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, 1996
COMMISSION FILE NO 1-13038
CRESCENT REAL ESTATE EQUITIES, INC.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1862813
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
900 Third Avenue, Suite 1800, New York, New York 10022
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (212) 836-4216
Number of shares outstanding of each of the registrant's classes of common
stock, as of May 8, 1996.
Common Stock, par value $.01 per share: 23,546,663
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
<PAGE>
Crescent Real Estate Equities, Inc.
Form 10-Q
TABLE OF CONTENTS
Part I: Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 (Audited)...................................3
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995........................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995........................5
Notes to Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Historical Results of Operations........................9
Part II: Other Information
Item 1. Legal Proceedings....................................................16.
Item 2. Changes in Securities................................................16
Item 3. Defaults Upon Senior Securities......................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 5. Other Information....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
2
<PAGE>
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Note 1)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(unaudited) (audited)
<S> <C> <C>
ASSETS:
Investment properties, at cost $ 1,024,617 $ 1,006,706
Less - Accumulated depreciation (180,473) (172,267)
-------------------- ------------------
844,144 834,439
Cash and cash equivalents 20,365 16,931
Restricted cash and cash equivalents 14,412 22,187
Accounts receivable, net 9,871 7,005
Deferred rent receivable 10,894 10,007
Investments in real estate mortgages and common stock of
Residential Development Corporations (Note 3) 31,347 20,090
Notes receivable 18,896 17,972
Other assets, net 37,106 35,540
-------------------- ------------------
Total assets $ 987,035 $ 964,171
==================== ==================
LIABILITIES:
Borrowings under Credit Facility (Note 4) $ - $ 20,000
Notes payable (Note 4) 484,121 424,528
Accounts payable, accrued expenses and other liabilities 19,745 31,706
-------------------- ------------------
Total liabilities 503,866 476,234
-------------------- ------------------
MINORITY INTEREST (Note 5) 82,129 81,406
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 250,000,000
shares, 23,541,413 and 23,523,547 shares issued and
outstanding at March 31, 1996 and December
31, 1995, respectively 236 236
Additional paid-in capital 423,999 423,530
Deferred compensation on restricted shares (455) (455)
Retained deficit (22,740) (16,780)
-------------------- ------------------
Total stockholders' equity 401,040 406,531
-------------------- ------------------
Total liabilities and stockholders' equity $ 987,035 $ 964,171
==================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Note 1)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months
ended March 31,
--------------------------------------------------------
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
REVENUES:
Rental property $ 41,997 $ 25,208
Interest and other income 1,063 747
-------------------- ----------------------
Total revenues 43,060 25,955
-------------------- ----------------------
EXPENSES:
Real estate taxes 4,033 2,664
Repairs and maintenance 2,200 1,395
Other rental property operating 8,721 5,647
Corporate general and administrative 1,158 798
Interest expense 9,159 4,470
Amortization of deferred financing costs 983 527
Depreciation and amortization 9,054 6,071
-------------------- ----------------------
Total expenses 35,308 21,572
-------------------- ----------------------
Operating income 7,752 4,383
OTHER INCOME:
Income from investments in real estate
mortgages and common stock of Residential
Development Corporations (Note 3) 811 937
-------------------- ----------------------
INCOME BEFORE MINORITY INTEREST 8,563 5,320
Minority Interest (1,583) (1,529)
-------------------- ----------------------
NET INCOME $ 6,980 $ 3,791
==================== ======================
PER SHARE DATA:
Net Income $ 0.30 $ 0.24
==================== ======================
WEIGHTED AVERAGE
SHARES OUTSTANDING: 23,535,314 16,047,392
==================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Notes 1 and 2)
(dollars in thousands)
<TABLE>
<CAPTION>
For the three months
ended March 31,
------------------------------------------------
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,980 $ 3,791
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,037 6,598
Equity in net income of Residential Development
Corporations (811) (937)
Minority interest 1,583 1,529
Increase in accounts receivable (2,960) (991)
Increase in deferred rent receivable (887) (96)
Increase in other assets (904) (277)
Decrease in restricted cash and cash equivalents -
property tax payments 9,943 9,476
Decrease in accounts payable, accrued expenses
and other liabilities (11,961) (4,339)
------------- -----------
Net cash provided by operating activities 11,020 14,754
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (16,423) (77,248)
Capital expenditures - rental properties (1,488) (2,087)
Increase in restricted cash and cash equivalents (2,168) (174)
Investment in Residential Development Corporations (10,446) 937
Increase in notes receivable (736) (13,451)
Escrow deposits - acquisition of investment properties 100 40,687
------------- -----------
Net cash used in investing activities (31,161) (51,336)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (2,668) (231)
Borrowings under Credit Facility - 48,200
Payments under Credit Facility (20,000) -
Debt proceeds 108,638 -
Debt payments (49,045) -
Issuance of partnership units 2,501 -
Dividends and unitholders distributions (15,851) (11,261)
------------- -----------
Net cash provided by financing activities 23,575 36,708
--------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,434 126
CASH AND CASH EQUIVALENTS,
Beginning of period 16,931 30,247
--------------- -------------
CASH AND CASH EQUIVALENTS,
End of period $ 20,365 $ 30,373
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CRESCENT REAL ESTATE EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization
- - ------------
Crescent Real Estate Equities, Inc. ("Crescent"), which was incorporated
under the General Corporation Law of Maryland on February 9, 1994, is a fully
integrated real estate company organized as a real estate investment trust
("REIT"), which owns, directly or indirectly, a portfolio of properties (the
"Properties") located primarily in 16 metropolitan submarkets in Texas,
Colorado, Arizona and New Mexico. As of March 31, 1996, the Properties include
31 office properties and two retail properties comprising an aggregate of
approximately 9.0 million net rentable square feet (primarily Class A), three
full service hotel properties with a total of 1,303 rooms, the real estate
mortgages and non-voting common stock in three Residential Development
Corporations that own all or a portion of six single-family residential land
developments and three prospective multi-family developments, and one mortgage
note secured by a Class A office property located in Phoenix, Arizona.
Crescent's direct and indirect subsidiary entities include Crescent Real
Estate Equities, Ltd. ("CREE, Ltd."), which is the general partner of Crescent
Real Estate Equities Limited Partnership (the "Operating Partnership"); CRE
Limited Partner, Inc. ("CRELP, Inc.") which is a limited partner of the
Operating Partnership; the Operating Partnership; Crescent Real Estate Funding
I, L.P. ("Funding I") and Crescent Real Estate Funding II, L.P. ("Funding II"),
limited partnerships in which the Operating Partnership owns substantially all
of the economic interests directly, or indirectly through Waterside Commons
Limited Partnership ("WCLP"), and the remaining interests which are owned
indirectly by Crescent through CRE Management I Corp. ("CREMI") and CRE
Management II Corp. ("CREMII") which are the general partners of Funding I and
Funding II, respectively, and are both wholly owned subsidiaries of CREE, Ltd.
(all the foregoing are collectively referred to as the "Company"). As of March
31, 1996, Funding I owned nine properties located in Texas and Colorado
consisting of eight office properties and one retail property and Funding II
owned 12 properties located in Texas, Colorado, Arizona and New Mexico
consisting of nine office properties, two hotel properties and one retail
property. As of March 31, 1996, the Operating Partnership owned directly or
indirectly through partnership interests 15 properties located in Texas,
Colorado and Arizona, consisting of 14 office properties, one hotel property, a
mortgage note secured by an office property and the real estate mortgages and
non-voting common stock of three Residential Development Corporations. The
following table sets forth by subsidiary, the properties owned by such
subsidiary:
<TABLE>
<CAPTION>
OPERATING
FUNDING I FUNDING II PARTNERSHIP
--------- ---------- -----------
<S> <C> <C>
The Crescent Office Towers Albuquerque Plaza Denver Marriott City Center
The Crescent Atrium Barton Oaks Plaza One MCI Tower
The Avallon Briargate Office and Research Center Spectrum Center
The Citadel Hyatt Regency Albuquerque The Woodlands Office Properties
The Aberdeen Hyatt Regency Beaver Creek 3333 Lee Parkway
Continental Plaza Las Colinas Plaza 6225 North 24th St.
Caltex House Liberty Plaza I & II
Regency Plaza One MacArthur Center I & II
Waterside Commons Ptarmigan Place
Stanford Corporate Centre
Two Renaissance Square
12404 Park Central
</TABLE>
6
<PAGE>
Basis of Presentation
- - ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements have been included. Operating results for interim
periods reflected are not necessarily indicative of the results that may be
expected for a full fiscal year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K.
Certain reclassifications have been made to previously reported amounts to
conform with current presentation.
2. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid (net of capitalized interest) $ 8,770 $ 3,314
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of operating partnership units to common
stock with resulting reduction in minority interest and
increases in additional paid-in capital $ 282 $ -
Exercise of stock options with resulting increase in
notes receivable, common stock and additional
paid-in capital $ 187 $ -
</TABLE>
3. INVESTMENTS IN REAL ESTATE MORTGAGES AND COMMON STOCK OF RESIDENTIAL
DEVELOPMENT CORPORATIONS:
The Company accounts for its investments in real estate mortgages and
non-voting common stock of Mira Vista Development Corp. ("MVDC"), Houston Area
Development Corp. ("HADC") and Crescent Development Management Corp. ("CDMC")
(collectively, the "Residential Development Corporations") under the equity
method of accounting. The following summarizes the combined financial
information for the Residential Development Corporations for the three months
ended March 31, 1996 and 1995.
Three Months Ended
March 31,
---------------------------------
1996 1995
---- ----
Summary Operations
Lot Sale Revenue $1,250 $1,796
Other Revenue 595 303
--- ---
Total Revenue $1,845 $2,099
====== ======
Net Income $ 867 $ 980
====== ======
7
<PAGE>
4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
---------------------------------------------------
<TABLE>
<CAPTION>
March 31,
1996
----
<S> <C>
Note payable to Asset Securitization Corporation, Commercial Mortgage
Pass-Through Certificates, 1995-MD IV ("Nomura Note I") bearing interest at
7.83% with an initial seven-year interest-only period, followed by principal
amortization based on a 25-year amortization schedule through maturity in August
2027 <F1>, secured by Funding I properties.................................................. $239,000
Note payable to Nomura Asset Securities Corporation, Commercial Mortgage
Pass-Through Certificates, 1996-MD V ("Nomura Note II") bearing interest at an
average rate of 7.79% with an initial seven-year interest-only period, followed
by principal amortization based on a 25-year amortization schedule through
maturity in March 2028<F2>, secured by Funding II properties................................ 161,000
Note payable to Connecticut General Life Insurance Company due December 2002,
bearing interest at 7.47% with a seven-year interest-only term, secured by MCI
Tower and Denver Marriott City Center....................................................... 63,500
Note payable to Metropolitan Life Insurance Company due September 2001, bearing
interest at 8.875% with monthly principal and interest payments, secured by five
of The Woodlands Office Properties.......................................................... 12,621
Short term note payable to The First National Bank of Boston ("FNBB") due April
1996, bearing interest at 7.65%, secured by three Operating Partnership
properties.................................................................................. 8,000
-----
Total Notes Payable $484,121
========
<FN>
<F1> In August 2007, the borrower 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
Company's intention to repay the note in full at the end of the 12 year
term by making a final payment of approximately $220,000.
<F2> In March 2006, the borrower 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
Company's intention to repay the note in full at the end of the 10 year
term by making a final payment of approximately $154,000.
</FN>
</TABLE>
The $150,000 credit facility (the "Credit Facility") led by FNBB has a two year
term ending May 1996, bears interest, at the Company's option, at either (i) 2%
above the Eurodollar rate or (ii) the greater of FNBB's base rate or .5% above
the federal funds effective rate. As of March 31, 1996, the Company had no
outstanding borrowings under the Credit Facility. On April 24, 1996, the Company
canceled the Credit Facility. In April 1996, the Company will recognize an
extraordinary loss of $1,599 resulting from the write-off of unamortized
deferred financing fees on the canceled Credit Facility. The Company is
currently negotiating a new $150,000 unsecured credit facility with FNBB which
is expected to be executed in May 1996.
8
<PAGE>
5. MINORITY INTEREST:
Minority interest represents (i) limited partnership interests in the Operating
Partnership ("units") and (ii) joint venture interests held by outside
interests. Each unit may be exchanged for either one share of common stock or,
at the election of the Company, cash equal to the fair market value of the share
of common stock at the time of the exchange. When a unitholder exchanges a unit,
minority interest will be reduced and the Company's investment in the Operating
Partnership will be increased. During the first quarter of 1996, 10,366 units
were exchanged for shares of common stock of the Company. At March 31, 1996,
5,361,362 units of the Operating Partnership were outstanding and held by
minority interest unitholders.
6. STOCKHOLDERS' EQUITY:
On February 6, 1996, the Company paid a cash dividend and unitholder
distribution of $15,851 or $.55 per share and equivalent unit, to stockholders
and unitholders of record on January 19, 1996. The cash dividend and unitholder
distribution represented an annualized distribution of $2.20 per share and
equivalent unit.
7. ACQUISITIONS:
On January 5, 1996, the Company acquired 3333 Lee Parkway, a 12-story, 234,000
net rentable square foot Class A office building located in the Oak Lawn
submarket of Dallas, Texas. The purchase price of the building was $14,500.
8. SUBSEQUENT EVENTS:
On April 4, 1996, the Company declared a cash dividend and unitholder
distribution of $15,897 or $.55 per share and equivalent unit, to stockholders
and unitholders of record on April 17, 1996. The cash dividend and unitholder
distribution were paid on May 1, 1996, and represented an annualized
distribution of $2.20 per share and equivalent unit.
On April 18, 1996, the Company acquired from Aetna Life Insurance Company a 50%
joint venture interest in 301 Congress Avenue, a 22-story Class A office
building located in downtown Austin, Texas. The Company's investment was
$21,635. Beginning in April 1996, the operations of 301 Congress Avenue, L.P.
will be consolidated into the operations of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Historical Results of Operations
The changes in operating results from period to period are primarily the result
of increases in the total square feet of the portfolio due to significant
acquisitions made by direct and indirect subsidiaries of Crescent Real Estate
Equities, Inc. (the "Company"). The weighted average square feet of consolidated
properties for the three months ended March 31, 1996 and 1995 were approximately
9.0 and 5.2 million, respectively.
The consolidated statement of operations for the three months ended March 31,
1996 includes the results of operations of 31 office properties and two retail
properties, rental income from three hotel properties, interest income earned on
one mortgage note and income from investments in three Residential Development
Corporations. The consolidated statement of operations for the three months
ended March 31, 1995 includes the results of operations of 12 office properties
and two retail centers, rental income from one hotel property, interest income
earned on one mortgage note and income from the investments in two Residential
Development Corporations.
9
<PAGE>
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal and recurring nature.
Results of Operations - Three Months Ended March 31, 1996 and 1995
- - ------------------------------------------------------------------
Revenues from rental properties increased approximately $16.8 million, or 66.7%,
to $42.0 million for the three months ended March 31, 1996, as compared to $25.2
million for the three months ended March 31, 1995. This increase is primarily
attributable to: a) the acquisition of two office properties and one hotel
property in the first quarter of 1995 which resulted in $1.7 million of
incremental revenues; and b) the acquisition of 18 office properties and two
hotel properties subsequent to March 31, 1995 which resulted in $14.5 million of
incremental revenues.
Total expenses increased $13.7 million, or 63.4%, to $35.3 million for the three
months ended March 31, 1996, as compared to $21.6 million for the three months
ended March 31, 1995. The increase in rental property operating expenses of $5.2
million is primarily attributable to: a) the acquisition of two office
properties and one hotel property in the first quarter of 1995 which resulted in
$.4 million of incremental expenses; and b) the acquisition of 18 office
properties and two hotel properties subsequent to March 31, 1995, which resulted
in $4.7 million of incremental expenses. Depreciation and amortization increased
$2.9 million primarily due to the property acquisitions subsequent to March 31,
1995. The increase in interest expense and amortization of deferred financing
costs of $4.7 million and $.5 million, respectively, is primarily attributable
to the three long-term financing arrangements which the Company entered into in
the third and fourth quarters of 1995. The borrowings were used primarily to
fund property acquisitions. The increase in corporate general and administrative
of $.4 million was attributable to incremental costs associated with the
corporate operations of the Company as a direct result of recent property
additions to the Company's portfolio.
Liquidity and Capital Resources
- - -------------------------------
Cash and cash equivalents were $20.4 million and $16.9 million at March 31, 1996
and December 31, 1995, respectively. The increase is attributable to $23.6
million and $11.0 million provided by financing and operating activities,
respectively, offset by $31.2 million of cash used in investing activities. The
Company utilized $31.2 million of cash flow primarily in the following investing
activities: (i) the acquisition of one office property ($14.5 million); (ii)
additional investments in Residential Development Corporations ($10.4 million);
(iii) tenant and building improvements ($1.5 million) and (iv) restricted cash
escrows for capital expenditures, real estate taxes and insurance ($2.2
million). The cash inflow from operating activities is primarily attributable to
property operations and a decrease in restricted cash reserves for the payment
of real estate taxes partially offset by the increase in accounts receivable due
to recent property acquisitions and the hotel leasee's percentage rent lease
payments which are remitted quarterly and decrease in accounts payable due to
payment of property taxes. The Company's inflow of cash provided by financing
activities is primarily attributable to proceeds received from the long-term
financing arrangements with Nomura Asset Capital Corporation ("Nomura") and
Connecticut General Life Insurance Company ("CIGNA") ($108.6 million) partially
offset by the paydown of the short-term note payable ($49.0 million) and the
Credit Facility ($20.0 million) and the distributions paid to stockholders and
unitholders ($15.9 million).
On February 16, 1996, the Company's S-3 shelf registration with the Securities
and Exchange Commission ("SEC") for an aggregate of $500 million of common
stock, preferred stock and warrants to purchase common stock was declared
effective by the SEC. Any securities issued under the registration statement may
be offered from time to time in amounts, at prices, and on terms to be
determined at the time of the offering. Management believes this shelf
registration will provide the Company with more efficient and immediate access
to the capital markets at such time as it is considered appropriate. Net
proceeds from any offering of these securities are expected to be used for
general business purposes, including the acquisition and development of
additional properties and other acquisition transactions, the payment of certain
outstanding debt and improvements to certain properties in the Company's
portfolio.
10
<PAGE>
The significant terms of the Company's debt financing arrangements are shown
below (dollars in thousands):
<TABLE>
<CAPTION>
Balance
Maximum Interest Expiration Outstanding at
Description Borrowings Rate Date March 31, 1996
----------- ---------- ---- ---- --------------
<S> <C> <C> <C> <C>
Line of Credit<F1> $ 150,000 Eurodollar+2% May 1996 $ -
Nomura Note I<F2> 239,000 7.83% August 2027 239,000
Nomura Note II<F3> 161,000 7.79% March 2028 161,000
CIGNA Note 63,500 7.47% December 2002 63,500
Short-Term Note Payable 35,000 7.65% April 1996 8,000
Metropolitan Life Note 13,000 8.88% September 2001 12,621
------ ------
$ 661,500 $484,121
========== ========
<FN>
<F1> On April 24, 1996, the Company canceled the $150 million credit facility.
The Company is currently negotiating a new $150 million unsecured credit
facility with First National Bank of Boston which is expected to be
executed in May 1996.
<F2> The note has a seven year period during which only interest is payable,
followed by five years of principal amortization based on a 25-year
amortization schedule. At the end of 12 years, the borrower 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 Company's intention to repay the note in full at the end
of the 12 year term by making a final payment of approximately $220
million.
<F3> The note has a seven year period during which only interest is payable,
followed by three years of principal amortization based on a 25-year
amortization schedule. At the end of 10 years, the borrower 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 Company's intention to repay the note in full at the end
of the 10 year term by making a final payment of approximately $154
million.
</FN>
</TABLE>
The Company expects to meet its short-term liquidity requirements primarily
through cash flow provided by operating activities, which the Company believes
will be adequate to fund normal recurring operating expenses, debt service
requirements, non-incremental revenue generating capital expenditures and
distributions to stockholders and unitholders. To the extent the Company's cash
flow from operating activities is not sufficient to finance incremental
revenue-generating capital expenditures (including additions to or replacements
of residential lots), or investment property acquisition costs, the Company
expects to finance such activities with proceeds from the new credit facility,
available cash reserves and other debt and equity financing.
The Company expects to meet its long-term liquidity requirements, consisting
primarily of maturities under the CIGNA Note and Nomura Notes, through long-term
secured and unsecured borrowings and the issuance of debt securities and/or
additional equity securities of the Company.
Based on the Company's total market capitalization of $1.5 billion at March 31,
1996 (at a $33.625 stock price and including the full conversion of all units of
minority interest in the Operating Partnership plus total indebtedness), the
Company's debt represented 33.2% of its total market capitalization. The Company
intends to maintain a conservative capital structure with total debt targeted at
40% of total market capitalization.
The Company intends to maintain its qualification as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
As a REIT, the Company will generally 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 taxable income to its
shareholders.
11
<PAGE>
Funds from Operations
- - ---------------------
Funds from Operations ("FFO"), based on the revised definition adopted by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and as used herein, means net income (loss) (determined in accordance
with generally accepted accounting principles or "GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a relative
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the basis
determined under GAAP. The Company considers FFO an appropriate measure of
performance of an equity REIT. However, FFO (i) does not represent cash
generated from operating activities determined in accordance with GAAP (which,
unlike FFO, generally reflects all cash effects of transactions and other events
that enter into the determination of net income), (ii) is not necessarily
indicative of cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net income determined in accordance with GAAP as
an indication of the Company'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 Company has
historically distributed an amount less than FFO, primarily due to reserves
required for capital expenditures, including leasing costs. The aggregate
distributions paid to stockholders and unitholders for the three months ended
March 31, 1996 and 1995 were $15.9 and $11.3 million, respectively. An increase
in FFO does not necessarily result in an increase in aggregate distributions
because the Company's board of directors is not required to increase
distributions on a quarterly basis unless necessary in order to enable the
Company to maintain REIT status. However, the Company must distribute 95% of its
real estate investment trust taxable income (as defined in the Code), therefore,
a significant increase in FFO will generally require an increase in
distributions to stockholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be considered in conjunction with the
Company's net income (loss) and cash flows as reported in the consolidated
financial statements and notes thereto. Management believes that FFO is a useful
indicator of operations and ability to generate cash and, therefore, is useful
to investors both in understanding the Company's performance and liquidity and
because industry analysts generally report FFO of REITs, in comparing these
factors to those of other REITs. However, the Company's measure of FFO may not
be comparable to similarly titled measures of other REITs because these REITs
may not apply the revised definition of FFO in the same manner as the Company.
STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Income before minority interest $ 8,563 $ 5,320
Adjustments:
Depreciation and amortization of real estate assets 8,889 5,929
Adjustment for unconsolidated investments in real estate mortgages
and common stock of Residential Development Corporations 322 649
------- -------
Funds from Operations $17,774 $11,898
======= =======
Supplemental information:
Rental income from straight-line rents $ 887 $ 96
Residential development capital expenditures 476 370
Non-incremental revenue generating exp.:
Rental property capital expenditures 139 273
Tenant leasing costs 777 822
</TABLE>
12
<PAGE>
Portfolio Information
The following tables set forth certain information about the properties
as of March 31, 1996.
<TABLE>
<CAPTION>
Office and Retail Properties
Average
Base
Net Rent
Rentable Per
Acq. Year Area Percent Leased
Property Location Date Completed (Sq. Ft.) Leased Sq. Ft. <F1>
--------------------------------------------- ---- --------- --------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Office Properties
The Crescent Office Towers Dallas, TX <F2> 1986 1,205,212 98% $21.56<F3>
Continental Plaza Fort Worth, TX <F2> 1982 954,895 84 14.73<F3>
MacArthur Center I & II Irving, TX <F2> 1982/1986 294,069 99 15.90
The Citadel Denver, CO <F2> 1987 130,652 98 15.84
Caltex House Irving, TX 5/5/94 1982 445,993 94 18.95<F3>
Liberty Plaza I & II Dallas, TX 7/15/94 1981/1986 218,813 95 11.51<F3>
Regency Plaza One Denver, CO 8/2/94 1985 309,862 99 16.98
Waterside Commons Irving, TX 10/1/94 1986 456,513 99 10.43<F6>
Two Renaissance Square Phoenix, AZ 11/3/94 1990 476,373 68 21.59
The Avallon Austin, TX 11/8/94 1993 125,959 100 16.20
Stanford Corporate Centre Dallas, TX 1/4/95 1985 265,507 100 13.39
The Aberdeen Dallas, TX 3/13/95 1986 320,629 100 15.75
12404 Park Central Dallas, TX 5/9/95 1987 239,103 100 13.12
Barton Oaks Plaza One Austin, TX 6/5/95 1986 99,792 81 17.45
MCI Tower Denver, CO 6/30/95 1982 550,807 98 16.65
The Woodlands Office
Properties<F4> Houston, TX 7/12/95 1980-1993 702,959 89 12.09<F3>
Spectrum Center<F5> Dallas, TX 8/31/95 1983 597,108 94 14.48
Ptarmigan Place Denver, CO 10/6/95 1984 418,565 66 13.35
6225 North 24th Street Phoenix, AZ 11/7/95 1981 84,460 100 9.88<F7>
Briargate Office and
Research Center CO Springs, CO 11/21/95 1988 252,857 100 8.48<F7>
Albuquerque Plaza Albuq., NM 12/19/95 1990 365,952 86 16.95
3333 Lee Parkway Dallas, TX 1/5/96 1983 233,484 62 14.48
--------- ---- ------
Total Office Properties/Weighted Average 8,749,564 91% $15.75
========= ==== ======
Retail Properties
Las Colinas Plaza Irving, TX <F2> 1989 135,449 98% $10.86<F7>
The Crescent Atrium Dallas, TX <F2> 1986 94,852 91 14.72<F7>
------ ---- ------
Total Retail Properties/Weighted Average 230,301 95% $12.38
======= == ======
- - -------------------------------------
<FN>
<F1> Calculated based on base rent payable as of March 31, 1996, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles.
<F2> Property was contributed to the Operating Partnership on May 5, 1994.
<F3> Excludes electricity costs, which (with the exception of the major tenant
of Caltex House, Liberty Plaza I and five of The Woodlands Office
Properties) are paid in full by the tenants.
<F4> The Company has a 75% limited partner interest in the partnership that owns
the 10 office properties that comprise The Woodlands Office Properties.
<F5> The Company owns the principal economic interest in Spectrum Center through
an interest in the Spectrum Partnership, which owns both the Spectrum note
and the ground lessor's interest in the land underlying the office
building.
<F6> Sprint Communications Company L.P. ("Sprint") leases 76% of the property's
net rentable area (approximately 356,000 square feet) pursuant to a
triple-net lease, which means that the tenant is responsible for paying all
operating costs of the property, including utilities, real estate taxes and
insurance. The listed rate excludes such items.
<F7> Lease(s) are triple-net, with the tenant(s) responsible for the payment of
all operating costs of the property, including utilities, real estate taxes
and insurance. The listed rate excludes such items.
</FN>
</TABLE>
13
<PAGE>
Hotel Properties
<TABLE>
<CAPTION>
For the three months
ended March
31,
--------------------------------------------
Revenue
Average Average Per
Acq. Year Occupancy Daily Available
Property Location Date Completed Rooms Rate Rate Room
-------- -------- ---- --------- ----- ---- ---- ----
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hotel Properties
Hyatt Regency Beaver Creek Avon, CO 1/3/95 1989 295 81% 84% $321 $295 $267 $252
Denver Marriott City Denver, CO 6/30/95 1982 613 80 75 94 86 76 65
Center
Hyatt Regency Albuquerque Albuquerque,NM 12/19/95 1990 395 77 75 90 83 69 62
--- ---- ---- ---- ---- ---- ----
Total Hotel Properties/Weighted Average 1,303 79% 77% $144 $132 $117 $106
===== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Residential Development Properties
Residential Total Total Average Range
Residential Development Lots/Units Lots/Units Closed of
Residential Development Corporation's Total Developed Closed Sale Price Proposed
Development Properties Type of Effective Lots/Units Since Since Per Lot/ Sale Prices
Corporation<F1> (RDP) RDP<F2> Location Ownership % Planned Inception Inception Unit Per Lot
----------- ----- ------ -------- ----------- ------- ------------------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.0% 695 504 400 $ 93,000 $45,000-250,000
Development The Highlands SF Breckenridge, CO 12.5% 900 144 84 144,000 $60,000-225,000
Corporation Whitehawk Ranch SF Greagle, CA 20.0% 223 14 8 95,000 $65,000-150,000
--- --- ---
Total Mira Vista Development Corporation 1,818 662 492
----- ----- ---
Houston Area Falcon Point SF Houston, TX 100.0% 1,205 288<F4> 95 $ 36,000 $20,000-60,000
Development Spring Lakes SF Houston, TX 100.0% 536 - - - $25,000-45,000
Corporation
Total Houston Area Development Corporation 1,741 288 95
----- ----- ----
Crescent One Beaver
Development Creek CO Avon, CO 60.0% 18<F3> - - $ - $1,330,000-3,420,000
Management Market Square CO Avon, CO 60.0% 26<F3> - - - $355,000-2,165,000
Corporation Cresta TH Edwards, CO 60.0% 25 - - - $1,275,000-1,725,000
The Reserve at
Frisco SF Frisco, CO 60.0% 131 - - - $86,000-110,000
----- ----- ----
Total Crescent Development Management Corporation 200 - -
----- ----- ----
Total Residential Development Properties 3,759 950 587
===== ===== =====
- - --------------------------------------
<FN>
<F1> The Company has a 94%, 94% and 90% effective ownership interest in Mira
Vista Development Corp., Houston Area Development Corp. and Crescent
Development Management Corp., respectively, through ownership of non-voting
common stock.
<F2> SF (Single-Family); CO (Condominium); TH (Townhome).
<F3> 10 and 19 units have been pre-sold for One Beaver Creek and Market Square,
respectively, and are expected to close beginning in the fourth quarter of
1997 upon completion of construction.
<F4> The initial 93 lot phase of this project is currently under development and
is expected to be completed in early 1997.
</FN>
</TABLE>
14
<PAGE>
Aggregate Lease Expirations of Office and Retail Properties
The following table sets out a schedule of the lease expirations for leases
in place as of March 31, 1996, for each of the 10 years beginning with the
remainder of 1996, for the office and retail properties, on an aggregate basis,
assuming that none of the tenants exercises renewal options.
<TABLE>
<CAPTION>
Percentage Percentage of Annual
Net Rentable of Leased Total Annual Base Rent
Number of Area Subject Net Rentable Annual Base Base Rent per Net
Tenants With to Area Subject Rent Under Represented Rentable
Expiring Expiring to Expiring Expiring by Expiring Area
Year of Lease Expiration Leases Leases Leases Leases<F2> Leases Expiring
(Square
Feet)<F1>
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 140 1,038,263 12.9% $15,579,273 11.8% $15.01
1997 129 1,036,938 12.8 14,919,495 11.3 14.39
1998 129 693,304 8.6 11,483,267 8.7 16.56
1999 81 989,985 12.3 14,709,026 11.1 14.86
2000 60 831,381 10.3 12,972,910 9.8 15.60
2001 29 699,156 8.6 13,523,986 10.2 19.34
2002 19 1,086,539 13.4 20,101,626 15.2 18.50
2003 10 340,750 4.2 6,308,716 4.8 18.51
2004 10 407,154 5.0 8,942,207 6.8 21.96
2005 6 910,231 11.3 12,817,311 9.6 14.08
2006 and thereafter 2 49,738 .6 1,011,566 .7 20.34
- - ----------------------
<FN>
<F1> Excludes an aggregate of 825,865 square feet of unleased space as of March
31, 1996.
<F2> Annual base rent (excluding increases in rent and free rent that would be
taken into account under generally accepted accounting principles) for net
rentable area expiring.
</FN>
</TABLE>
15
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
Form 8-K dated August 2, 1994 and filed January 9, 1996, as amended on
February 2, 1996 and February 15, 1996.
Form 8-K dated October 3, 1994 and filed January 9, 1996, as amended on
February 2, 1996 and February 15, 1996.
Form 8-K dated December 19, 1995 and filed January 3, 1996, as amended
on February 2, 1996 and February 15, 1996.
16
<PAGE>
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, INC.
/s/ Gerald W. Haddock
Date: May 13, 1996 Gerald W. Haddock, President and Chief
Operating Officer
/s/ Dallas E. Lucas
Date: May 13, 1996 Dallas E. Lucas, Senior Vice President,
Chief Financial Officer and Chief
Accounting Officer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of operations found on
pages 3 and 4 of the Company's Form 10-Q for the year-to-date, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,365
<SECURITIES> 0
<RECEIVABLES> 39,661
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 142,891
<PP&E> 1,024,617
<DEPRECIATION> 180,473
<TOTAL-ASSETS> 987,035
<CURRENT-LIABILITIES> 19,745
<BONDS> 484,121
0
0
<COMMON> 236
<OTHER-SE> 400,804
<TOTAL-LIABILITY-AND-EQUITY> 987,035
<SALES> 0
<TOTAL-REVENUES> 43,060
<CGS> 0
<TOTAL-COSTS> 26,149
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,159
<INCOME-PRETAX> 8,563
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,980
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0
</TABLE>
