<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 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 incorporation (I.R.S. Employer
or organization) Identification Number)
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 November 8, 1996.
Common Stock, par value $.01 per share: 36,146,380
- --------------------------------------------------------------------------------
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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<PAGE> 2
CRESCENT REAL ESTATE EQUITIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1996 and December 31,
1995 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine months ended September
30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Historical Results of Operations . . . . . . . . . . . . . . . . . 12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE> 3
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Land $ 82,530 $ 57,566
Building, improvements and equipment 1,155,887 949,140
Less - Accumulated depreciation (198,517) (172,267)
--------------- ---------------
1,039,900 834,439
Cash and cash equivalents 14,367 16,931
Restricted cash and cash equivalents 19,054 22,187
Accounts receivable, net 10,731 7,005
Deferred rent receivable 12,939 10,007
Investments in real estate mortgages and common
stock of residential development corporations 35,477 20,090
Notes receivable 29,497 17,972
Other assets, net 51,247 35,540
--------------- ---------------
Total assets $ 1,213,212 $ 964,171
=============== ===============
LIABILITIES:
Borrowings under Credit Facility $ 172,500 $ 20,000
Notes payable 491,983 424,528
Accounts payable, accrued expenses and other liabilities 30,312 31,706
--------------- ---------------
Total liabilities 694,795 476,234
--------------- ---------------
MINORITY INTERESTS:
Operating partnership, 6,033,966 and 5,296,734 units,
respectively 95,604 71,925
Investment joint ventures 34,521 9,481
--------------- ---------------
Total minority interests 130,125 81,406
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 250,000,000 shares, 23,596,586 and
23,523,547 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively 236 236
Additional paid-in capital 424,496 423,530
Deferred compensation on restricted shares (364) (455)
Retained deficit (36,076) (16,780)
--------------- ---------------
Total stockholders' equity 388,292 406,531
--------------- ---------------
Total liabilities and stockholders' equity $ 1,213,212 $ 964,171
=============== ===============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE> 4
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental property $ 48,306 $ 33,086 $ 133,855 $ 84,371
Interest and other income 1,062 1,194 3,572 5,092
------------ ------------ ------------ ------------
Total revenues 49,368 34,280 137,427 89,463
------------ ------------ ------------ ------------
EXPENSES:
Real estate taxes 5,077 3,378 13,454 8,678
Repairs and maintenance 2,369 1,950 7,248 4,843
Other rental property operating 9,452 6,312 27,294 17,535
Corporate general and administrative 1,199 1,102 3,498 2,847
Interest expense 11,843 5,151 30,861 11,424
Amortization of deferred financing costs 745 643 2,065 1,735
Depreciation and amortization 11,058 7,386 29,339 19,650
------------ ------------ ------------ ------------
Total expenses 41,743 25,922 113,759 66,712
------------ ------------ ------------ ------------
Operating income 7,625 8,358 23,668 22,751
OTHER INCOME:
Equity in net income of residential
development corporations 892 3,069 3,067 5,008
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM 8,517 11,427 26,735 27,759
Minority interests (2,239) (2,369) (5,858) (6,744)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 6,278 9,058 20,877 21,015
Extraordinary item -- -- (1,306) --
------------ ------------ ------------ ------------
NET INCOME $ 6,278 $ 9,058 $ 19,571 $ 21,015
============ ============ ============ ============
PER SHARE DATA:
Income before extraordinary item $ 0.27 $ 0.39 $ 0.89 $ 1.05
Extraordinary item -- -- (0.06) --
------------ ------------ ------------ ------------
Net income $ 0.27 $ 0.39 $ 0.83 $ 1.05
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 23,595,282 23,143,547 23,563,632 20,062,345
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
4
<PAGE> 5
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Notes 1 and 2)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,571 $ 21,015
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 31,404 21,385
Equity in earnings in excess of distributions
received from residential development
corporations (363) (108)
Extraordinary item 1,306 --
Minority interests 5,858 6,744
Non-cash compensation 91 --
Increase in accounts receivable (3,997) (4,750)
Increase in deferred rent receivable (2,932) (489)
Increase in other assets (1,445) (5,888)
Decrease (Increase) in restricted cash and cash
equivalents 1,451 (217)
(Decrease) Increase in accounts payable, accrued
expenses and other liabilities (1,394) 3,225
------------ ------------
Net cash provided by operating activities 49,550 40,917
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (173,091) (239,292)
Capital expenditures - rental properties (8,394) (4,547)
Leasing costs - rental properties (4,848) (5,211)
Decrease (Increase) in restricted cash and cash
equivalents - capital reserves 1,682 (8,137)
Investment in unconsolidated companies (3,900) --
Investment in residential development corporations (15,024) (6,891)
Increase in notes receivable (11,525) (62,698)
Escrow deposits - acquisition of investment properties (6,350) 40,136
------------ ------------
Net cash used in investing activities (221,450) (286,640)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (4,317) (7,217)
Borrowings under Credit Facility 172,500 207,200
Payments under Credit Facility (20,000) (381,842)
Debt proceeds 124,638 276,965
Debt payments (57,184) --
Capital distributions - joint venture partner (988) --
Capital contributions - joint venture partner 750 125
Net proceeds from offering -- 166,926
Issuance of partnership units 1,574 --
Dividends and unitholders distributions (47,637) (36,931)
------------ ------------
Net cash provided by financing activities 169,336 225,226
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,564) (20,497)
CASH AND CASH EQUIVALENTS,
Beginning of period 16,931 30,247
------------ ------------
CASH AND CASH EQUIVALENTS,
End of period $ 14,367 $ 9,750
============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE> 6
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 15 metropolitan submarkets in Texas and
Colorado. As of September 30, 1996, the Properties included 37 office
properties and two retail properties comprising an aggregate of approximately
10.8 million net rentable square feet (primarily Class A), three full-service
hotel properties with a total of 1,303 rooms, one destination health and
fitness resort, the real estate mortgages and non-voting common stock of three
Residential Development Corporations (as defined in Note 3) that own all or a
portion of six single-family residential land developments and three
multi-family developments, and one mortgage note secured by an office property.
Crescent's direct and indirect subsidiary entities include Crescent Real
Estate Equities Limited Partnership (the "Operating Partnership"), Crescent
Real Estate Equities, Ltd. ("CREE, Ltd.") which is the general partner of the
Operating Partnership; CRE Limited Partner, Inc. ("CRELP, Inc.") which is a
limited partner of 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 with respect to Funding I's interest in
Waterside Commons, 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.; and Crescent/301 L.L.C.,
which is a wholly owned subsidiary of the Operating Partnership and CREE, Ltd.
(Crescent and all the foregoing are collectively referred to as the "Company").
As of September 30, 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 September 30, 1996, the Operating Partnership owned,
directly or indirectly through partnership interests 22 properties located in
Texas, Colorado, Arizona, Louisiana, and Nebraska consisting of 20 office
properties, one hotel property and one destination health and fitness resort.
The Operating Partnership also owned 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>
FUNDING I FUNDING II OPERATING PARTNERSHIP
- --------- ---------- ---------------------
<S> <C> <C>
Caltex House Albuquerque Plaza Canyon Ranch - Tucson
Continental Plaza Barton Oaks Plaza One Central Park Plaza
Regency Plaza One Briargate Office and Research Center Denver Marriott City Center
Waterside Commons Hyatt Regency Albuquerque MCI Tower
The Aberdeen Hyatt Regency Beaver Creek Spectrum Center(1)
The Avallon Las Colinas Plaza The Woodlands Office
The Citadel Liberty Plaza I & II Properties (through WOE,
The Crescent Atrium MacArthur Center I & II see Note 7)
The Crescent Office Towers Ptarmigan Place Three Westlake Park (see Note 7)
Stanford Corporate Centre 301 Congress Avenue (see Note 7)
Two Renaissance Square 1615 Poydras
12404 Park Central 3333 Lee Parkway
6225 North 24th Street
</TABLE>
(1) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in Spectrum Mortgage Associates, L.P., which
owns both the Spectrum Note and the ground lessor's interest in the land
underlying the office building.
6
<PAGE> 7
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>
Nine months ended
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid (net of capitalized interest) $ 30,930 $ 11,100
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Minority interest - joint venture capital $ 25,705 $ 8,994
Conversion of operating partnership units to common
stock with resulting reduction in minority interest and
increases in additional paid-in capital $ 857 $ 42,143
Issuance of operating partnership units in conjunction
with property acquisition $ 27,056 $ -
Mortgage note assumed in property acquisition $ - $ 12,732
</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 and nine
months ended September 30, 1996 and 1995, respectively.
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Summary Operations
------------------
Lot Sale Revenue $ 2,617 $2,303 $ 6,213 $ 9,642
Other Revenue 249 53 1,282 406
-------- ------ ------- --------
Total Revenue $ 2,866 $2,356 $ 7,495 $ 10,048
======== ====== ======= ========
Net Income $ 928 $ 993 $ 3,251 $ 5,443
======== ====== ======= ========
</TABLE>
4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
NOTES PAYABLE
<TABLE>
<CAPTION>
September 30,
1996
----
<S> <C>
Note payable to Asset Securitization Corporation, ("Nomura Note
I") bears interest at an average rate of 7.83% with an initial
seven-year interest-only period (through August 2002), followed
by five years of principal amortization based on a 25-year
amortization schedule through maturity in August 2027 (1),
secured by Funding I properties.................................. $239,000
Note payable to Nomura Asset Securities Corporation, ("Nomura Note
II") bears interest at an average rate of 7.79% with an initial
seven-year interest-only period (through March 2003), followed by
three years of principal amortization based on a 25-year
amortization schedule through maturity in March 2028(2), 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....................................................... 12,483
Short-term note payable to The First National Bank of Boston
("FNBB"), unsecured, due October 1996, bearing interest
at 7.9% ......................................................... 16,000
--------
Total Notes Payable.............................................. $491,983
========
</TABLE>
(1) In August 2007, the interest rate increases, and the Company 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 such time (August 2007) by making a final payment of
approximately $220,000.
(2) In March 2006, the interest rate increases, and the Company 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 such time (March 2006) by making a final payment of
approximately $154,000.
8
<PAGE> 9
CREDIT FACILITY
In April 1996, the Company canceled its $150,000 credit facility led by FNBB.
At that time the Company had no outstanding borrowings under the credit
facility. In connection with the cancellation of the credit facility, the
Company recognized an extraordinary loss of $1,306, net of minority interests,
resulting from the write-off of unamortized deferred financing fees.
In June 1996, the Company executed a new $150,000 credit facility (the "Credit
Facility") led by FNBB which was increased to $175,000 in August 1996.
Initially, the Credit Facility has a nine month term with advances bearing
interest at the Eurodollar rate +240 basis points for advances of $2,000 or
more, or at the lender's prime rate plus 50 basis points for advances of less
than $2,000. Upon the occurrence of certain qualifying events, including the
raising of additional equity, the Credit Facility will be unsecured, the term
will be extended by 24 months and interest rate will be reduced to the
Eurodollar rate +185 basis points or, as applicable, the lender's prime rate.
As of September 30, 1996, the interest rate was 7.90% and the outstanding
balance was $172,500 with availability of $2,500. The Credit Facility requires
the Company to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including loan-to-value and debt service
coverage ratios, limitations on additional indebtedness and stockholders'
distributions, and a minimum net worth requirement. As of September 30, 1996,
the Company was in compliance with all covenants of the Credit Facility. In
October 1996, the Company raised additional equity (see Note 8), which
satisfied the qualifying event and as a result the Credit Facility became
unsecured, the term was extended to March 1999 and the interest rate was
reduced.
5. MINORITY INTERESTS:
Minority interests 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 nine
months ended September 30, 1996, 53,789 units were exchanged for shares of
common stock of the Company.
6. STOCKHOLDERS' EQUITY:
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 for the quarter ended March 31,
1996. The cash dividend and unitholder distribution were paid on May 1, 1996,
and were equivalent to an annualized distribution of $2.20 per share and
equivalent unit.
On July 3, 1996, the Company declared a cash dividend and unitholder
distribution of $15,884 or $.55 per share and equivalent unit, to shareholders
and unitholders of record on July 17, 1996 for the quarter ended June 30, 1996.
The cash dividend and unitholder distribution were paid on August 6, 1996 and
were equivalent to an annualized distribution of $2.20 per share and equivalent
unit.
On September 13, 1996, the Company declared an approximate 11% increase in
the quarterly dividend, increasing the quarterly cash dividend and distribution
on its common stock and units from $.55 to $.61 per share and equivalent unit
or $25,730. The higher annualized dividend and distribution of $2.44 per share
and equivalent unit commenced with the Company's third quarter payment on
November 5, 1996 to shareholders and unitholders of record on October 16, 1996.
7. ACQUISITIONS:
On January 5, 1996, the Company acquired 3333 Lee Parkway, a 12-story Class A
office property containing 234,000 square feet of net rentable space located in
the Oak Lawn submarket of Dallas, Texas. The purchase price of 3333 Lee Parkway
was approximately $14,500, which was funded through a draw under the Credit
Facility.
9
<PAGE> 10
On April 18, 1996, the Company together with Aetna Life Insurance Company
("Aetna") formed 301 Congress Avenue, L.P., a Delaware limited partnership in
which the Company and Aetna, each own a 50% interest. Crescent/301, L.L.C., a
Delaware limited liability company that is wholly owned by the Company's
Operating Partnership and CREE, Ltd., serves as the general partner of 301
Congress Avenue, L.P. On April 18, 1996, the partnership acquired from Aetna
301 Congress Avenue, a 22-story Class A office property consisting of 418,000
square feet of net rentable space located in downtown Austin, Texas. The
Company contributed to the partnership approximately $21,635 which was funded
through a short-term note payable to FNBB. Beginning in April 1996, the
operations of the partnership were consolidated into the operations of the
Company.
On June 13, 1996, the Company acquired Central Park Plaza, a Class A office
property consisting of two 15-story towers and containing 410,000 square feet
of net rentable space located in downtown Omaha, Nebraska. The purchase price
of Central Park Plaza was approximately $25,200, which was funded through a
draw under the Credit Facility.
On July 26, 1996, the Company acquired Canyon Ranch-Tucson, a destination
health and fitness resort, located at the base of the Catalina Mountains near
Tucson, Arizona. Canyon Ranch-Tucson encompasses 50 acres, including 179 rooms,
which can accommodate 240 guests on a daily basis, a 62,000 square foot spa
complex, a life enhancement center offering structured therapy and counseling,
a health and healing center with a complete staff of physicians, dietitians,
psychologists and therapists, four pools and eight tennis courts. The Tucson
resort was acquired for approximately $57,000 through the issuance of $27,000
of operating partnership units and assumption of debt which the Company
subsequently retired for $30,000, through a draw under the Credit Facility.
On July 31, 1996, the Woodland Office Equities - '95 Limited ("WOE"), in which
the Company owns a 75% limited partnership interest, acquired two office
properties developed by The Woodlands Corporation consisting of a combined
109,000 square feet of net rentable space located in The Woodlands, a community
25 miles north of Houston, Texas. The purchase price for the two office
properties was approximately $10,915, of which the Company contributed $8,186
to WOE through a draw under the Credit Facility.
On August 16, 1996, the Company acquired for approximately $29,000, which was
funded through a draw under the Credit Facility, the principal economic
interest in Three Westlake Park through its acquisition from the lender of a
mortgage note (the "Three Westlake Note"), in the principal amount of
approximately $46,300. Under the terms of the Three Westlake Note, as modified,
the Company will receive all net cash flow from Three Westlake Park through
February 2004. The Three Westlake Note is secured by a first priority deed of
trust on Three Westlake Park, a 19-story Class A office property containing
approximately 414,000 square feet of net rentable space and located in the Katy
Freeway submarket of Houston, Texas. The operations of the property were
consolidated into the operations of the Company.
On August 23, 1996, the Company acquired 1615 Poydras, a 23-story Class A
office property containing approximately 509,000 square feet of net rentable
space located in downtown New Orleans, Louisiana. The purchase price of 1615
Poydras was approximately $36,450, which was funded through a draw under the
Credit Facility of $24,800 and $11,650 borrowed on the FNBB short term note.
Assuming that the 3333 Lee Parkway, 301 Congress, Central Park Plaza, Canyon
Ranch-Tucson, the two office properties in The Woodlands, Three Westlake Park,
and 1615 Poydras were acquired at the beginning of the periods, pro forma
operating results are presented as follows:
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30,1996 September 30, 1996
---------------------- ----------------------
<S> <C> <C>
Revenue $50,939 $153,090
Income before minority
interests and extraordinary item 8,589 27,288
Net income 6,449 19,615
Earnings per share $ .27 $ .83
</TABLE>
The pro forma operating results combine the Company's historical operating
results with the historical incremental rental income and operating expenses
including an adjustment for depreciation based on the acquisition price
associated with the property acquisitions and pro forma adjustments. The
historical operations of the destination resort were adjusted to reflect the
lease payments from the Hotel Lessee to the Company calculated on a pro forma
basis by applying the rent provisions (as defined in the lease agreement). Pro
forma adjustments primarily represent the increase in interest costs assuming
the borrowings to finance property acquisitions had occurred at the beginning of
the period.
These pro forma amounts are not necessarily indicative of what the actual
financial position of the Company would have been assuming the above property
acquisitions had been consummated as of the beginning of the periods, nor do
they purport to represent the future financial position of the Company.
8. SUBSEQUENT EVENTS:
On October 2, 1996, the Company completed an offering (the "Offering) of
11,500,000 shares (including the underwriters' overallotment option) of its
common stock at $40.375 per share. Net proceeds from the Offering to the
Company after underwriting discount of $24,380 and other offering costs of
approximately $2,500 were approximately $437,433. The Company used a portion of
these net proceeds to repay $16,000 on the FNBB short-term note and $151,500 of
the Credit Facility. In addition, net proceeds of $66,000 were used to fund the
cash portion of the purchase price of the Greenway Plaza Portfolio (as
described below). The remaining net proceeds of $203,993 will be used to fund
future acquisitions. On October 9, 1996, the Company completed an additional
offering of 450,000 shares of its common stock to several underwriters who
participated in the Offering. The shares of common stock were sold at $42 per
share. The gross proceeds of $18,900 from the additional offering will be used
to fund future acquisitions.
On October 7, 1996, the Company through three newly formed subsidiaries,
Crescent Real Estate Funding III, IV and V, L.P. ("Funding III, IV, and V"),
limited partnerships in which the Operating Partnership owns substantially all
the economic interests directly, and the remaining interests which are owned
indirectly by the Company through CRE Management III, IV and V Corp. which are
the general partners of Funding III, IV and V, respectively, and are all wholly
owned subsidiaries of CREE, Ltd., acquired a property portfolio located in
Houston, Texas (the "Greenway Plaza Portfolio"). The Greenway Plaza Portfolio
consists primarily of 10 suburban office properties with an aggregate of
approximately 4.3 million net rentable square feet, a central plant which
provides heated and chilled water to both the 10 office properties and third
parties, and the 389-room full-service Renaissance Hotel and the Houston City
Club building, which are both subject to triple-net leases. Funding III owns 9
office properties, Renaissance Hotel and the Houston City Club. Funding IV owns
the central plant. Funding V owns one office property. The aggregate cost of the
Greenway Plaza Portfolio was $206,000, which was funded through the issuance of
599,332 shares of common stock at an average price of $41.71 per share, the
assumption of $115,000 of nonrecourse indebtedness and $66,000 of cash from
proceeds of the Offering.
11
<PAGE> 12
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 Crescent Real Estate Equities, Inc. through its direct and
indirect subsidiaries (collectively, the "Company"). The weighted average
square feet of consolidated properties for the three and nine months ended
September 30, 1996 were approximately 10.3 and 9.4 million, respectively,
compared to 6.9 and 5.9 million for the same periods in 1995. These increases
in consolidated properties square feet represent a 49.3% and 59.3% increase in
square feet for the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995.
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those
set forth in the forward-looking statements. Certain factors that might cause
such a difference include the following: real estate investment considerations,
such as the effect of economic, demographic, competitive and other conditions
in the market area on cash flows and values, the ability to renew leases or
relet space on a timely basis upon the expiration of current leases, and the
Company's ability to generate revenues sufficient to meet debt service payments
and other operating expenses; and financing risks, such as the availability of
equity and debt financing, the Company's ability to service existing debt, the
possibility that the Company's outstanding debt (which requires so-called
balloon payments of principal) may be refinanced at higher interest rates or
otherwise on terms less favorable to the Company and the fact that interest
rates under the Credit Facility may increase.
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 SEPTEMBER 30, 1996 AND 1995
Revenues from rental properties increased approximately $15.2 million, or
45.9%, to $48.3 million for the three months ended September 30, 1996, as
compared to $33.1 million for the three months ended September 30, 1995. This
increase is primarily attributable to the acquisition of: a) five office
properties and one full-service hotel in the fourth quarter of 1995 which
resulted in $6.8 million of incremental revenues; b) seven office properties
and one destination health and fitness resort in the first three quarters of
1996 which resulted in $6.7 million of incremental revenues; and c) $1.0
million of incremental rental revenue is due to a net increase in rental rates
and occupancies in office properties acquired prior to the fourth quarter of
1995.
Total expenses increased $15.8 million, or 61.0%, to $41.7 million for the
three months ended September 30, 1996, as compared to $25.9 million for the
three months ended September 30, 1995. An increase in rental property operating
expenses of $5.3 million is primarily attributable to the acquisition of: a)
five office properties and one full- service hotel in the fourth quarter of
1995 which resulted in $2.4 million of incremental expenses; and b) seven
office properties and one destination health and fitness resort in the first
three quarters of 1996 which resulted in $2.3 million of incremental expenses.
Depreciation and amortization increased $3.7 million primarily due to the
property acquisitions subsequent to September 30, 1995. An increase in interest
expense of $6.7 million is primarily attributable to interest payable under the
terms of the three long-term financing arrangements entered into between August
1995 and March 1996, proceeds of which were used to repay the Credit Facility
and to fund property acquisitions in 1995 and 1996. An increase in corporate
general and administrative of $.1 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.
12
<PAGE> 13
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues from rental properties increased approximately $49.5 million, or
58.6%, to $133.9 million for the nine months ended September 30, 1996, as
compared to $84.4 million for the nine months ended September 30, 1995. This
increase is primarily attributable to the acquisition of: a) 15 office
properties and two full-service hotels during the nine months ended September
30, 1995 which resulted in $19.1 million of incremental revenues; b) five
office properties and one full-service hotel in the fourth quarter of 1995
which resulted in $20.6 million of incremental revenues; and c) seven office
properties and one destination resort in 1996 which resulted in $9.7 million of
incremental revenues.
The decrease in interest and other income of $1.5 million is primarily due to
the sale of the co-investment rights in the Ritz-Carlton Hotel Company in the
second quarter of 1995, resulting in a $2.3 million gain, compared to the sale
of marketable securities in the second quarter of 1996, resulting in a $.7
million gain.
Total expenses increased $47.1 million, or 70.6%, to $113.8 million for the
nine months ended September 30, 1996, as compared to $66.7 million for the nine
months ended September 30, 1995. An increase in rental property operating
expenses of $16.9 million, is primarily attributable to the acquisition of: a)
15 office properties and two full- service hotels during the nine months ended
September 30, 1995 which resulted in $5.5 million of incremental expenses; b)
five office properties and one full-service hotel in the fourth quarter of 1995
which resulted in $7.4 million of incremental expenses; and c) seven office
properties and one destination resort in 1996 which resulted in $4.0 million of
incremental expenses. Depreciation and amortization increased $10.0 million
primarily due to the property acquisitions during the nine months ended
September 30, 1995, and subsequent to September 30, 1995. An increase in
interest expense of $19.5 million is primarily attributable to $24.7 million of
interest payable under the terms of the three long-term financing arrangements
entered into between August 1995 and March 1996, proceeds of which were used to
repay the Credit Facility and to fund property acquisitions in 1995 and 1996
offset by the decrease of interest expense of $5.2 million for the Credit
Facility. An increase in corporate general and administrative of $.7 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 $14.4 million and $16.9 million at September 30,
1996 and December 31, 1995, respectively. The decrease is attributable to $221.4
million used in investing activities, offset by $169.3 million and $49.6 million
of cash provided by financing and operating activities, respectively. The
Company utilized $221.4 million of cash flow primarily in the following
investing activities: (i) the acquisition of seven office properties and one
destination resort, ($173.1 million); (ii) additional investments in Residential
Development Corporations ($15.0 million); (iii) capital expenditures - rental
properties ($8.4 million) primarily attributable to tenant and building
improvements ($6.1 million); (iv) tenant leasing costs ($4.8 million); (v) notes
receivable ($11.5 million) primarily attributable to Canyon Ranch-Tucson Hotel
Lessee ($3.0 million) and Crescent Development Management Corp. ($5.0 million);
and (vi) acquisition escrow deposits ($6.4 million) primarily attributable to
the Greenway Plaza Portfolio acquisition ($5.0 million). The cash inflow from
operating activities is primarily attributable to property operations partially
offset by both the increase in accounts receivable which is due to (i) recent
property acquisitions and (ii) the hotel lessee's percentage rent lease payments
which are remitted quarterly and by an increase in other assets. 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
Securities Corporation ("Nomura") and Connecticut General Life Insurance Company
("CIGNA") ($105.6 million), the Credit Facility and short-term note payable to
FNBB ($191.5 million), which amounts were partially offset by the repayment of
the short-term note payable to FNBB ($57.2 million), the pay-off and
cancellation of the prior credit facility ($20.0 million) and the distributions
paid to stockholders and unitholders ($47.6 million).
On October 2, 1996, the Company completed an offering (the "Offering") of
11,500,000 shares (including the underwriters' overallotment option) of its
common stock at $40.375 per share (gross proceeds of
13
<PAGE> 14
$464.3 million). Net proceeds from the Offering to the Company after
underwriting discount of $24.4 million and other offering costs of
approximately $2.5 million were approximately $437.4 million. The Company used
a portion of these net proceeds to repay $16.0 million on the FNBB short term
note and $151.5 million of the Credit Facility. In addition, net proceeds of
$66.0 million were used to fund the cash portion of the purchase price of the
Greenway Plaza Portfolio. The remaining net proceeds of $204.0 million will be
used to fund future acquisitions. On October 9, 1996, the Company completed an
additional offering of 450,000 shares of its common stock to several
underwriters who participated in the Offering. The shares of common stock were
sold at $42 per share. The gross proceeds of $18.9 million from the additional
offering will be used to fund future acquisitions.
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 SEPTEMBER 30, 1996
----------- ---------- ---- ---- ------------------
<S> <C> <C> <C> <C>
Line of Credit(a) $ 175,000 7.90% February 1997 $ 172,500
Nomura Note I(b) 239,000 7.83% August 2027 239,000
Nomura Note II(c) 161,000 7.79% March 2028 161,000
CIGNA Note(d) 63,500 7.47% December 2002 63,500
Metropolitan Life Note(e) 12,483 8.88% September 2001 12,483
---------- ---- ----------
Total/Wtd. Avg. $ 650,983 7.82% $ 648,483
========== ==== ==========
</TABLE>
(a) The Company executed a new $150 million credit facility led by The First
National Bank of Boston which was increased to $175 million in August 1996.
Initially, the term is nine months and with advances bearing interest at
the Eurodollar rate +240 basis points for advances of $2.0 million or more,
or at the lender's prime rate plus 50 basis points for advances of less
than $2.0 million. Upon the occurrence of certain qualifying events,
including the raising of additional equity, the Credit Facility will be
unsecured, the term will be extended by 24 months and interest rate will be
reduced to the Eurodollar rate +185 basis points or, as applicable, the
lender's prime rate. In October 1996, the Company raised additional equity,
which satisfied the qualifying event, and as a result, the Credit Facility
became unsecured, the term was extended to March 1999 and the interest rate
was reduced.
(b) The note has a seven-year period during which only interest is payable
(through August 2002), followed by five years of principal amortization
based on a 25-year amortization schedule through maturity. At the end of 12
years (August 2007), the interest rate increases, and the Company 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 such
time (August 2007) by making a final payment of approximately $220 million.
Nomura Note I is secured by The Aberdeen, The Avallon, Caltex House, The
Citadel, Continental Plaza, The Crescent Atrium, The Crescent Office
Towers, Regency Plaza One and Waterside Commons.
(c) The note has a seven-year period during which only interest is payable
(through March 2003), followed by three years of principal amortization
based on a 25-year amortization schedule through maturity. At the end of 10
years (March 2006), the interest rate increases, and the Company 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 such
time (March 2006) by making a final payment of approximately $154 million.
Nomura Note II is secured by Albuquerque Plaza, Barton Oaks Plaza One,
Briargate Office and Research Center, Hyatt Regency Albuquerque, Hyatt
Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I & II, MacArthur
Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance
Square and 12404 Park Central.
(d) The note requires payments of interest only during its term, with a final
payment due in December 2002 of approximately $63.5 million. The CIGNA Note
is secured by MCI Tower and Denver Marriott City Center.
(e) The note requires monthly payments of principal and interest and is secured
by five of the Office Properties within The Woodlands.
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 available under the Credit
Facility, available cash reserves and other debt and equity financing.
14
<PAGE> 15
The Company expects to meet its long-term liquidity requirements, consisting
primarily of maturities under the Credit Facility, 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 $1.9 billion at September
30, 1996 (at a $41.125 stock price, which was the closing price of the common
stock on the NYSE on September 30, 1996, and including the full conversion of
all units of minority interest in the Operating Partnership plus total
indebtedness), the Company's debt represented 35% of its total market
capitalization. After the completion of the October Offerings, repayment of
debt and Greenway Plaza Portfolio acquisition, the Company's total market
capitalization was $2.4 billion (at a $43.25 stock price, which was the closing
of the common stock on the NYSE on November 11, 1996, and including the full
conversion of all units of minority interest in the Operating Partnership plus
total indebtedness) and debt represented a 25.1% 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.
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 nine
months ended September 30, 1996 and 1995 were $47.6 and $36.9 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. Because the Company must
distribute 95% of its real estate investment trust taxable income (as defined
in the Code), however, a significant increase in FFO will generally require an
increase in distributions to 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. However, the Company's measure of FFO
may not be comparable to similarly titled measures of other REIT's because
these REIT's may not apply to the modified definition of FFO in the same manner
as the Company.
15
<PAGE> 16
STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM $ 8,517 $ 11,427 $ 26,735 $ 27,759
ADJUSTMENTS:
Depreciation and amortization of real
estate assets 10,670 7,110 28,488 19,094
Adjustment for unconsolidated
investments in real estate
mortgages and common stock of
residential development corporations 461 (866) 1,473 3,002
Joint Ventures minority interest (635) (148) (955) (148)
Other (1) -- -- -- (2,300)
------------ ------------ ------------ ------------
FUNDS FROM OPERATIONS $ 19,013 $ 17,523 $ 55,741 $ 47,407
============ ============ ============ ============
WEIGHTED-AVERAGE SHARES/UNITS
OUTSTANDING 29,419,472 28,821,279 29,058,062 26,508,255
DIVIDEND PAID PER SHARE $ 0.55 $ 0.50 $ 1.65 $ 1.50
SUPPLEMENTAL INFORMATION:
Rental income from straight-line rents $ (1,287) $ (263) $ (2,892) $ (489)
Residential development capital expenditures (318) (873) (1,585) (1,647)
Non-incremental revenue generating exp.:
Rental property capital expenditures (791) (333) (1,550) (915)
Tenant leasing costs (2,610) (1,027) (5,976) (2,710)
Depreciation and amortization of non-real
estate assets 233 153 578 433
Amortization of deferred financing costs 745 643 2,065 1,735
</TABLE>
(1)Represents non-recurring gain on sale of investment
16
<PAGE> 17
PORTFOLIO INFORMATION
The following tables set forth certain information about the properties owned
by the Company as of September 30, 1996.
OFFICE AND RETAIL PROPERTIES
<TABLE>
<CAPTION>
Net Avg. Base
Rentable Rent Per
Acq. Year Area Percent Leased
Property Location Date Completed (Sq. Ft.) Leased Sq. Ft.(1)
- -------- --------- ---- --------- --------- ------ -------
OFFICE PROPERTIES
- -----------------
<S> <C> <C> <C> <C> <C>
The Crescent Office
Towers Dallas, TX (2) 1986 1,211,441 96% $21.97 (3)
Continental Plaza Fort Worth, TX (2) 1982 954,895 84 14.67 (3)
MacArthur Center I & II Irving, TX (2) 1982/1986 294,069 100 15.98
The Citadel Denver, CO (2) 1987 130,652 98 15.84
Caltex House Irving, TX 5/5/94 1982 445,993 95 19.19 (3)
Liberty Plaza I & II Dallas, TX 7/15/94 1981/1986 218,813 95 11.46 (3)
Regency Plaza One Denver, CO 8/2/94 1985 309,862 97 17.21
Waterside Commons Irving, TX 10/1/94 1986 458,739 100 9.29 (4)
Two Renaissance Square Phoenix, AZ 11/3/94 1990 476,373 74 21.21
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 13.46
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 91 18.13
MCI Tower Denver, CO 6/30/95 1982 550,807 97 16.11
The Woodlands Office
Properties(5) Houston, TX 7/12/95(6) 1980-1996 812,359 93 12.20 (3)(7)
Spectrum Center(8) Dallas, TX 8/31/95 1983 598,250 92 15.16 (3)
Ptarmigan Place Denver, CO 10/6/95 1984 418,565 67 13.64
6225 North 24th Street Phoenix, AZ 11/7/95 1981 84,460 100 12.00 (4)
Briargate Office and
Research Center CO Springs, CO 11/21/95 1988 252,857 100 8.48 (4)
Albuquerque Plaza Albuq., NM 12/19/95 1990 365,952 92 16.98
3333 Lee Parkway Dallas, TX 1/5/96 1983 233,484 62 14.43
301 Congress Avenue (9) Austin, TX 4/18/96 1986 418,443 96 14.99 (4)
Central Park Plaza Omaha, NE 6/13/96 1982 409,850 98 11.93 (4)
Three Westlake Park (10) Houston, TX 8/16/96 1983 414,251 100 7.39 (4)
1615 Poydras New Orleans, LA 8/23/96 1984 508,741 73 14.64
---------- ------ ------
Total Office Properties/Weighted Average 10,619,846 91% $15.17
========== ====== ======
RETAIL PROPERTIES
- -----------------
Las Colinas Plaza Irving, TX (2) 1989 135,449 93% $10.69 (4)
The Crescent Atrium Dallas, TX (2) 1986 88,623 75 15.19 (4)
---------- ------ ------
Total Retail Properties/Weighted Average 224,072 86% $12.22
========== ====== ======
</TABLE>
- ------------------------------
(1) Calculated based on base rent payable as of September 30, 1996, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles ("GAAP") and
excluding (i) any operating costs (such as utilities, real estate taxes
and/or insurance) payable by the tenants and (ii) any expense
reimbursements received from the tenants.
(2) Property was contributed to the Operating Partnership on May 5, 1994.
(3) Excludes electricity costs, which (with the exception of five of The
Woodlands Office Properties, the major tenants of Caltex House and Liberty
Plaza I and 78% of leased square feet in Spectrum Center) are paid in full
by the tenants.
(4) 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 (with the exception of 75% and 22% of leased square feet in
Central Park Plaza and Waterside Commons, respectively). The listed rate
excludes such items for the property or, for Central Park Plaza and
Waterside Commons, the portion of the property subject to a triple-net
lease.
(5) The Company has a 75% limited partner interest in the partnership that owns
the 12 office properties that comprise The Woodlands Office Properties.
(6) Two of The Woodlands Office Properties were acquired July 31, 1996.
(7) Two of The Woodlands Office Properties are leased pursuant to a triple-net
lease, which means that the tenant is responsible for paying all operating
costs for the property, including utilities, real estate taxes and
insurance. The listed rate excludes such items for the two Office
Properties.
(8) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates L.P., which owns both the
Spectrum Note and the ground lessor's interest in the land underlying the
office building.
(9) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
(10)The Company owns the principal economic interest in Three Westlake Park
through its ownership of the Three Westlake Park cash flow mortgage note.
17
<PAGE> 18
HOTEL PROPERTIES
<TABLE>
<CAPTION>
For the nine months
ended September 30,
---------------------------------------------
Revenue
Average Average Per
Occupancy Daily Available
Acq. Year Rate Rate Room
Property Location Date Completed Rooms 1996 1995 1996 1995 1996 1995
-------- -------- ---- --------- ----- ---- ---- ---- ---- ---- ----
Full-Service
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek Avon, CO 1/3/95 1989 295 72% 73% $204 $188 $151 $142
Denver Marriott City Center Denver, CO 6/30/95 1982 613 83 82 107 98 89 81
Hyatt Regency Albuquerque Albuquerque,NM 12/19/95 1990 395 79 76 92 85 72 65
----- -- -- ---- ---- ---- ----
Total Weighted Average 1,303 79% 78% $124 $115 $ 98 $ 90
===== == == ==== ==== ==== ====
Destination Resort
Canyon Ranch - Tucson Tucson, AZ 7/26/96 1980 240(1) 80%(2) 76%(2) $467(3) $467(3) $355(4) $340(4)
===== == == ==== ==== ==== ====
</TABLE>
(1) Represents the maximum number of guests that Canyon Ranch-Tucson can
accommodate per night.
(2) The occupancy rate equals the number of paying and complimentary guests for
the period, divided by the maximum number of available guest nights for the
period (65,520 guest nights for the nine months ended September 30, 1995
and 1996, respectively, based on a maximum of 240 guests per night).
(3) Average daily rate equals the average daily "all-inclusive" guest package
charges for the period, divided by the average daily number of paying
guests for the period.
(4) Revenue per available room equals the total "all-inclusive" guest package
charges for the period, divided by the maximum number of available guest
nights for the period.
RESIDENTIAL DEVELOPMENT PROPERTIES
<TABLE>
<CAPTION>
Residential Total Total
Residential Development Lots/Units Lots/Units
Residential Development Corporation's Total Developed Closed
Development Properties Type of Effective Lots/Units Since Since
Corporation(1) (RDP) RDP(2) Location Ownership % Planned Inception Inception
------------- ------------ ------- --------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.00% 691 521 448
Development The Highlands SF Breckenridge, CO 12.25% 750 165 112
Corporation Whitehawk Ranch SF Graeagle, CA 20.00% 223 36 12
----- ----- ---
Total Mira Vista Development Corporation 1,664 722 572
----- ----- ---
Houston Area Falcon Point SF Houston, TX 100.0% 1,051(4) 288 102
Development Spring Lakes SF Houston, TX 100.0% 533(4)(5) - -
----- ----- ---
Corporation
Total Houston Area Development Corporation 1,584 288 102
----- ----- ---
Crescent One Beaver
Development Creek CO Avon, CO 60.0% 18(6) - -
Management Market Square CO Avon, CO 60.0% 26(6) - -
Corporation Cresta TH Edwards, CO 60.0% 25 - -
The Reserve at
Frisco SF Frisco, CO 60.0% 131(6) 60 10
----- ----- ---
Total Crescent Development Management Corporation 200 60 10
----- ----- ---
Total Residential Development Properties 3,448 1,070 684
===== ===== ===
<CAPTION>
Average
Residential Closed Range of
Residential Development Sale Price Proposed
Development Properties Type of Per Lot/ Sale Prices
Corporation(1) (RDP) RDP(2) Location Unit Per Lot(3)
------------- ---------- ------- -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX $ 94,000 $50,000 - 265,000
Development The Highlands SF Breckenridge, CO $142,000 55,000 - 225,000
Corporation Whitehawk Ranch SF Graeagle, CA $ 91,000 65,000 - 150,000
Total Mira Vista Development Corporation
Houston Area Falcon Point SF Houston, TX $ 36,000 $16,000 - 50,000
Development Spring Lakes SF Houston, TX - 21,000 - 45,000
Corporation
Total Houston Area Development Corporation
Crescent One Beaver
Development Creek CO Avon, CO $ - $1,330,000 - 3,420,000
Management Market Square CO Avon, CO - 356,000 - 2,161,000
Corporation Cresta TH Edwards, CO - 1,278,000 - 1,725,000
The Reserve at
Frisco SF Frisco, CO 88,000 86,000 - 110,000
Total Crescent Development Management Corporation
Total Residential Development Properties
</TABLE>
- --------------------------------------
(1) 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.
(2) SF (Single-Family); CO (Condominium); TH (Townhome).
(3) Based on existing inventory of developed lots and lots to be developed.
(4) Houston Area Development Corporation has entered into a letter of intent
with a national homebuilder to sell 166 lots in Falcon Point and 93 lots in
Spring Lakes over a 24-month period commencing in the fourth quarter of
1996.
(5) The initial phase of this project (93 lots) is expected to be completed in
early 1997.
(6) As of September 30, 1996, 12 of the condominium units at One Beaver Creek,
19 of the condominium units at Market Square and 25 of the lots at The
Reserve at Frisco had been pre-sold, generating aggregate gross sales of
$25.6, $13.9 and $2.5 million, respectively. Closings are expected to begin
in the fourth quarter of 1997 for One Beaver Creek and Market Square.
Closings at The Reserve at Frisco are expected to be completed by the end
of the first quarter of 1997.
18
<PAGE> 19
AGGREGATE LEASE EXPIRATIONS OF OFFICE AND RETAIL PROPERTIES
The following table sets forth a schedule of the lease expirations for
leases in place as of September 30, 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
and excluding an aggregate of 1,001,439 square feet of unleased space.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NET RENTABLE OF LEASED OF TOTAL ANNUAL
AREA NET RENTABLE ANNUAL BASE RENT
NUMBER OF REPRESENTED AREA ANNUAL BASE BASE RENT PER NET
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 76 609,840 6.2% $ 8,811,250 5.7% $14.45
1997 140 1,078,100 11.0 14,996,822 9.6 13.91
1998 141 879,918 9.0 14,594,706 9.3 16.59
1999 108 978,025 10.0 14,397,349 9.2 14.72
2000 66 1,401,219 14.3 18,553,888 11.9 13.24
2001 62 1,086,651 11.1 20,469,816 13.1 18.84
2002 26 1,298,338 13.3 22,731,176 14.6 17.51
2003 13 419,996 4.3 7,484,829 4.8 17.82
2004 13 846,149 8.6 16,748,125 10.7 19.79
2005 9 1,021,347 10.4 13,896,943 8.9 13.61
2006 and thereafter 8 172,337 1.8 3,369,482 2.2 19.55
</TABLE>
(1) Based on base rent payable as of the expiration day of the lease, for net
rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under GAAP and
excluding (i) any operating costs (such as utilities, real estate taxes
and/or insurance) payable by the tenants and (ii) any expense
reimbursements received from the tenants.
19
<PAGE> 20
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.
(a) Exhibits Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K dated August 15, 1996 reporting the commitment to
purchase a portfolio of properties and including the following
financial statements: (i) Combined Statement of Excess of
Revenues Over Specific Operating Expenses for the Year Ended
December 31, 1995 and the Five Months Ended May 31, 1996 for
the properties and (ii) Pro Forma Financial Statements for the
Company.
Form 8-K/A dated August 15, 1996 amending and restating the
Form 8-K relating to the commitment to purchase a portfolio of
properties and updating the Pro Forma Financial Statements for
the Company.
Form 8-K dated June 17, 1996 reporting the stockholders'
approval of the reorganization of Crescent Real Estate
Equities, Inc. as a Texas real estate investment trust and
the Company's adoption of an incentive compensation plan and
granting of options to purchase Operating Partnership
units to two of the Company's directors.
Form 8-K dated September 27, 1996 filed for the purpose of
incorporating by reference certain exhibits into the Company's
Registration Statement on Form S-3.
20
<PAGE> 21
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: November 13, 1996 Gerald W. Haddock, President and Chief
Operating Officer
/s/ Dallas E. Lucas
----------------------------------------
Date: November 13, 1996 Dallas E. Lucas, Senior Vice President,
Financial Officer and Chief Accounting
Officer
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4
OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,367
<SECURITIES> 0
<RECEIVABLES> 23,670
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,238,417
<DEPRECIATION> (198,517)
<TOTAL-ASSETS> 1,039,900
<CURRENT-LIABILITIES> 30,312
<BONDS> 664,483
0
0
<COMMON> 236
<OTHER-SE> 388,056
<TOTAL-LIABILITY-AND-EQUITY> 1,213,212
<SALES> 0
<TOTAL-REVENUES> 137,427
<CGS> 0
<TOTAL-COSTS> 82,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,861
<INCOME-PRETAX> 20,877
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,877
<DISCONTINUED> 0
<EXTRAORDINARY> 1,306
<CHANGES> 0
<NET-INCOME> 19,571
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
