<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, 2000
COMMISSION FILE NO. 333-42293
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2531304
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
</TABLE>
777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (817) 321-2100
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
--- ---
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999
(audited)............................................................................. 2
Consolidated Statements of Operations for the three months ended March 31, 2000
and 1999 (unaudited).................................................................. 3
Consolidated Statements of Partners' Capital for the three months ended
March 31, 2000 and 1999 (unaudited)................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31,
2000 and 1999 (unaudited)............................................................. 5
Notes to Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 56
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 57
Item 2. Changes in Securities................................................................. 57
Item 3. Defaults Upon Senior Securities....................................................... 57
Item 4. Submission of Matters to a Vote of Security Holders................................... 57
Item 5. Other Information..................................................................... 57
Item 6. Exhibits and Reports on Form 8-K...................................................... 57
</TABLE>
1
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Investments in real estate:
Land $ 362,149 $ 398,754
Land held for development or sale 110,811 95,760
Building and improvements 3,385,937 3,529,344
Furniture, fixtures and equipment 72,332 71,716
Less - accumulated depreciation (520,799) (507,520)
------------ ------------
Net investment in real estate 3,410,430 3,588,054
Cash and cash equivalents 136,584 72,102
Restricted cash and cash equivalents 63,360 87,939
Accounts receivable, net 42,768 37,098
Deferred rent receivable 76,864 74,271
Investments in real estate mortgages and
equity of unconsolidated companies 827,128 812,494
Notes receivable, net 135,647 133,165
Other assets, net 163,046 146,297
------------ ------------
Total assets $ 4,855,827 $ 4,951,420
============ ============
LIABILITIES:
Borrowings under Bank Boston Credit Facility $ -- $ 510,000
UBS Facility 754,952 --
Notes payable 1,724,147 2,088,929
Accounts payable, accrued expenses and other liabilities 120,854 170,980
------------ ------------
Total liabilities 2,599,953 2,769,909
------------ ------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: 116,464 24,648
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, 67,773,668 and 67,744,629 issued
and outstanding at March 31, 2000 and December 31, 1999,
respectively:
General partner -- outstanding 607,488 and 607,687 20,956 21,097
Limited partners' -- outstanding 67,166,180 and 67,136,942 1,904,719 1,923,307
Accumulated other comprehensive income 13,735 12,459
------------ ------------
Total partners' capital 2,139,410 2,156,863
------------ ------------
Total liabilities and partners' capital $ 4,855,827 $ 4,951,420
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
(UNAUDITED)
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Office and retail properties $ 149,108 $ 150,022
Hotel properties 17,544 15,404
Behavioral healthcare properties 2,079 13,823
Interest and other income 7,057 6,498
------------ ------------
Total revenues 175,788 185,747
------------ ------------
EXPENSES:
Real estate taxes 22,671 20,746
Repairs and maintenance 12,197 11,024
Other rental property operating 30,266 32,612
Corporate general and administrative 5,245 4,114
Interest expense 52,250 42,481
Amortization of deferred financing costs 2,347 3,069
Depreciation and amortization 30,902 33,647
Settlement of merger dispute -- 15,000
------------ ------------
Total expenses 155,878 162,693
------------ ------------
Operating income 19,910 23,054
OTHER INCOME AND EXPENSE:
Equity in net income of unconsolidated
companies:
Office and retail properties 2,704 1,961
Temperature-controlled logistics properties 4,036 5,709
Residential development properties 10,464 8,629
Other 2,341 307
------------ ------------
Total equity in net income of unconsolidated companies: 19,545 16,606
------------ ------------
Gain on property sales, net 22,627 --
------------ ------------
Total other income and expense 42,172 16,606
------------ ------------
INCOME BEFORE MINORITY INTERESTS 62,082 39,660
Minority interests (650) (245)
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 61,432 39,415
Extraordinary item - extinguishment of debt (4,378) --
------------ ------------
NET INCOME 57,054 39,415
Preferred unit distributions (3,375) (3,375)
Return on share repurchase agreement (2,076) --
Forward share purchase agreement return -- (2,152)
------------ ------------
NET INCOME AVAILABLE TO PARTNERS $ 51,603 $ 33,888
============ ============
BASIC EARNINGS PER UNIT DATA:
Net income available to partners
before extraordinary item $ 0.83 $ 0.49
Extraordinary item - extinguishment of debt (0.06) --
------------ ------------
Net income available to partners $ 0.77 $ 0.49
============ ============
DILUTED EARNINGS PER UNIT DATA:
Net income available to partners
before extraordinary item $ 0.82 $ 0.48
Extraordinary item - extinguishment of debt (0.06) --
------------ ------------
Net income available to partners $ 0.76 $ 0.48
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
PREFERRED LIMITED GENERAL TOTAL
PARTNERS' PARTNERS' PARTNER'S PARTNERS'
CAPITAL CAPITAL CAPITAL CAPITAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(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, 1999 $ 200,000 $ 21,097 $ 1,923,307 $ 12,459 $ 2,156,863
Contributions -- 170 2,145 -- 2,315
Distributions -- (848) (73,875) -- (74,723)
Net income -- 537 53,142 -- 53,679
Accumulated other comprehensive income -- -- -- 1,276 1,276
----------- ----------- ----------- ----------- -----------
Partners' capital, March 31, 2000 $ 200,000 $ 20,956 $ 1,904,719 $ 13,735 $ 2,139,410
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(UNAUDITED)
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,054 $ 39,415
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 33,249 36,716
Extraordinary item - extinguishment of debt 4,378 --
Gain on property sales, net (22,627) --
Minority interests 650 245
Non-cash compensation 20 20
Distributions received in excess of equity in earnings
from unconsolidated companies -- --
Equity in earnings in excess of distributions received
from unconsolidated companies (8,455) (9,019)
(Increase) decrease in accounts receivable (5,670) 5,027
Increase in deferred rent receivable (2,593) (7,529)
(Increase) decrease in other assets (1,268) 2,635
Decrease in restricted cash and cash equivalents 21,528 12,485
Decrease in accounts payable, accrued
expenses and other liabilities (54,197) (39,886)
--------- ---------
Net cash provided by operating activities 22,069 40,109
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land held for development or sale (15,051) --
Proceeds from property sales 215,508 --
Development of investment properties (8,526) (2,471)
Capital expenditures - rental properties (3,291) (3,267)
Tenant improvement and leasing costs - rental properties (16,646) (14,744)
Decrease (increase) in restricted cash and cash equivalents 11,735 (1,514)
Investment in unconsolidated companies (1,174) (7,421)
Investment in residential development companies (5,006) 13,980
Escrow deposits - acquisition of investment properties 500 --
(Increase) decrease in notes receivable (2,482) 1,804
--------- ---------
Net cash provided by (used in) investing activities 175,567 (13,633)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (17,708) (741)
Share Repurchase Agreement Return (8,685) --
Forward Share Purchase Agreement -- (14,740)
Borrowings under BankBoston Credit Facility -- 26,400
Payments under BankBoston Credit Facility (510,000) (51,920)
Borrowings under UBS Facility 833,000 --
Payments under UBS Facility (78,047) --
Notes Payable proceeds -- 60,000
Notes Payable payments (364,782) (364)
Capital proceeds - joint venture partner 98,212 --
Capital distributions - joint venture partner (7,046) (763)
Capital contributions to the Operating Partnership -- 972
Preferred Unit Distributions (3,375) (3,375)
Distributions from the Operating Partnership (74,723) (75,707)
--------- ---------
Net cash used in financing activities (133,154) (60,238)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,482 (33,762)
CASH AND CASH EQUIVALENTS,
Beginning of period 72,102 109,828
--------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 136,584 $ 76,066
========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
5
<PAGE> 8
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 nine single purpose limited partnerships. Eight of these
limited partnerships were formed for the purpose of obtaining securitized debt,
and all or substantially all of the economic interests in these partnerships are
owned directly or indirectly by the Operating Partnership, with the remaining
interests, if any, owned indirectly by the Company through eight separate
corporations or limited liability companies, each of which is a wholly-owned
subsidiary of CREE, Ltd. or the Operating Partnership and a general partner or
managing member of one of the eight limited partnerships or limited liability
companies. The ninth limited partnership was formed for the purpose of obtaining
equity financing through the sale of preferred equity interests, with all of the
common equity interests owned directly or indirectly by the Operating
Partnership, and all of the preferred equity interests owned by an unrelated
third party.
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 60,141,357 units, and the remaining approximately
10% limited partner interest has been treated as equivalent, for purposes of
this report, to 7,024,823 units. In addition, the Company's 1% general partner
interest has been treated as equivalent, for purposes of this report, to 607,488
units. For purposes of this report, in computing relative partner interests, the
Operating Partnership has assumed the purchase by the Company and the retirement
of common shares held by a wholly-owned subsidiary of the Company, the
corresponding reduction in the Company's limited partner interest and the
corresponding increase in the limited partner interest of the other limited
partners of the Operating Partnership. Without this adjustment, the Company's
limited partner interest, the Company's general partner interest, and the
remaining limited partner interest would be approximately 89%, 1%, and
approximately 10%, respectively.
The Company owns its assets and carries on its operation 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.
6
<PAGE> 9
The following table shows, by entity, the Properties that the Operating
Partnership and its subsidiaries owned as of March 31, 2000:
<TABLE>
<S> <C>
Operating Partnership: 26 Office Properties, Denver Marriott City Center and The Park Shops at Houston Center
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 Office Properties and Renaissance Houston Hotel(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 77 Behavioral Healthcare Properties
Funding VII, L.P.:
("Funding VII")
Crescent Real Estate 24 Office Properties and four Hotel Properties
Funding VIII, L.P.:
("Funding VIII")
Crescent Real Estate Chancellor Park, Four Seasons - Houston, Miami Center, Reverchon Plaza, 44 Cook Street,
Funding IX, L.P.: 55 Madison and 6225 N. 24th Street
("Funding IX")
</TABLE>
- ---------------------------
(1) FUNDING III OWNS NINE OF THE 10 OFFICE PROPERTIES IN THE GREENWAY PLAZA
OFFICE PORTFOLIO AND THE RENAISSANCE HOUSTON HOTEL; FUNDING IV OWNS THE CENTRAL
HEATED AND CHILLED WATER PLANT BUILDING LOCATED AT GREENWAY PLAZA; AND FUNDING V
OWNS COASTAL TOWER, THE REMAINING OFFICE PROPERTY IN THE GREENWAY PLAZA OFFICE
PORTFOLIO.
SEGMENTS
As of March 31, 2000, the Operating Partnership's assets and operations
were composed of five major investment segments:
o Office and Retail Segment;
o Hotel/Resort Segment;
o Residential Development Segment;
o Temperature-Controlled Logistics Segment; and
o Behavioral Healthcare Segment.
Within these segments, the Operating Partnership owned directly or
indirectly the following real estate assets (the "Properties") as of March 31,
2000:
o OFFICE AND RETAIL SEGMENT consisted of 83 office properties
(collectively referred to as the "Office Properties") located
in 29 metropolitan submarkets in eight states, with an
aggregate of approximately 29.8 million net rentable square
feet and three retail properties (collectively referred to as
the "Retail Properties") with an aggregate of approximately
0.4 million net rentable square feet. See Note 16.
Dispositions.
o HOTEL/RESORT SEGMENT consisted of five upscale business class
hotels with a total of 2,168 rooms, three luxury spa resorts
with a total of 536 rooms and two Canyon Ranch destination
fitness resorts and spas that can accommodate up to 462 guests
daily (collectively referred to as the "Hotel Properties").
All Hotel Properties, except the Omni Austin Hotel, are leased
to subsidiaries of Crescent Operating, Inc. ("COI"). The Omni
Austin Hotel is leased to HCD Austin Corporation.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership's ownership of real estate mortgages and
non-voting common stock representing interests ranging from
90% to 95% in five unconsolidated residential development
corporations (collectively referred to as the "Residential
7
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Development Corporations"), which in turn, through joint
venture or partnership arrangements, currently own 18
residential development properties (collectively referred to
as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Operating Partnership's indirect 39.6% interest in three
partnerships (collectively referred to as the
"Temperature-Controlled Logistics Partnerships"), each of
which owns one or more corporations or limited liability
companies (collectively referred to as the
"Temperature-Controlled Logistics Corporations") which, as of
March 31, 2000, directly or indirectly owned 90
temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics
Properties") with an aggregate of approximately 444.9 million
cubic feet (17.8 million square feet).
o BEHAVIORAL HEALTHCARE SEGMENT consisted of 77 properties in 24
states (collectively referred to as the "Behavioral Healthcare
Properties"), 37 of which were leased to Charter Behavioral
Health Systems, LLC. ("CBHS") and its subsidiaries under a
master lease. CBHS was formed to operate the behavioral
healthcare business located at the Behavioral Healthcare
Properties and is owned 10% by a subsidiary of Magellan Health
Services, Inc. ("Magellan") and 90% by COI and an affiliate of
COI. On February 16, 2000, CBHS and all of its subsidiaries
that are subject to the master lease with the Operating
Partnership filed voluntary Chapter 11 bankruptcy petitions in
the United States Bankruptcy Court for the District of
Delaware. Of these 77 Behavioral Healthcare Properties, the 37
Behavioral Healthcare Properties that remain subject to the
master lease are designated as the "Core Properties" for the
conduct of CBHS's business. The other 40 Behavioral Healthcare
Properties, at which CBHS has ceased operations or is planning
to cease operations, are designated as the "Non-Core
Properties." Subsequent to March 31, 2000, the Operating
Partnership sold two of the Non-Core Properties. The Operating
Partnership also has entered into contracts or letters of
intent to sell 11 additional Non-Core Properties. The
remaining 27 Non-Core Properties are being actively marketed
for sale. See Note 15. CBHS and Note 16. Dispositions for a
description of the current status of CBHS and the Operating
Partnership's investment in the Behavioral Healthcare
Properties.
See Note 6. Segment Reporting for a table showing consolidated revenues
and funds from operations for each of these investment segments for the three
months ended March 31, 2000 and 1999 and identifiable assets for each of these
investment segments at March 31, 2000 and 1999.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the information and footnotes required by GAAP for
complete financial statements are not included. In management's opinion, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the unaudited interim financial statements are
included. Operating results for interim periods reflected do not necessarily
indicate the results that may be expected for a full fiscal year. You should
read these financial statements in conjunction with the financial statements and
the accompanying notes included in the Operating Partnership's Form 10-K for the
year ended December 31, 1999.
Certain previously reported amounts have been reclassified to conform
with the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
8
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Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No.
133", which deferred the effective date of SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Operating
Partnership elected to implement SFAS No. 133 in the third quarter of 1999. See
Note 9. Cash Flow Hedges for a description of the impact on the Operating
Partnership's financial statements for the three months ended March 31, 2000.
3. PROPERTIES HELD FOR DISPOSITION:
Office and Retail Segment
In pursuit of management's objective to dispose of non-strategic or
non-core assets, at March 31, 2000, the Operating Partnership was actively
marketing for sale its wholly owned interests in four Office Properties, which
are included in the Net Investment in Real Estate of $3,410,430. The carrying
value of these Properties at March 31, 2000 was approximately $57,824. Two of
the Properties are located in Dallas, Texas, one is located in New Orleans,
Louisiana, and one is located in Denver, Colorado. Subsequent to March 31, 2000,
the Operating Partnership completed the sale of two of these Office Properties.
The Operating Partnership has also entered into contracts to sell the remaining
two Properties. The Operating Partnership anticipates completing any
economically justified sales of these Office Properties by the end of the second
quarter of 2000.
The following table summarizes the condensed results of operations for
the three months ended March 31, 2000 and 1999 for the four Office Properties
held for disposition. These Properties are classified as held for sale, and
depreciation expense has not been recognized since June 30, 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue $ 3,028 $ 2,929
Operating Expenses 1,190 1,092
------------ ------------
Net Operating Income $ 1,838 $ 1,837
============ ============
</TABLE>
Subsequent to March 31, 2000, the Operating Partnership has begun
actively marketing one additional Office Property for sale, and has classified
that Property, which is located in San Francisco, California, as held for
disposition. The carrying value of this Property at March 31, 2000 was
approximately $34,563. The Net Operating Income of this Property for the three
months ended March 31, 2000 and 1999, was $947 and $1,144, respectively.
Behavioral Healthcare Segment
The 40 Non-Core Properties were classified as held for disposition at
March 31, 2000, and no depreciation expense for these Properties was recognized
for the three months ended March 31, 2000. The carrying value for these
Properties at March 31, 2000 was approximately $98,100. See Note 16.
Dispositions for a description of the sale of certain Non-Core Properties
subsequent to March 31, 2000 and the execution of contracts or letters of intent
relating to the sale of additional Non-Core Properties as of May 10, 2000.
Other
The Woodlands Commercial Properties Company, L.P., owned by the
Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., is actively
marketing for sale its office/venture tech portfolio located in The Woodlands.
These assets include the Operating Partnership's 12 Office Properties located in
The Woodlands.
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4. EARNINGS PER UNIT OF PARTNERSHIP INTEREST:
SFAS No. 128 "Earnings Per Share" ("EPS") 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,
---------------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
Wtd. Avg. Per Unit Wtd. Avg. Per Unit
Income Units Amount Income Units Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS -
Income before extraordinary item $ 61,432 $ 39,415
Preferred unit distributions (3,375) (3,375)
Share repurchase agreement return (2,076) --
Forward share purchase
agreement return -- (2,152)
--------- --------- --------- --------- --------- ---------
Net income available to partners
before extraordinary item $ 55,981 67,769 $ 0.83 $ 33,888 68,850 $ 0.49
Extraordinary item -
extinguishment of debt (4,378) (0.06) -- --
--------- --------- --------- --------- --------- ---------
Net income available to partners $ 51,603 67,769 $ 0.77 $ 33,888 68,850 $ 0.49
========= ========= ========= ========= ========= =========
DILUTED EPS -
Net income available to partners
before extraordinary item $ 55,981 67,769 $ 0.83 $ 33,888 68,850 $ 0.49
Effect of dilutive securities:
Unit options -- 228 -- 1,071
--------- --------- --------- --------- --------- ---------
Net income available to partners
before extraordinary item $ 55,981 67,997 $ 0.82 $ 33,888 69,921 $ 0.48
Extraordinary item -
extinguishment of debt (4,378) (0.06) -- --
--------- --------- --------- --------- --------- ---------
Diluted EPS -
Net income available to partners $ 51,603 67,997 $ 0.76 $ 33,888 69,921 $ 0.48
========= ========= ========= ========= ========= =========
</TABLE>
The effect of the conversion of the Series A Convertible Cumulative
Preferred Units is not included in the computation of Diluted EPS for the three
months ended March 31, 2000 or 1999, since the effect of their conversion is
antidilutive.
10
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5. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid .............................................. $ 58,326 $ 48,793
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Operating Partnership units in conjunction
with settlement of an obligation ...................... $ 2,125 $ --
Unrealized loss on available-for-sale securities ........... 3,009 2,678
Forward Share Purchase Agreement Return .................... -- 2,152
Share Repurchase Agreement Return .......................... 2,076 --
Increase of cash flow hedges to fair value ................. 4,285 --
Equity investment in a tenant in exchange
for office space ...................................... 2,700 --
</TABLE>
6. SEGMENT REPORTING
The Operating Partnership adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" beginning with the year ended
December 31, 1998. The Operating Partnership currently has five major investment
segments: the Office and Retail Segment; the Hotel/Resort Segment; the
Temperature-Controlled Logistics Segment; the Residential Development Segment;
and the Behavioral Healthcare Segment. Management organizes the segments within
the Operating Partnership based on property type for making operating decisions
and assessing performance. Investment segments for SFAS No. 131 are determined
on the same basis.
The Operating Partnership uses funds from operations ("FFO") as the
measure of segment profit or loss. FFO, based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), effective January 1, 2000, and as used in this document,
means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from sales of depreciable
operating property;
o excluding extraordinary items (as defined by GAAP);
o plus depreciation and amortization of real estate
assets; and
o after adjustments for unconsolidated partnerships and
joint ventures.
NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. Effective January 1,
2000, NAREIT clarified the definition of FFO to include non-recurring events,
except for those that are defined as "extraordinary items" under GAAP and gains
or losses from sales of depreciable operating property. The Operating
Partnership has adopted the revised definition of FFO effective as of January 1,
2000. Under the prior definition of FFO, for the three months ended March 31,
1999, FFO was approximately $92,900, which excluded $15,000 paid in connection
with the settlement and release of all claims between the Company and Station
Casinos, Inc. ("Station") arising out of the agreement and plan of merger
between the Company and Station. Because this settlement is not considered an
"extraordinary item" under GAAP, FFO for the three months ended March 31, 1999
would have been approximately $77,900, which included the $15,000 settlement
payment, if the revised definition of FFO had been in effect. The Operating
Partnership considers FFO an appropriate measure of performance for an equity
REIT, and for its investment segments. However, the Operating Partnership's
measure of FFO may not be comparable to similarly titled measures of REITs
(other than the Company) because these REITs may apply the definition of FFO in
a different manner than the Operating Partnership.
11
<PAGE> 14
Selected financial information related to each segment at or for the
three months ended March 31, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES:
Office and Retail Segment $ 149,108 $ 150,022
Hotel/Resort Segment 17,544 15,404
Behavioral Healthcare Segment 2,079 13,823
Temperature-Controlled Logistics Segment -- --
Residential Development Segment -- --
Corporate and other 7,057 6,498
----------- -----------
TOTAL REVENUE $ 175,788 $ 185,747
=========== ===========
FUNDS FROM OPERATIONS:
Office and Retail Segment $ 86,211 $ 89,107
Hotel/Resort Segment 17,291 15,198
Behavioral Healthcare Segment 2,079 13,823
Temperature-Controlled Logistics Segment 9,487 8,280
Residential Development Segment 15,043 13,300
Corporate and other adjustments
Interest expense (52,250) (42,481)
Preferred unit distributions (3,375) (3,375)
Interest and other income 5,939 3,179
Corporate general & adminstrative (5,245) (4,114)
Settlement of merger dispute -- (15,000)
----------- -----------
TOTAL FUNDS FROM OPERATIONS $ 75,180 $ 77,917
----------- -----------
ADJUSTMENTS TO RECONCILE FUNDS FROM OPERATIONS TO
CONSOLIDATED NET INCOME:
Depreciation and amortization of real estate assets $ (29,792) $ (32,877)
Gain on property sales, net 22,627 --
Extraordinary item - extinguishment of debt (4,378) --
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office and Retail Properties 72 (1,758)
Temperature-Controlled Logistics Properties (5,451) (2,571)
Residential Development Properties (4,579) (4,671)
Preferred unit distributions 3,375 3,375
----------- -----------
NET INCOME $ 57,054 $ 39,415
=========== ===========
EQUITY IN NET INCOME OF UNCONSOLIDATED
COMPANIES:
Office and Retail Properties $ 2,704 $ 1,961
Hotel/Resort Properties -- --
Behavioral Healthcare Properties -- --
Temperature-Controlled Logistics Properties 4,036 5,709
Residential Development Properties 10,464 8,629
Corporate and other 2,341 307
----------- -----------
TOTAL EQUITY IN NET INCOME OF
UNCONSOLIDATED COMPANIES $ 19,545 $ 16,606
=========== ===========
BALANCE AT MARCH 31,
----------------------------
2000 1999
----------- -----------
IDENTIFIABLE ASSETS:
Office and Retail Segment $ 3,220,159 $ 3,212,881
Hotel/Resort Segment 465,774 452,362
Behavioral Healthcare Segment 220,882 383,389
Temperature-Controlled Logistics Segment 298,329 281,436
Residential Development Segment 288,744 275,720
Other 361,939 392,486
----------- -----------
TOTAL IDENTIFIABLE ASSETS $ 4,855,827 $ 4,998,274
=========== ===========
</TABLE>
12
<PAGE> 15
At March 31, 2000, COI was the Operating Partnership's largest lessee
in terms of total consolidated rental revenues derived from leases. Total rental
revenues received from COI for the three months ended March 31, 2000 was
approximately 9% of the Operating Partnership's total consolidated rental
revenues. COI was the lessee for nine of the Hotel Properties for the three
months ended March 31, 2000.
See Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Temperature-Controlled Logistics Segment for a
description of the sole lessee of the Temperature-Controlled Logistics
Properties.
7. 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, or equity investments:
<TABLE>
<CAPTION>
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATIONS AS OF MARCH 31, 2000
- ------------------------------------------- ------------------------------------- -------------------------------
<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 Office and Retail (office/venture tech
Properties Company, L.P. portfolio)(3) 42.5%
Main Street Partners, L.P. Office and Retail (office property -
Bank One Center) 50%
DBL Holdings, Inc. Other 95%
Metropolitan Partners, LLC Other (4)
CRL Investments, Inc. Other 95%
</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 each of the
Temperature-Controlled Logistics Partnerships, which own the
Temperature-Controlled Logistics Corporations, which directly or
indirectly own the Temperature-Controlled Logistics Properties.
Accordingly, the Operating Partnership has an indirect 39.6% interest
in the Temperature-Controlled Logistics Properties. See Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Temperature Controlled Logistics Segment for additional
information regarding the ownership of the Temperature-Controlled
Logistics Properties.
(3) See Note 3. Properties Held for Disposition - Other.
(4) The Operating Partnership has an $85,000 preferred member interest in
Metropolitan Partners, LLC ("Metropolitan"), representing an
approximately 20% equity interest at March 31, 2000. The investment has
a cash flow preference of 7.5% until May 19, 2001 and may be redeemed
by Metropolitan until May 19, 2001 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 by
May 19, 2001, the Operating Partnership may convert the interest either
into (i) a common equity interest in Metropolitan or (ii) shares of
common stock of Reckson Associates Realty Corporation at a conversion
price of $24.61.
13
<PAGE> 16
The Operating Partnership reports its share of income and losses based
on its ownership interest in its respective equity investments. The following
summarized information for all unconsolidated companies is presented on an
aggregate basis and classified under the captions "Residential Development
Corporations," "Temperature-Controlled Logistics Corporations," "Office and
Retail" and "Other," as applicable, as of March 31, 2000.
<TABLE>
<CAPTION>
BALANCE SHEETS:
MARCH 31, 2000
---------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Real estate, net $ 710,027 $ 1,332,342 $ 412,131
Cash 32,026 10,669 24,494
Other assets 198,031 92,734 40,024
----------- ----------- -----------
Total assets $ 940,084 $ 1,435,745 $ 476,649
=========== =========== ===========
Notes payable $ 324,503 $ 591,467 $ 282,074
Notes payable to the Operating Partnership 152,953 11,333 --
Other liabilities 232,332 62,868 17,225
Equity 230,296 770,077 177,350
----------- ----------- -----------
Total liabilities and equity $ 940,084 $ 1,435,745 $ 476,649
=========== =========== ===========
Operating Partnership's share of
unconsolidated debt $ 163,730 $ 234,221 $ 131,475
=========== =========== ===========
Operating Partnership's investments in
real estate mortgages and equity of
unconsolidated companies $ 288,744 $ 298,329 $ 97,373 $ 142,682
=========== =========== =========== ===========
<CAPTION>
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
DEVELOPMENT LOGISTICS OFFICE AND
CORPORATIONS CORPORATIONS RETAIL OTHER
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 111,621 $ 41,577 $ 20,060
Expenses:
Operating expense 82,211 5,185(1) 3,896
Interest expense 1,708 11,445 5,878
Depreciation and amortization 3,497 14,543 4,362
Taxes 6,418 876 --
Other (income)/expense -- (223) --
----------- ----------- -----------
Total expenses 93,834 31,826 14,136
----------- ----------- -----------
Net income $ 17,787 $ 9,751 $ 5,924
=========== =========== ===========
Operating Partnership's equity in net
income of unconsolidated companies $ 10,464 $ 4,036 $ 2,704 $ 2,341
=========== =========== =========== ===========
</TABLE>
- -------------
(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per
annum of the Total Combined Assets).
14
<PAGE> 17
8. NOTES PAYABLE AND BORROWINGS UNDER UBS FACILITY:
The following is a summary of the Operating Partnership's debt financing at
March 31, 2000:
<TABLE>
<CAPTION>
BALANCE AT
MARCH 31,
2000
------------
<S> <C>
SECURED DEBT
AEGON Note(1) due July 1, 2009, bears interest at 7.53% with monthly principal and interest
payments based on a 25-year amortization schedule, secured by the Funding III, IV and V
Properties ....................................................................................... $ 277,402
UBS Term Loan I(2) (see description of UBS Facility below) ....................................... 257,213
UBS Term Loan II(2) (see description of UBS Facility below) ...................................... 257,213
UBS Line of Credit(2) (see description of UBS Facility below) .................................... 240,526
LaSalle Note I(3) 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, secured by the Funding I Properties ............................. 239,000
BankBoston Term Note II(4) due August 31, 2003, bears interest at the 30-day LIBOR rate plus
400 basis points (at March 31, 2000, the interest rate was 9.94%) with a four-year interest
only term, secured by equity interests in Funding I and II ....................................... 200,000
JP Morgan Mortgage Note(5) due October 1, 2016, bears interest at a fixed rate of 8.31% with
a two-year interest-only term, secured by the Houston Center mixed-use Office Property
complex .......................................................................................... 200,000
LaSalle Note II(6) 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,
secured by the Funding II Properties ............................................................. 161,000
SFT Whole Loans, Inc. ("SFT") Note due September 30, 2001, bears interest at 30-day LIBOR
plus 1.75% (at March 31, 2000, the rate was 7.58%) 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 V due December 2005, bears interest at 8.49% with monthly principal
and interest payments based on a 25-year amortization schedule, secured by the
Datran Center Office Property .................................................................... 39,584
Northwestern Life Note due January 2003, bears interest at 7.66% 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 ...................................................................... 11,356
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
BALANCE AT
MARCH 31,
2000
------------
<S> <C>
Nomura Funding VI Note(7) bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
July 2020, secured by the Funding VI Property ...................................................... 8,459
Rigney Promissory Note due November 2012, bears interest at 8.50% with quarterly principal and
interest payments based on a 15-year amortization schedule, secured by a parcel of land ............ 723
UNSECURED DEBT
2007 Notes(8) bear interest at a fixed rate of 7.50% with a ten-year interest-only term, due
September 2007 ..................................................................................... 250,000
2002 Notes(8) bear interest at a fixed rate of 7.00% with a five-year interest-only term, due
September 2002 ..................................................................................... 150,000
------------
Total Notes Payable ........................................................................... $ 2,479,099
============
</TABLE>
(1) The outstanding principal balance of this note at maturity will be
approximately $223,000.
(2) The Operating Partnership entered into the UBS Facility which consists
of three tranches: UBS Line of Credit, UBS Term Loan I and UBS Term
Loan II effective January 31, 2000. The proceeds were primarily used to
repay and retire the Operating Partnership's prior credit facility with
BankBoston, N.A. (the "BankBoston Credit Facility") and an additional
term loan (the "BankBoston Term Note I"). For a further description of
the UBS Facility, see "UBS Facility" below.
(3) 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.
(4) This loan is secured by partnership interests in two pools of
underleveraged assets. On February 1, 2000, the Operating Partnership
renegotiated certain terms and covenants under this note. As a result,
the interest rate on the facility increased to 30-day LIBOR plus 400
basis points. The Operating Partnership entered into a four-year
$200,000 cash flow hedge agreement effective September 1, 1999 with
Salomon Brothers Holding Company, Inc. in a separate transaction
related to the BankBoston Term Note II. See Note 9. Cash Flow Hedges.
(5) At the end of seven years (October 2006), the loan reprices based on
current interest rates at this time. It is the Operating Partnership's
intention to repay the note in full at such time (October 2006) by
making a final payment of approximately $179,000.
(6) 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.
(7) 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 at that date.
(8) The notes were issued in an offering registered with the SEC.
16
<PAGE> 19
Below are the aggregate principal amounts due as of March 31, 2000
under the UBS Facility and other indebtedness of the Operating Partnership by
year. Scheduled principal installments and amounts due at maturity are included.
<TABLE>
<CAPTION>
SECURED UNSECURED TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
2000 $ 3,897 $ -- $ 3,897
2001 113,887 -- 113,887
2002 73,911 150,000 223,911
2003 738,796 -- 738,796
2004 274,067 -- 274,067
Thereafter 874,541 250,000 1,124,541
---------- ---------- ----------
$2,079,099 $ 400,000 $2,479,099
========== ========== ==========
</TABLE>
UBS FACILITY
On February 4, 2000, the Operating Partnership repaid and retired the
BankBoston Credit Facility and the BankBoston Term Note I primarily with the
proceeds of the UBS Facility. The UBS Facility is an $850,000 secured,
variable-rate facility fully underwritten by UBS AG ("UBS") and currently funded
by UBS and Fleet Boston Financial ("Fleet"). The UBS Facility consists of three
tranches: the UBS Line of Credit, a three-year $300,000 revolving line of
credit; the UBS Term Loan I, a $275,000 three-year term loan; and the UBS Term
Loan II, a $275,000 four-year term loan. Borrowings under the UBS Line of
Credit, the UBS Term Loan I and the UBS Term Loan II at March 31, 2000 were
approximately $240,500, $257,200 and $257,200, respectively. The UBS Line of
Credit and the UBS Term Loan I bear interest at LIBOR plus 250 basis points. The
UBS Term Loan II bears interest at LIBOR plus 275 basis points. As of March 31,
2000, the interest rate on the UBS Line of Credit and UBS Term Loan I was 8.63%
and the interest rate on the UBS Term Loan II was 8.88%. In order to mitigate
its exposure to variable-rate debt, the Operating Partnership has entered into
two cash flow hedge agreements related to a portion of the UBS Facility. See
Note 9. Cash Flow Hedges for a description of these agreements. As of March 31,
2000, the UBS Facility was secured by 40 Office Properties and four Hotel
Properties. Subsequent to March 31, 2000, the Operating Partnership sold two
Office Properties securing the UBS Facility. The net proceeds of the sale of
these Properties were used to repay amounts outstanding under the UBS Facility.
The UBS 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 allocated property values and debt service
coverage ratios, and, with respect solely to Funding VIII, limitations on
additional secured and total indebtedness, distributions, additional investments
and the incurrence of additional liens. The Operating Partnership was in
compliance with all covenants related to the UBS Facility for the March 31, 2000
reporting period.
9. CASH FLOW HEDGES:
The Operating Partnership does not use derivative financial instruments
for trading purposes, but utilizes them to manage exposure to variable rate
debt. The Operating Partnership accounts for its derivative instruments under
SFAS No. 133, which was adopted in the third quarter of 1999.
In September 1999, the Operating Partnership entered into a four-year
cash flow hedge agreement with Salomon Brothers Holding Company, Inc.
("Salomon") for a notional amount of $200,000 relating to the BankBoston Term
Note II. As a result of the cash flow hedge agreement, the interest rate on the
underlying note, which was originally issued at a floating interest rate of
30-day LIBOR plus 325 basis points, was effectively converted to a fixed
weighted average interest rate of 9.43% through maturity. Effective February 1,
2000, the Operating Partnership renegotiated certain terms and covenants under
the BankBoston Term Note II. At such time, the interest rate on the underlying
note increased to 30-day LIBOR plus 400 basis points, and consequently, the
effective fixed weighted average interest rate increased to 10.18% through
maturity. During the three months ended March 31, 2000, the cash flow hedge
agreement with Salomon resulted in approximately $50 of additional interest
expense.
17
<PAGE> 20
Effective February 4, 2000, the Operating Partnership entered into a
three-year cash flow hedge agreement with Fleet, for a notional amount of
$200,000, relating to a portion of the UBS Term Loan I and the UBS Line of
Credit. As a result, the interest rate on $200,000 of the amount under the UBS
Term Loan I and the UBS Line of Credit, which were originally issued at a
floating interest rate of LIBOR plus 250 basis points, was effectively converted
to a fixed weighted average interest rate of 9.61% through maturity. During the
three months ended March 31, 2000, the cash flow hedge agreement with Fleet
resulted in approximately $384 of additional interest expense.
Effective April 18, 2000, the Operating Partnership entered into a
four-year cash flow hedge agreement with Fleet, for a notional amount of
$100,000, relating to a portion of the UBS Term Loan II. As a result, the
interest rate on $100,000 of this loan, which was originally issued at a
floating interest rate of LIBOR plus 275 basis points, was effectively converted
to a fixed weighted average interest rate of 9.51% through maturity. Fleet has
an option to terminate the agreement at the end of the third year of the
agreement.
10. SETTLEMENT OF MERGER DISPUTE:
On April 14, 1999, the Company and Station entered into a 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.
11. MINORITY INTEREST:
Minority interest represents joint venture and preferred equity
interests held by third parties in other consolidated subsidiaries.
12. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY:
During the first quarter of 2000, the Operating Partnership formed
Funding IX and contributed six Office Properties and one Hotel Property to
Funding IX. The Operating Partnership owns 100% of the voting interests in
Funding IX, 0.1% in the form of a general partner interest and 99.9% in the form
of a limited partner interest.
As of March 31, 2000, the Operating Partnership had sold $100,000 of
non-voting, redeemable preferred Class A Units in Funding IX to GMAC Commercial
Mortgage Corporation ("GMACCM"). The Class A Units receive a preferred variable
rate dividend based on 30-day LIBOR, or approximately 10.6% per annum as of
March 31, 2000, and are redeemable at the option of the Operating Partnership at
the original purchase price. Subsequent to March 31, 2000, the Operating
Partnership sold an additional $10,000 of Class A Units in Funding IX to GMACCM.
As of May 10, 2000, the net proceeds of $108,100 from the sale of the
Class A Units were loaned to a wholly-owned subsidiary of the Company which used
these proceeds to repurchase 6,089,604 of the Company's outstanding common
shares. These shares will be held in the subsidiary of the Company until the
Class A Units are redeemed. Distributions will continue to be paid by the
Company on the repurchased common shares and will be used to pay dividends on
the Class A Units. See Note 13. Partner's Capital - Share Repurchase Program.
The Operating Partnership expects to contribute an additional Office
Property and an additional Hotel Property to Funding IX during the second
quarter of 2000. Following the contribution of these Properties and the
satisfaction of other conditions relating to the Properties, the Operating
Partnership will have the right to sell to GMACCM an aggregate of $275,000 of
Class A Units.
18
<PAGE> 21
The Operating Partnership is actively marketing the Office Properties
held by Funding IX for joint venture and will use the proceeds from any joint
venture or sale of a Property held by Funding IX, to redeem the preferred Class
A Units.
13. PARTNERS' CAPITAL:
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, 2000, there were 14,562 units exchanged for 29,124
common shares of the Company.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized
the repurchase of a portion of its outstanding common shares from time to time
in the open market or through privately negotiated transactions, in an amount
not to exceed $500,000. The repurchase of common shares by the Company will
decrease the Company's limited partner interest, which will result in an
increase in net income per unit.
The Company expects the share repurchase program to be funded through a
combination of asset sales and financing arrangements, which, in some cases, may
be secured by the repurchased shares. The amount of shares that the Company
actually will purchase will be determined from time to time, in its reasonable
judgment, based on market conditions and the availability of funds, among other
factors. There can be no assurance that any number of shares actually will be
purchased within any particular time period.
During the three months ended March 31, 2000, the Company repurchased
161,000 common shares in the open market at an average price of $17.53 per
common share for an aggregate of approximately $2,823. Subsequent to March 31,
2000, the Company repurchased 1,926,500 common shares in the open market at an
average price of $18.16 per common share for an aggregate of $34,976. In
addition, subsequent to March 31, 2000, the Company repurchased 4,002,104 common
shares at an average price of $17.49 per common share for an aggregate of
approximately $70,000, substantially settling the "Share Repurchase Agreement"
with UBS. See "Share Repurchase Agreement" below for a description of the
agreement. All of the common shares repurchased by the Company will be held in a
wholly-owned subsidiary of the Company. Pursuant to an agreement between the
Company and the subsidiary, the Company is required to purchase these common
shares from the subsidiary no later than March 15, 2003, at which time the
shares will be retired. The presentation in these financial statements assumes
that the Company has purchased the shares from the wholly-owned subsidiary and
retired these shares. Based on these assumptions, the Company's limited partner
interest decreased, which in turn resulted in an increase in net income per
unit.
The purchase of the 6,089,604 common shares was financed with the
proceeds of the sale of Class A Units in Funding IX. See Note 12. Sale of
Preferred Equity Interests in Subsidiary.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to
repurchase a portion of its common shares from UBS. As of December 31, 1999, the
Company was obligated to repurchase 4,789,580 common shares, or approximately
$84,100 of the Company's common shares. The agreement was amended on January 4,
2000, increasing the number of common shares the Company was obligated to
repurchase from UBS by January 4, 2001 to approximately 5,800,000 common shares,
or approximately $102,000 of the Company's common shares (as amended, the "Share
Repurchase Agreement"). The price the Company is obligated to pay for the common
shares (the "Settlement Price") is calculated based on the average cost of the
common shares purchased by UBS in connection with the Share Repurchase Agreement
plus a return to UBS of 30-day LIBOR plus 250 basis points, minus an adjustment
for the Company's distributions during the term of the Share Repurchase
Agreement. The guaranteed rate of return to UBS under the agreement is equal to
30-day LIBOR plus 250 basis points.
19
<PAGE> 22
The Company may settle the Share Repurchase Agreement in cash or common
shares. If the Company fulfills its settlement obligations in cash, the
Operating Partnership will repurchase a portion of the Company's limited partner
interest for an amount approximately equal to the cash required to settle the
Company's obligations under the Share Repurchase Agreement. In the event that
the Company elects to fulfill the Share Repurchase Agreement in common shares,
UBS will sell the common shares on behalf of the Company in the open market. If,
as a result of a decrease in the market price of the common shares, the number
of common shares required to be sold to achieve the Settlement Price exceeds the
number of common shares purchased by UBS in connection with the agreement, the
Company will deliver additional cash or common shares to UBS. The issuance of
additional common shares will increase the Company's limited partner interest,
which will result in reduction in the Operating Partnership's net income per
unit and net book value per unit. If the Company elects to fulfill the Share
Repurchase Agreement in common shares, and the market price of the common shares
is greater than the Settlement Price, UBS will return a portion of the common
shares that it purchased in the open market to the Company. If UBS returns
common shares to the Company, the Operating Partnership will repurchase a
portion of the Company's limited partner interest in the Operating Partnership,
which will result in an increase in net income per unit and net book value per
unit.
If the common share price on the NYSE falls below the Settlement Price
calculated approximately every two weeks, the Company is required to remit cash
collateral to UBS equal to the product of the number of common shares purchased
by UBS and 115% of the difference between the Settlement Price and the closing
price of the common shares as reported on the NYSE. If the Company elects to
settle the Share Repurchase Agreement in cash, any cash collateral held by UBS
will be used to "pay-down" the Settlement Price. If the Company elects to settle
the Share Repurchase Agreement in common shares, UBS will release all claims to
any cash collateral they hold at that time. On February 18, 2000, the Company
posted cash collateral of $8,700 to UBS, as a result of a decline in the common
share price. As of March 31, 2000, no additional cash collateral was due to UBS.
Subsequent to March 31, 2000, the Company purchased 4,002,104 common
shares from UBS at an average cost of $17.49 per common share, substantially
settling the Share Repurchase Agreement. In connection with this purchase, UBS
returned approximately $5,980 of the cash collateral posted to the Company as a
result of substantially settling the Share Repurchase Agreement. The purchase
was funded through the sale of Class A Units in Funding IX. See Note 12. Sale of
Preferred Equity Interests in Subsidiary and see also "Share Repurchase Program"
above for a description of the effect of this transaction on the Company's
interest in the Operating Partnership.
DISTRIBUTIONS
Units
On February 17, 2000, the Operating Partnership paid a distribution of
$74,542, or $1.10 per unit to holders of record on January 28, 2000. The
distribution represented an annualized distribution of $4.40 per unit.
On April 17, 2000, the Operating Partnership declared a distribution of
$74,628, or $1.10 per unit, to holders of record on April 28, 2000. The
distribution represents and annualized distribution of $4.40 per unit and is
payable on May 15, 2000.
Preferred Units
On February 17, 2000, the Operating Partnership paid a distribution on
its Series A Preferred Units of $3,375, or $0.421875 per unit, to the Company,
which was the sole holder of record on January 28, 2000. The distribution
represented an annualized distribution of $1.6875 per preferred unit.
On April 17, 2000, the Operating Partnership declared a distribution on
its Series A Preferred Units of $3,375, or $0.421875 per unit, to the Company,
which was the sole holder of record on April 28, 2000. The distribution
represents and annualized distribution of $1.6875 per preferred unit and is
payable on May 15, 2000.
20
<PAGE> 23
14. RELATED PARTY INVESTMENT:
As of March 31, 2000, the Operating Partnership, upon the approval of
CREE, Ltd. and the independent members of the Board of Trust Managers of the
Company, had contributed approximately $23,500 of a $25,000 commitment to DBL
Holdings, Inc. ("DBL"). The total contribution will be made though a combination
of loans and equity investments. The Operating Partnership has a 97.4%
non-voting interest in DBL.
The contribution was used by DBL to make an equity contribution to
DBL-ABC, Inc., a wholly-owned subsidiary, which committed to purchase $25,000 of
limited partnership interests in G2 Opportunity Fund, LP ("G2"), representing a
limited partnership interest of approximately 12.5%. DBL-ABC, Inc. is committed
to contribute the balance of $1,500 upon demand of the general partner of G2. G2
was formed for the purpose of investing in commercial mortgage backed securities
and is managed by an entity that is owned equally by Goff-Moore Strategic
Partners, LP ("GMSP") and GMAC. John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company and member of the Strategic
Planning Committee of CREE, Ltd., and Darla Moore, who is married to Richard
Rainwater, Chairman of the Board of Trust Managers of the Company and member of
the Strategic Planning Committee of CREE, Ltd., each own 50% of the entity that
ultimately controls GMSP. Mr. Rainwater is a limited partner of GMSP. At March
31, 2000, DBL's primary holdings consisted of the 12.5% investment in G2.
15. CBHS:
BEHAVIORAL HEALTHCARE SEGMENT
As of December 31, 1999, all of the Behavioral Healthcare Properties
were leased by the Operating Partnership to CBHS under a master lease. CBHS's
business has been negatively affected by many factors, including adverse
industry conditions, and on February 16, 2000, CBHS and all of its subsidiaries
that are subject to the master lease with the Operating Partnership filed
voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court
for the District of Delaware. CBHS has stated in its bankruptcy petitions that
it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by
mid-May of 2000 or develop an appropriate liquidation procedure if the sales
have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties were terminated
from the master lease, although the aggregate rent due under the master lease
was not reduced as a result, except as described below with respect to sales of
Non-Core Properties. See Note 16. Dispositions for a description of recent
dispositions of Non-Core Properties. The Core Properties remain subject to the
master lease. The Operating Partnership agreed with CBHS that, upon each sale by
the Operating Partnership of Non-Core Properties, the monthly minimum rent due
from CBHS under the master lease would be reduced by a specified percentage of
the net proceeds of such sale. Payment and treatment of rent for the Behavioral
Healthcare Properties is subject to a rent stipulation agreed to by certain of
the parties involved in the CBHS bankruptcy proceeding.
As of March 31, 2000, the Behavioral Healthcare Segment consisted of 77
Behavioral Healthcare Properties in 24 states, 37 of which are designated as
Core Properties and were leased to CBHS and its subsidiaries under a triple-net
master lease, and 40 of which are designated as Non-Core Properties. Subsequent
to March 31, 2000, the Operating Partnership sold two of the Non-Core
Properties. The Operating Partnership has also entered into contracts or letters
of intent to sell 11 additional Non-Core Properties. The remaining 27 Non-Core
Properties, which are the Properties at which CBHS has ceased operations or is
planning to cease operations, are being actively marketed for sale.
An auction for the core operating assets of CBHS was held on May 10,
2000, as part of the bankruptcy proceedings relating to CBHS. The results of the
auction are preliminary pending court approval.
21
<PAGE> 24
16. DISPOSITIONS:
Office & Retail Segment
During the three months ended March 31, 2000, the Operating Partnership
completed the sale of six wholly owned Office Properties and was actively
marketing four additional Office Properties for sale as of March 31, 2000. The
six Office Properties sold were previously classified as held for disposition.
The sales of the six Office Properties generated approximately $146,600 of net
proceeds. The proceeds were used primarily to pay down variable-rate debt. The
Operating Partnership recognized a net gain of approximately $13,200 in the
first quarter of 2000, related to the sales of five of the Office Properties
that were sold during the three months ended March 31, 2000, and, during the
year ended December 31, 1999, recognized an impairment loss of $16,800 on the
remaining Office Property. For the three months ended March 31, 2000, the
Operating Partnership recognized an impairment loss of approximately $5,000 on
one Office Property classified as held for disposition, which was sold
subsequent to March 31, 2000. The impairment loss represented the difference
between the carrying value of the Office Property and the sales price less costs
of the sale, and is included in Gain on Property Sales, net. Subsequent to March
31, 2000, the Operating Partnership had completed the sale of two of the four
Office Properties held for disposition at March 31, 2000. The sales of these
Office Properties generated approximately $34,800 of net proceeds, which were
used primarily to pay down variable-rate debt. The Operating Partnership has
also entered into contracts relating to the sale of the remaining two Office
Properties. The sales of these Properties are expected to close by the end of
the second quarter of 2000.
Behavioral Healthcare Segment
During the three months ended March 31, 2000, the Operating Partnership
completed the sale of 11 of the 51 Non-Core Properties classified as held for
disposition. The sales generated approximately $38,300 in net proceeds and a net
gain of approximately $9,600. As of March 31, 2000, 40 Non-Core Properties were
classified as held for disposition. Subsequent to March 31, 2000, the Operating
Partnership completed the sale of two additional Non-Core Properties held for
disposition. The sale generated approximately $2,800 in net proceeds and a net
gain of approximately $500. The net proceeds from the sale of all 13 Non-Core
Properties sold subsequent to December 31, 1999 were primarily used to pay down
variable-rate debt. The Operating Partnership has also entered into contracts or
letters of intent to sell an additional 11 Non-Core Properties. See Note 15.
CBHS.
Other
The Woodlands Commercial Properties Company, L.P., owned by the
Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been
actively marketing for sale certain property assets (retail and office/venture
tech portfolio) located in The Woodlands. The sale of the retail portfolio,
including the Operating Partnership's four Retail Properties located in The
Woodlands, closed on January 5, 2000, and generated approximately $49,800 of net
proceeds, of which the Operating Partnership's portion was approximately
$37,300. The Woodlands Retail Properties were sold at a net gain of
approximately $9,000, of which the Operating Partnership's portion was
approximately $6,900. The proceeds to the Operating Partnership were used
primarily to pay down variable-rate debt.
22
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1. Financial
Statements of this document and the more detailed information contained in the
Operating Partnership's Form 10-K for the year ended December 31, 1999. In
management's opinion, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements are included. Capitalized terms used but not
otherwise defined in this section have the meanings given to them in the notes
to the financial statements in Item 1. Financial Statements.
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
characterized by terms such as "believe," "expect" 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 given in the forward-looking statements.
The following factors might cause such a difference:
o The Operating Partnership's ability to timely lease unoccupied
square footage and timely re-lease occupied square footage
upon expiration;
o Changes in real estate conditions (including rental rates and
competition from other properties and new development of
competing properties);
o Financing risks, such as the ability to generate revenue
sufficient to service existing debt, increases in debt service
associated with variable-rate debt, the ability to meet
existing financial covenants and the Operating Partnership's
ability to consummate planned financings and refinancings on
the terms and within the time frames anticipated;
o The Operating Partnership's ability to close anticipated sales
of assets or joint venture transactions or other pending
transactions;
o The failure of CBHS as debtor in possession to negotiate or
consummate an acceptable sale of its core operating assets in
the on-going bankruptcy proceedings;
o The failure of CBHS, any successful purchaser or purchasers of
such core operating assets out of bankruptcy, and the
Operating Partnership to negotiate and consummate leases for
the core facilities or the inability of the Operating
Partnership to secure on a timely basis the release of
hospital facilities from the debtor in possession;
o The failure of the purchaser or purchasers of the core
operating assets of CBHS, following any purchase and
bankruptcy restructuring, to fulfill all new lease obligations
to the Operating Partnership over the long term;
o The Operating Partnership's ability to close sales of the
Behavioral Healthcare Properties;
o The Operating Partnership's ability to find acquisition and
development opportunities which meet the Operating
Partnership's investment strategy;
o The existence of complex regulations relating to the Company's
status as a REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse
consequences of the failure to qualify as a REIT;
o The concentration of a significant percentage of the Operating
Partnership's assets in Texas;
o Adverse changes in the financial condition of existing
tenants; and
o Other risks detailed from time to time in the Operating
Partnership's and the Company's filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Operating Partnership is not obligated to
update these forward-looking statements to reflect any future events or
circumstances.
23
<PAGE> 26
The following sections include information for each of the Operating
Partnership's investment segments for the three months ended March 31, 2000.
OFFICE AND RETAIL SEGMENT
The following tables show the same-store net operating income growth
for the approximately 28.3 million square feet of Office Property space owned as
of March 31, 2000, excluding approximately 1.5 million square feet of Office
Property space at Bank One Center, in which the Operating Partnership owns a 50%
non-controlling interest.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS PERCENTAGE/
ENDED MARCH 31, POINT
-------------------------- INCREASE
2000 1999 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
(IN MILLIONS)
Same-store Revenues $ 142.5 $ 138.6 2.8%
Same-store Expenses (61.1) (59.2) 3.2%
-------- --------
Net Operating Income $ 81.4 $ 79.4 2.5%
======== ========
Weighted Average Occupancy 90.9%(1) 93.0% (2.1)pt
</TABLE>
- ---------------------------------
(1) The decline in weighted-average occupancy is due to three significant lease
expirations; two at year-end 1999 and one in the first quarter of 2000. To
date, approximately 61% of the expiring space has been re-leased, with
commencement dates over the next two quarters.
The following table shows renewed or re-leased leasing activity and the
percentage increase of leasing rates for signed leases compared to expiring
leasing rates at the Operating Partnership's Office Properties owned as of March
31, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------------------------
SIGNED EXPIRING PERCENTAGE
LEASES LEASES INCREASE
-------------------- -------------------- --------------
<S> <C> <C> <C>
Renewed or re-leased (1) 819,000 sq. ft. N/A N/A
Weighted average full-
service rental rate (2) $ 24.51 per sq. ft. $ 21.36 per sq. ft. 15%
FFO annual net effective
rental rate (3) $ 15.25 per sq. ft. $ 12.09 per sq. ft. 26%
</TABLE>
- ---------------------------------
(1) All of which have commenced or will commence during the next twelve months.
(2) Including free rent, scheduled rent increases taken into account under GAAP
and expense recoveries.
(3) Calculated as weighted average full-service rental rate minus operating
expenses.
24
<PAGE> 27
HOTEL/RESORT SEGMENT
The following table shows weighted average occupancy, average daily
rate and revenue per available room/guest for the Hotel Properties for the three
months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS PERCENTAGE/
ENDED MARCH 31, POINT
-------------------------- INCREASE
2000 1999 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
UPSCALE BUSINESS CLASS HOTELS:
Weighted average occupancy 74% 74% 0 pt
Average daily rate $ 131 $ 129 2%
Revenue per available room $ 97 $ 95 2%
LUXURY SPA RESORTS:
Weighted average occupancy 76% 79% (3)pt(1)
Average daily rate $ 361 $ 313 15%
Revenue per available room $ 275 $ 248 11%
DESTINATION FITNESS RESORTS AND SPAS:
Weighted average occupancy (2) 91% 91% 0 pt
Average daily rate (3) $ 589 $ 544 8%
Revenue per available guest (4) $ 525 $ 483 9%
---------- ---------- ----------
TOTAL HOTEL PROPERTIES:
Weighted average occupancy 77% 77% 0 pt
Average daily rate $ 250 $ 234 7%
Revenue per available room/guest $ 192 $ 180 7%
</TABLE>
- -----------------
(1) This decline in occupancy is primarily due to inclement weather conditions
in northern California in the first quarter of 2000.
(2) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights, which is the
maximum number of guests that the resort can accommodate per night, for the
period.
(3) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(4) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
25
<PAGE> 28
The following table shows pro forma Hotel Property same-store rental
income for the three months ended March 31, 2000 and 1999, including weighted
average base rent with scheduled rent increases that would be taken into account
under GAAP, and percentage rent, for the nine Hotel Properties owned as of
January 1, 1999. Management believes that the pro forma rental income, which
excludes the effect of the change in accounting for contingent rental revenues
that was adopted January 1, 2000, is the best measure of same-store rental
income growth for both periods.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------- PERCENTAGE
2000 1999 INCREASE
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Upscale Business Class Hotels $ 6,685 $ 6,661 0%
Luxury Spa Resorts 6,644 5,471 21(1)
Destination Fitness Resorts and Spas 3,518 3,271 8
---------- ---------- ----------
All Hotel Properties $ 16,847 $ 15,403 9%
========== ========== ==========
</TABLE>
- -----------------
(1) Of the 21% same-store rental income growth, approximately 13 percentage
points are due to the $21.0 million expansion project at Sonoma Mission Inn
and Spa.
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 18 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 Development, L.P. and The Woodlands Commercial Properties
Company, L.P. (collectively "The Woodlands"), The Woodlands, Texas:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Residential lot sales 563 511
Average sales price per lot $ 46,195 $ 49,393
Commercial land sales 21 acres 8 acres
Average sales price per acre $ 312,761 $ 377,665
</TABLE>
o Residential lot sales increased by 52 lots or 10.2%, for the three months
ended March 31, 2000 compared to the same period in 1999.
o The Woodlands estimates that additional sales of approximately 1,500
residential lots and 60 acres of commercial land will close during the
remainder of 2000.
o Future buildout of The Woodlands is estimated at approximately 14,000
residential lots and approximately 1,900 acres of commercial land, of which
approximately 1,000 residential lots and 1,400 acres are currently in
inventory.
26
<PAGE> 29
Desert Mountain Properties Limited Partnership ("Desert Mountain"), Scottsdale,
Arizona:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Residential lot sales 44 36
Average sales price per lot(1) $ 533,000 $ 435,000
</TABLE>
- -------------------
(1) Including equity golf memberships.
o The average sales price per lot increased by $98,000 or 23%, as a
reflection of a higher price product mix sold for the three months
ended March 31, 2000 compared to the same period in 1999.
o Future buildout of Desert Mountain is estimated at approximately 650
residential lots, of which approximately 140 are currently in
inventory.
Crescent Development Management Corporation ("CDMC"), Beaver Creek, Colorado:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Active projects 13 7
Residential lot sales 1 6
Townhome sales 2 11
Single-family home sales 5 2
Equivalent timeshare unit sales -- 4
Condominium sales 1 --
Total Revenue (in millions) $ 30.1 $ 25.9
</TABLE>
o CDMC experienced 16% growth in total revenue for the first quarter of 2000
compared to the first quarter of 1999.
o In April 1999, a partnership in which CDMC has a 64% economic interest
completed the purchase of Riverfront Park (previously known as "The
Commons"), a master planned residential development on 23 acres in the
Central Platte Valley near downtown Denver, Colorado for approximately
$25.0 million. The development of Riverfront Park is expected to begin in
the summer of 2000. The first phase will consist of one condominium project
and two loft projects with prices ranging from $0.2 million to $2.5
million. Park Place, one of the first residential projects in this first
phase, consisting of 71 lofts, commenced pre-selling in January 2000. As of
May 10, 2000, contracts had been signed on 85% of the 71 lofts. In the
first quarter of 2000, the partnership has entered into contracts relating
to the sale of 8.3 acres of Riverfront Park, which are expected to close by
the end of the fourth quarter of 2000. The acreage is in close proximity to
several major entertainment and recreational facilities including Coors
Field (home to the Major League Baseball's Colorado Rockies), Elitch
Gardens (an amusement park), the new Pepsi Center (home to the National
Hockey League's Colorado Avalanche and the National Basketball
Association's Denver Nuggets) and the new downtown Commons Park. An
adjacent 28 acres is expected to be commercially developed by another
company, thus providing a major mixed-use community adjacent to the lower
downtown area of Denver.
o Main Street Station, a premier slope-side residential development in
Breckenridge, Colorado, is expected to begin development in the late spring
of this year. Contracts on all of the 82 condominiums were signed within
the first six hours of pre-selling. Prices range from $0.2 million to $2.5
million.
o CDMC estimates the following sales for the year 2000 from its 13 active
projects: approximately 380 residential lots, 15 townhomes, five
single-family homes, and 40 condominiums.
o As of March 31, 2000, contracts relating to 80% of the sales anticipated
during the full year 2000 had been executed.
27
<PAGE> 30
Mira Vista Development Corp. ("Mira Vista"), Fort Worth, Texas:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Residential lot sales 11 8
Average sales price per lot (1) $ 88,182 $ 131,875
</TABLE>
- -----------------------
(1) Decrease in average sales price per lot between years is due to a change in
product mix.
Houston Area Development Corp. ("Houston Area Development"), Houston, Texas:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Residential lot sales 55 46
Average sales price per lot $ 29,909 $ 27,022
</TABLE>
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of March 31, 2000, the Operating Partnership held an indirect 39.6%
interest in the Temperature-Controlled Logistics Partnerships, which own the
Temperature-Controlled Logistics Corporations, which directly or indirectly own
the Temperature-Controlled Logistics Properties. The business operations
associated with the Temperature-Controlled Logistics Properties are owned by
AmeriCold Logistics, which is owned 60% by Vornado Operating L.P. and 40% by a
subsidiary of COI, in which the Operating Partnership has no interest. COI holds
an indirect 0.4% interest in the Temperature-Controlled Logistics Partnerships.
COI has an option to require the Operating Partnership to purchase COI's
remaining 1% economic interest, representing all of the voting stock, in each of
the Crescent Subsidiaries at such time as the purchase would not, in the opinion
of counsel to the Company, adversely affect the status of the Company as a REIT,
for an aggregate price, payable by the Operating Partnership, of approximately
$3.4 million.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, entered into triple-net master leases of the Temperature-
Controlled Logistics Properties with certain of the Temperature-Controlled
Logistics Corporations. Each of the Temperature-Controlled Logistics 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. Under the leases, AmeriCold
Logistics is required to pay for all costs arising from the operation,
maintenance, and repair of property as well as property capital expenditures in
excess of $5.0 million annually. For the three months ended March 31, 2000,
rental revenues were approximately $41.6 million of which base rent represented
approximately 80%. AmeriCold Logistics has the right to defer a portion of the
rent for up to three years beginning on March 12, 1999 to the extent that
available cash, as defined in the leases, is insufficient to pay such rent. As
of March 31, 2000, the Operating Partnership's share of deferred rent was
approximately $2.1 million.
Management believes that earnings before interest, taxes, depreciation
and amortization and rent ("EBITDAR") is a useful financial performance measure
for assessing the relative stability of the financial condition of AmeriCold
Logistics.
This table shows EBITDAR and lease payments for AmeriCold Logistics for
the three months ended March 31, 2000.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, 2000
------------------
<S> <C>
EBITDAR(1) $ 38.5
Lease Payment $ 41.9
</TABLE>
- -----------------
(1) EBITDAR does not represent net income or cash flows from operating,
financing or investing activities as defined by GAAP.
28
<PAGE> 31
o During the first quarter of 2000, the Temperature-Controlled Logistics
Corporations completed and opened $30.6 million of expansion and new
product, representing approximately 16.6 million cubic feet (0.8 million
square feet).
o The Temperature-Controlled Logistics Corporations have approximately $50.0
to $75.0 million of expansion and new product temperature-controlled
logistics facilities under review for development or acquisition during
2000.
BEHAVIORAL HEALTHCARE SEGMENT
As of December 31, 1999, all of the Behavioral Healthcare Properties
were leased by the Operating Partnership to CBHS under a master lease. CBHS's
business has been negatively affected by many factors, including adverse
industry conditions, and on February 16, 2000, CBHS and all of its subsidiaries
that are subject to the master lease with the Operating Partnership filed
voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court
for the District of Delaware. CBHS has stated in its bankruptcy petitions that
it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by
mid-May of 2000 or develop an appropriate liquidation procedure if the sales
have not taken place by that time.
During the three months ended March 31, 2000, the Operating Partnership
received cash rental payments of approximately $2.1 million from CBHS. See
"Liquidity and Capital Resources - CBHS" below for a complete description of the
current status of CBHS, the voluntary filing of Chapter 11 bankruptcy petitions
by CBHS and its subsidiaries and the Operating Partnership's investment in the
Behavioral Healthcare Properties.
At March 31, 2000, the Operating Partnership's investment in the
Behavioral Healthcare Properties represented approximately 5% of its total
assets and approximately 1% of consolidated rental revenues for the three months
ended March 31, 2000.
29
<PAGE> 32
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's financial data as
a percentage of total revenues for the three month periods ended March 31, 2000
and 1999 and the variance in dollars between the three month periods ended March
31, 2000 and 1999. See Note 6. Segment Reporting included in Item 1. Financial
Statements for financial information about investment segments.
<TABLE>
<CAPTION>
FINANCIAL DATA AS A PERCENTAGE TOTAL VARIANCE IN
OF TOTAL REVENUES FOR THE DOLLARS BETWEEN
THREE MONTHS ENDED MARCH 31, THE THREE MONTHS
------------------------------- ENDED MARCH 31,
2000 1999 2000 AND 1999
------------ ------------ -----------------
<S> <C> <C> <C>
REVENUES
Office and retail properties 84.8% 80.8% $ (0.9)
Hotel properties 10.0 8.3 2.1
Behavioral healthcare properties 1.2 7.4 (11.7)
Interest and other income 4.0 3.5 0.6
------------ ------------ -------------
TOTAL REVENUES 100.0 100.0 (9.9)
------------ ------------ -------------
EXPENSES
Operating expenses 37.1 34.7 0.7
Corporate general and administrative 3.0 2.2 1.2
Interest expense 29.7 22.9 9.8
Amortization of deferred financing costs 1.3 1.7 (0.8)
Depreciation and amortization 17.6 18.1 (2.7)
Settlement of merger dispute -- 8.0 (15.0)
------------ ------------ -------------
TOTAL EXPENSES 88.7 87.6 (6.8)
------------ ------------ -------------
OPERATING INCOME 11.3 12.4 (3.1)
OTHER INCOME
Equity in net income of unconsolidated
companies:
Office and retail properties 1.5 1.1 0.7
Temperature-controlled logistics properties 2.3 3.1 (1.7)
Residential development properties 6.0 4.6 1.9
Other 1.3 0.2 2.0
TOTAL EQUITY IN NET INCOME FROM ------------ ------------ -------------
UNCONSOLIDATED COMPANIES: 11.1 9.0 2.9
Gain on property sales, net 12.9 -- 22.6
------------ ------------ -------------
TOTAL OTHER INCOME 24.0 9.0 25.5
------------ ------------ -------------
INCOME BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM 35.3 21.4 22.4
Minority interests (0.3) (0.2) (0.4)
------------ ------------ -------------
INCOME BEFORE EXTRAORDINARY ITEM 35.0 21.2 22.0
Extraordinary item (2.5) -- (4.4)
------------ ------------ -------------
NET INCOME 32.5 21.2 17.6
Preferred unit distributions (1.9) (1.8) --
Share repurchase agreement return (1.2) -- (2.1)
Forward share purchase
agreement return -- (1.2) 2.2
------------ ------------ -------------
NET INCOME AVAILABLE TO
PARTNERS 29.4% 18.2% $ 17.7
============ ============ =============
</TABLE>
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED
MARCH 31, 1999
REVENUES
Total revenues decreased $9.9 million, or 5.3%, to $175.8 million for
the three months ended March 31, 2000, as compared to $185.7 million for the
three months ended March 31, 1999.
The decrease in Office and Retail Property revenues of $0.9 million for
the three months ended March 31, 2000, or 0.6%, compared to the three months
ended March 31, 1999, is attributable to:
o a decrease in incremental revenue of $4.5 million due to the
sale of the Office and Retail Properties in the first
quarter of 2000; offset by
o increased revenues of $3.6 million primarily as a result of
increased weighted average full-service rental rates.
The increase in Hotel Property revenues of $2.1 million for the three
months ended March 31, 2000, or 13.6%, compared to the three months ended March
31, 1999, is primarily attributable to:
o increased revenues of $0.8 million primarily due to an
increase in base rents resulting from lease amendments
entered into in connection with amounts paid by the
Operating Partnership for capital improvements at Sonoma
Mission Inn & Spa; and
o the reclassification of the Renaissance Houston Hotel from
the Office Property segment to the Hotel Property segment as
a result of the restructuring of its lease on July 1, 1999,
which resulted in $1.3 million of incremental revenues under
the new lease.
The decrease in Behavioral Healthcare Property revenue of $11.7 million
for the three months ended March 31, 2000, or 84.8%, is attributable to the
reflection of rent from CBHS on a cash basis beginning in the third quarter of
1999, and CBHS's failure to perform in accordance with its operating budget and
subsequent filing of voluntary bankruptcy petitions by CBHS and its subsidiaries
on February 16, 2000, which have resulted in a reduction of rent received to
$2.1 million for the three months ended March 31, 2000.
EXPENSES
Total expenses decreased $6.8 million, or 4.2%, to $155.9 million for
the three months ended March 31, 2000, as compared to $162.7 million for the
three months ended March 31, 1999.
The increase in rental property operating expenses of $0.7 million for
the three months ended March 31, 2000, or 1.1%, compared to the three months
ended March 31, 1999, is attributable to:
o a net increase in expenses of $1.9 million as a result of
increased real estate taxes of $2.3 million, offset by a
decrease in real estate taxes of $0.4 million due to Office
Property dispositions; offset by
o a decrease in expenses of $1.2 million due to the sale of
the Office and Retail Properties.
The increase in interest expense of $9.8 million for the three months
ended March 31, 2000, or 23.1%, compared to the three months ended March 31,
1999, is primarily attributable to:
o $10.7 million of incremental interest payable due to draws
under the UBS Facility;
o $5.0 million of incremental interest payable due under the
BankBoston Term Note II which was obtained on September 14,
1999;
o $1.0 million of incremental interest payable due to the
refinancing of the Houston Center Office Property complex in
September 1999; and
o $3.2 million of incremental interest payable due to the
refinancing of the Greenway Plaza Office Property complex in
June 1999.
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<PAGE> 34
The increase in interest expense is partially offset by:
o a decrease of $9.9 million of interest payable due to the
repayment and retiring of the BankBoston Credit Facility and
the BankBoston Term Note I on February 4, 2000.
The decrease in amortization of deferred financing costs of $0.8
million for the three months ended March 31, 2000, or 25.8%, compared to the
three months ended March 31, 1999, is primarily attributable to the write-off of
approximately $3.9 million in unamortized financing costs associated with the
BankBoston Credit Facility and BankBoston Term Note II as a result of the
repayment and retiring of these loans on February 4, 2000.
The decrease in depreciation and amortization expense of $2.7 million,
or 8.0%, compared to the three months ended March 31, 1999, is primarily
attributable to the fact that no depreciation was recognized during the first
quarter of 2000 on the Office Properties and Behavioral Healthcare Properties
held for disposition.
An additional decrease in expenses of $15.0 million is attributable to
a decrease in non-recurring costs incurred during the three months ended March
31, 1999 in connection with the settlement of litigation relating to the merger
agreement entered into January 1998 between the Company and Station.
OTHER INCOME
Other income increased $25.5 million, or 153.6% to $42.2 million for
the three months ended March 31, 2000, as compared to $16.6 million for the
three months ended March 31, 1999. The components of the increase in other
income are discussed below.
The increase in equity in net income of unconsolidated companies of
$2.9 million for the three months ended March 31, 2000, or 17.5%, compared to
the three months ended March 31, 1999, is attributable to:
o an increase in equity in net income of the unconsolidated
Office and Retail Properties of $0.7 million, or 35.0%
compared to the three months ended March 31, 1999,
attributable to increased revenues at The Woodlands
Commercial Properties Company L.P., due to the sale of its
retail portfolio, including the Operating Partnership's four
Retail Properties located in The Woodlands, during the three
months ended March 31, 2000;
o an increase in equity in net income of the Residential
Development Corporations of $1.9 million for the three
months ended March 31, 2000, or 22.1%, compared to the three
months ended March 31, 1999, primarily as a result of (i)
the increase in average sales price per lot at Desert
Mountain, which, due to constant lot absorption between
years, resulted in $1.2 million of incremental equity in net
income to the Operating Partnership; (ii) an increase in
residential lot sales at The Woodlands by 52 lots, which
resulted in $0.8 million of incremental equity in net income
to the Operating Partnership; and (iii) the increased in lot
sales and average price per lot sold at Houston Area
Development, which resulted in $0.4 million of incremental
equity in net income to the Operating Partnership; partially
offset by (iv) a decrease in sales activity at CDMC, which
resulted in a decrease of $0.4 million of incremental equity
in net income to the Operating Partnership; and (v) a
decrease in average sales price per lot at Mira Vista, which
resulted in a decrease of $0.1 million in equity in net
income to the Operating Partnership; and
o an increase in equity in net income of the other
unconsolidated companies of $2.0 million for the three
months ended March 31, 2000, or 666.7%, compared to the
three months ended March 31, 1999, primarily as a result of
the dividend income attributable to the 7.5% per annum cash
flow preference of the Operating Partnership's $85.0 million
preferred member interest in Metropolitan Partners, LLC,
which the Operating Partnership purchased in May 1999.
The increase in equity in net income of unconsolidated companies is
partially offset by a decrease in equity in net income of the
Temperature-Controlled Logistics Partnerships of $1.7 million for the three
months ended March 31, 2000, or 29.8%, compared to the three months ended March
31, 1999, resulting primarily from:
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<PAGE> 35
o the one-time tax benefit of approximately $2.9 million in
the three months ended March 31, 1999, which resulted from
the election of REIT status by one of the
Temperature-Controlled Logistics Corporations in 1999;
offset by
o the change in ownership structure which created a $1.2
million increase in equity in net income from the
Temperature-Controlled Logistics Partnerships for the three
months ended March 31, 2000. Prior to March 12, 1999, the
Temperature-Controlled Logistics Corporations reflected its
equity in the operations of the Temperature-Controlled
Logistics Properties. Subsequent to March 12, 1999, the
Temperature-Controlled Logistics Corporations reflect equity
in the rent it receives from AmeriCold Logistics, the lessee
and owner of business operations.
The increase in net gain on property sales of $22.6 million represents
a gain recognized on property sales during the three months ended March 31,
2000, reduced by an impairment loss of $5.0 million recognized during the three
months ended March 31, 2000 on one Office Property sold subsequent to March 31,
2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $136.6 million and $72.1 million at
March 31, 2000 and December 31, 1999, respectively. This 89.5% increase is
attributable to $22.1 million and $175.6 million provided by operating and
investing activities, respectively, partially offset by $133.2 million of cash
used in financing activities.
OPERATING ACTIVITIES
The Operating Partnership's cash provided by operating activities of
$22.1 million is attributable to:
o $86.6 million from Property operations;
o $21.5 million from a decrease in restricted cash and cash
equivalents, primarily as a result of a decrease in property
tax escrow deposits due to the payment of property taxes in
January 2000; and
o $0.6 million from minority interests.
The cash provided by operating activities is partially offset by:
o $54.2 million from an decrease in accounts payable, accrued
liabilities and other liabilities primarily due to the
payment of property taxes during the three months ended
March 31, 2000;
o $22.6 million attributable to a net gain on the sale of
Office, Retail and Behavioral Healthcare Properties;
o $8.5 million representing equity in earnings in excess of
distributions received from unconsolidated companies; and
o $1.3 million from an increase in other assets, primarily
attributable to an increase in prepaid assets.
INVESTING ACTIVITIES
The Operating Partnership's cash provided by investing activities of
$175.6 million is primarily attributable to:
o $215.5 million of net sales proceeds attributable to the
disposition of Office, Retail and Behavioral Healthcare
Properties; and
o $11.7 million attributable to a decrease in restricted cash
and cash equivalents primarily due to a decrease in capital
reserves at certain Office Properties.
The Operating Partnership's cash provided by investing activities is
partially offset by:
o $16.6 million for recurring and non-recurring tenant
improvement and leasing costs for the Office and Retail
Properties;
o $15.1 million for the acquisition of land held for
development in Houston;
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<PAGE> 36
o $8.5 million for the development of investment properties,
including expansions and renovations at the Hotel
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 $5.0 million of additional investment in the Residential
Development Corporations;
o $1.2 million of additional investment in unconsolidated
companies; and
o $2.5 million from an increase in notes receivable.
FINANCING ACTIVITIES
The Operating Partnership's use of cash for financing activities of
$133.2 million is primarily attributable to:
o payments under the BankBoston Credit Facility of $510.0
million;
o payments of $364.8 million of long-term debt, primarily
attributable to payments of (i) $320.0 million on the
BankBoston Term Note II, and (ii) $43.6 million for the
retirement of the Metropolitan Life II Note;
o distributions paid to unitholders of $74.7 million;
o debt financing costs of $17.7 million primarily related to
capitalized financing costs in connection with the UBS
Facility;
o posting of cash collateral in connection with the Share
Repurchase Agreement of $8.7 million; and
o distributions paid to the holder of preferred units of
$3.4 million.
The use of cash for financing activities is partially offset by:
o net proceeds under the UBS Facility of $755.0 million; and
o net capital proceeds from a joint venture partner of $91.2
million.
PROPERTY DISPOSITIONS
Office & Retail Segment
During the three months ended March 31, 2000, the Operating Partnership
completed the sale of six wholly owned Office Properties and was actively
marketing four additional Office Properties for sale as of March 31, 2000. The
six Office Properties sold were previously classified as held for disposition.
The sales of the six Office Properties generated approximately $146.6 million of
net proceeds. The proceeds were used primarily to pay down variable-rate debt.
The Operating Partnership recognized a net gain of approximately $13.2 million
in the first quarter of 2000, related to the sales of five of the Office
Properties that were sold during the three months ended March 31, 2000, and,
during the year ended December 31, 1999, recognized an impairment loss of $16.8
million on the remaining Office Property. For the three months ended March 31,
2000, the Operating Partnership recognized an impairment loss of approximately
$5.0 million on one Office Property classified as held for disposition, which
was sold subsequent to March 31, 2000. The impairment loss represented the
difference between the carrying value of the Office Property and the sales price
less costs of the sale. Subsequent to March 31, 2000, the Operating Partnership
had completed the sale of two of the four Office Properties held for disposition
at March 31, 2000. The sales of these Office Properties generated approximately
$34.8 million of net proceeds, which were used primarily to pay down
variable-rate debt. The Operating Partnership has also entered into contracts
relating to the sale of the remaining two Office Properties. The sales of these
Properties are expected to close by the end of the second quarter of 2000.
Behavioral Healthcare Segment
During the three months ended March 31, 2000, the Operating Partnership
completed the sale of 11 of the 51 Non-Core Properties classified as held for
disposition. The sales generated approximately $38.3 million in net proceeds and
a net gain of approximately $9.6 million. As of March 31, 2000, 40 Non-Core
Properties were classified as held for disposition. Subsequent to March 31,
2000, the Operating Partnership completed the sales of two additional Non-Core
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<PAGE> 37
Properties held for disposition. The sales generated approximately $2.8 million
in net proceeds and a net gain of approximately $0.5 million. The net proceeds
from the sale of all 13 Non-Core Properties sold subsequent to December 31, 1999
were primarily used to pay down variable-rate debt. The Operating Partnership
has also entered into contracts or letters of intent to sell an additional 11
Non-Core Properties. See "CBHS" below.
Other
The Woodlands Commercial Properties Company, L.P., owned by the
Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been
actively marketing for sale certain property assets (retail and office/venture
tech portfolio) located in The Woodlands. The sale of the retail portfolio,
including the Operating Partnership's four Retail Properties located in The
Woodlands, closed on January 5, 2000, and generated approximately $49.8 million
of net proceeds, of which the Operating Partnership's portion was approximately
$37.3 million. The Woodlands Retail Properties were sold at a net gain of
approximately $9.0 million, of which the Operating Partnership's portion was
approximately $6.9 million. The proceeds to the Operating Partnership were used
primarily to pay down variable-rate debt.
CBHS
As of December 31, 1999, all of the Behavioral Healthcare Properties
were leased by the Operating Partnership to CBHS under a master lease. CBHS's
business has been negatively affected by many factors, including adverse
industry conditions, and on February 16, 2000, CBHS and all of its subsidiaries
that are subject to the master lease with the Operating Partnership filed
voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court
for the District of Delaware. CBHS has stated in its bankruptcy petitions that
it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by
mid-May of 2000 or develop an appropriate liquidation procedure if the sales
have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties were terminated
from the master lease, although the aggregate rent due under the master lease
was not reduced as a result, except as described below with respect to sales of
Non-Core Properties. The Core Properties remain subject to the master lease. The
Operating Partnership agreed with CBHS that, upon each sale by the Operating
Partnership of Non-Core Properties, the monthly minimum rent due from CBHS under
the master lease would be reduced by a specified percentage of the net proceeds
of such sale. Payment and treatment of rent for the Behavioral Healthcare
Properties is subject to a rent stipulation agreed to by certain of the parties
involved in the CBHS bankruptcy proceeding.
As of March 31, 2000, the Behavioral Healthcare Segment consisted of 77
Behavioral Healthcare Properties in 24 states, 37 of which are designated as
Core Properties and were leased to CBHS and its subsidiaries under a triple-net
master lease, and 40 of which are designated as Non-Core Properties. Subsequent
to March 31, 2000, the Operating Partnership sold two of the Non-Core
Properties. The Operating Partnership has also entered into contracts or letters
of intent to sell 11 additional Non-Core Properties. The remaining 27 Non-Core
Properties, which are the Properties at which CBHS has ceased operations or is
planning to cease operations, are being actively marketed for sale.
An auction for the core operating assets of CBHS was held on May 10,
2000, as part of the bankruptcy proceedings relating to CBHS. The results of the
auction are preliminary pending court approval.
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<PAGE> 38
SHELF REGISTRATION STATEMENT
On October 29, 1997, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the SEC relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Management believes the Shelf
Registration Statement will provide the Company with more efficient and
immediate access to capital markets when considered appropriate. As of March 31,
2000, 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.
SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY
During the first quarter of 2000, the Operating Partnership formed
Funding IX and contributed six Office Properties and one Hotel Property to
Funding IX. The Operating Partnership owns 100% of the voting interests in
Funding IX, 0.1% in the form of a general partner interest and 99.9% in the form
of a limited partner interest.
As of March 31, 2000, the Operating Partnership had sold $100.0 million
of non-voting, redeemable preferred Class A Units in Funding IX to GMACCM. The
Class A Units receive a preferred variable rate dividend based on 30-day LIBOR,
or approximately 10.6% per annum as of March 31, 2000, and are redeemable at the
option of the Operating Partnership at the original purchase price. Subsequent
to March 31, 2000, the Operating Partnership sold an additional $10.0 million of
Class A Units in Funding IX to GMACCM.
As of May 10, 2000, the net proceeds of $108.1 million from the sale of
the Class A Units were loaned to a wholly-owned subsidiary of the Company, which
used these proceeds to repurchase 6,089,604 of the Company's outstanding common
shares. These shares will be held in the subsidiary until the Class A Units are
redeemed. Distributions will continue to be paid by the Company on the
repurchased common shares and will be used to pay dividends on the Class A
Units. See "Share Repurchase Program" below.
The Operating Partnership expects to contribute an additional Office
Property and an additional Hotel Property to Funding IX during the second
quarter of 2000. Following the contribution of these Properties and the
satisfaction of other conditions relating to the Properties, the Operating
Partnership will have the right to sell to GMACCM an aggregate of $275.0 million
of Class A Units.
The Operating Partnership is actively marketing the Office Properties
held by Funding IX for joint venture and will use the proceeds from any joint
venture or sale of a Property held by Funding IX, to redeem the preferred Class
A Units.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized
the repurchase of a portion of its outstanding common shares from time to time
in the open market or through privately negotiated transactions, in an amount
not to exceed $500.0 million. The repurchase of common shares by the Company
will decrease the Company's limited partner interest, which will result in an
increase in net income per unit.
The Company expects the share repurchase program to be funded through a
combination of asset sales and financing arrangements, which, in some cases, may
be secured by the repurchased shares. The amount of shares that the Company
actually will purchase will be determined from time to time, in its reasonable
judgment, based on market conditions and the availability of funds, among other
factors. There can be no assurance that any number of shares actually will be
purchased within any particular time period.
During the three months ended March 31, 2000, the Company repurchased
161,000 common shares in the open market at an average price of $17.53 per
common share for an aggregate of approximately $2.8 million. Subsequent to March
31, 2000, the Company repurchased 1,926,500 common shares in the open market at
an average
36
<PAGE> 39
price of $18.16 per common share for an aggregate of $35.0 million. In addition,
subsequent to March 31, 2000, the Company repurchased 4,002,104 common shares at
an average price of $17.49 per common share for an aggregate of approximately
$70.0 million, substantially settling the "Share Repurchase Agreement" with UBS.
See "Share Repurchase Agreement" below for a description of the agreement. All
of the common shares repurchased by the Company will be held in a wholly-owned
subsidiary of the Company. Pursuant to an agreement between the Company and the
subsidiary, the Company is required to repurchase these common shares from the
subsidiary no later than March 15, 2003, at which time the shares will be
retired. The presentation in these financial statements assumes that the Company
has purchased the shares from the wholly-owned subsidiary and retired these
shares. Based on these assumptions, the Company's limited partner interest
decreased, which in turn resulted in an increase in net income per unit.
The purchase of the 6,089,604 common shares was financed with the
proceeds of the sale of Class A Units in Funding IX. See "Sale of Preferred
Equity Interests in Subsidiary" above.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to
repurchase a portion of its common shares from UBS. As of December 31, 1999, the
Company was obligated to repurchase 4,789,580 common shares, or approximately
$84,100 of the Company's common shares. The agreement was amended on January 4,
2000, increasing the number of common shares the Company was obligated to
repurchase from UBS by January 4, 2001 to approximately 5,800,000 common shares,
or approximately $102,000 of the Company's common shares (as amended, the "Share
Repurchase Agreement"). The price the Company is obligated to pay for the common
shares (the "Settlement Price") is calculated based on the average cost of the
common shares purchased by UBS in connection with the Share Repurchase Agreement
plus a return to UBS of 30-day LIBOR plus 250 basis points, minus an adjustment
for the Company's distributions during the term of the Share Repurchase
Agreement. The guaranteed rate of return to UBS under the agreement is equal to
30-day LIBOR plus 250 basis points.
The Company may settle the Share Repurchase Agreement in cash or common
shares. The Company currently intends to settle the Share Repurchase Agreement
to UBS in cash, by purchasing and retiring the shares with proceeds from Office
Property joint ventures and financing arrangements. If the Company fulfills its
settlement obligations in cash, the Operating Partnership will repurchase a
portion of the Company's limited partner interest for an amount approximately
equal to the cash required to settle the Company's obligations under the Share
Repurchase Agreement. This will decrease the Operating Partnership's liquidity
and result in an increase in the Operating Partnership's net income per unit.
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 Share Repurchase Agreement or until such earlier time as it determines to
settle the Share Repurchase Agreement.
In the event that the Company elects to fulfill the Share Repurchase
Agreement in common shares, UBS will sell the common shares on behalf of the
Company on the open market. If, as a result of a decrease in the market price of
the common shares, the number of common shares required to be sold to achieve
the Settlement Price exceeds the number of common shares purchased by UBS in
connection with the agreement, the Company will deliver additional cash or
common shares to UBS. The issuance of additional common shares would increase
the Company's limited partner interest, and result in a decrease in the
Operating Partnership's net income per unit and net book value per unit. If the
Company elects to fulfill the Share Repurchase Agreement in common shares, and
the market price of the common shares is greater than the Settlement Price, UBS
will return a portion of the common shares that it purchased in the open market
to the Company. If UBS returns common shares to Company, the Operating
Partnership will repurchase a portion of the Company's limited partner interest
in the Operating Partnership, which will result in an increase in net income per
unit and net book value per unit.
If the common share price on the NYSE falls below the Settlement Price
calculated approximately every two weeks, the Company is required to remit cash
collateral to UBS equal to the product of the number of common shares purchased
by UBS and 115% of the difference between the Settlement Price and the closing
price of the common shares as reported on the NYSE. If the Company elects to
settle the Share Repurchase Agreement in cash, any cash collateral held by UBS
will be used to "pay-down" the Settlement Price. If the Company elects to settle
the Share Repurchase Agreement in common shares, UBS will release all claims to
any cash collateral they hold at that time. On February 18, 2000,
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<PAGE> 40
the Company posted cash collateral of $8.7 million to UBS, as a result of a
decline in the common share price. As of March 31, 2000, no cash collateral was
due to UBS.
According to the terms of the Share Repurchase Agreement, had the
agreement been settled, and the average cost of common shares to UBS on March
31, 2000 of approximately $17.45 been used, the Company would have had to
repurchase the 5,800,000 common shares from UBS for approximately $101.4
million. In that event, the Operating Partnership's liquidity would have
decreased and the Operating Partnership's net income - diluted per unit would
have been approximately $0.76 for the quarter ended March 31, 2000.
Subsequent to March 31, 2000, the Company purchased 4,002,104 common
shares from UBS, at an average cost of $17.49 per common share, substantially
settling the Share Repurchase Agreement. In connection with this purchase, UBS
returned approximately $6.0 million of the cash collateral posted to the Company
as a result of substantially settling the Share Repurchase Agreement. The
purchase was funded through the sale of Class A Units in Funding IX. See "Sale
of Preferred Equity Interests in Subsidiary" and see also "Share Repurchase
Program" above for a description of the effect of this transaction on the
Company's interest in the Operating Partnership.
METROPOLITAN
The Operating Partnership's $85.0 million preferred member interest in
Metropolitan Partners, LLC ("Metropolitan") at March 31, 2000 would equate to an
approximately 20% equity interest. The investment has a cash flow preference of
7.5% until May 19, 2001 and may be redeemed by Metropolitan on or before May 19,
2001 for $85.0 million, 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 by May 19, 2001, 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.
UBS FACILITY
On February 4, 2000, the Operating Partnership repaid and retired the
BankBoston Credit Facility and the BankBoston Term Note I primarily with the
proceeds of the UBS Facility. The UBS Facility is an $850.0 million secured,
variable-rate facility fully underwritten by UBS and currently funded by UBS and
Fleet. The UBS Facility consists of three tranches: the UBS Line of Credit, a
three-year $300.0 million revolving line of credit, the UBS Term Loan I, a
$275.0 million three-year term loan and the UBS Term Loan II, a $275.0 million
four-year term loan. Borrowings under the UBS Line of Credit, the UBS Term Loan
I and the UBS Term Loan II at March 31, 2000 were approximately $240.5 million,
$257.2 million and $257.2 million, respectively. The UBS Line of Credit and the
UBS Term Loan I bear interest at LIBOR plus 250 basis points. The UBS Term Loan
II bears interest at LIBOR plus 275 basis points. As of March 31, 2000, the
interest rate on the UBS Line of Credit and UBS Term Loan I was 8.63% and the
interest rate on the UBS Term Loan II was 8.88%. In order to mitigate its
exposure to variable rate debt, the Operating Partnership entered into two cash
flow hedge agreements related to a portion of the UBS Facility, as more fully
described in "Interest Rate Hedging Transactions" below. As of March 31, 2000,
the UBS Facility was secured by 40 Office Properties and four Hotel Properties.
Subsequent to March 31, 2000, the Operating Partnership sold two Office
Properties securing the UBS Facility. The net proceeds of the sale of these
Properties were used to repay amounts outstanding under the UBS Facility. The
UBS 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 allocated property values and debt service coverage
ratios, and, with respect solely to the Funding VIII, limitations on additional
secured and total indebtedness, distributions, additional investments and the
incurrence of additional liens. The Operating Partnership was in compliance with
all covenants related to the UBS Facility for the March 31, 2000 reporting
period.
INTEREST RATE HEDGING TRANSACTIONS
The Operating Partnership does not use derivative financial instruments
for trading purposes, but utilizes them to manage exposure to variable rate
debt. The Operating Partnership accounts for its derivative instruments under
SFAS 133, which was adopted in the third quarter of 1999.
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<PAGE> 41
On September 1, 1999, the Operating Partnership entered into a
four-year cash flow hedge agreement with Salomon, relating to the BankBoston
Term Note II, for a notional amount of $200.0 million. As a result of the cash
flow hedge agreement, the interest rate on the underlying note, which was
originally issued at a floating interest rate of 30-day LIBOR plus 325 basis
points was effectively converted to a fixed weighted average interest rate of
9.43% through maturity. Effective February 1, 2000, the Operating Partnership
renegotiated certain terms and covenants under the BankBoston Term Note II. At
such time, the interest rate on the underlying note increased to 30-day LIBOR
plus 400 basis points, and consequently, the effective fixed weighted average
interest rate increased to 10.18% through maturity. During the three months
ended March 31, 2000, the cash flow hedge agreement with Salomon resulted in
approximately $0.05 million of additional interest expense.
Effective February 4, 2000, the Operating Partnership entered into a
three-year cash flow hedge agreement with Fleet, relating to a portion of the
UBS Term Loan I and the UBS Line of Credit, for a notional amount of $200.0
million. As a result, the interest rate on $200.0 million of the amount due
under the UBS Term Loan I and the UBS Line of Credit, which were originally
issued at a floating interest rate of LIBOR plus 250 basis points, was
effectively converted to a fixed weighted average interest rate of 9.61% through
maturity. During the three months ended March 31, 2000, the cash flow hedge
agreement with Fleet resulted in approximately $0.4 million of additional
interest expense.
Effective April 18, 2000, the Operating Partnership entered into a
four-year cash flow hedge agreement with Fleet, for a notional amount of $100.0
million, relating to a portion of the UBS Term Loan II. As a result, the
interest rate on $100.0 million of this loan, which was originally issued at a
floating interest rate of LIBOR plus 275 basis points, was effectively converted
to a fixed weighted average interest rate of 9.51% through maturity. Fleet has
an option to terminate the agreement at the end of the third year of the
agreement.
ASSET JOINT VENTURES
The Operating Partnership has agreements with Chadwick Saylor & Co.,
Inc. and Warburg Dillon Read pursuant to which they are providing investment
advisory services to the Operating Partnership regarding the Operating
Partnership's joint-venture strategy. The Operating Partnership intends to hold
a minority equity interest in these assets and will continue to lease and manage
these Properties. Marketing memorandums for seven Office Properties are
currently being reviewed by prospective joint venture partners.
LIQUIDITY REQUIREMENTS
In the first quarter of 2000, the Operating Partnership entered into
the UBS Facility, which is described above under "UBS Facility." The Operating
Partnership used the proceeds of the UBS Facility to retire the BankBoston
Credit Facility and BankBoston Term Note I, which made up 86% of the Operating
Partnership's maturing debt in 2000 and 2001.
The Company's Share Repurchase Agreement with UBS, as described in
"Share Repurchase Agreement" above, expires on January 4, 2001, at which time
the Company is required to settle in cash or common shares. The Company
currently intends to fulfill the Share Repurchase Agreement to UBS in cash, by
purchasing and retiring the shares with proceeds from Office Property joint
ventures and financing arrangements. If the Company fulfills its settlement
obligations in cash, the Operating Partnership will repurchase a portion of the
Company's limited partner interest for an amount approximately equal to the cash
required to settle the Company's obligations under the Share Repurchase
Agreement. As of May 10, 2000, the Company had repurchased 4,002,104 common
shares from UBS at an average cost of $17.49 per common share. The purchase was
funded through the sale of the Class A Units in Funding IX, as described in
"Sale of Preferred Equity Interests in Subsidiary" above. See "Share Repurchase
Program" above for a description of the effect of this transaction on the
Company's interest in the Operating Partnership. 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 Share Repurchase
Agreement or until such earlier time as it determines to settle the remainder of
Share Repurchase Agreement.
The Sonoma Mission Inn & Spa, located north of San Francisco,
California, is scheduled to complete its estimated $21.0 million expansion,
consisting of 30 additional guest rooms and a 30,000 square foot full-service
spa by
39
<PAGE> 42
the end of the second quarter of 2000. The Operating Partnership has incurred
costs of $17.0 million related to the expansion prior to March 31, 2000. In the
first quarter of 2000, the 389 guest room Renaissance Houston Hotel, located in
the center of Greenway Plaza, has commenced a substantial renovation, including
improvements to all guest rooms, the lobby, corridors and exterior and interior
systems. The estimated $15.0 million renovation project, of which the Operating
Partnership has incurred costs of $1.7 million prior to March 31, 2000, is
scheduled to be completed in the fourth quarter of 2000. Both of these projects
will be funded from cash flows provided by operating activities, additional debt
financing or a combination thereof.
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, property sales, proceeds received from joint venture
arrangements or additional debt financing.
The Operating Partnership expects to meet its long-term liquidity
requirements through long-term secured and unsecured borrowings and other debt
and equity financing alternatives. As of March 31, 2000, 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:
o Additional proceeds from the refinancing of existing secured and
unsecured debt;
o Additional debt secured by existing underleveraged properties,
investment properties, or by investment property acquisitions or
developments;
o Issuances of Operating Partnership units or common and/or preferred
shares of the Company; and
o Joint venture arrangements.
REIT QUALIFICATION
The Company intends to maintain its qualification as a REIT under
Section 856(c) of the Code. As a REIT, the Company generally will not be subject
to corporate federal income taxes as long as it satisfies certain technical
requirements of the Code, including the requirement to distribute 95% of its
REIT taxable income to its shareholders.
On December 17, 1999, President Clinton signed into law the REIT
Modernization Act which will become effective after December 31, 2000, and
contains a provision that would permit the Company to own and operate certain
types of investments that are currently owned by COI. The REIT Modernization Act
is expected to reduce the number of business opportunities that the Company
would otherwise offer to COI pursuant to the Intercompany Agreement between the
Company and COI, which provides each party with rights to participate in certain
transactions. The Company has expressed an interest to COI in certain of the
businesses currently owned or operated by COI that the REIT Modernization Act
would allow the Company to own or operate. The Company is exploring alternatives
with COI regarding a potential future transaction with respect to certain of
COI's assets.
40
<PAGE> 43
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt
financing arrangements existing as of March 31, 2000 are shown below (dollars in
thousands):
<TABLE>
<CAPTION>
INTEREST BALANCE
RATE AT OUTSTANDING AT
MAXIMUM MARCH 31, EXPIRATION MARCH 31,
DESCRIPTION BORROWINGS 2000 DATE 2000
- ------------------------------------ ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C>
SECURED FIXED RATE DEBT:
AEGON Note (1) $ 277,402 7.53% July 2009 $ 277,402
LaSalle Note I (2) 239,000 7.83 August 2027 239,000
JP Morgan Mortgage Note (3) 200,000 8.31 October 2016 200,000
LaSalle Note II (4) 161,000 7.79 March 2028 161,000
CIGNA Note 63,500 7.47 December 2002 63,500
Metropolitan Life Note V 39,584 8.49 December 2005 39,584
Northwestern Life Note 26,000 7.66 January 2003 26,000
Metropolitan Life Note I 11,356 8.88 September 2001 11,356
Nomura Funding VI Note (5) 8,459 10.07 July 2020 8,459
Rigney Promissory Note 723 8.50 November 2012 723
----------- --------- -----------
Subtotal/Weighted Average $ 1,027,024 7.87% $ 1,027,024
----------- --------- -----------
SECURED VARIABLE RATE DEBT (6):
UBS Line of Credit(7) $ 300,000 8.63% February 2003 $ 240,526
UBS Term Loan I(7) 275,000 8.63 February 2003 257,213
UBS Term Loan II(7) 275,000 8.88 February 2004 257,213
BankBoston Term Note II (8) 200,000 9.94 August 2003 200,000
SFT Whole Loans, Inc. Note(9) 97,123 7.58 September 2001 97,123
----------- --------- -----------
Subtotal/Weighted Average $ 1,147,123 8.84% $ 1,052,075
----------- --------- -----------
UNSECURED FIXED RATE DEBT:
Notes due 2007 (10) $ 250,000 7.50% September 2007 $ 250,000
Notes due 2002 (10) 150,000 7.00 September 2002 150,000
----------- --------- -----------
Subtotal/Weighted Average $ 400,000 7.31% $ 400,000
----------- --------- -----------
TOTAL/WEIGHTED AVERAGE $ 2,574,147 8.17%(11) $ 2,479,099
=========== ========= ===========
</TABLE>
- --------------------
(1) The outstanding principal balance of this note at maturity will be
approximately $223.0 million.
(2) 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 $220.0 million.
(3) At the end of seven years (October 2006), the loan reprices based on
current interest rates at that time. It is the Operating Partnership's
intention to repay the note in full at such time (October 2006) by making a
final payment of approximately $179.0 million.
(4) 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 $154.0 million.
(5) 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 at that date.
(6) For the method of calculation of the interest rate for the Operating
Partnership's variable-rate debt, see Note 8. Notes Payable and Borrowings
under the UBS Facility of Item 1. Financial Statements.
(7) The Operating Partnership entered into the UBS Facility which consists of
three tranches, the UBS Line of Credit, the UBS Term Loan I and the UBS
Term Loan II, effective January 31, 2000. The proceeds were primarily used
to repay and retire the BankBoston Credit Facility and the BankBoston Term
Note I. The UBS Line of Credit and the UBS Term Loan I bear interest at
LIBOR plus 250 basis points. The UBS Term Loan II bears interest at LIBOR
plus 275 basis points. In the first quarter of 2000, the Operating
Partnership entered into two cash flow hedge agreements related to a
portion of the UBS Facility, which are intended to mitigate its exposure to
variable rate debt as more fully described in "Interest Rate Hedging
Transactions" above. As of March 31, 2000, the UBS Facility was secured by
40 Office Properties and four Hotel Properties. Subsequent to March 31,
2000, the Operating Partnership sold two Office Properties securing the UBS
Facility. The net proceeds of the sale of these Properties were used to
repay amounts outstanding under the UBS Facility. The UBS 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 allocated property values and debt service coverage ratios,
and, with respect solely to Funding VIII, limitations on additional secured
and total indebtedness, distributions, additional investments and the
incurrence of additional liens. The Operating Partnership was in compliance
with all covenants related to the UBS Facility for the March 31, 2000
reporting period.
41
<PAGE> 44
(8) This loan is secured by partnership interests in two pools of
underleveraged assets. On February 1, 2000, the Operating Partnership
renegotiated certain terms and covenants under this note. As a result, the
interest rate on the underlying note increased to 30-day LIBOR plus 400
basis points. The Operating Partnership entered into a four-year $200
million cash flow hedge agreement effective September 1, 1999 with Salomon
in a separate transaction related to the BankBoston Term Note II. Pursuant
to this agreement, the Operating Partnership will pay Salomon on a
quarterly basis a 6.183% fixed interest rate, and Salomon will pay the
Operating Partnership a floating 90-day LIBOR rate based on the same
quarterly reset dates.
(9) The SFT Whole Loans, Inc. Note bears interest at 30-day LIBOR plus 1.75%.
(10) The notes were issued in an offering registered with the SEC.
(11) The overall weighted average interest rate does not include the effect of
the Operating Partnership's cash flow hedge agreements. Including the
effect of these agreements, the overall weighted average interest rate
would have been 8.32%.
Below are the aggregate principal amounts due as of March 31, 2000
under the UBS Facility and other indebtedness of the Operating Partnership by
year. Scheduled principal installments and amounts due at maturity are included.
<TABLE>
<CAPTION>
SECURED UNSECURED TOTAL
----------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
2000 $ 3,897 $ -- $ 3,897
2001 113,887 -- 113,887
2002 73,911 150,000 223,911
2003 738,796 -- 738,796
2004 274,067 -- 274,067
Thereafter 874,541 250,000 1,124,541
----------- --------- -----------
$ 2,079,099 $ 400,000 $ 2,479,099
=========== ========= ===========
</TABLE>
The Operating Partnership has approximately $3,897 of secured and
unsecured debt that was scheduled to expire during 2000, consisting primarily of
monthly principal payments due under the AEGON Note during 2000, which are
expected to be funded through cash flows provided by operating activities.
The Operating Partnership's policy with regard to the incurrence and
maintenance of debt is based on a review and analysis of:
o investment opportunities for which capital is required and the
cost of debt in relation to such investment opportunities;
o the type of debt available (secured or unsecured);
o the effect of additional debt on existing coverage ratios;
o the maturity of the proposed debt in relation to maturities of
existing debt; and
o exposure to variable-rate debt and alternatives such as interest
rate swaps and cash flow hedges to reduce this exposure.
The Operating Partnership's debt service coverage ratio for the three
months ended March 31, 2000 and 1999 was approximately 2.4 and 3.2,
respectively. 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 debt service coverage ratio the
Operating Partnership is required to maintain as stipulated by the Operating
Partnership's $400.0 million unsecured notes and calculated as described above
is 1.5. The Operating Partnership's UBS Facility requires a debt service
coverage ratio (which is calculated in a different manner) of 2.0. Under the
calculation required by the UBS Facility, the Operating Partnership's debt
service coverage ratio was 2.2 at March 31, 2000.
FUNDS FROM OPERATIONS
FFO, based on the revised definition adopted by the Board of Governors
of the NAREIT, effective January 1, 2000, and as used in this document, means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from sales of depreciable
operating property;
o excluding extraordinary items (as defined by GAAP);
42
<PAGE> 45
o plus depreciation and amortization of real estate assets;
and
o after adjustments for unconsolidated partnerships and joint
ventures.
NAREIT developed FFO as a relative measure of performance and liquidity
of an equity REIT to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. Effective January 1,
2000, NAREIT clarified the definition of FFO to include non-recurring events,
except for those that are defined as "extraordinary items" under GAAP and gains
or losses from sales of depreciable operating property. The Operating
Partnership has adopted the revised definition of FFO effective as of January 1,
2000. Under the prior definition of FFO, for the three months ended March 31,
1999, FFO was approximately $92.9 million, which excluded $15.0 million paid in
connection with the 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. Because this settlement is not considered an "extraordinary item" under
GAAP, FFO for the three months ended March 31, 1999 would have been
approximately $77.9 million, which included the $15.0 million settlement
payment, if the revised definition of FFO had been in effect. The Operating
Partnership considers FFO an appropriate measure of performance of an equity
REIT. However, FFO:
o 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);
o is not necessarily indicative of cash flow available to fund cash
needs; and
o should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the
Operating Partnership's operating performance, or to cash flow
from operating activities determined in accordance with GAAP as a
measure of either liquidity or the Company's ability to make
distributions.
The Operating Partnership has historically distributed an amount less
than FFO, primarily due to reserves required for capital expenditures, including
leasing costs. The aggregate cash distributions paid to shareholders of the
Company and the Operating Partnership's unitholders for the three months ended
March 31, 2000 and 1999 were $74.5 and $75.7 million, respectively.
An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because the Company's Board of
Trust Managers is not required to increase distributions on a quarterly basis
unless necessary for the Company to maintain REIT status. However, the Company
must distribute 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 of the Company and the Operating Partnership's
unitholders although not necessarily on a proportionate basis.
Accordingly, the Operating Partnership believes that to facilitate a
clear understanding of the consolidated historical operating results of the
Operating Partnership, FFO should be considered in conjunction with the
Operating Partnership's net income (loss) and cash flows reported in the
consolidated financial statements and notes to the financial statements.
However, the Operating Partnership's measure of FFO may not be comparable to
similarly titled measures of REITs (other than the Company) because these REITs
may apply the definition of FFO in a different manner than the Operating
Partnership.
43
<PAGE> 46
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS AND UNITS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income $ 57,054 $ 39,415
Adjustments:
Depreciation and amortization of real estate assets 29,792 32,877
Gain on Property sales, net (22,627) --
Settlement of merger dispute -- 15,000
Extraordinary item - extinguishment of debt 4,378 --
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office and Retail Properties (72) 1,758
Temperature-Controlled Logistics Properties 5,451 2,571
Residential Development Properties 4,579 4,671
Preferred unit distributions (3,375) (3,375)
------------ ------------
Funds from operations - old definition(1) $ 75,180 $ 92,917
------------ ------------
Adjustments:
Settlement at merger dispute -- (15,000)
------------ ------------
Funds from operations - new definition(1) $ 75,180 $ 77,917
============ ============
Investment Segments:
Office and Retail Segment $ 86,211 $ 89,107
Hospitality Segment 17,291 15,198
Behavioral Healthcare Segment 2,079 13,823
Temperature-Controlled Logistics Properties 9,487 8,280
Residential Development Segment 15,043 13,300
Corporate general & administrative (5,245) (4,114)
Interest expense (52,250) (42,481)
Preferred unit distributions (3,375) (3,375)
Other(2) 5,939 3,179
Settlement of merger dispute -- (15,000)
------------ ------------
Funds from operations - new definition(1) $ 75,180 $ 77,917
============ ============
Basic weighted average units 67,769 68,850
============ ============
Diluted weighted average units(3) 67,997 69,921
============ ============
</TABLE>
- ------------------------
(1) For the periods beginning after January 1, 2000, the Operating Partnership
has adopted the revised definition of FFO adopted by NAREIT effective on
January 1, 2000. The revised definition modifies the prior FFO calculation
to include certain nonrecurring charges.
(2) Includes interest and other income, net of gains on Behavioral Healthcare
Properties and Office Property dispositions, preferred return paid to GMAC
less depreciation and amortization of non-real estate assets and
amortization of deferred financing costs.
(3) See calculations for the amounts presented in the reconciliation following
this table.
44
<PAGE> 47
The following schedule reconciles the Operating Partnership's basic
weighted average units to the diluted weighted average units presented above:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
(UNITS IN THOUSANDS) 2000 1999
--------------- --------------
<S> <C> <C>
Basic weighted average units: 67,769 68,850
Add: Unit options 228 1,071
--------------- --------------
Diluted weighted average units 67,997 69,921
=============== ==============
</TABLE>
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Funds from operations - new definition $ 75,180 $ 77,917
Adjustments:
Depreciation and amortization of non-real estate assets 861 556
Amortization of deferred financing costs 2,347 3,069
Minority interest in joint ventures profit and depreciation
and amortization 899 459
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies (9,958) (9,000)
Change in deferred rent receivable (2,593) (7,529)
Change in current assets and liabilities (39,607) (19,739)
Equity in earnings in excess of distributions received from
unconsolidated companies (8,455) (9,019)
Preferred unit distributions 3,375 3,375
Non-cash compensation 20 20
------------ ------------
Net cash provided by operating activities $ 22,069 $ 40,109
============ ============
</TABLE>
<PAGE> 48
OFFICE AND RETAIL PROPERTIES
As of March 31, 2000, the Operating Partnership owned 83 Office
Properties located in 29 metropolitan submarkets in eight states with an
aggregate of approximately 29.8 million net rentable square feet. The Operating
Partnership's Office Properties are located primarily in the Dallas/Fort Worth
and Houston, Texas metropolitan areas. As of March 31, 2000, the Operating
Partnership's Office Properties in Dallas/Fort Worth and Houston represented an
aggregate of approximately 71% of its office portfolio based on total net
rentable square feet (36% for Dallas/Fort Worth and 35% for Houston).
In pursuit of management's objective of disposing of non-strategic and
non-core assets, the Operating Partnership sold six Office Properties in the
first quarter of 2000 and the Operating Partnership was actively marketing for
sale its wholly owned interests in four additional Office Properties at
March 31, 2000. The Office Properties sold were The Amberton, Concourse Office
Park, The Meridian, and Walnut Green Office Properties located in Dallas, Texas;
the Energy Centre Office Property located in New Orleans, Louisiana; and the
Central Park Plaza Office Property located in Omaha, Nebraska. Subsequent to
March 31, 2000, the Operating Partnership had completed the sale of two of the
four Office Properties held for disposition at March 31, 2000. The Office
Properties sold were One Preston Park located in Dallas, Texas and 1615 Poydras
located in New Orleans, Louisiana.
In addition, the Operating Partnership has entered into contracts
relating to the sale of the two remaining Office Properties held for
disposition at March 31, 2000, AT&T Building located in Denver, Colorado and
Valley Centre located in Dallas, Texas. The sales of these Properties are
expected to close by the end of the second quarter of 2000. The disposition of
these Properties remains subject to the negotiation of acceptable terms and
other customary conditions. Subsequent to March 31, 2000, the Operating
Partnership has begun actively marketing for sale its wholly owned interests in
one additional Office Property, 160 Spear located in San Francisco, California,
and has classified this Property as held for disposition.
46
<PAGE> 49
OFFICE PROPERTIES TABLES
The following table shows, as of March 31, 2000, certain information
about the Operating Partnership's Office Properties. "CBD," as used in the
table below, means central business district.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT. (1)
--------------------- ---------- --------- --------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Bank One Center(2) 1 CBD 1987 1,530,957 75% $ 22.99
The Crescent Office Towers 1 Uptown/Turtle Creek 1985 1,204,670 87 31.05
Fountain Place 1 CBD 1986 1,200,266 96 19.43
Trammell Crow Center(3) 1 CBD 1984 1,128,331 76(5) 24.12
Stemmons Place 1 Stemmons Freeway 1983 634,381 88 15.90
Spectrum Center(4) 1 Far North Dallas 1983 598,250 90 23.05
Waterside Commons 1 Las Colinas 1986 458,739 100 20.18
Caltex House 1 Las Colinas 1982 445,993 92 29.78
Reverchon Plaza 1 Uptown/Turtle Creek 1985 374,165 77 20.35
The Aberdeen 1 Far North Dallas 1986 320,629 100 18.77
MacArthur Center I & II 1 Las Colinas 1982/1986 294,069 95 22.27
Stanford Corporate Centre 1 Far North Dallas 1985 265,507 34(5) 20.31
12404 Park Central 1 LBJ Freeway 1987 239,103 100 21.67
Palisades Central II 1 Richardson/Plano 1985 237,731 75(5) 18.15
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,769 92 21.48
Liberty Plaza I & II 1 Far North Dallas 1981/1986 218,813 100 15.98
The Addison 1 Far North Dallas 1981 215,016 100 19.50
Palisades Central I 1 Richardson/Plano 1980 180,503 87 18.04
Greenway II 1 Richardson/Plano 1985 154,329 100 22.78
Addison Tower 1 Far North Dallas 1987 145,886 92 17.55
Greenway I & IA 2 Richardson/Plano 1983 146,704 100 23.46
5050 Quorum 1 Far North Dallas 1981 133,594 89 17.87
Cedar Springs Plaza 1 Uptown/Turtle Creek 1982 110,923 96 18.54
Valley Centre 1 Las Colinas 1985 74,861 90 18.77
One Preston Park(6) 1 Far North Dallas 1980 40,525 59 18.54
------ ------------- ------- ----------
Subtotal/Weighted Average 26 10,587,714 86% $ 22.28
------ ------------- ------- ----------
FORT WORTH
UPR Plaza 1 CBD 1982 954,895 95% $ 15.57
------ ------------- ------- ----------
HOUSTON
Greenway Plaza Office Portfolio 10 Richmond-Buffalo 1969-1982 4,286,277 93% $ 17.83
Speedway
Houston Center 3 CBD 1974-1983 2,764,418 96 17.83
Post Oak Central 3 West Loop/Galleria 1974-1981 1,277,516 93 18.44
The Woodlands Office Properties(7) 12 The Woodlands 1980-1996 811,067 96 16.35
Four Westlake Park 1 Katy Freeway 1992 561,065 96(5) 19.42
Three Westlake Park(8) 1 Katy Freeway 1983 414,251 62(5) 21.26
1800 West Loop South 1 West Loop/Galleria 1982 399,777 68 17.35
------ ------------- ------- ----------
Subtotal/Weighted Average 31 10,514,371 92% $ 17.95
------ ------------- ------- ----------
AUSTIN
Frost Bank Plaza 1 CBD 1984 433,024 93% $ 23.33
301 Congress Avenue(9) 1 CBD 1986 418,338 98 25.35
Bank One Tower 1 CBD 1974 389,503 97 19.84
Austin Centre 1 CBD 1986 343,665 92 22.61
The Avallon 1 Northwest 1993/1997 232,301 100 23.07
Barton Oaks Plaza One 1 Southwest 1986 99,895 100 21.47
------ ------------- ------- ----------
Subtotal/Weighted Average 6 1,916,726 96% $ 22.83
------ ------------- ------- ----------
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT. (1)
--------------------- ---------- --------- --------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
COLORADO
DENVER
MCI Tower 1 CBD 1982 550,807 99% $ 18.06
Ptarmigan Place 1 Cherry Creek 1984 418,630 97 18.73
Regency Plaza One 1 DTC 1985 309,862 96 23.80
AT&T Building 1 CBD 1982 184,581 89 16.43
The Citadel 1 Cherry Creek 1987 130,652 91 22.58
55 Madison 1 Cherry Creek 1982 137,176 80(5) 19.41
44 Cook 1 Cherry Creek 1984 124,174 97 20.06
------ ------------- ------- ----------
Subtotal/Weighted Average 7 1,855,882 95% $ 19.59
------ ------------- ------- ----------
COLORADO SPRINGS
Briargate Office and
and Research Center 1 Colorado Springs 1988 252,857 100% $ 18.72
------ ------------- ------- ----------
LOUISIANA
NEW ORLEANS
1615 Poydras(6) 1 CBD 1984 508,741 83% $ 16.63
------ ------------- ------- ----------
FLORIDA
MIAMI
Miami Center 1 CBD 1983 782,686 79%(5) $ 25.13
Datran Center 2 South Dade/Kendall 1986/1988 472,236 91 22.28
------ ------------- ------- ----------
Subtotal/Weighted Average 3 1,254,922 84% $ 23.95
------ ------------- ------- ----------
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 96% $ 24.50
6225 North 24th Street 1 Camelback Corridor 1981 86,451 100 21.82
------ ------------- ------- ----------
Subtotal/Weighted Average 2 562,824 96% $ 24.07
------ ------------- ------- ----------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour 2 Georgetown 1986 536,206 96%(5) $ 38.74
------ ------------- ------- ----------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza 1 CBD 1990 366,236 90% $ 18.77
------ ------------- ------- ----------
CALIFORNIA
SAN FRANCISCO
160 Spear Street 1 South of Market/CBD 1984 276,420 100% $ 26.32
------ ------------- ------- ----------
SAN DIEGO
Chancellor Park(10) 1 UTC 1988 195,733 92% $ 22.72
------ ------------- ------- ----------
TOTAL/WEIGHTED AVERAGE 83 29,783,527 90%(5) $ 20.65(11)
====== ============= ======= ==========
</TABLE>
--------------------------
(1) Calculated based on base rent payable as of March 31, 2000, 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
0.5% general partner interest in the partnership that owns Bank One
Center.
(3) The Operating Partnership owns the principal economic interest in
Trammell Crow Center through its ownership of fee simple title to the
Property (subject to a ground lease and a leasehold estate regarding
the building) and two mortgage notes encumbering the leasehold
interests in the land and building.
(4) The Operating Partnership owns the principal economic interest in
Spectrum Center through an interest in Spectrum Mortgage Associates,
L.P. which owns both a mortgage note secured by Spectrum Center and
the ground lessor's interest in the land underlying the office
building.
48
<PAGE> 51
(5) Leases have been executed at certain Office Properties but had not
commenced as of March 31, 2000. If such leases had commenced as of
March 31, 2000, the percent leased for all Office Properties would
have been 93%. The total percent leased for these Properties would
have been as follows: Trammell Crow Center - 85%; Stanford Corporate
Centre - 63%; Palisades Central II - 93%; Four Westlake Park - 100%;
Three Westlake Park - 67%; 55 Madison - 92%; Miami Center - 86%; and
Washington Harbour - 99%.
(6) Sold subsequent to March 31, 2000.
(7) 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.
(8) As of December 31, 1999, the Operating Partnership owned the
principal economic interest in Three Westlake Park through its
ownership of a mortgage note secured by Three Westlake Park.
Effective January 7, 2000, the Property was conveyed to the Operating
Partnership by a deed in lieu of foreclosure, and as a result, the
Operating Partnership now owns Three Westlake Park in fee simple.
(9) The Operating Partnership has a 1% general partner interest and a 49%
limited partner interest in the partnership that owns 301 Congress
Avenue.
(10) The Operating Partnership owns Chancellor Park through its ownership
of a mortgage note secured by the building and through its direct and
indirect interests in the partnership which owns the building.
(11) 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, 2000, 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 $21.18.
The following table shows, as of March 31, 2000, the principal
businesses conducted by the tenants at the Operating Partnership's Office
Properties, based on information supplied to the Operating Partnership from the
tenants.
<TABLE>
<CAPTION>
Percent of
Industry Sector Leased Sq. Ft.
- ---------------------------- --------------
<S> <C>
Professional Services(1) 26%
Energy 21
Financial Services(2) 20
Telecommunications 8
Technology 6
Manufacturing 3
Retail 3
Food Service 3
Medical 2
Government 2
Other(3) 6
-------------
TOTAL LEASED 100%
=============
</TABLE>
- --------------------
(1) Includes legal, accounting, engineering, architectural, and advertising
services.
(2) Includes banking, title and insurance, and investment services.
(3) Includes construction, real estate, transportation and other industries.
49
<PAGE> 52
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following tables show schedules of lease expirations for leases in
place as of March 31, 2000 for the Operating Partnership's total Office
Properties and for Dallas and Houston, Texas, individually, for each of the 10
years beginning with 2000, assuming that none of the tenants exercises or has
exercised renewal options.
TOTAL OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
2000 406 2,252,981(2) 8.5% $ 42,205,574 7.2% $ 18.73
2001 366 3,344,096 12.6 66,000,795 11.3 19.74
2002 355 3,591,001 13.5 79,600,198 13.6 22.17
2003 282 2,798,936 10.5 56,931,457 9.7 20.34
2004 268 4,374,532 16.4 96,328,587 16.4 22.02
2005 137 2,661,425 10.0 61,606,873 10.5 23.15
2006 47 1,297,330 4.9 30,685,593 5.2 23.65
2007 42 1,719,236 6.5 39,769,006 6.8 23.13
2008 25 974,391 3.7 25,487,520 4.3 26.16
2009 21 647,984 2.4 17,621,774 3.0 27.19
2010 and thereafter 27 2,941,404 11.0 70,191,197 12.0 23.86
------------ ------------ ------------ ------------ ------------ ------------
1,976 26,603,316 100.0% $586,428,574 100.0% $ 22.04
============ ============ ============ ============ ============ ============
</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 expense levels.
(2) As of March 31, 2000, leases have been signed for approximately 1,306,309
net rentable square feet (including renewed leases and leases of previously
unleased space) commencing after March 31, 2000 and on or before December
31, 2000.
(3) Reconciliation to the Operating Partnership's total Office Property net
rentable area is as follows:
<TABLE>
<CAPTION>
SQUARE PERCENTAGE
FEET OF TOTAL
----------- -----------
<S> <C> <C>
Square footage leased to tenants 26,603,316 89.3%
Square footage reflecting
management offices, building use,
and remeasurement adjustments 267,923 0.9
Square footage vacant 2,912,288 9.8
----------- -----------
Total net rentable square footage 29,783,527 100.0%
=========== ===========
</TABLE>
50
<PAGE> 53
DALLAS OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
2000 126 767,200(2) 8.5% $ 14,807,126 7.0% $ 19.30
2001 102 911,494 10.0 19,637,634 9.3 21.54
2002 89 901,421 9.9 23,364,231 11.1 25.92
2003 73 1,086,438 12.0 22,844,049 10.8 21.03
2004 84 1,082,010 11.9 27,658,489 13.1 25.56
2005 38 1,371,919 15.1 30,105,151 14.3 21.94
2006 17 367,114 4.0 9,964,500 4.7 27.14
2007 15 894,977 9.9 21,364,841 10.1 23.87
2008 9 571,209 6.3 14,423,688 6.8 25.25
2009 8 380,641 4.2 9,612,569 4.6 25.25
2010 and thereafter 4 738,666 8.2 17,465,524 8.2 23.64
------------ ------------ ------------ ------------ ------------ ------------
565 9,073,089 100.0% $211,247,802 100.0% $ 23.28
============ ============ ============ ============ ============ ============
</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 expense levels.
(2) As of March 31, 2000, leases have been signed for approximately 649,695 net
rentable square feet (including renewed leases and leases of previously
unleased space) commencing after March 31, 2000 and on or before December
31, 2000.
HOUSTON OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
2000 162 862,987(2) 9.0% $ 13,983,969 7.3% $ 16.20
2001 133 1,605,333 16.7 28,292,517 14.8 17.62
2002 151 1,302,480 13.5 24,586,537 12.9 18.88
2003 104 902,916 9.4 16,508,993 8.6 18.28
2004 94 1,820,744 18.9 35,222,137 18.4 19.34
2005 42 349,471 3.6 7,154,339 3.7 20.47
2006 12 615,683 6.4 13,058,994 6.8 21.21
2007 8 502,817 5.2 10,221,368 5.3 20.33
2008 5 183,719 1.9 3,319,233 1.7 18.07
2009 2 48,538 0.5 1,175,034 0.6 24.21
2010 and thereafter 11 1,439,091 14.9 37,542,268 19.9 26.09
------------ ------------ ------------ ------------ ------------ ------------
724 9,633,779 100.0% $191,065,389 100.0% $ 19.83
============ ============ ============ ============ ============ ============
</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 expense levels.
(2) As of March 31, 2000, leases have been signed for approximately 373,881 net
rentable square feet (including renewed leases and leases of previously
unleased space) commencing after March 31, 2000 and on or before December
31, 2000.
51
<PAGE> 54
RETAIL PROPERTIES
As of March 31, 2000, the Operating Partnership owned three Retail
Properties, which in the aggregate contain approximately 421,000 net rentable
square feet. 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, 2000, the Retail
Properties were 90% leased.
On January 5, 2000, the sale of the Operating Partnership's four
Retail Properties located in The Woodlands, a master-planned development
located 27 miles north of downtown Houston, Texas, was completed.
52
<PAGE> 55
HOTEL PROPERTIES
HOTEL PROPERTIES TABLES
The following table shows certain information for the three months
ended March 31, 2000 and 1999, 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 fitness resorts and spas that measure their performance based on
available guest nights.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM/GUEST
COMPLETED/ ----------------- --------------- ---------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 2000 1999 2000 1999 2000 1999
- ----------------- -------- --------- -------- ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UPSCALE BUSINESS CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613 79% 79% $ 114 $121 $ 90 $ 96
Four Seasons Hotel-Houston(2) Houston, TX 1982 399 74 68 206 193 152 131
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 62 68 104 107 64 73
Omni Austin Hotel Austin, TX 1986 372 80 85 135 130 109 111
Renaissance Houston Hotel(3) Houston, TX 1975 389 75 69 98 96 73 66
-------- ------ ------- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 2,168 74% 74% $ 131 $129 $ 97 $ 95
======== ====== ======= ====== ====== ====== ======
LUXURY SPA RESORTS:
Hyatt Regency Beaver Creek Avon, CO 1989 276 85% 82% $ 417 $399 $353 $327
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(4) 67 75 256 174(4) 171 131(4)
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62 68 81 379 297 257 242
-------- ------ ------- ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 536 76% 79% $ 361 $313 $275 $248
======== ====== ======= ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
GUEST
DESTINATION FITNESS RESORTS AND SPAS: NIGHTS
--------
<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 91%(6) 92%(6) $ 589(7) $543(7) $525(8) $483(8)
======== ====== ======= ====== ====== ====== ======
GRAND TOTAL/WEIGHTED AVERAGE FOR HOTEL PROPERTIES 77% 77% $ 250 $234 $192 $180
====== ======= ====== ====== ====== ======
</TABLE>
- --------------------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
the Operating Partnership 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 March 31, 2000, the Omni Austin Hotel
is leased pursuant to a separate long term lease, to HCD Austin
Corporation.
(2) The hotel is undergoing a $5.0 million renovation of all guest rooms
scheduled to be completed by the end of the third quarter of 2000.
(3) The hotel is undergoing a $15.0 million renovation project scheduled to be
completed in the fourth quarter of 2000. The renovation includes
improvements to all guest rooms, the lobby, corridor, and exterior and
interior systems.
(4) In January 2000, 20 rooms, which were previously taken out of commission
for construction of a 30,000 square foot full-service spa in connection
with an approximately $21.0 million expansion of the hotel, were returned
to service. The expansion is scheduled to be completed in the second
quarter of 2000. The expansion will also include the construction of 30
additional guest rooms. Rates were discounted during the construction
period which resulted in a lower average daily rate and revenue per
available room for the three months ended March 31, 1999 as compared to
March 31, 2000.
(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.
53
<PAGE> 56
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES TABLE
The following table shows the number and aggregate size of
Temperature-Controlled Logistics Properties by state as of March 31, 2000:
<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 MILLIONS)
----- ------------- ------------- ------------- ----- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama 4 9.4 0.3 Missouri(2) 2 48.8 2.8
Arizona 1 2.9 0.1 Nebraska 2 4.4 0.2
Arkansas 6 33.1 1.0 New York 1 11.8 0.4
California 9 28.6 1.1 North Carolina 3 8.5 0.3
Colorado 2 3.4 0.1 Ohio 1 5.7 0.2
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 5.0 0.2 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 2 8.7 0.3
Massachusetts 6 15.2 0.7 Washington 6 28.7 1.1
Mississippi 1 4.7 0.2 Wisconsin 3 17.4 0.7
------------- ------------ ------------
TOTAL 90(3) 444.9(3) 17.8(3)
============= ============ ============
</TABLE>
- -------------------------
(1) As of March 31, 2000, the Operating Partnership held an indirect 39.6%
interest in the Temperature-Controlled Logistics Partnerships, which own
the Temperature-Controlled Logistics Corporations, which directly or
indirectly owned the Temperature-Controlled Logistics Properties. The
business operations associated with the Temperature-Controlled Logistics
Properties are owned by AmeriCold Logistics, in which the Operating
Partnership has no interest. The Temperature-Controlled Logistics
Corporations are entitled to receive lease payments (base rent and
percentage rent) from AmeriCold Logistics.
(2) Includes an underground storage facility, with approximately 33.1 million
cubic feet.
(3) As of March 31, 2000, AmeriCold Logistics operated 104
temperature-controlled logistics properties with an aggregate of
approximately 533.0 million cubic feet (20.6 million square feet).
54
<PAGE> 57
RESIDENTIAL DEVELOPMENT PROPERTIES
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table shows certain information as of March 31, 2000,
relating to the Residential Development Properties.
<TABLE>
<CAPTION>
TOTAL TOTAL
RESIDENTIAL RESIDENTIAL TOTAL LOTS/UNITS LOTS/UNIT
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 Mountain SF Scottsdale, AZ
Development 93.0% 2,665 2,236 2,014
Corp. ------- --------- ---------
The Woodlands The Woodlands SF The Woodlands, TX
Land Company, 42.5% 36,385 22,303 21,284
Inc. ------- --------- ---------
Crescent Deer Trail SFH Avon, CO 60.0% 16(6) 12 12
Development Bear Paw Lodge CO Avon, CO 60.0% 53(6) 11 11
Management QuarterMoon TH Avon, CO 64.0% 13(6) -- --
Corp. Eagle Ranch SF Eagle, CO 60.0% 1,260(6) 93 92
Main Street
Junction CO Breckenridge, CO 60.0% 36(6) 18 14
Main Street
Station CO Breckenridge, CO 60.0% 82(6) -- --
Riverbend SF Charlotte, NC 60.0% 650(6) -- --
Three Peaks
(Eagle's Nest) SF Silverthorne, CO 30.0% 391(6) 75 71
Park Place at
Riverfront CO Denver, CO 64.0% 71(6) -- --
Park Tower at
Riverfront CO Denver, CO 64.0% 58(6) -- --
Bridge Lofts
at Riverfront CO Denver, CO 64.0% 53 -- --
Cresta TH/SFH Edwards, CO 60.0% 25(6) -- --
------- --------- ---------
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORP. 2,708 209 200
------- --------- ---------
Mira Vista Mira Vista SF Fort Worth, TX 100.0% 757 740 639
Development The Highlands SF Breckenridge, CO 12.3% 750 332 327
Corp. ------- --------- ---------
TOTAL MIRA VISTA DEVELOPMENT CORP. 1,507 1,072 966
------- --------- ---------
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 688 560
Development Spring Lakes SF Houston, TX 100.0% 536 161 136
Corp. ------- --------- ---------
TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,741 849 696
------- --------- ---------
TOTAL 45,006 26,669 25,160
======= ========= =========
<CAPTION>
AVERAGE
RESIDENTIAL CLOSED RANGE OF
RESIDENTIAL DEVELOPMENT SALE PRICE PROPOSED
DEVELOPMENT PROPERTIES TYPE OF PER LOT/ SALE PRICES
CORPORATION(1) (RDP) RDP(2) LOCATION UNIT($)(3) PER LOT/UNIT($)(4)
- --------------- ----- ------ -------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Desert Mountain Desert Mountain SF Scottsdale, AZ
Development 467,000 375,000 - 3,000,000(5)
Corp.
The Woodlands The Woodlands SF The Woodlands, TX
Land Company, 47,893 13,600 - 500,000
Inc.
Crescent Deer Trail SFH Avon, CO 2,930,000 2,695,000 - 4,075,000
Development Bear Paw Lodge CO Avon, CO 1,675,000 665,000 - 2,025,000
Management QuarterMoon TH Avon, CO N/A 1,850,000 - 2,795,000
Corp. Eagle Ranch SF Eagle, CO 111,500 80,000 - 150,000
Main Street
Junction CO Breckenridge, CO 475,000 300,000 - 580,000
Main Street
Station CO Breckenridge, CO N/A 215,000 - 1,065,000
Riverbend SF Charlotte, NC N/A 25,000 - 38,000
Three Peaks
(Eagle's Nest) SF Silverthorne, CO 220,000 135,000 - 425,000
Park Place at
Riverfront CO Denver, CO N/A 195,000 - 1,445,000
Park Tower at
Riverfront CO Denver, CO N/A 180,000 - 2,100,000
Bridge Lofts
at Riverfront CO Denver, CO N/A 180,000 - 2,100,000
Cresta TH/SFH Edwards, CO N/A 1,900,000 - 2,600,000
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORP.
Mira Vista Mira Vista SF Fort Worth, TX 100,000 50,000 - 265,000
Development The Highlands SF Breckenridge, CO 150,000 55,000 - 450,000
Corp.
TOTAL MIRA VISTA DEVELOPMENT CORP.
Houston Area Falcon Point SF Houston, TX 28,000 22,000 - 60,000
Development Spring Lakes SF Houston, TX 26,000 22,000 - 33,000
Corp.
TOTAL HOUSTON AREA DEVELOPMENT CORP.
TOTAL
</TABLE>
- -------------------------
(1) The Operating Partnership has an approximately 95%, 95%, 90%, 94% and 94%,
ownership interest in Desert Mountain Development Corp., The Woodlands
Land Company, Inc., Crescent Development Management Corp., Mira Vista
Development Corp., and Houston Area Development Corp., respectively,
through ownership of non-voting common stock in each of these Residential
Development Corporations.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); 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) Includes golf membership, which for 2000, is approximately $175,000.
(6) As of March 31, 2000, four units were under contract at Deer Trail
representing $14.2 million in sales; 34 units were under contract at Bear
Paw Lodge representing $47.4 million in sales; 13 units were under
contract at QuarterMoon representing $29.8 million in sales; 74 lots were
under contract at Eagle Ranch representing $10.6 million in sales; six
units were under contract at Main Street Junction representing $2.4
million in sales; 82 units were under contract at Main Street Station
representing $40.9 million in sales; 117 lots were under contract at
Riverbend representing $3.5 million in sales; 28 lots were under contract
at Three Peaks representing $6.6 million in sales; 58 units were under
contract at Park Place representing $23.5 million in sales; and 16 units
were under contract at Park Tower representing $10.8 million in sales;
nine units were under contract at Cresta representing $15.4 million in
sales.
55
<PAGE> 58
BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE PROPERTIES
As of December 31, 1999, all of the Behavioral Healthcare Properties
were leased by the Operating Partnership to CBHS under a master lease. CBHS's
business has been negatively affected by many factors, including adverse
industry conditions, and on February 16, 2000, CBHS and all of its subsidiaries
that are subject to the master lease with the Operating Partnership filed
voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court
for the District of Delaware. CBHS has stated in its bankruptcy petitions that
it intends to sell all of the ongoing businesses of CBHS and its subsidiaries
by mid-May of 2000 or develop an appropriate liquidation procedure if the sales
have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties were terminated
from the master lease, although the aggregate rent due under the master lease
was not reduced as a result, except as described below with respect to sales of
Non-Core Properties. The Core Properties remain subject to the master lease.
The Operating Partnership agreed with CBHS that, upon each sale by the
Operating Partnership of Non-Core Properties, the monthly minimum rent due from
CBHS under the master lease would be reduced by a specified percentage of the
net proceeds of such sale. Payment and treatment of rent for the Behavioral
Healthcare Properties is subject to a rent stipulation agreed to by certain of
the parties involved in the CBHS bankruptcy proceeding.
During the three months ended March 31, 2000, the Operating
Partnership sold 11 Non-Core Properties for approximately $38.3 million in net
proceeds. The sale of these properties generated a net gain of approximately
$9.6 million. As of March 31, 2000, the Behavioral Healthcare Segment consisted
of 77 Behavioral Healthcare Properties in 24 states, 37 of which are designated
as Core Properties and were leased to CBHS and its subsidiaries under a
triple-net master lease, and 40 of which are designated as Non-Core Properties.
Subsequent to March 31, 2000, the Operating Partnership sold two of the
Non-Core Properties for approximately $2.8 million of net proceeds. The sales
generated a net gain of approximately $0.5 million. The Operating Partnership
has also entered into contracts or letters of intent to sell 11 additional
Non-Core Properties. The remaining 27 Non-Core Properties, which are the
Properties at which CBHS has ceased operations or is planning to cease
operations, are being actively marketed for sale.
An auction for the core operating assets of CBHS was held on May 10,
2000, as part of the bankruptcy proceedings relating to CBHS. The results of
the auction are preliminary pending court approval.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Operating Partnership's and the Company's use of financial
instruments, such as debt instruments and the Share Repurchase Agreement with
UBS, subject the Operating Partnership to market risk which may affect the
Operating Partnership's future earnings and cash flows as well as the fair
value of its assets. Market risk generally refers to the risk of loss from
changes in interest rates and market prices. The Operating Partnership manages
its market risk by attempting to match anticipated inflow of cash from its
operating, investment and financing activities with anticipated outflow of cash
to fund debt payments, distributions to shareholders, investments, capital
expenditures and other cash requirements. The Operating Partnership does not
enter into financial instruments for trading purposes.
The following discussion of market risk is based solely on
hypothetical changes in interest rates related to the Operating Partnership's
variable-rate debt and the Company's Share Repurchase Agreement and in the
market price of the Company's common shares as such changes relate to the Share
Repurchase Agreement. This discussion does not purport to take into account all
of the factors that may affect the financial instruments discussed in this
section.
INTEREST RATE RISK
The Operating Partnership's interest rate risk is most sensitive to
fluctuations in interest rates on its short-term variable-rate debt. The
Operating Partnership had total outstanding debt of approximately $2.5 billion
at March 31, 2000, of which approximately $0.7 billion, or 28%, was
variable-rate unhedged debt. The weighted average interest rate on such
variable-rate debt was 8.57% as of March 31, 2000. A 10% (85.7 basis point)
increase in the weighted average interest rate on such variable-rate debt would
result in an annual decrease in net income and cash flows of approximately $5.6
million based on the variable-rate unhedged debt outstanding as of March 31,
2000, as a result of the increased interest expense associated with the change
in rate. Conversely, a 10% (85.7 basis point) decrease in the weighted
56
<PAGE> 59
average interest rate on such variable-rate debt would result in an annual
increase in net income and cash flows of approximately $5.6 million based on
the variable rate debt outstanding as of March 31, 2000, as a result of the
decreased interest expense associated with the change in rate.
In addition, the Company's settlement obligations under the Share
Repurchase Agreement with UBS described in Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Share Repurchase
Agreement, are subject to interest rate risk, specifically changes in the
30-day LIBOR rate.
MARKET PRICE RISK
The Share Repurchase Agreement is subject to market rate risk because
changes in the closing share price for the Company's common shares affect the
Company's settlement obligation. Assuming the Company elects to settle in
common shares on January 4, 2001, and the market price of the common shares
decreases by 10% from the $17.50 per share closing price of the common shares
on March 31, 2000, and assuming no change in the 30-day LIBOR rate from the
rate at March 31, 2000, the Company will issue an additional 416,249 common
shares based on its obligation under the Share Repurchase Agreement as of March
31, 2000, which related to 5,800,000 common shares. Assuming the Company elects
to settle in common shares on January 4, 2001, and the market price of the
common shares increases by 10% from the $17.50 per share closing price of the
common shares of March 31, 2000, and assuming no change in the 30-day LIBOR
rate from March 31, 2000, UBS will return to the Company 416,249 common shares
based on its obligation under the Share Repurchase Agreement as of March 31,
2000, which related to 5,800,000 common shares. The issuance of additional
common shares under the terms of the Share Repurchase Agreement would result in
the reduction of the Operating Partnership's net income per unit and net book
value per unit. A change in the market price will not affect the amount
required to be paid to settle the Share Repurchase Agreement in cash. The
issuance of additional common shares would result in an increase in the
Company's limited partner interest, which would result in a reduction of the
Operating Partnership's net income per unit and net book value per unit.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
57
<PAGE> 60
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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 Annual
Report on Form 10-K for the fiscal year ended December
31, 1999 (the "Company 1999 10-K") 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 No. 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 No. 4.01 to the Registration Statement on Form
S-3 (File No. 333-2905) of the Company and incorporated
herein by reference)
4.03 Amended and Restated Bylaws of the Company as amended
(filed as Exhibit No. 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 (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)
4.05 7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the
Company 2Q 10-Q and incorporated herein by reference)
4* Pursuant to Regulation S-K Item 601 (6) (4) (iii), the
Registrant by this filing agrees, upon request to
furnish to the SEC a copy of other instruments defining
the rights of holders of long-term debt of the
Registrant
10.01 Noncompetition 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 Employment Agreement with John C. Goff, as assigned to
the Registrant on May 5, 1994, and as further amended
(filed as Exhibit 10.04 to the Company 1999 10-K and
incorporated herein by reference)
10.04 Employment Agreement of Jerry R. Crenshaw, Jr. dated as
of December 14, 1998 (filed as Exhibit 10.08 to the
Company 1999 10-K and incorporated herein by reference)
10.05 Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Company and each
of its executive officers and trust managers (filed as
Exhibit No. 10.07 to the Form S-4 and incorporated
herein by reference)
10.08 Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the
Registration Statement on Form S-11 (File No. 33-75188)
of the Company and incorporated herein by reference)
58
<PAGE> 61
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.09 Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan, as amended (filed as Exhibit
10.12 to the Annual Report of Form 10-K for the year
ended December 31, 1998 of the Company and incorporated
herein by reference)
10.10 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)
10.11 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)
10.12 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan, as amended (filed as Exhibit 10.14
to the Company 1999 10-K) and incorporated herein by
reference
10.13 Secured Loan Agreement, dated as of January 31, 2000,
by and among Crescent Real Estate Funding VIII, L.P and
UBS AG, Stamford Branch (filed as Exhibit 10.12 to the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 of the Company and incorporated herein
by reference)
10.14 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.
59
<PAGE> 62
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
(Registrant)
By: Crescent Real Estate Equities, Ltd.,
its General Partner
By /s/ John C. Goff
-------------------------------------
John C. Goff
Date: May 19, 2000 Vice Chairman of the Board
and Chief Executive Officer
By /s/ Jerry R. Crenshaw
-------------------------------------
Jerry R. Crenshaw
Senior Vice President and Chief
Financial Officer (Principal
Date: May 19, 2000 Financial and Accounting Officer)
60
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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 Annual
Report on Form 10-K for the fiscal year ended December
31, 1999 (the "Company 1999 10-K") 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 No. 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 No. 4.01 to the Registration Statement on Form
S-3 (File No. 333-2905) of the Company and incorporated
herein by reference)
4.03 Amended and Restated Bylaws of the Company as amended
(filed as Exhibit No. 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 (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)
4.05 7-1/8% Note due 2007 (filed as Exhibit No. 4.08 to the
Company 2Q 10-Q and incorporated herein by reference)
4* Pursuant to Regulation S-K Item 601 (6) (4) (iii), the
Registrant by this filing agrees, upon request to
furnish to the SEC a copy of other instruments defining
the rights of holders of long-term debt of the
Registrant
10.01 Noncompetition 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 Employment Agreement with John C. Goff, as assigned to
the Registrant on May 5, 1994, and as further amended
(filed as Exhibit 10.04 to the Company 1999 10-K and
incorporated herein by reference)
10.04 Employment Agreement of Jerry R. Crenshaw, Jr. dated as
of December 14, 1998 (filed as Exhibit 10.08 to the
Company 1999 10-K and incorporated herein by reference)
10.05 Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Company and each
of its executive officers and trust managers (filed as
Exhibit No. 10.07 to the Form S-4 and incorporated
herein by reference)
10.08 Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the
Registration Statement on Form S-11 (File No. 33-75188)
of the Company and incorporated herein by reference)
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.09 Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan, as amended (filed as Exhibit
10.12 to the Annual Report of Form 10-K for the year
ended December 31, 1998 of the Company and incorporated
herein by reference)
10.10 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)
10.11 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)
10.12 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan, as amended (filed as Exhibit 10.14
to the Company 1999 10-K) and incorporated herein by
reference
10.13 Secured Loan Agreement, dated as of January 31, 2000,
by and among Crescent Real Estate Funding VIII, L.P and
UBS AG, Stamford Branch (filed as Exhibit 10.12 to the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 of the Company and incorporated herein
by reference)
10.14 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 136,584
<SECURITIES> 0
<RECEIVABLES> 119,632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,189,181
<PP&E> 3,931,229
<DEPRECIATION> (520,799)
<TOTAL-ASSETS> 4,855,827
<CURRENT-LIABILITIES> 120,854
<BONDS> 2,479,099
0
200,000
<COMMON> 0
<OTHER-SE> 2,055,874
<TOTAL-LIABILITY-AND-EQUITY> 4,855,827
<SALES> 0
<TOTAL-REVENUES> 175,788
<CGS> 0
<TOTAL-COSTS> 103,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,250
<INCOME-PRETAX> 55,981
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,981
<DISCONTINUED> 0
<EXTRAORDINARY> (4,378)
<CHANGES> 0
<NET-INCOME> 51,603
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.76
</TABLE>
