a fixed interest rate of 7.53%. Based on these terms, the refinancing would
permit the Operating Partnership to repay the existing debt and result in
additional loan proceeds of approximately $165 million. The Operating
Partnership currently intends to use the net proceeds to settle the Forward
Share Purchase Agreement with UBS. The second component is the $184 million
Merrill Lynch Note maturing in September 1999, which is secured by the Houston
Center mixed-use Property complex and the Four Seasons Hotel - Houston. The
Operating Partnership is currently in negotiations with lenders to refinance
the Merrill Lynch Note pursuant to a loan of $200 million to $240 million,
which will result in net proceeds to the Operating Partnership, after repayment
of the Merrill
27
<PAGE> 28
Lynch Note, of between $15 and $55 million. Closing of this loan is expected to
occur in approximately 90 days. In addition, the Metropolitan Life Notes III
and IV, in the aggregate principal amount of approximately $47 million, mature
in December 1999. The Operating Partnership intends to refinance these Notes
prior to maturity but does not currently expect to obtain additional loan
proceeds in connection with the refinancing.
The Operating Partnership expects to meet its other 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, regular debt service requirements (including debt service relating to
additional and replacement debt), 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 that 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, as described above, additional debt
financing. The Operating Partnership also anticipates that it will fund any
investments during 1999 primarily with 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 March 31, 1999, 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 issuances of Operating Partnership units or the Company's
common and/or preferred shares to existing holders or in exchange for
contributions of investment properties.
28
<PAGE> 29
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt
financing arrangements are shown below (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST RATE BALANCE
MAXIMUM AT MARCH 31, EXPIRATION OUTSTANDING AT
DESCRIPTION BORROWINGS 1999 DATE MARCH 31, 1999
- --------------------------------------- ------------ ------------- -------------- --------------
<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 11,692 8.88 September 2001 11,692
Metropolitan Life Note II 44,183 6.93 December 2002 44,183
Metropolitan Life Note III 40,000 7.74 December 1999 40,000
Metropolitan Life Note IV 6,681 7.11 December 1999 6,681
Northwestern Life Note 26,000 7.65 January 2003 26,000
Nomura Funding VI Note 8,567 10.07 July 2020(3) 8,567
Rigney Promissory Note 747 8.50 June 2012 747
------------ ----------- --------------
Subtotal/Weighted Average $ 601,370 7.75% $ 601,370
------------ ----------- --------------
SECURED CAPPED VARIABLE RATE DEBT(4):
LaSalle Note III $ 115,000 7.07% July 1999 $ 115,000
------------ ----------- --------------
SECURED VARIABLE RATE DEBT(4):
BankBoston Note $ 320,000 8.19% October 2001 $ 320,000
Merrill Lynch Note 184,299 6.94 September 1999 184,299
Chase Manhattan Note 97,123 6.69 September 2001 97,123
------------ ----------- --------------
Subtotal/Weighted Average $ 601,422 7.56% $ 601,422
------------ ----------- --------------
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:
Credit Facility(6) $ 660,000 6.31% June 2000 $ 634,480
------------ ----------- --------------
TOTAL/WEIGHTED AVERAGE $ 2,377,792 7.21% $ 2,352,272
============ =========== ==============
</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 in an amount sufficient 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) For the method of calculation of the interest rate for the Operating
Partnership's variable rate debt (other than the Credit Facility), see
Note 7 of Item 1. Financial Statements.
(5) The notes were issued in an offering registered with the SEC.
(6) The Credit Facility is unsecured with an interest rate of the Eurodollar
rate plus 137 basis points. In connection with the refinancing of a
BankBoston term note, the Operating Partnership used $90 million of the
net proceeds of the refinancing to purchase a 12% participation interest
from BankBoston in the $750 million Credit Facility. As a result, the
Operating Partnership's borrowing capacity under the Credit Facility is
currently limited to $660 million. 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,
limitations on additional investments and the incurrence of additional
liens, restrictions on real estate development activity and a minimum net
worth requirement.
29
<PAGE> 30
The combined aggregate principal amounts, either at maturity or in the
form of scheduled principal installments due pursuant to borrowings under the
Credit Facility and other indebtedness of the Operating Partnership, are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C>
1999 ........................................................ $346,928
2000 ........................................................ 635,839
2001 ........................................................ 429,181
2002 ........................................................ 215,655
2003 ........................................................ 72,201
Thereafter .................................................. 652,468
------------
$ 2,352,272
============
</TABLE>
The Operating Partnership's policy with regard to the incurrence and
maintenance of debt is based on a review and analysis of investment
opportunities for which capital is required and the cost of debt in relation to
such investment opportunities, the type of debt available (secured or
unsecured), the effect of additional debt on existing coverage ratios and the
maturity of the proposed debt in relation to maturities of existing debt.
The Operating Partnership's debt service coverage ratio for both the
three months ended March 31, 1999 and the three months ended March 31, 1998 was
approximately 3.2. Debt service coverage for a 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 Operating Partnership's debt arrangements and calculated as described
above is 1.5. In addition, the Operating Partnership's Credit Facility requires
a debt service coverage ratio (which is calculated in a different manner) of
2.5. Under the calculation required by the Credit Facility, the Operating
Partnership's debt service coverage ratio is 3.5.
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 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. NAREIT
developed FFO 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 and its
operating partnership. 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 cash distributions paid to shareholders
and unitholders for the three months ended March 31, 1999 and 1998 were $75.7
and $49.7 million, respectively. An increase in FFO does not necessarily result
in an increase in aggregate distributions because the Company's Board of Trust
Managers is not required to increase distributions on a quarterly basis unless
necessary in order to enable the Company to maintain REIT status. However, the
Company must distribute 95% of its REIT taxable income (as defined in the
Code). Therefore, 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 Company and 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 REITs (other than the Company) or
other partnerships because these REITs or partnerships may not apply the
definition of FFO in the same manner as the Operating Partnership.
30
<PAGE> 31
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Income before minority interest ....................... $ 39,660 $ 47,154
Adjustments:
Depreciation and amortization of real estate
assets ......................................... 32,877 26,051
Settlement of merger dispute ...................... 15,000 --
Adjustment for investments in real estate
mortgages and equity of unconsolidated
companies ...................................... 9,000 12,314
Minority interest in joint ventures ............... (245) (400)
Preferred unit dividends .......................... (3,375) (1,575)
------------ ------------
Funds from operations ................................. $ 92,917 $ 83,544
============ ============
Investment Segments:
Office and Retail Segment ......................... $ 89,107 $ 74,046
Hospitality Segment ............................... 15,198 12,625
Behavioral Healthcare Segment ..................... 13,823 13,823
Refrigerated Storage Segment ...................... 8,280 5,962
Residential Development Segment ................... 13,300 9,554
Corporate general & administrative ................ (4,114) (3,147)
Interest expense .................................. (42,481) (34,283)
Preferred unit dividends .......................... (3,375) (1,575)
Other(1) .......................................... 3,179 6,539
------------ ------------
Funds from operations ................................. $ 92,917 $ 83,544
============ ============
</TABLE>
- --------------------------
(1) Includes interest and other income less depreciation and amortization of
non-real assets and amortization of deferred financing costs.
31
<PAGE> 32
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Funds from operations ........................................... $ 92,917 $ 83,544
Adjustments:
Depreciation and amortization of non-real estate assets ... 556 345
Settlement of merger dispute .............................. (15,000) --
Amortization of deferred financing costs .................. 3,069 1,140
Minority interest in joint ventures profit and depreciation
and amortization ...................................... 459 586
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies ................ (9,000) (12,314)
Change in deferred rent receivable ........................ (7,529) (8,809)
Change in current assets and liabilities .................. (19,739) (49,390)
Equity in earnings in excess of distributions received from
unconsolidated companies .............................. (9,019) --
Distributions received in excess of equity in earnings from
unconsolidated companies .............................. -- 6,905
Preferred unit dividends .................................. 3,375 1,575
Non-cash compensation ..................................... 20 24
---------- ----------
Net cash provided by operating activities ....................... $ 40,109 $ 23,606
========== ==========
</TABLE>
OFFICE AND RETAIL PROPERTIES
The Operating Partnership's Office Properties are located primarily in
Dallas/Fort Worth and Houston, Texas. As of March 31, 1999, the Operating
Partnership's Office Properties in Dallas/Fort Worth and Houston represent an
aggregate of approximately 72% of its office portfolio based on total net
rentable square feet (39% for Dallas/Fort Worth and 33% for Houston).
OFFICE PROPERTIES TABLES
The following table sets forth, as of March 31, 1999, certain
information about the Operating Partnership's Office Properties.
32
<PAGE> 33
<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)
------------------------------ ---------- --------------- ---------- --------- ------- -------------
TEXAS
DALLAS
<S> <C> <C> <C> <C> <C> <C>
Bank One Center(2)............ 1 CBD 1987 1,530,957 78% $22.33
The Crescent Office Towers.... 1 Uptown/Turtle 1985 1,204,720 99 30.13
Creek
Fountain Place................ 1 CBD 1986 1,200,266 89(5) 19.51
Trammell Crow Center(3)....... 1 CBD 1984 1,128,331 94(5) 26.22
Stemmons Place................ 1 Stemmons Freeway 1983 634,381 90 15.12
Spectrum Center(4)............ 1 Far North Dallas 1983 598,250 83(5) 23.19
Waterside Commons............. 1 Las Colinas 1986 458,739 100 18.78
Caltex House.................. 1 Las Colinas 1982 445,993 97 29.13
Reverchon Plaza............... 1 Uptown/Turtle 1985 374,165 93 18.77
Creek
The Aberdeen.................. 1 Far North Dallas 1986 320,629 100 19.27
MacArthur Center I & II....... 1 Las Colinas 1982/1986 294,069 98 20.39
Stanford Corporate Centre..... 1 Far North Dallas 1985 265,507 97 19.21
The Amberton.................. 1 Central Expressway 1982 255,052 86 13.13
Concourse Office Park......... 1 LBJ Freeway 1972-1986 244,879 90(5) 14.75
12404 Park Central............ 1 LBJ Freeway 1987 239,103 100 21.67
Palisades Central II.......... 1 Richardson/Plano 1985 237,731 64 17.13
3333 Lee Parkway.............. 1 Uptown/Turtle 1983 233,769 85(5) 20.85
Creek
Liberty Plaza I & II.......... 1 Far North Dallas 1981/1986 218,813 98 15.62
The Addison................... 1 Far North Dallas 1981 215,016 100 18.41
The Meridian.................. 1 LBJ Freeway 1984 213,915 91 16.54
Palisades Central I........... 1 Richardson/Plano 1980 180,503 83 16.21
Walnut Green.................. 1 Central Expressway 1986 158,669 66(5) 16.00
Greenway II................... 1 Richardson/Plano 1985 154,329 100 20.39
Addison Tower................. 1 Far North Dallas 1987 145,886 84(5) 14.89
Greenway I & IA............... 2 Richardson/Plano 1983 146,704 100 23.41
5050 Quorum................... 1 Far North Dallas 1981 133,594 88 16.86
Cedar Springs Plaza........... 1 Uptown/Turtle 1982 110,923 90(5) 17.98
Creek
Valley Centre................. 1 Las Colinas 1985 74,861 92 16.96
One Preston Park.............. 1 Far North Dallas 1980 40,525 85(5) 16.68
---- ---------- --- -------
Subtotal/Weighted Average... 30 11,460,279 90% $21.55
---- ---------- --- ------
FORT WORTH
UPR Plaza..................... 1 CBD 1982 954,895 98% $16.67
---- ---------- --- ------
HOUSTON
Greenway Plaza Office
Portfolio................... 10 Richmond-Buffalo 1969-1982 4,286,277 91% $16.77
Speedway
Houston Center................. 3 CBD 1974-1983 2,764,418 96 15.99
Post Oak Central............... 3 West Loop/Galleria 1974-1981 1,277,516 93 16.89
The Woodlands Office
Properties(6)............... 12 The Woodlands 1980-1996 810,630 93 15.94
BP Plaza....................... 1 Katy Freeway 1992 561,065 100 18.26
Three Westlake Park(7)......... 1 Katy Freeway 1983 414,251 99 14.05
1800 West Loop South........... 1 West Loop/Galleria 1982 399,777 68 16.98
---- ---------- --- -------
Subtotal/Weighted Average... 31 10,513,934 93% $16.48
---- ---------- --- ------
AUSTIN
Frost Bank Plaza.............. 1 CBD 1984 433,024 86%(5) $20.10
301 Congress Avenue(8)........ 1 CBD 1986 418,338 91 22.25
Bank One Tower................ 1 CBD 1974 389,503 94 17.98
Austin Centre................. 1 CBD 1986 343,665 97 21.27
The Avallon................... 1 Northwest 1993/1997 232,301 93(5) 21.04
Barton Oaks Plaza One......... 1 Southwest 1986 99,895 98 21.28
---- ---------- --- -------
Subtotal/Weighted Average... 6 1,916,726 92% $20.51
---- ---------- --- ------
</TABLE>
33
<PAGE> 34
<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)
---------------------- ---------- ------------- ---------- ---------- ------- -------------
COLORADO
DENVER
<S> <C> <C> <C> <C> <C> <C>
MCI Tower....................... 1 CBD 1982 550,807 99% $18.21
Ptarmigan Place................. 1 Cherry Creek 1984 418,630 97 17.69
Regency Plaza One............... 1 DTC 1985 309,862 98 22.82
AT&T Building................... 1 CBD 1982 184,581 82 15.05
The Citadel..................... 1 Cherry Creek 1987 130,652 96 21.30
55 Madison...................... 1 Cherry Creek 1982 137,176 81 17.89
44 Cook......................... 1 Cherry Creek 1984 124,174 57(5) 18.19
--- ---------- --- -------
Subtotal/Weighted Average... 7 1,855,882 92% $18.84
--- ---------- --- ------
COLORADO SPRINGS
Briargate Office and Research
Center........................ 1 Colorado Springs 1988 252,857 89%(5) $16.55
--- ---------- --- ------
LOUISIANA
NEW ORLEANS
Energy Centre................... 1 CBD 1984 761,500 79% $15.36
1615 Poydras.................... 1 CBD 1984 508,741 79 15.75
--- ---------- --- -------
Subtotal/Weighted Average... 2 1,270,241 79% $15.52
--- ---------- --- ------
FLORIDA
MIAMI
Miami Center.................... 1 CBD 1983 782,686 82% $24.39
Datran Center................... 2 South Dade/Kendall 1986/1988 472,236 96 23.48
--- ----------- --- ------
Subtotal/Weighted Average... 3 1,254,922 87% $24.01
--- ---------- --- ------
ARIZONA
PHOENIX
Two Renaissance Square.......... 1 Downtown/CBD 1990 476,373 92%(5) $23.84
6225 North 24th Street.......... 1 Camelback Corridor 1981 86,451 83 21.77
--- ---------- --- -------
Subtotal/Weighted Average... 2 562,824 91% $23.55
--- ---------- --- ------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour............ 2 Georgetown 1986 536,206 91%(5) $35.62
--- ---------- --- ------
NEBRASKA
OMAHA
Central Park Plaza.............. 1 CBD 1982 409,850 92% $15.53
--- ---------- --- ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza............... 1 CBD 1990 366,236 95% $18.88
--- ---------- --- ------
CALIFORNIA
SAN FRANCISCO
160 Spear Street................. 1 South of Market/CBD 1984 276,420 100% $25.71
--- ---------- --- ------
SAN DIEGO
Chancellor Park (9)............. 1 UTC 1988 195,733 81% $21.09
--- ---------- --- ------
TOTAL/WEIGHTED AVERAGE............. 89 31,827,005 91%(5) $19.51(10)
=== ========== ==== =====
</TABLE>
- -------------------------------------------
(1) Calculated based on base rent payable as of March 31, 1999, without
giving effect to free rent or scheduled rent increases that would be
taken into account under GAAP and including adjustments for expenses
payable by or reimbursable from tenants.
(2) The Operating Partnership has a 49.5% limited partner interest and a
.5% general partner interest in the partnership that owns Bank One
Center.
34
<PAGE> 35
(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 March 31, 1999. If such leases had commenced as of
March 31, 1999, the percent leased for Office Properties would have
been 93%. The total percent leased for such Properties would have been
as follows: Fountain Place - 92%; Trammell Crow - 97%; Spectrum Center
- 86%; Concourse Office Park - 93%; 3333 Lee Parkway - 91%; Walnut
Green - 80%; Addison Tower - 98%; Cedar Springs Plaza - 96%; One
Preston Park - 88%; Frost Bank Plaza - 96%; The Avallon - 100%; 44
Cook - 67%; Briargate Office and Research Center - 100%; Two
Renaissance Square - 96%; and Washington Harbour - 94%.
(6) The Operating Partnership has a 75% limited partner interest and an
approximate 10% indirect 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) 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.
(10) The weighted average full-service rental rate per square foot
calculated based on base rent payable for Operating Partnership Office
Properties as of March 31, 1999, giving effect to free rent and
scheduled rent increases that would be taken into consideration under
GAAP and including adjustments for expenses payable by or reimbursed
from tenants is $20.05.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following tables set forth schedules of lease expirations for
leases in place as of March 31, 1999 at the Operating Partnership's total
Office Properties and for Dallas and Houston, Texas individually, for each of
the ten years beginning with the remainder of 1999, assuming that none of the
tenants exercise or have exercised renewal options and excluding an aggregate
2,692,898 square feet of unleased space and 449,868 square feet of leased space
for which the leases have not yet commenced.
TOTAL OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE ANNUAL
PERCENTAGE OF TOTAL FULL-SERVICE
NET RENTABLE OF LEASED NET ANNUAL RENT PER
AREA RENTABLE ANNUAL FULL-SERVICE SQUARE
NUMBER OF REPRESENTED AREA FULL-SERVICE RENT FOOT OF NET
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ------------------- ------------- ------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1999.............. 505 2,856,532(2) 10.0% $52,883,375 8.8% $18.51
2000.............. 407 3,350,233 11.7 66,558,675 11.1 19.87
2001 ............. 408 3,928,862 13.7 73,588,293 12.3 18.73
2002.............. 331 3,632,218 12.7 76,094,827 12.7 20.95
2003.............. 289 2,775,751 9.7 54,309,794 9.1 19.57
2004.............. 151 3,255,566 11.3 67,996,807 11.4 20.89
2005.............. 80 2,306,574 8.0 50,762,020 8.5 22.01
2006.............. 31 730,521 2.5 15,750,386 2.6 21.56
2007.............. 32 1,280,927 4.5 29,395,884 4.9 22.95
2008.............. 30 1,077,330 3.8 26,922,437 4.5 24.99
2009 and
thereafter........ 35 3,489,725 12.1 84,636,598 14.1 24.25
</TABLE>
- ---------------------
(1) Calculated based on base rent payable under 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 GAAP and
including adjustments for expenses payable by or reimbursable from
tenants based on current levels.
(2) As of March 31, 1999, leases have been signed for approximately
1,463,000 net rentable square feet (including renewed leases and
leases of previously unleased space) commencing after March 31, 1999.
35
<PAGE> 36
DALLAS OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL ANNUAL
NET RENTABLE ANNUAL FULL-SERVICE
AREA PERCENTAGE OF ANNUAL FULL-SERVICE RENT PER
NUMBER OF REPRESENTED LEASED NET FULL-SERVICE RENT SQUARE
TENANTS WITH BY EXPIRING RENTABLE AREA RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES REPRESENTED BY EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) EXPIRING LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------- ------------- ---------------- ---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1999.............. 173 967,690(2) 9.4% $21,361,573 9.2% $22.07
2000.............. 155 1,775,413 17.3 37,977,321 16.4 21.39
2001 ............. 141 1,170,748 11.4 25,043,404 10.8 21.39
2002.............. 93 965,870 9.4 23,668,889 10.2 24.51
2003.............. 91 1,187,946 11.6 23,544,230 10.2 19.82
2004.............. 42 594,216 5.8 15,165,194 6.5 25.52
2005.............. 18 1,140,886 11.1 24,299,233 10.5 21.30
2006.............. 11 211,122 2.1 5,318,970 2.3 25.19
2007.............. 12 535,353 5.2 13,157,913 5.7 24.58
2008.............. 10 555,065 5.4 13,945,404 6.0 25.12
2009 and
thereafter....... 10 1,158,756 11.3 28,477,615 12.2 24.58
</TABLE>
- -----------------------
(1) Calculated based on base rent payable under 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 GAAP and including
adjustments for expenses payable by or reimbursable from tenants based on
current levels.
(2) As of March 31, 1999, leases have been signed for approximately 482,000 net
rentable square feet (including renewed leases and lease of previously
unleased space) commencing after March 31, 1999.
HOUSTON OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL ANNUAL
NET RENTABLE ANNUAL FULL-SERVICE
AREA PERCENTAGE OF ANNUAL FULL-SERVICE RENT PER
NUMBER OF REPRESENTED LEASED NET FULL-SERVICE RENT SQUARE
TENANTS WITH BY EXPIRING RENTABLE AREA RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES REPRESENTED BY EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) EXPIRING LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------- ------------- ---------------- ---------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1999.............. 165 1,186,797(2) 12.2% $17,941,438 10.1% $15.12
2000.............. 130 769,349 7.9 12,029,954 6.8 15.64
2001 ............. 130 1,852,755 19.1 30,223,852 17.0 16.31
2002.............. 132 1,066,222 11.0 19,108,982 10.7 17.92
2003.............. 95 811,119 8.3 14,579,420 8.2 17.97
2004.............. 53 1,474,034 15.2 26,884,496 15.1 18.24
2005.............. 16 190,368 2.0 3,638,975 2.0 19.12
2006.............. 9 270,067 2.8 4,849,270 2.7 17.96
2007.............. 5 474,024 4.9 9,329,736 5.2 19.68
2008.............. 7 183,719 1.9 3,223,821 1.8 17.55
2009 and thereafter 10 1,437,952 14.7 36,132,887 20.4 25.13
</TABLE>
- ---------------------
(1) Calculated based on base rent payable under 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 GAAP and including
adjustments for expenses payable by or reimbursable from tenants based on
current levels.
(2) As of March 31, 1999, leases have been signed for approximately 627,000 net
rentable square feet (including renewed leases and lease of previously
unleased space) commencing after March 31, 1999.
36
<PAGE> 37
RETAIL PROPERTIES
The Operating Partnership owns seven Retail Properties, which in the
aggregate contain approximately 777,000 net rentable square feet. Four of the
Retail Properties, The Woodlands Retail Properties, with an aggregate of
approximately 356,000 net rentable square feet, are located in The Woodlands, a
master-planned development located 27 miles north of downtown Houston, Texas.
The Operating Partnership has a 75% limited partner interest and an
approximately 10% indirect general partner interest in the partnership that
owns The Woodlands Retail Properties. Two of the Retail Properties, Las Colinas
Plaza, with approximately 135,000 net rentable square feet, and The Crescent
Atrium with approximately 95,000 net rentable square feet, are located in
submarkets of Dallas, Texas. The remaining Retail Property, The Park Shops at
Houston Center, with an aggregate of approximately 191,000 net rentable square
feet, is located in the CBD submarket of Houston, Texas. As of March 31, 1999,
the Retail Properties were 93% leased.
HOTEL PROPERTIES
HOTEL PROPERTIES TABLES
The following table sets forth certain information for the three
months ended March 31, 1999 and 1998, about the Operating Partnership's Hotel
Properties. 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 their performance based on
available guest nights.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
AVERAGE AVERAGE REVENUE PER
YEAR OCCUPANCY DAILY AVAILABLE
COMPLETED/ RATE RATE ROOM
------------ ------------- -------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1999 1998 1999 1998 1999 1998
- -------------- -------- --------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY
HOTELS:
Denver Marriott City
Center Denver, CO 1982/1994 613 79% 81% $121 $114 $ 96 $ 92
Four Seasons
Hotel-Houston Houston, TX 1982 399 68 69 193 179 131 123
Hyatt Regency
Albuquerque Albuquerque, NM 1990 395 68 64 107 102 73 65
Omni Austin Hotel Austin, TX 1986 324(2) 85 79 130 119 111 94
Hyatt Regency Beaver
Creek Avon, CO 1989 276 82 78 399 377 327 296
Sonoma Mission Inn &
Spa Sonoma, CA 1927/1987/1997 178(3) 75 72 174 190 131 137
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 81 28(4) 297 270 242 77(4)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 2,247 76% 73% $179 $169 $136 $124
----- -- -- ---- ---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
DESTINATION HEALTH & GUEST NIGHTS
FITNESS RESORTS: ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Canyon Ranch-Tucson Tucson, AZ 1980 250(5)
Canyon Ranch-Lenox Lenox, MA 1989 212(5)
---
TOTAL/WEIGHTED AVERAGE 462 92%(6) 90%(6) $543(7) $518(7) $483(8) $455(8)
--- ------ ------ ------- ------- ------- -------
</TABLE>
- -----------------------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased all of the Hotel
Properties, except the Omni Austin Hotel, to COI pursuant to long term
leases. As of January 1, 1999, the Omni Austin Hotel is leased pursuant to
a separate long term lease to HCD Austin Corporation, an unrelated third
party.
(2) As of March 31, 1999, 20 condominiums have been converted to hotel suites
and 10 of the parlor rooms have been taken out of commission to be
renovated.
(3) In February 1999, 20 rooms were taken out of commission during construction
of the spa.
(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.
37
<PAGE> 38
REFRIGERATED STORAGE PROPERTIES
REFRIGERATED STORAGE PROPERTIES TABLE
The following table shows the number and aggregate size of
Refrigerated Storage Properties by state as of March 31, 1999:
<TABLE>
<CAPTION>
TOTAL CUBIC TOTAL TOTAL CUBIC TOTAL
NUMBER OF FOOTAGE SQUARE FEET NUMBER OF FOOTAGE SQUARE FEET
STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS) STATE PROPERTIES(1) (IN MILLIONS) (IN MILLION)
----- ------------- ------------- ------------- ----- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama 5 9.5 0.4 Mississippi 1 4.7 0.2
Arizona 1 2.9 0.1 Missouri(2) 2 37.9 2.2
Arkansas 6 33.1 1.0 Nebraska 2 4.4 0.2
California 11 32.7 1.2 New York 1 11.8 0.4
Colorado 2 3.4 0.1 North Carolina 3 8.5 0.3
Florida 5 7.5 0.3 Oklahoma 2 2.1 0.1
Georgia 7 44.5 1.6 Oregon 6 40.4 1.7
Idaho 2 18.7 0.8 Pennsylvania 2 27.4 0.9
Illinois 2 11.6 0.4 South Carolina 1 1.6 0.1
Indiana 1 9.1 0.3 South Dakota 1 2.9 0.1
Iowa 2 12.5 0.5 Tennessee 3 10.6 0.4
Kansas(2) 3 40.2 2.4 Texas 2 6.6 0.2
Kentucky 1 2.7 0.1 Utah 1 8.6 0.4
Maine 1 1.8 0.2 Virginia 1 1.9 0.1
Massachusetts 6 15.2 0.7 Washington 6 28.7 1.1
Minnesota 1 5.9 0.2 Wisconsin 2 14.0 0.5
----- ----- ----
TOTAL 92 463.4 19.2
===== ===== ====
</TABLE>
- -----------------------------
(1) The Operating Partnership has an indirect 39.6% interest in the
Refrigerated Storage Partnerships, each of which owns one or more of the
Refrigerated Storage Corporations which, as of March 31, 1999, directly or
indirectly owned 92 Refrigerated Storage Properties with an aggregate of
approximately 463.4 million cubic feet (19.2 million square feet). The
remaining interest in the Refrigerated Storage Partnerships is owned by
Vornado (60% of each Refrigerated Storage Partnership) and COI (.4%
indirect interest of each Refrigerated Storage Partnership). As a result
of the Restructuring, effective March 12, 1999, the Refrigerated Storage
Corporations own, but no longer operate, the Refrigerated Storage
Properties.
(2) Both Kansas and Missouri have one underground storage facility. These
underground facilities in Kansas and Missouri approximate 35.2 million and
33.1 million cubic feet (2.2 million and 2.1 million square feet),
respectively. It is anticipated that the underground facility in Kansas
will be closed in 1999.
38
<PAGE> 39
RESIDENTIAL DEVELOPMENT PROPERTIES
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table sets forth certain information as of March 31,
1999, 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>
Desert Mountain Desert
Development Mountain SF Scottsdale, AZ 93.0% 2,486 2,163 1,813
Corp. ------ ------ ------
The Woodlands The Woodlands SF The Woodlands, 42.5% 37,000 20,428 19,241
Land Company TX ------ ------ ------
Inc.
Crescent The Reserve
Development at Frisco SF Frisco, CO 60.0% 134 134 134
Management Villa Montane
Corp. Townhomes TH Avon, CO 30.0% 27 27 21
Villa Montane
Club TS Avon, CO 30.0% 38(5) 38 36
Villas at
Beaver Creek TH Avon, CO 30.0% 10 10 9
Deer Trail SFH Avon, CO 60.0% 16(5) 2 2
Buckhorn
Townhomes TH Avon, CO 60.0% 24(5) 8 8
Bear Paw
Lodge CO Avon, CO 60.0% 53(5) - -
------ ------ ------
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORP. 302 219 210
------ ------ ------
Mira Vista Mira Vista SF Fort Worth, TX 100.00% 710 677 567
Development The Highlands SF Breckenridge, CO 12.25% 750 292 256
Corp. ------- ------ ------
TOTAL MIRA VISTA DEVELOPMENT CORP. 1,460 969 823
------ ------ ------
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 556 408
Development Spring Lakes SF Houston, TX 100.0% 536 93 48
Corp. ------ ------ ------
TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,741 649 456
------- ------ ------
TOTAL 42,989 24,428 22,543
====== ====== ======
<CAPTION>
AVERAGE
CLOSED
RESIDENTIAL SALE RANGE OF
RESIDENTIAL DEVELOPMENT PRICE PROPOSED
DEVELOPMENT PROPERTIES TYPE OF PER LOT/ SALE PRICES
CORPORATION(1) (RDP) RDP(2) LOCATION UNIT ($)(3) PER LOT/UNIT ($)(4)
- -------------- ----------- ------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
Desert Mountain Desert
Development Mountain SF Scottsdale, AZ 431,000 275,000 - 2,775,000
Corp.
The Woodlands The Woodlands SF The Woodlands, 50,000 14,700 - 500,000
Land Company TX
Inc.
Crescent The Reserve
Development at Frisco SF Frisco, CO 95,000 -
Management Villa Montane
Corp. Townhomes TH Avon, CO 905,000 515,000 - 1,700,000
Villa Montane
Club TS Avon, CO 60,000 18,000 - 150,000
Villas at
Beaver Creek TH Avon, CO 2,070,000 2,995,000
Deer Trail SFH Avon, CO 2,845,000 2,560,000 - 3,325,000
Buckhorn
Townhomes TH Avon, CO 1,088,000 945,000 - 1,850,000
Bear Paw
Lodge CO Avon, CO N/A 1,495,000 - 1,895,000
Mira Vista Mira Vista SF Fort Worth, TX 97,000 50,000 - 265,000
Development The Highlands SF Breckenridge, CO 138,000 55,000 - 250,000
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.
</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 Corporation,
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 Lots/Units closed during the
Operating Partnership's ownership period.
(4) Based on existing inventory of developed lots and lots to be developed.
(5) As of March 31, 1999, 1 unit was under contract at Villa Montane Club
representing $0.7 million in sales, 9 units were under contract at Deer
Trail representing $26.9 million in sales, 13 units were under contract at
Buckhorn Townhomes representing $20.7 million in sales, and 25 units were
under contract at Bear Paw Lodge representing $34.7 million in sales.
39
<PAGE> 40
BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE PROPERTIES TABLE
The following table shows the number of properties and beds by state
of the 88 Behavioral Healthcare Properties as of March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
STATE PROPERTIES(1) BEDS STATE PROPERTIES(1) 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 Pennsylvania 1 169
Georgia 15 986 South Carolina 3 248
Indiana 7 517 Tennessee 1 204
Kansas 2 160 Texas 9 816
Kentucky 3 251 Utah 2 196
Louisiana 1 0 Virginia 3 285
Maryland 1 0 Wisconsin 2 160
-- -----
Minnesota 1 40
Missouri 1 96 TOTAL 88 6,807
== =====
</TABLE>
-------------------
(1) The Behavioral Healthcare Properties include 88 properties in 26 states
that are leased to CBHS. One property was sold in January 1999. CBHS was
formed to operate the Behavioral Healthcare Properties and is owned 50%
by a subsidiary of Magellan and 50% by COI.
YEAR 2000 COMPLIANCE
OVERVIEW
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.
YEAR 2000 READINESS DISCLOSURE
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 75% 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,
the Operating Partnership has not identified any significant problem areas and
it believes that the mission-critical systems, AS/400 and accounting system,
local network servers, WAN equipment and the majority of desktop PC's are
compliant, or can be made compliant with minor software upgrades.
40
<PAGE> 41
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 has identified
substantially all of the non-IT systems and has retained an outside specialist
company to assist in identifying any year 2000 exposure relating to these
systems. As of May 10, 1999, approximately 60% of the systems for which
manufacturer's statements are available are deemed compliant. The balance of
the systems are being reviewed to determine whether, and to what extent,
upgrades or remediation are required. This process is currently on going,
therefore, these estimates will change as more information is received. It is
expected that the assessment and remediation plan should 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.
The Operating Partnership believes that the greatest exposure lies
with third parties, such as its tenants, vendors, financial institutions and
the Operating Partnership's 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 full extent of any year 2000 exposure
has not been finalized and the total cost to specifically remediate IT and
non-IT systems 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 given current vendor estimates for
complete remediation for non-IT systems.
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 on or before October 31, 1999. Based on the
progress the Operating Partnership has made in addressing the Operating
Partnership's year 2000 issues and its plan and timeline to complete its
compliance program, at this time, the Operating Partnership does not foresee
significant risks associated with the Operating Partnership's year 2000
compliance. 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, a year 2000 problem that is experienced at one Property
generally should have no effect on the other Operating Partnership Properties.
In addition, management believes that the Operating Partnership has sufficient
time to correct those system problems within its control before the year 2000.
Because the Operating Partnership's major source of income is rental payments
under long-term leases, a failure of the Company'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.
41
<PAGE> 42
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 DISCLOSURES ABOUT MARKET RISK
Since December 31, 1998, there have been no material changes in the
information regarding market risk that was provided in the Operating
Partnership's Form 10-K for the year ended December 31, 1998.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of April 14, 1999, the Company and Station Casinos, Inc.
("Station") entered into an agreement (the "Settlement Agreement") relating to
certain litigation arising out of a merger agreement entered into between the
Company and Station in January 1998.
As discussed in the Registrant's Form 10-K for the year ended December
31, 1998, Station had filed and subsequently amended a complaint in Clark
County District Court, State of Nevada seeking, primarily, declaratory relief
against, and damages from, the Company, and the Company had filed a complaint
in the United States District Court, Northern District of Texas, seeking
damages from, and declaratory relief against, Station. In addition, the Company
had sought to have the dispute tried in federal court either in Texas or
Nevada, while Station had sought to maintain the action in state court in
Nevada. Although the Nevada federal district court had remanded the case to
Nevada state court and the Texas federal court had followed suit, the Company
had filed an appeal in the Fifth Circuit Court of Appeals.
The Settlement Agreement provides for the mutual settlement and
release of all claims between the Company and Station arising out of the merger
agreement and the dismissal with prejudice of the litigation described above as
to all claims and counterclaims in connection therewith. The Settlement
Agreement also provides that each party will be responsible for the payment of
its own attorney's fees and costs of litigation, including attorney's fees and
costs associated with the dismissal. As part of the Settlement Agreement, the
Company paid $15 million to Station on April 22, 1999.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Description
3.01 Second Amended and Restated Agreement of Limited
Partnership of the Registrant, dated as of November
1, 1997, as amended (filed as Exhibit 10.01 to the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 of Crescent Real Estate Equities
Company (the "Company") and incorporated herein by
reference)
42
<PAGE> 43
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 "Form S-4") and
incorporated herein by reference)
4.02 Restated Declaration of Trust of the Company (filed
as Exhibit 4.01 to the Registration Statement on Form
S-3 (File No. 333-21905) of the Company and
incorporated herein by reference)
4.03 Amended and Restated Bylaws of the Company, as
amended (filed as Exhibit 3.02 to the Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1998 (the "Company 3Q 10-Q") of the
Company and incorporated herein by reference)
4.04 6-5/8% Note due 2002 of the Registrant (filed as
Exhibit No. 4.07 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1998 (the
"Company 2Q 10-Q") of the Company and incorporated
herein by reference)
4.08 7-1/8% Note due 2007 of the Registrant (filed as
Exhibit No. 4.08 to the Company 2Q 10-Q and
incorporated herein by reference)
10.01 Noncompetition Agreement of Richard E. Rainwater, as
assigned to the Registrant on May 5, 1994 (filed as
Exhibit 10.02 to the Annual Report on Form 10-K for
the Fiscal year ended December 31, 1997 (the "Company
1997 10-K") of the Company and incorporated herein by
reference)
10.02 Noncompetition Agreement of John C. Goff, as assigned
to the Registrant on May 5, 1994 (filed as Exhibit
10.03 to the Company 1997 10-K and incorporated
herein by reference)
10.03 Noncompetition Agreement of Gerald W. Haddock, as
assigned to the Registrant on May 5, 1994 (filed as
Exhibit 10.04 to the Company 1997 10-K and
incorporated herein by reference)
10.04 Employment Agreement of John C. Goff, as assigned to
the Registrant on May 5, 1997, and as further amended
(the "Goff Employment Agreement") (filed as Exhibit
10.05 to the Company 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
Form S-4 and incorporated herein by reference)
10.06 Employment Agreement of Gerald W. Haddock, as
assigned to the Registrant on May 5, 1994, and as
further amended (the "Haddock Employment Agreement")
(filed as Exhibit 10.06 to the Company 1997 10-K and
incorporated herein by reference)
10.07 Amendment No. 5 to the Haddock Employment Agreement,
dated March 1, 1999 (filed as Exhibit 10.09 to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 of the Company (the "Company 1998
10-K") and incorporated herein by reference)
10.08 Form of Officer's 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 Form 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
Registration Statement on Form S-11 (File No.
33-75188) of the Company and incorporated by
reference)
10.10 Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan, as amended (filed as Exhibit
10.12 to the Company 1998 10-K and incorporated
herein by reference)
43
<PAGE> 44
10.11 Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan (filed as
Exhibit 10.13 to the Form S-4 and incorporated herein
by reference)
10.12 Amended and Restated 1995 Crescent Real Estate
Equities Limited Partnership Unit Incentive Plan
(filed as Exhibit 99.01 to the Registration Statement
on Form S-8 (File No. 333-3452) of the Company and
incorporated herein by reference)
10.13 1996 Crescent Real Estate Equities Limited
Partnership Unit Incentive Plan (filed as Exhibit
10.01 to the Current Report on Form 8-K dated and
filed September 27, 1996 of the Company 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 Behavioral
Healthcare Properties (filed as Exhibit 10.27 to the
Company 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 10.17 to the Company 2Q 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)
(b) Reports on Form 8-K.
None
44
<PAGE> 45
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: May 14, 1999 -----------------------------------------
------------ Gerald W. Haddock, President and Chief
Executive Officer
/s/ Jack I. Tompkins
-----------------------------------------
Date: May 14, 1999 Jack I. Tompkins, Executive Vice President
------------ and Chief Financial Officer
(Principal Financial and Accounting Officer)
45
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.01 Second Amended and Restated Agreement of Limited Partnership of the
Registrant, dated as of November 1, 1997, as amended (filed as Exhibit
10.01 to the Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 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 "Form S-4") and incorporated herein
by reference)
4.02 Restated Declaration of Trust of the Company (filed as Exhibit 4.01 to
the Registration Statement on Form S-3 (File No. 333-21905) of the
Company and incorporated herein by reference)
4.03 Amended and Restated Bylaws of the Company, as amended (filed as
Exhibit 3.02 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998 (the "Company 3Q 10-Q") of the Company
and incorporated herein by reference)
4.04 6-5/8% Note due 2002 of the Registrant (filed as Exhibit No. 4.07 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1998 (the "Company 2Q 10-Q") of the Company and incorporated herein by
reference)
4.08 7-1/8% Note due 2007 of the Registrant (filed as Exhibit No. 4.08 to
the Company 2Q 10-Q and incorporated herein by reference)
10.01 Noncompetition Agreement of Richard E. Rainwater, as assigned to the
Registrant on May 5, 1994 (filed as Exhibit 10.02 to the Annual Report
on Form 10-K for the Fiscal year ended December 31, 1997 (the "Company
1997 10-K") of the Company and incorporated herein by reference)
10.02 Noncompetition Agreement of John C. Goff, as assigned to the Registrant
on May 5, 1994 (filed as Exhibit 10.03 to the Company 1997 10-K and
incorporated herein by reference)
10.03 Noncompetition Agreement of Gerald W. Haddock, as assigned to the
Registrant on May 5, 1994 (filed as Exhibit 10.04 to the Company 1997
10-K and incorporated herein by reference)
10.04 Employment Agreement of John C. Goff, as assigned to the Registrant on
May 5, 1997, and as further amended (the "Goff Employment Agreement")
(filed as Exhibit 10.05 to the Company 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 Form S-4 and incorporated herein by
reference)
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.06 Employment Agreement of Gerald W. Haddock, as assigned to the
Registrant on May 5, 1994, and as further amended (the "Haddock
Employment Agreement") (filed as Exhibit 10.06 to the Company 1997 10-K
and incorporated herein by reference)
10.07 Amendment No. 5 to the Haddock Employment Agreement, dated March 1,
1999 (filed as Exhibit 10.09 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 of the Company (the "Company 1998
10-K") and incorporated herein by reference)
10.08 Form of Officer's 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 Form 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 Registration Statement on Form S-11 (File No.
33-75188) of the Company and incorporated by reference)
10.10 Crescent Real Estate Equities, Ltd. First Amended and Restated 401(k)
Plan, as amended (filed as Exhibit 10.12 to the Company 1998 10-K and
incorporated herein by reference)
10.11 Second Amended and Restated 1995 Crescent Real Estate Equities Company
Stock Incentive Plan (filed as Exhibit 10.13 to the Form S-4 and
incorporated herein by reference)
10.12 Amended and Restated 1995 Crescent Real Estate Equities Limited
Partnership Unit Incentive Plan (filed as Exhibit 99.01 to the
Registration Statement on Form S-8 (File No. 333-3452) of the Company
and incorporated herein by reference)
10.13 1996 Crescent Real Estate Equities Limited Partnership Unit Incentive
Plan (filed as Exhibit 10.01 to the Current Report on Form 8-K dated
and filed September 27, 1996 of the Company 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 Behavioral
Healthcare Properties (filed as Exhibit 10.27 to the Company 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 10.17 to the Company 2Q 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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4
OF THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 76,066
<SECURITIES> 0
<RECEIVABLES> 108,722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,087,835
<PP&E> 4,144,085
<DEPRECIATION> (418,434)
<TOTAL-ASSETS> 4,998,274
<CURRENT-LIABILITIES> 109,556
<BONDS> 2,352,272
0
200,000
<COMMON> 0
<OTHER-SE> 2,336,446
<TOTAL-LIABILITY-AND-EQUITY> 4,998,274
<SALES> 0
<TOTAL-REVENUES> 185,747
<CGS> 0
<TOTAL-COSTS> 120,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,481
<INCOME-PRETAX> 33,888
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,888
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
</TABLE>
