<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 JUNE 30, 1997
COMMISSION FILE NO 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
(formerly known as Crescent Real Estate Equities, Inc.)
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 877-0477
Number of shares outstanding of each of the registrant's classes of common
shares, as of August 12, 1997
Common Shares, par value $.01 per share: 102,092,627.
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such report) and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
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CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 (Audited)..................................... 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996..................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.................................... 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Historical Results of Operations.................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
Item 2. Changes in Securities........................................... 25
Item 3. Defaults Upon Senior Securities................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............. 25
Item 5. Other Information............................................... 25
Item 6. Exhibits and Reports on Form 8-K................................ 25
2
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(NOTE 1)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Investments in real estate:
Land $ 343,001 $ 146,036
Building and improvements 2,240,096 1,561,639
Furniture, fixtures and equipment 45,695 24,951
Less - accumulated depreciation (236,967) (208,808)
----------- -----------
Net investment in real estate 2,391,825 1,523,818
Cash and cash equivalents 55,589 25,592
Restricted cash and cash equivalents 28,429 36,882
Accounts receivable, net 17,324 15,329
Deferred rent receivable 23,266 16,217
Investments in real estate mortgages and common
stock of residential development corporations 41,993 37,069
Notes receivable, net 122,992 28,890
Other assets, net 98,362 47,125
----------- -----------
Total assets $ 2,779,780 $ 1,730,922
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 339,700 $ 40,000
Notes payable 792,796 627,808
Accounts payable, accrued expenses and other liabilities 62,206 48,462
----------- -----------
Total liabilities 1,194,702 716,270
----------- -----------
MINORITY INTERESTS:
Operating partnership, 6,631,731 and 6,640,336 units,
respectively 118,645 120,227
Investment joint ventures 28,369 29,265
----------- -----------
Total minority interests 147,014 149,492
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 250,000,000 shares,
97,034,491 and 36,146,380 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 970 361
Additional paid-in capital 1,499,477 905,724
Deferred compensation on restricted shares (283) (364)
Retained deficit (62,100) (40,561)
----------- -----------
Total shareholders' equity 1,438,064 865,160
----------- -----------
Total liabilities and shareholders' equity $ 2,779,780 $ 1,730,922
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ -----------------------------
(UNAUDITED) (UNAUDITED)
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Office and retail properties $ 84,904 $ 39,360 $ 155,319 $ 76,825
Hotel properties 8,436 4,192 17,421 8,724
Behavioral healthcare properties 2,142 -- 2,142 --
Interest and other income 3,647 1,447 8,321 2,510
------------ ------------ ------------ -----------
Total revenues 99,129 44,999 183,203 88,059
------------ ------------ ------------ -----------
EXPENSES:
Real estate taxes 9,697 4,344 17,622 8,377
Repairs and maintenance 5,792 2,679 10,943 4,879
Other rental property operating 19,080 9,121 36,600 17,842
Corporate general and administrative 2,638 1,141 7,483 2,299
Interest expense 16,868 9,859 31,612 19,018
Amortization of deferred financing costs 571 337 1,220 1,320
Depreciation and amortization 16,339 9,227 30,291 18,281
------------ ------------ ------------ -----------
Total expenses 70,985 36,708 135,771 72,016
------------ ------------ ------------ -----------
Operating income 28,144 8,291 47,432 16,043
OTHER INCOME:
Equity in net income of residential
development corporations 1,042 1,364 1,999 2,175
------------ ------------ ------------ -----------
INCOME BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM 29,186 9,655 49,431 18,218
Minority interests (4,092) (2,036) (7,586) (3,619)
------------ ------------ ------------ -----------
INCOME BEFORE EXTRAORDINARY ITEM 25,094 7,619 41,845 14,599
Extraordinary item -- (1,306) -- (1,306)
------------ ------------ ------------ -----------
NET INCOME $ 25,094 $ 6,313 $ 41,845 $ 13,293
============ ============ ============ ===========
PER SHARE DATA:
Income before extraordinary item $ 0.28 $ 0.16 $ 0.52 $ 0.31
Extraordinary item -- (0.03) -- (0.03)
------------ ------------ ------------ -----------
Net income $ 0.28 $ 0.13 $ 0.52 $ 0.28
============ ============ ============ ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 89,591,456 47,120,438 80,996,072 47,095,254
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 3)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
(UNAUDITED)
1997 1996
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,845 $ 13,293
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 31,511 19,601
Minority interest 7,586 3,619
Extraordinary item -- 1,306
Non-cash compensation 131 91
Equity in earnings in excess of distributions
received from residential development corporations (390) (365)
Increase in accounts receivable (1,995) (2,792)
Increase in deferred rent receivable (7,049) (1,605)
Increase in other assets (23,439) (4,933)
Decrease in restricted cash and cash equivalents 9,549 12,874
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 13,744 (9,603)
----------- ---------
Net cash provided by operating activities 71,493 31,486
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties (876,903) (64,017)
Capital expenditures - rental properties (8,169) (759)
Tenant improvement and leasing costs
- rental properties (18,519) (4,443)
Increase in restricted cash and cash equivalents (1,096) (5,234)
Investment in residential development corporations (4,534) (12,667)
Investment in unconsolidated companies (15,064) --
Escrow deposits - acquisition of investment properties (5,665) (2,950)
Increase in notes receivable (94,102) (2,306)
----------- ---------
Net cash used in investing activities (1,024,052) (92,376)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (2,948) (4,066)
Borrowings under Credit Facility 430,700 58,355
Payments under Credit Facility (131,000) (20,000)
Debt proceeds 315,174 108,638
Debt payments (150,186) (57,113)
Capital distributions - joint venture (1,698) --
Proceeds from common shares offering 593,522 --
Proceeds from exercise of share options 475 --
Issuance of partnership units -- 1,574
Distribution of Crescent Operating, Inc. shares to
unitholders of Operating Partnership and
shareholders of Crescent Equities (11,907) --
Dividends and unitholder distributions (59,576) (31,748)
----------- ---------
Net cash provided by financing activities 982,556 55,640
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,997 (5,250)
CASH AND CASH EQUIVALENTS,
Beginning of period 25,592 16,931
----------- ---------
CASH AND CASH EQUIVALENTS,
End of period $ 55,589 $ 11,681
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Company ("Crescent Equities" and,
together with its subsidiaries, the "Company") is a fully integrated real
estate company operating as a real estate investment trust for federal income
tax purposes (a "REIT"). The Company provides management, leasing, and
development services with respect to certain of its properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
Crescent Real Estate Equities, Inc., a Maryland corporation (the "Predecessor
Corporation"), on December 31, 1996, through the merger (the "Merger") of the
Predecessor Corporation and CRE Limited Partner, Inc., a Delaware corporation,
into Crescent Equities. The direct and indirect subsidiaries of Crescent
Equities include Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership"); Crescent Real Estate Equities, Ltd. (the "General
Partner"), which is the sole general partner of the Operating Partnership;
seven single purpose limited partnerships (formed for the purpose of obtaining
securitized debt) in which the Operating Partnership owns substantially all of
the economic interests directly or indirectly, with the remaining interests
owned indirectly by the Company through seven separate corporations, each of
which is a wholly owned subsidiary of the General Partner and a general partner
of one of the seven limited partnerships. The term "Company" includes, unless
the context otherwise requires, Crescent Equities, the Predecessor Corporation,
the Operating Partnership, and the other subsidiaries of the Company.
As of June 30, 1997, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties") located primarily in 19
metropolitan submarkets in Texas and Colorado. The Properties include 72 office
properties (the "Office Properties") with an aggregate of approximately 21.0
million net rentable square feet, 92 behavioral healthcare facilities, four
full-service hotels with a total of 1,471 rooms and two destination health and
fitness resorts (the "Hotel Properties"), six retail properties (the "Retail
Properties") with an aggregate of approximately .6 million net rentable square
feet and real estate mortgages and non-voting common stock in three residential
development corporations (the "Residential Development Corporations").
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
Company also has an economic interest in the development activities of the
Residential Development Corporations.
The following table sets forth, by subsidiary, the Properties owned by
such subsidiary:
<TABLE>
<S> <C>
Operating Partnership: Addison Tower, The Amberton, AT&T Building, Bank One
Tower, Canyon Ranch-Tucson, Cedar Springs Plaza,
Chancellor Park(1), Central Park Plaza, Concourse
Office Park, Denver Marriott City Center, Frost Bank
Plaza, Greenway I and IA, Greenway II, MCI Tower, One
Preston Park, Palisades Central I, Palisades Central
II, Reverchon Plaza, Sonoma Mission Inn & Spa,
Spectrum Center(2), Stemmons Place, Three Westlake
Park(3), Trammell Crow Center(4), The Addison, The
Meridian, The Woodlands Office Properties(5), The
Woodlands Retail Properties(5), Valley Centre, Walnut
Green, 44 Cook, 55 Madison, 160 Spear Street, 1615
Poydras, 301 Congress Avenue(6), 3333 Lee Parkway,
5050 Quorum and 6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P.: Continental Plaza, The Crescent Atrium, The Crescent
("Funding I") Office Towers, Regency Plaza One, and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One,
Funding II, L.P.: Briargate Office and Research Center, Hyatt Regency
("Funding II") 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
</TABLE>
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<TABLE>
<S> <C>
Crescent Real Estate Greenway Plaza Portfolio(7)
Funding III, IV, and V, L.P.:
("Funding III, IV and V")
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.:
("Funding VI")
Crescent Real Estate Behavioral Healthcare Facilities
Funding VII, L.P.:
("Funding VII")
</TABLE>
- -------------------
(1) The Operating Partnership owns Chancellor Park through its ownership of a
mortgage note secured by the building and through its direct and indirect
interests in the partnership which owns the building.
(2) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(3) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(4) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(5) The Operating Partnership owns a 75% limited partner interest in the
partnerships that own The Woodlands Office and Retail Properties (See
footnote 10 for change in ownership interest).
(6) The Operating Partnership owns a 49% limited partner interest and
Crescent/301, L.L.C., a wholly owned subsidiary of the General Partner and
the Operating Partnership, owns a 1% general partner interest in 301
Congress Avenue, L.P., the partnership that owns 301 Congress Avenue.
(7) Funding III owns the Greenway Plaza Portfolio, except for the central
heated and chilled water plant building and Coastal Tower Office property,
both located within Greenway Plaza, which are owned by Funding IV and
Funding V, respectively.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements have been included. Operating results
for interim periods reflected are not necessarily indicative of the results
that may be expected for a full fiscal year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K.
Certain reclassifications have been made to previously reported amounts to
conform with current presentation.
2. NEW ACCOUNTING PRONOUNCEMENT:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("EPS") ("SFAS 128") which supersedes APB No. 15 for periods ending December
15, 1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Primary EPS and Fully Diluted EPS are
replaced by Basic EPS and Diluted EPS, respectively. Basic EPS, unlike Primary
EPS, excludes all dilution while Diluted EPS, like Fully Diluted EPS, reflects
the potential dilution that could occur if securities or other contracts to
issue common shares were exercised or converted into common shares. The Company
does not expect the effect of its adoption of SFAS 128 to be material.
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3. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $30,648 $18,952
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Two-for-one stock split $ 361 $ --
Conversion of operating partnership units to common
shares with resulting reduction in minority
interest and increases in common share and
additional paid-in capital $ 225 $ 825
Minority interest - joint venture capital $ -- $21,635
</TABLE>
4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
Following is a summary of the Company's debt financing:
<TABLE>
<CAPTION>
June 30,
1997
--------------
<S> <C>
Note payable to LaSalle National Bank, as Trustee for Commercial Mortgage
Pass-Through Certificates, Series 1995-MD IV ("LaSalle Note I") bears interest
at 7.83% with an initial seven-year interest-only period (through August 2002),
followed by principal amortization based on a 25-year amortization schedule
through maturity in August 2027 (1), secured by the Funding I properties.......... $239,000
Note payable to LaSalle National Bank, as Trustee for Commercial Mortgage
Pass-Through Certificates, Series 1996-MD V ("LaSalle Note II") bears interest
at 7.79% with an initial seven-year interest-only period (through March 2003),
followed by principal amortization based on a 25-year amortization schedule
through maturity in March 2028(2), secured by the Funding II properties........... 161,000
Note payable to LaSalle National Bank, as Trustee for Commercial Mortgage
Pass-Through Certificates, Series 1994-MD II ("LaSalle Note III") due July
1999, bears interest at 30-day LIBOR plus a weighted average rate of 2.135% (at
June 30, 1997 the rate was 7.82% subject to a rate cap of 10%) with a five-year
interest-only term, secured by the Funding III, IV and V properties............... 115,000
Note payable to Connecticut General Life Insurance Company ("CIGNA") due
December 2002, bears interest at 7.47% with a seven-year interest-only term,
secured by the MCI Tower and Denver Marriott City Center properties............... 63,500
Note payable to Northwestern Mutual Life Insurance Company due January 2004,
bears interest at 7.66% with a seven-year interest-only term, secured by the
301 Congress Avenue property...................................................... 26,000
</TABLE>
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<TABLE>
<CAPTION>
June 30,
1997
--------------
<S> <C>
Note payable to Metropolitan Life Insurance Company due September 2001, bears
interest at 8.88% with monthly principal and interest payments, secured by five
of The Woodlands Office Properties................................................ 12,264
Note payable to Nomura Asset Capital Corporation ("Nomura Funding VI Note")
bears interest at 10.07% with monthly principal and interest payments based on
a 25-year amortization schedule through July 2020(3), secured by the Funding VI
property.......................................................................... 8,741
Short-term unsecured note payable to The First National Bank of Boston ("FNBB")
due October 1997, bears interest at Eurodollar rate plus 138 (at June 30, 1997,
the rate was 7.06%)............................................................... 160,000
Short-term construction loan payable to Texas Commerce Bank due September 1997,
bears interest at 30-day LIBOR plus 1.7% (at June 30, 1997 the rate was 7.39%)
secured by land and improvements that relate to the construction of an
additional office building that will be part of The Avallon....................... 7,291
--------
Total Notes Payable $792,796
========
</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.
(3) In July 1998, the Company may defease the loan by purchasing Treasury
obligations to pay the note without penalty. In July 2010, the
interest rate due under the note will change to a 10-year treasury
yield plus 500 basis points or if the Company so elects, it may repay
the note without penalty.
In June 1997, the Company amended and restated the $175,000 unsecured
credit facility (the "Credit Facility") agreement which is led by FNBB and
increased the amount of the Credit Facility to $350,000, decreased the interest
rate to Eurodollar rate plus 138 basis points and extended the term to June
2000. The Credit Facility requires the Company to maintain compliance with a
number of customary financial and other covenants on an ongoing basis,
including leverage ratios based on book value and debt service coverage ratios,
limitations on additional secured and total indebtedness and distributions, and
a minimum net worth requirement. As of June 30, 1997, the Company was in
compliance with all covenants except for one financial covenant for which the
Company had obtained a bank waiver. As of June 30, 1997, the interest rate was
7.06% and the outstanding balance was $339,700, with availability of $10,300.
5. MINORITY INTERESTS:
Minority interests represents (i) the limited partnership interests
owned by unitholders in the Operating Partnership ("units") and (ii) joint
venture interests held by outside interests. Due to the March 26, 1997
two-for-one stock split, the exchange factor has been adjusted in accordance
with the Operating Partnership's limited partnership agreement and each unit
may be exchanged for either two common shares or, at the election of the
Company, cash equal to the fair market value of two common shares at the time
of the exchange. When a unitholder exchanges a unit, the Company's investment
in the Operating Partnership is increased. During the six months ended June 30,
1997, there were 9,651 units exchanged for 19,302 common shares.
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6. SHAREHOLDERS' EQUITY:
On February 4, 1997, the Company paid a cash dividend and unitholder
distribution of $26,100 or $.61 per share and equivalent unit, to shareholders
and equivalent unitholders of record on January 21, 1997. The dividend
represented an annualized dividend of $2.44 per share and equivalent unit.
On March 2, 1997, the Company declared a two-for-one stock split in
the form of a 100% share dividend. The share dividend was paid on March 26,
1997 to shareholders of record on March 20, 1997.
On April 28, 1997, the Company completed an offering (the "April 1997
Offering") of 24,150,000 common shares (including the underwriters'
overallotment option) at $25.375 per share. Net proceeds from the April 1997
Offering to the Company after underwriting discount of $29,222 and other
offering costs of $3,000 were approximately $580,584. On May 14, 1997, the
Company completed an additional offering of 500,000 common shares to several
underwriters who participated in the April 1997 Offering. The common shares
were sold at $25.875 per share, totaling gross proceeds of approximately
$12,938 (collectively referred to as, the "Offerings").
In the second quarter of 1997, the Company used net proceeds of
$593,522 from the Offerings and approximately $314,700 from borrowings under
the Credit Facility and $160,000 of short-term borrowings from FNBB (i) to
fund approximately $30,000 in connection with the formation and capitalization
of Crescent Operating, Inc. ("Crescent Operating"); (ii) to repay the $150,000
FNBB short-term note payable; (iii) to reduce by $131,000 amounts outstanding
under the Credit Facility; (iv) to fund approximately $306,300 of the purchase
price of the Carter-Crowley Portfolio (as defined below) acquired by the
Company and (v) to fund the commitments of the Company and Crescent Operating
related to the Magellan transaction totaling approximately $419,700. The
remaining $31,222 has been or will be used for working capital purposes.
On May 14, 1997, the Company paid a cash dividend and unitholder
distribution of $33,476 or $.305 per share and equivalent unit, to shareholders
and unitholders of record on April 30, 1997. The dividend represented an
annualized dividend of $1.22 per share and equivalent unit.
7. FORMATION AND CAPITALIZATION OF CRESCENT OPERATING, INC.
In April 1997, the Company established a new Delaware corporation,
Crescent Operating to become a lessee and operator of various assets and to
perform an agreement (the "Intercompany Agreement") between Crescent Operating
and the Operating Partnership, pursuant to which each has agreed to provide the
other with rights to participate in certain transactions. Crescent Operating's
certificate of incorporation, as amended and restated, generally prohibits
Crescent Operating, for so long as the Intercompany Agreement remains in
effect, from engaging in activities or making investments that a REIT could
make, unless the Operating Partnership was first given the opportunity but
elected not to pursue such activities or investments.
In connection with the formation and capitalization of Crescent
Operating, the Company provided to Crescent Operating approximately $50,000 in
the form of cash contributions and loans to be used by Crescent Operating to
acquire certain assets described below. The Company also made available to
Crescent Operating a line of credit in the amount of $20,400 to be used by
Crescent Operating to fulfill certain ongoing obligations associated with these
assets.
On June 12, 1997, the Company distributed the outstanding common stock
of Crescent Operating to those persons who were unitholders of the Operating
Partnership or shareholders of Crescent Equities on May 30, 1997, on the basis
of one share of common stock of Crescent Operating for every five units of
limited partner interest in the Operating Partnership held on that date and one
share of common stock of Crescent Operating for every ten common shares of
beneficial interest of Crescent Equities held on that date. The mailing of the
shares and account statements representing the ownership of common stock of
Crescent Operating occurred on June 26, 1997.
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<PAGE> 11
On June 12, 1997, Crescent Operating's registration statement was declared
effective and Crescent Operating became a public company. The shares of
Crescent Operating were accepted for quotation on the OTC Bulletin Board and
began trading on a when-issued basis on June 13, 1997.
8. ACQUISITIONS:
Greenway II. On January 17, 1997, the Company acquired Greenway II, a
seven-story Class A office building containing approximately 154,000 net
rentable square feet and located in the Richardson/Plano submarket of Dallas,
Texas. The purchase price of Greenway II was approximately $18,200 which was
funded through a draw under the Credit Facility.
Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center, a 50-story
Class A office building, which contains approximately 1,128,000 net rentable
square feet. The property is located in the cultural and financial district of
the CBD submarket of Dallas, Texas. The Company acquired its interest in
Trammell Crow Center through the purchase of fee simple title to the property
(subject to a ground lease and a leasehold estate regarding the building) and
two mortgage notes encumbering the leasehold interests in the land and
building. The purchase price was approximately $162,000, of which $150,000 was
funded through proceeds from an unsecured, short-term loan with FNBB and the
remaining balance of $12,000 through a draw under the Credit Facility.
Denver Properties. On February 28, 1997, the Company acquired three
office buildings in Denver, Colorado, in a single transaction: 44 Cook, 55
Madison and the AT&T Building. 44 Cook, a 10-story Class A office building
containing approximately 119,000 net rentable square feet, and 55 Madison, an
eight-story Class A office building containing approximately 125,000 net
rentable square feet, are both located in the Cherry Creek submarket of Denver,
Colorado. The AT&T Building, a 15-story office building, contains approximately
170,000 net rentable square feet and is located in the Denver CBD submarket.
The three office properties were acquired for an aggregate purchase price of
approximately $42,675, which was funded through a draw under the Credit
Facility.
Carter-Crowley Portfolio. On February 10, 1997, the Company entered
into a contract to acquire for approximately $383,300, substantially all of the
assets (the "Carter-Crowley Portfolio") of Carter-Crowley Properties, Inc.
("Carter-Crowley"), an unaffiliated company controlled by the family of Donald
J. Carter. At the time the contract was executed, the Carter-Crowley Portfolio
included 14 office properties (the "Carter-Crowley Office Portfolio"), with an
aggregate of approximately 3.0 million net rentable square feet, approximately
1,216 acres of commercially zoned, undeveloped land located in the Dallas/Fort
Worth metropolitan area, two multifamily residential properties located in the
Dallas/Fort Worth metropolitan area, marketable securities, an approximately
12% limited partner interest in the limited partnership that owns the Dallas
Mavericks NBA basketball franchise, secured and unsecured promissory notes,
certain direct non-operating working interests in various oil and gas wells, an
approximately 35% limited partner interest in two oil and gas limited
partnerships and certain other assets (including operating businesses).
Pursuant to an agreement between Carter-Crowley and the Company, Carter-Crowley
liquidated approximately $51,000 of such assets originally included in the
Carter-Crowley Portfolio, consisting primarily of the marketable securities and
the oil and gas investments, resulting in a reduction in the total purchase
price by a corresponding amount to approximately $332,300. On May 9, 1997, the
Company and Crescent Operating acquired the Carter-Crowley Portfolio.
The Company acquired certain assets from the Carter-Crowley Portfolio,
with an aggregate purchase price of approximately $306,300, consisting
primarily of the Carter-Crowley Office Portfolio, the two multifamily
residential properties, the approximately 1,216 acres of undeveloped land and
the secured and unsecured promissory notes relating primarily to the Dallas
Mavericks. In addition to the promissory notes relating to the Dallas
Mavericks, the Company obtained rights from the current holders of the majority
interest in the Dallas Mavericks to a contingent $10,000 payment if a new arena
is built within a 75-mile radius of Dallas.
11
<PAGE> 12
The remainder of the Carter-Crowley Portfolio was purchased by
Crescent Operating utilizing cash contributions and loan proceeds that were
provided to Crescent Operating by the Company. These assets, which have an
allocated cost of approximately $26,000, consist primarily of the approximately
12% limited partner interest in the limited partnership that owns the Dallas
Mavericks, an approximately 1% interest in a private venture capital fund and a
100% interest in a construction equipment sale, leasing and services company.
Dallas Mavericks Interest. On June 11, 1997, DBL Holdings, Inc.
("DBL"), a wholly owned subsidiary of the Operating Partnership was formed. In
connection with the formation of DBL, the Operating Partnership acquired all
the voting and non-voting common stock of DBL, for an aggregate purchase price
of approximately $2,500 and loaned to DBL approximately $10,100. The voting
common stock, which represented a 5% effective interest in DBL, was
subsequently sold to Gerald W. Haddock , the President and Chief Executive
Officer of the Company and John C. Goff, the Vice Chairman of the Company for
$126. On June 11, 1997, DBL acquired from Crescent Operating for approximately
$12,550, the limited partner interest in the partnership that owns the Dallas
Mavericks.
Magellan Transaction. On June 17, 1997, the Company acquired
substantially all of the real estate assets of Magellan Health Services, Inc.'s
("Magellan") domestic hospital provider business as previously owned and
operated by a wholly owned subsidiary of Magellan. The Magellan transaction
involved various components, certain of which relate to the Company and certain
of which relate to Crescent Operating.
The total purchase price for the assets acquired in the Magellan
transaction was approximately $419,700. Of this amount, the Company paid
approximately $387,200 for the acquisition of 92 behavioral healthcare
facilities (the "Magellan Facilities") and $12,500 for the acquisition of
warrants to purchase 1,283,311 shares of common stock of Magellan. Crescent
Operating paid $5,000 for its interest in Charter Behavioral Health Systems,
LLC, a limited liability company ("CBHS"), $12,500 for the acquisition of
warrants to purchase 1,283,311 shares of common stock of Magellan and $2,500
to CBHS after the closing. CBHS is owned 50% by Crescent Operating and 50%
by a wholly owned subsidiary of Magellan, subject to potential dilution of each
by up to 5% in connection with future incentive compensation of management of
CBHS.
The principal component of the transaction is the Company's
acquisition of the Magellan Facilities, which are leased to CBHS, and the
subsidiaries of CBHS, under a triple-net lease. The lease requires the payment
of annual minimum rent in the amount of $41,700, increasing in each subsequent
year during the 12-year term at a 5% compounded annual rate. The lease provides
for four, five-year renewal options. All maintenance and capital improvement
costs will be the responsibility of CBHS during the term of the lease. In
addition, CBHS will pay annually an additional $20,000 under the lease, at
least $10,000 of which must be used, as directed by CBHS, for capital
expenditures each year and up to $10,000 of which may be used, if requested by
CBHS, to cover capital expenditures, property taxes, insurance premiums and
franchise fees.
9. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information for the six months ended June 30,
1997 and 1996 assumes the completion, in each case as of January 1, 1996, of
(i) the 11,500,000 common share offering on October 2, 1996 and the additional
450,000 common share offering on October 9, 1996, (ii) the Offerings and,
(iii) the 1996 and 1997 acquisitions.
12
<PAGE> 13
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30,1997 June 30,1996
----------------- ----------------
(in thousands) (in thousands)
<S> <C> <C>
Total revenue $226,989 $210,176
Operating income 65,014 54,170
Income before minority interests
and extraordinary item 67,013 56,345
Net income 58,239 47,944
Per share:
Income before extraordinary item 0.60 0.51
Net income 0.60 0.50
</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 Office and Retail Property acquisitions. Proforma
adjustments primarily represent the following: (i) rental income based on the
lease payments from the hotel lessees, of the three hotels acquired subsequent
to June 30, 1996, to the Company calculated on a pro forma basis by applying
the rent provisions (as set forth in the lease agreements); (ii) rental income
based on the lease payment from CBHS to the Company by applying the rent
provisions (as set forth in the lease agreement); (iii) adjustment for
depreciation expense for destination resorts, full-service hotel properties and
Magellan Facilities; (iv) interest income for the notes acquired in the
Carter-Crowley transaction and the loans to Crescent Operating; and (v) interest
costs assuming the borrowings to finance acquisitions.
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 period,
nor do they purport to represent the future financial position of the Company.
10. SUBSEQUENT EVENTS
On July 3, 1997, the Company declared a cash dividend of $.305 per
share and equivalent unit, to shareholders and unitholders of record on July
16, 1997. The cash dividend and unitholder distributions were paid on August 5,
1997, and represented an annualized dividend of $1.22 per share and equivalent
unit.
The Woodlands Corporation. On July 31, 1997, the Company and certain
Morgan Stanley funds (the "Morgan Stanley Group"), acquired The Woodlands
Corporations, a subsidiary of Mitchell Energy Corporation, for approximately
$543,000. The Woodlands Corporation was the principal owner, developer and
operator of The Woodlands, an approximately 27,000-acre, master-planned
residential and commercial community located 27 miles north of downtown
Houston. The Woodlands, which is approximately 50% developed, includes a
shopping mall, retail centers, office buildings, a hospital, club facilities, a
community college, a performance pavilion and numerous other amenities.
The acquisition was made through two limited partnerships, The
Woodlands Commercial Properties Company, L.P. ("Woodlands-CPC"), a limited
partnership in which the Morgan Stanley Group holds a 57.5% interest and the
Company holds a 42.5% interest, and the Woodlands Land Development Company,
L.P. ("Woodlands-LDC"), a limited partnership in which the Morgan Stanley Group
holds a 57.5% interest and a newly formed Residential Development Corporation,
the Woodlands Land Development Company, Inc. ("Landevco"), holds a 42.5%
interest. The Company is currently the sole stockholder of Landevco, although
it is anticipated that the Company will sell 100% of the voting stock
representing a 5% equity interest, in Landevco to Crescent Operating. The
Company is the managing general partner of Woodlands-CPC and Landevco is the
managing general partner of Woodlands-LDC.
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<PAGE> 14
Woodlands-CPC and Woodlands-LDC financed the acquisition price and
associated acquisition and financing costs of approximately $15,000 through a
combination of approximately $369,000 in borrowings and contributions from the
Company and the Morgan Stanley Group totaling approximately $189,000. The
Company financed its approximately $80,000 equity contribution through
short-term borrowings bearing interest at the Eurodollar rate plus 138 basis
points.
In connection with the acquisition, Woodlands-CPC acquired The
Woodlands Corporation's 25% general partner interest in the partnership that
owns approximately 1.2 million square feet of Office and Retail Properties in
The Woodlands. The Company previously held a 75% limited partner interest in
this partnership and, as a result of the acquisition, the Company's indirect
ownership interest in these Properties increased to approximately 85%. The
other assets acquired by Woodlands-CPC consisted primarily of a 364-room
executive conference center, a private golf and tennis club serving
approximately 1,600 members and offering 81 holes of golf, and approximately
2,900 acres of land that will support commercial development of more than 25
million square feet of office, multi-family, industrial, retail and lodging
properties. In addition, Woodlands-CPC acquired The Woodlands Corporation's
partnership interests in additional office, retail, multi-family and light
industrial properties. The assets acquired by Woodlands-LDC consisted primarily
of approximately 6,400 acres of land that will support development of more than
20,000 lots for single-family homes and approximately 2,900 acres of commercial
land that will be sold and not developed by Woodlands-LDC. The executive
conference center, including the golf and tennis club and golf courses, are
operated and leased by a partnership owned 42.5% by Crescent Operating and 57.5%
by the Morgan Stanley Group.
On August 12, 1997, the Company entered into two transactions with
affiliates of Union Bank of Switzerland ("UBS"). In one transaction, the
Company sold 4,700,000 common shares to UBS Securities, LLC for approximately
$148,000 (approximately $145,000 of net proceeds). In the other transaction,
the Company entered in to forward share purchase agreement with Union Bank of
Switzerland, London Branch which provides that during a preliminary term of one
year the Company will have the opportunity to execute a share settlement based
on the then market price of the Company's common shares. Alternatively, the
Company may complete the settlement for cash.
The Company has entered into a definitive agreement to acquire Desert
Mountain, an exclusive master-planned community located in northern Scottsdale,
Arizona, for approximately $229,000. The transaction is expected to close in
the third quarter of 1997, subject to due diligence and customary closing
conditions.
The Company has pending acquisitions for 4 to 5 million square feet of
office properties located in the Southwest, which the Company anticipates
closing in the third quarter of 1997, subject to due diligence and customary
closing conditions.
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 and number of hotel/resort
rooms/guest nights contained in the portfolio due to acquisitions made by the
Company. The weighted average square feet of consolidated office and retail
properties for the three and six months ended June 30, 1997, were approximately
20.3 and 18.9 million, respectively, compared to 9.4 and 9.1 million for the
same periods in 1996. These increases represent an 115.9% and 107.6% increase in
square feet for the three and six months ended June 30, 1997, respectively,
compared to the same periods in 1996. The weighted average number of rooms/guest
nights for consolidated hotel properties for the three months and six months
ended June 30, 1997, were approximately 1,913 compared to and 1,303, for the
same periods in 1996. This increase represents a 46.8% increase in rooms/guest
nights for the three and six months ended June 30, 1997.
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: changes in
14
<PAGE> 15
real estate conditions (including rental rates and competing properties) or in
industries in which the Company's principal tenants compete, the failure to
consummate anticipated transactions, the ability to identify acquisitions
opportunities meeting the Company's investment strategy, timely leasing of
unoccupied square footage, timely releasing of occupied square footage upon
expiration, 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 and certain other loans
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 JUNE 30, 1997 AND 1996
Total revenues increased approximately $54.1 million, or 120.2% to
$99.1 million for the three months ended June 30, 1997, as compared to $45.0
million for the three months ended June 30, 1996. An increase in office and
retail property revenues of $45.5 million is primarily attributable to the
acquisition of: a) 19 office properties in 1997 which resulted in $15.5 million
of incremental revenues; b) 20 office properties and four retail properties in
the third and fourth quarters of 1996 which resulted in $27.0 million of
incremental revenues; and c) two office properties in the second quarter of
1996 which resulted in $2.1 million of incremental revenues. An increase in
hotel property revenues of $4.2 million is primarily attributable to the
acquisition of two destination health and fitness resorts and one full-service
hotel property in the third and fourth quarters of 1996. Due to the closing of
the Magellan transaction in June 1997, the rental revenues from the behavioral
healthcare facilities for the quarter was $2.1 million. The increase in
interest and other income of $2.2 million is primarily attributable to the
$82.1 million increase in notes receivable as a result of the notes acquired in
the Carter-Crowley transaction and loans to Crescent Operating, Inc.
("Crescent Operating"), and interest earned on available cash from the
Offerings.
Total expenses increased $34.3 million, or 93.5% to $71.0 million for
the three months ended June 30, 1997, as compared to $36.7 million for the
three months ended June 30, 1996. The increase in rental property operating
expenses of $18.4 million, is primarily attributable to the acquisition of: a)
19 office properties in 1997 which resulted in $7.1 million of incremental
expenses; b) 20 office properties and four retail properties in the third and
fourth quarters of 1996 which resulted in $11.4 million of incremental
expenses; c) two office properties in the second quarter of 1996 which resulted
in $.7 million of incremental expenses. Depreciation and amortization increased
$7.1 million primarily attributable to the acquisitions of office properties
and behavioral healthcare facilities. The increase in interest expense of $7.0
million is primarily attributable to: (i) $.5 million of interest payable
under the financing arrangement with Northwestern Mutual Life Insurance
Company, which was in-place as of December 1996; (ii) $2.2 million payable
under LaSalle Note III, which was assumed in the acquisition of the Greenway
Plaza Portfolio in October 1996; (iii) $.5 million of interest payable under
the short-term note with the First National Bank of Boston ("FNBB") which was
not in-place in 1996; and (iv) $2.8 million of incremental interest payable
due to draws under the Credit Facility (average balance outstanding for the
second quarter 1997 and 1996 was $166.9 million and $19.5 million,
respectively), all of the financing arrangements, except for LaSalle Note III,
were used to fund acquisitions. The increase in corporate general and
administrative expense of $1.5 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Total revenues increased approximately $95.1 million, or 107.9%, to
$183.2 million for the six months ended June 30, 1997, as compared to $88.1
million for the six months ended June 30, 1996. An increase in office and
retail property revenues of $78.5 million is primarily attributable to the
acquisition
15
<PAGE> 16
of: a) 19 office properties in 1997 which resulted in $18.6 million of
incremental revenues; b) 20 office properties and four retail properties in the
third and fourth quarters of 1996, which resulted in $52.3 million of
incremental revenues; and c) two office properties in the second quarter of
1996 which resulted in $5.9 million of incremental revenues. An increase in
hotel property revenues of $8.7 million is primarily attributable to the
acquisition of two destination health and fitness resorts and one full-service
hotel property subsequent to June 30, 1996, which resulted in $8.3 million of
incremental revenues. Due to the closing of the Magellan transaction in June
1997, the rental revenues from the behavioral healthcare facilities was $2.1
million. The increase in interest and other income of $5.8 million for the six
months ended June 30, 1997, is primarily attributable to: a) the $3.1 million
profit distribution related to the Company's investment in HBCLP, Inc., whose
primary asset is its investment in Hudson Bay Partners, L.P., an investment
partnership in which the Company holds an effective 95% economic interest; b)
the $82.1 million increase in notes receivable as a result of the notes
acquired in the Carter-Crowley transaction and loans to Crescent Operating;
and c) interest earned on available cash from the Offerings.
Total expenses increased $63.8 million, or 88.6%, to $135.8 million
for the six months ended June 30, 1997, as compared to $72.0 million for the
six months ended June 30, 1996. An increase in rental property operating
expenses of $34.1 million is primarily attributable to the acquisition of: a)
19 office properties in 1997 which resulted in $8.2 million of incremental
expenses; b) 20 office properties and four retail properties in the third and
fourth quarters of 1996, which resulted in $23.5 million of incremental
expenses; and c) two office properties in the second quarter of 1996 which
resulted in $2.1 million of incremental expenses. Depreciation and amortization
increased $12.0 million primarily attributable to the acquisitions of office
properties and behavioral healthcare facilities. An increase in interest
expense of $12.6 million is primarily attributable to: (i) $1.0 million of
interest payable under the financing arrangement with Northwestern Mutual Life
Insurance Company, which was in-place as of December 1996; (ii) $4.5 million of
interest payable under LaSalle Note III, which was assumed in the acquisition
of the Greenway Plaza Portfolio transaction in October 1996; (iii) $.5 million
of interest payable under the short-term note with the FNBB, which was not
in-place in 1996; (iv) $4.6 million of incremental interest payable due to
draws under the Credit Facility (average balance outstanding for six months
ended June 30, 1997 and 1996 was $134.7 and $13.1, respectively), all of the
financing arrangements, except for LaSalle Note III, were used to fund
acquisitions. An increase in corporate general and administrative expense of
$5.2 million was primarily attributable to incentive compensation awarded to
the Company's executive officers and also 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 $55.6 million and $25.6 million at June
30, 1997 and December 31, 1996, respectively. The increase is attributable to
$982.6 million and $71.5 million of cash provided by financing and operating
activities, respectively, offset by $1,024.1 million used in investing
activities. The Company's inflow of cash provided by financing activities is
primarily attributable to proceeds received from the Offerings (as defined
below) ($593.5 million), the net borrowings under the Credit Facility ($299.7
million) and the borrowings under the short-term FNBB note ($160.0 million), all
of which were partially offset by the distributions paid to shareholders and
unitholders ($59.6 million) and the distribution of Crescent Operating shares to
unitholders of the Operating Partnership and shareholders of the Company ($11.9
million). The cash inflow from operating activities is primarily attributable
to: (i) property operations; (ii) a decrease in restricted cash reserves for
payment of real estate taxes; and (iii) an increase in accounts payable which is
primarily attributable to 1997 acquisitions. The inflows from operating
activities were partially offset by an increase in other assets which is
primarily attributable to the purchase of the Magellan warrants ($12.5 million).
The Company utilized $1,024.1 million of cash flow primarily in the following
investing activities: (i) the acquisition of 19 office properties and 92
behavioral healthcare facilities ($876.9 million); (ii) notes receivable ($94.1
million) primarily attributable to the acquisition of a note receivable secured
by a hotel property ($6.3 million), the acquisition, as a part of the
Carter-Crowley transaction of certain secured and unsecured promissory notes
relating primarily to the Dallas Mavericks ($56.1 million), the loans to
Crescent Operating ($26.0 million) and Houston Area Development Corporation
($1.9 million); (iii) investment in DBL Holdings, Inc. ($12.6 million); (iv)
capital expenditures for rental properties ($8.2 million) primarily attributable
to non-recoverable building improvements for the office and retail properties,
and replacement of furniture, fixtures and equipment for the hotel properties;
and (v) recurring and non-recurring tenant improvement and leasing costs for the
office and retail properties ($18.5 million).
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On February 14, 1997, the Company filed a shelf registration with the
Securities and Exchange Commission ("SEC") for an aggregate of $1.2 billion of
common shares, preferred shares and warrants exercisable for common shares. 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.
On April 28, 1997, the Company completed an offering (the "April 1997
Offering") of 24,150,000 common shares (including the underwriters'
overallotment option) at $25.375 per share. Net proceeds from the April 1997
Offering to the Company after underwriting discount of $29.2 million and other
offering costs of $3.0 million were approximately $580.6 million. On May 14,
1997, the Company completed an additional offering of 500,000 common shares to
several underwriters who participated in the Offering. The common shares were
sold at $25.875 per share, totaling gross proceeds of $12.9 million
(collectively referred to as, the "Offerings").
In the second quarter of 1997, the Company used net proceeds of $593.5
million from the Offerings and approximately $314.7 million from borrowings
under the Credit Facility and $160.0 million of short-term borrowings from FNBB
(i) to fund approximately $30.0 million in connection with the formation and
capitalization of Crescent Operating; (ii) to repay the $150.0 million FNBB
short-term note payable; (iii) to reduce by $131.0 million amounts outstanding
under the Credit Facility; (iv) to fund approximately $306.3 million of the
purchase price of the Carter-Crowley Portfolio acquired by the Company and (v)
to fund the commitments of the Company and Crescent Operating related to the
Magellan transaction totaling approximately $419.7 million. The remaining $31.2
million has been or will be used for working capital purposes.
The significant terms of the Company's debt financing arrangements are
shown below (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST BALANCE
MAXIMUM RATE AT EXPIRATION OUTSTANDING AT
DESCRIPTION BORROWINGS JUNE 30, 1997 DATE JUNE 30, 1997
- ----------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Fixed Rate Debt:
LaSalle Note I(a) $ 239,000 7.83% August 2027 $ 239,000
LaSalle Note II(b) 161,000 7.79% March 2028 161,000
CIGNA Note (c) 63,500 7.47% December 2002 63,500
Northwestern Life Note(d) 26,000 7.66% January 2004 26,000
Metropolitan Life Note(e)(f) 12,264 8.88% September 2001 12,264
Nomura Funding VI Note(f)(g) 8,741 10.07% July 2020 8,741
---------- ---- ----------
Subtotal /Weighted Average $ 510,505 7.83% $ 510,505
---------- ---- ----------
Variable Rate Debt:
Line of Credit(h) $ 350,000 7.06% June 2000 $ 339,700
FNBB Note(i) 160,000 7.06% October 1997 160,000
LaSalle Note III(j)(f) 115,000 7.82% July 1999 115,000
Texas Commerce Bank Note(k) 11,700 7.39% September 1997 7,291
---------- ---- ----------
Subtotal/Weighted Average $ 636,700 7.21% $ 621,991
---------- ---- ----------
TOTAL/WEIGHTED AVERAGE $1,147,205 7.49% $1,132,496
========== ==== ==========
</TABLE>
NOTES:
(a) The note provides for the payment of interest only through August 2002,
followed by principal amortization based on a 25-year amortization
schedule through maturity. 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
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<PAGE> 18
to repay the note in full at such time (August 2007) by making a final
payment of approximately $220 million. LaSalle Note I is secured by
Funding I properties (see Note 1 to Item 1. Financial Statements).
(b) The note provides for the payment of interest only through March 2003,
followed by principal amortization based on a 25-year amortization
schedule through maturity. 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 million. LaSalle Note II is secured by Funding II
properties (see Note 1 to Item 1. Financial Statements).
(c) The note requires payments of interest only during its term. The CIGNA
Note is secured by the MCI Tower and Denver Marriott City Center
properties.
(d) The note requires payments of interest only during its term. The
Northwestern Life note is secured by the 301 Congress Avenue property.
(e) The note requires monthly payments of principal and interest and is
secured by five of The Woodlands Office Properties.
(f) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties.
(g) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. In July 1998, the Company may defease the
note by purchasing Treasury obligations to pay the note without penalty.
The Nomura Funding VI Note is secured by the property owned by Funding VI
(see Note 1 to Item 1. Financial Statements). In July 2010, the interest
rate due under the note will change to a 10-year treasury yield plus 500
basis points or if the Company so elects, it may repay the note without
penalty.
(h) The Credit Facility is unsecured with an interest rate of Eurodollar plus
138 basis points.
(i) The note is unsecured with an interest rate of the Eurodollar rate plus 138
basis points. The note requires payments of interest only during its term.
(j) The note bears interest at 30-day LIBOR plus a weighted average rate of
2.135% (subject to a rate cap of 10%) and requires payments of interest
only during its term. LaSalle Note III is secured by Funding III, IV and V
properties (See Note 1 to Item 1. Financial Statements).
(k) The note bears interest at 30-day LIBOR plus 1.7% and requires payments of
interest only during its term. The Texas Commerce Bank Note is secured by
land and improvements that relate to the construction of an additional
office building that will be part of The Avallon.
Based on the Company's total market capitalization of $4.6 billion at
June 30, 1997 (at a $31.750 share price, which was the closing price of the
common shares on the NYSE on June 30, 1997, and including the full conversion
of all units of minority interest in the Operating Partnership plus total
indebtedness), the Company's debt represented 24.4% of its total market
capitalization. The Company currently intends to maintain a conservative
capital structure with total debt targeted at 40% of total market
capitalization.
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, recurring capital expenditures and distributions to
shareholders and unitholders. To the extent the Company's cash flow from
operating activities is not sufficient to finance non-recurring capital
expenditures, such as tenant improvement and leasing costs related to
previously unoccupied space, 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.
The Company expects to meet its long-term liquidity requirements,
consisting primarily of maturities under the Company's fixed and variable rate
debt through long-term secured and unsecured borrowings and the issuance of
debt securities and/or additional equity securities of the Company.
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 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
18
<PAGE> 19
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 cash distributions paid to shareholders and unitholders for the six
months ended June 30, 1997 and 1996 were $59.6 and $31.7 million, respectively.
An increase in FFO does not necessarily result in an increase in aggregate
distributions because the Company's board of trustees 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 shareholders 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 the definition of FFO in the same manner as the Company.
STATEMENTS OF FUNDS FROM OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income before minority interests $ 29,186 $ 9,655 $ 49,431 $ 18,218
Adjustments:
Depreciation and amortization of real
estate assets 15,724 8,929 29,220 17,818
Adjustment for unconsolidated investments
in real estate mortgages and common stock of
residential development corporations 407 690 673 1,012
Minority interest in joint ventures (386) (320) (802) (320)
------------- ------------ ------------ ------------
Funds from operations $ 44,931 $ 18,954 $ 78,522 $ 36,728
============= ============ ============ ============
Weighted average common shares outstanding and
issuable in exchange for units 102,857,612 57,785,748 94,269,446 57,753,882
============= ============ ============ ============
</TABLE>
19
<PAGE> 20
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Funds from operations $ 78,522 $ 36,728
Adjustments:
Depreciation and amortization of non-real estate assets 743 345
Amortization of deferred financing costs 1,220 1,320
Minority interest in joint ventures profit and
depreciation and amortization of real estate assets 1,130 438
Adjustment in unconsolidated investments in
real estate mortgages and common stock of
residential development corporations (673) (1,012)
Change in deferred rent receivable (7,049) (1,605)
Change in current assets and liabilities (2,141) (4,454)
Other (259) (274)
-------- --------
Net cash provided by operating activities $ 71,493 $ 31,486
======== ========
</TABLE>
20
<PAGE> 21
The following table sets forth certain information about the Office
Properties as of June 30, 1997.
OFFICE PROPERTIES
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FULL-SERVICE
NET RENTAL
RENTABLE RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- --------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
TEXAS
DALLAS
The Crescent Office Towers....... Uptown/Turtle Creek 1985 1,210,899 98% $25.50
Trammell Crow Center(2).......... CBD 1984 1,128,331 80 23.29
Stemmons Place................... Stemmons 1983 634,381 90 13.51
Spectrum Center(3)............... Far North Dallas 1983 598,250 93 16.67
Waterside Commons................ Las Colinas 1986 458,739 100 15.82
Caltex House..................... Las Colinas 1982 445,993 95 23.27
Reverchon Plaza.................. Uptown/Turtle Creek 1985 374,165 83 14.39
The Aberdeen..................... Far North Dallas 1986 320,629 100 17.31
MacArthur Center I &II........... Las Colinas 1982/1986 294,069 98 17.00
Stanford Corporate Centre........ Far North Dallas 1985 265,507 100 14.75
The Amberton .................... Central Expressway 1982 255,052 79 10.46
Concourse Office Park ........... LBJ Freeway 1972-1986 244,879 91 11.39
12404 Park Central............... LBJ Freeway 1987 239,103 76(4) 16.08
Palisades Central II............. Richardson/Plano 1985 237,731 100 15.08
3333 Lee Parkway................. Uptown/Turtle Creek 1983 233,484 41(4) 16.93
Liberty Plaza I & II............. Far North Dallas 1981/1986 218,813 100 12.81
The Addison...................... Far North Dallas 1981 215,016 100 15.00
The Meridian..................... LBJ Freeway 1984 213,915 99 12.67
Palisades Central I.............. Richardson/Plano 1980 180,503 100 13.19
Walnut Green..................... Central Expressway 1986 158,669 97 12.89
Greenway II...................... Richardson/Plano 1985 154,329 100 18.14
Addison Tower.................... Far North Dallas 1987 145,886 88 12.71
5050 Quorum...................... Far North Dallas 1981 133,594 93 13.79
Cedar Springs Plaza.............. Uptown/Turtle Creek 1982 110,923 81 14.93
Greenway IA...................... Richardson/Plano 1983 94,784 100 12.88
Valley Centre.................... Las Colinas 1985 74,861 99 13.07
Greenway I....................... Richardson/Plano 1983 51,920 100 12.88
One Preston Park................. Far North Dallas 1980 40,525 74 12.38
--------- ----- ------
Subtotal/Weighted Average..... 8,734,950 91% $17.67
--------- ----- ------
FORT WORTH
Continental Plaza................ CBD 1982 954,895 63%(4) $16.67
--------- ----- ------
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FULL-SERVICE
NET RENTAL
RENTABLE RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- --------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
HOUSTON
Greenway Plaza Office
Portfolio(5).................. Richmond-Buffalo 1969-1982 4,256,885 79%(4) $14.37
Speedway
The Woodlands Office
Properties(6)................. The Woodlands 1980-1996 812,227 97 13.61
Three Westlake Park(7)........... Katy Freeway 1983 414,251 100 13.18
--------- ----- ------
Subtotal/Weighted Average...... 5,483,363 83% $14.14
AUSTIN
Frost Bank Plaza................. CBD 1984 433,024 72% $16.28
301 Congress Avenue(8)........... CBD 1986 418,338 95 23.14
Bank One Tower................... CBD 1974 389,503 95 15.37
The Avallon...................... Northwest 1993 125,959 100 17.72
Barton Oaks Plaza One............ Southwest 1986 99,792 92 19.30
--------- ----- ------
Subtotal/Weighted Average...... 1,466,616 89% $18.47
--------- ----- ------
COLORADO
DENVER
MCI Tower........................ CBD 1982 550,807 98% $17.20
Ptarmigan Place.................. Cherry Creek 1984 418,565 83(4) 15.29
Regency Plaza One................ DTC 1985 309,862 94 19.58
AT&T............................. CBD 1982 169,610 99 14.16
The Citadel...................... Cherry Creek 1987 130,652 96 17.93
55 Madison....................... Cherry Creek 1982 125,690 90 15.11
44 Cook.......................... Cherry Creek 1984 119,363 70 16.48
--------- ----- ------
Subtotal/Weighted Average..... 1,824,549 91% $16.78
--------- ----- ------
COLORADO SPRINGS
Briargate Office and Research
Center......................... Colorado Springs 1988 252,857 100% $14.15
--------- ----- ------
ARIZONA
PHOENIX
Two Renaissance Square........... CBD 1990 476,373 87(4) $22.59
6225 North 24th Street........... Camelback Corridor 1981 86,451 67 21.24
--------- ----- ------
Subtotal/Weighted Average..... 562,824 84% $22.43
--------- ----- ------
LOUISIANA
NEW ORLEANS
1615 Poydras..................... CBD 1984 508,741 74% $14.62
--------- ----- ------
NEBRASKA
OMAHA
Central Park Plaza............... CBD 1982 409,850 99% $12.91
--------- ----- ------
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FULL-SERVICE
NET RENTAL
RENTABLE RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- --------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza................ CBD 1990 365,952 94% $18.12
---------- ----- ------
CALIFORNIA
SAN FRANCISCO
160 Spear Street................. South of Market-CBD 1984 276,420 81% $22.15
---------- ----- ------
SAN DIEGO
Chancellor Park.................. UTC 1988 195,733 85% $20.50
---------- ----- ------
TOTAL/WEIGHTED AVERAGE......... 21,036,750 87%(4) $16.73
========== ===== ======
</TABLE>
Notes:
(1) Calculated based on base rent payable as of June 30, 1997, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles, and including
adjustments for expenses payable by tenants.
(2) The Company owns the principal economic interest in Trammell Crow Center
through its ownership of fee simple title to the property (subject to a
ground lease and a leasehold estate regarding the building) and two
mortgage notes encumbering the leasehold interests in the land and
building.
(3) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates, L.P., which owns both a
mortgage note secured by Spectrum Center and the ground lessor's interest
in the land underlying the office buildings.
(4) The Company has executed leases at certain properties that had not
commenced as of June 30, 1997. If such leases had commenced as of June 30,
1997, the percent leased for all Office Properties would have been 90%. The
total percent leased for such Properties would have been as follows: 12404
Park Central - 100%; 3333 Lee Parkway - 79%; Continental Plaza - 100%;
Greenway Plaza - 82%; Ptarmigan Place - 94% and Two Renaissance Square -
88%.
(5) Consists of 10 Office Properties.
(6) The Company has a 75% limited partner interest in the partnership that
owns the 12 Office Properties that comprise The Woodlands Office
Properties.
(7) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by Three Westlake Park.
(8) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon
Ranch-Tucson and Canyon Ranch-Lenox, which are destination health and fitness
resorts that measure performance based on available guest nights.
23
<PAGE> 24
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------------------------
Revenue
Average Average Per
Year Occupancy Daily Available
Completed/ Rate Rate Room
Property Location Renovated Rooms 1997 1996 1997 1996 1997 1996
- -------- -------- --------- ----- ---- ---- ---- ---- ---- ----
FULL-SERVICE HOTELS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek Avon, CO 1989 295 69% 68% $270 $253 $186 $173
Denver Marriott City Center Denver, CO 1982/1994 613 81 81 111 104 90 85
Hyatt Regency Albuquerque Albuquerque,NM 1990 395 74 78 99 93 74 72
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987 168 89 93 180 162 161 150
----- -- -- ---- ---- ---- ----
Total / Weighted Average 1,471 78% 79% $145 $134 $113 $106
===== == == ==== ==== ==== ====
DESTINATION HEALTH & FITNESS RESORTS
Canyon Ranch - Tucson Tucson, AZ 1980 240(1) 86%(2) 85%(2) $527(3) $503(3) $437(4) $413(4)
Canyon Ranch - Lenox Lenox, MA 1989 202(1) 79 (2) 82 (2) 407(3) 367(3) 311(4) 292(4)
----- -- -- ---- ---- ---- ----
Total / Weighted Average 442 83% 84% $475 $442 $379 $358
===== == == ==== ==== ==== ====
</TABLE>
Notes:
(1) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(2) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(3) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(4) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE ANNUAL
OF TOTAL FULL
NET RENTABLE PERCENTAGE ANNUAL SERVICE
AREA OF LEASED ANNUAL FULL FULL SERVICE RENT PER
NUMBER OF REPRESENTED NET RENTABLE SERVICE RENT NET
TENANTS WITH BY EXPIRING AREA REPRESENTED RENT UNDER REPRESENTED RENTABLE
EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1997 265 1,533,471 8.4% $22,585,786 6.8% $ 14.73
1998 337 1,784,061 9.8 29,908,200 9.0 16.77
1999 292 2,046,420 11.3 35,243,983 10.6 17.22
2000 222 2,406,113 13.2 38,515,015 11.6 16.01
2001 196 2,122,859 11.8 40,108,273 12.1 18.90
2002 100 2,348,461 13.0 43,611,227 13.2 18.57
2003 38 975,832 5.4 17,835,289 5.4 18.27
2004 37 1,820,573 10.0 35,870,867 10.8 19.71
2005 22 1,439,685 7.9 26,230,770 7.9 18.22
2006 15 444,817 2.4 9,794,119 3.0 22.02
2007 and thereafter 10 1,237,349 6.8 31,783,041 9.6 25.69
</TABLE>
(1) Calculated 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
generally accepted accounting principles and including expenses payable by
tenants.
24
<PAGE> 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
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
At the Company's Annual Meeting of Shareholders held on June 9, 1997,
the Trust Managers were elected and the following proposals were
approved:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE VOTES BROKER
VOTES VOTES ABSTAIN NON-VOTE
----- ----- ------- --------
(VOTES IN THOUSANDS)
<S> <C> <C> <C> <C>
1. To consider and vote upon the proposal to
approve the right of the Vice Chairman of the
Board of Trust Managers and the President and
Chief Executive Officer of the Company, upon
the vesting and exercise of options previously
granted to them to purchase of units of
ownership interest in the Company's operating
partnership, to exchange such units for common
shares of beneficial interest of the Company,
par value $.01 per share, on a one-for-two
basis or, at the election of the Company, for
cash equal to the then-current fair market
value of the number of common shares for which
such units are exchangeable. 52,897 508 493 2,604
2. To approve the appointment of Arthur Andersen
LLP as the independent auditors of the Company
for the fiscal year ending December 31, 1997. 56,435 9 57 --
</TABLE>
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a)
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
3.03 Restated Declaration of Trust of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.01 to the Registrant's
Registration Statement on Form S-3 (File No. 333-21905) (the
"1997 S-3") and incorporated herein by reference)
3.04 Amended and Restated Bylaws of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.02 to the Registrant's
Registration Statement on Form S-3 (File No. 333-23005) and
incorporated herein by reference)
4.02 Registration Rights Agreement, dated February 16, 1996, by and
among the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed as
Exhibit 4.02 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "1996 10-K") and
incorporated herein by reference)
4.03 Registration Rights Agreement dated January 20, 1997, by and
among the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed as
Exhibit 4.03 to the 1996 10-K and incorporated herein by
reference)
4.04 Form of Registration Agreement relating to the acquisition of
the Greenway Plaza Portfolio (filed as Exhibit 4.01 to the
Registrant's Current Report on Form 8-K dated and filed
September 27,1996 (the "1996 Form 8-K") and incorporated herein
by reference)
4.05 Registration Rights Agreement, dated as of June 26, 1996,
relating to Canyon Ranch-Tucson (filed as Exhibit No. 4.02 to
the 1996 Form 8-K and incorporated herein by reference)
4.06 Form of Common Share Certificate (filed as Exhibit No. 4.03 to
the 1997 S-3 and incorporated herein by reference
4.07 Purchase Agreement, dated as of August 11, 1997, relating to
registration rights granted to the purchaser named therein (filed
as Exhibit 4.01 to the Registrant's Current Report on Form 8-K
dated August 11, 1997 and filed August 13, 1997 and incorporated
herein by reference).
10.01 First Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated May 5,
1994 (filed as Exhibit No. 10.01 to the Registrant's
Registration Statement on Form S-11 (File No. 33-75188) (the
"1994 S-11") and incorporated herein by reference)
10.03 Form of Noncompetition Agreement (Goff) (filed as Exhibit No.
10.03 to the Registrant's Registration Statement on Form S-11
(File No. 33-90226) (the "1995 S-11") and incorporated herein by
reference)
10.04 Form of Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1995 S-11 and incorporated herein by reference)
10.05 Form of Employment Agreement (Goff) (filed as Exhibit No. 10.05
to the 1995 S-11 and incorporated herein by reference)
10.06 Form of Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1995 S-11 and incorporated herein by reference)
10.07 Form of Registration Rights, Lock-Up and Pledge Agreement (filed
as Exhibit No. 10.05 to the 1994 S-11 and incorporated herein by
reference)
10.08 Form of Officers' and Trust Managers' Indemnification Agreement
as entered into between the Registrant and each of its executive
officers and trust managers (filed as Exhibit No. 10.08 to the
1995 S-11 and incorporated herein by reference)
10.09 Crescent Real Estate Equities Company 1994 Stock Incentive Plan
(filed as Exhibit No. 10.07 to the 1994 S-11 and incorporated
herein by reference)
10.10 Crescent Real Estate Equities, Ltd. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 and incorporated herein by
reference)
10.11 Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as Exhibit
No. 10.02 to the 1996 Form 8-K and incorporated herein by
reference)
10.12 Form of Amended and Restated Lease Agreement, dated January 1,
1996, among Crescent Real Estate Equities Limited Partnership,
Mogul Management, LLC and RoseStar Management, LLC, relating to
the Hyatt Regency Beaver Creek (filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K") and incorporated
herein by reference)
10.13 Real Estate Purchase and Sale Agreement, dated as of January 29,
1997, between Crescent Real Estate Equities Limited Partnership,
as purchaser, and Magellan Health Services, Inc., as seller,
relating to the acquisition of approximately 90 behavioral
healthcare facilities, as amended effective February 28, 1997
(filed as Exhibit 10.13 to the 1996 10-K and incorporated herein
by reference)
10.15 First Amended and Restated 1995 Crescent Real Estate Equities
Company Stock Incentive Plan (filed as Exhibit 10.15 to the 1996
10-K and incorporated herein by reference)
10.16 Lease Agreement, dated December 19, 1995 between Crescent Real
Estate Equities Limited Partnership and RoseStar Management,
LLC, relating to the Hyatt Regency Albuquerque (filed as Exhibit
10.16 to the 1995 10-K and incorporated herein by reference)
10.17 Amended and Restated Lease Agreement, dated June 30, 1995
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management, LLC, relating to the Denver Marriott (filed
as Exhibit 10.17 to the 1995 10-K and incorporated herein by
reference)
10.18 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, and Amendment to Loan Agreement, dated October 19, 1995,
between Crescent Real Estate Funding I, L.P. and Nomura Asset
Capital Corporation (filed as Exhibit 10.15 to the 1995 10-K and
incorporated herein by reference)
10.19 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, between Crescent Real Estate Funding II, L.P. and Nomura
Asset Capital Corporation (filed as Exhibit 10.19 to the 1995
10-K and incorporated herein by reference)
10.20 Mortgage Loan Application and Agreement, dated October 3, 1995,
as amended by letter agreements dated October 10, 1995 and
October 30, 1995, between Crescent Real Estate Equities Limited
Partnership and CIGNA Investments, Inc. and Secured Promissory
Note dated December 11, 1995 (filed as Exhibit 10.20 to the 1995
10-K and incorporated herein by reference)
10.22 1995 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 99.01 to the Registrant's
Registration Statement on Form S-8 (File No. 333-3452) and
incorporated herein by reference)
10.23 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 10.01 to the 1996 Form 8-K
and incorporated herein by reference)
10.24 Lease Agreement, dated July 26, 1996, between Canyon Ranch, Inc.
and Canyon Ranch Leasing, L.L.C. (filed as Exhibit 10.24 to the
1996 10-K and incorporated herein by reference)
10.25 Lease Agreement, dated November 18, 1996, between Crescent Real
Estate Equities Limited Partnership and Wine Country Hotel, LLC.
(filed as Exhibit 10.25 to the 1996 10-K and incorporated herein
by reference)
10.26 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts, LLC.
(filed as Exhibit 10.26 to the 1996 10-K and incorporated herein
by reference)
27.01 Financial Data Schedule (filed herewith)
</TABLE>
25
<PAGE> 26
(b) Reports on Form 8-K.
The Company's Current Report on Form 8K/A dated January 29,
1997, as amended on April 9, 1997 and April 24, 1997,
describing the proposed Carter-Crowley transaction, the
proposed Magellan transaction, and the proposed spin-off of
Crescent Affiliate, and certain preliminary financial
information relating to certain properties included in the
Carter-Crowley transaction.
The Company's Current Report on Form 8K/A dated January 29,
1997, as amended on May 23, 1997, describing the completion
of the Carter-Crowley portfolio acquisition, the proposed
Magellan transaction, and the proposed spin-off of Crescent
Affiliate, and certain financial information and pro forma
financial information relating to the Carter-Crowley
transaction.
The Company's Current Report on Form 8K dated April 9, 1997
and filed April 10, 1997, containing certain pro forma
financial information filed in conjunction with the Company's
preliminary prospectus supplement dated April 9, 1997, for
the offering of 17,500,000 common shares, as amended April
24, 1997 to reflect the increase in the offering to 21,000,000
common shares.
The Company's Current Report on Form 8K dated April 22, 1997,
and filed April 24, 1997, for the purpose of filing certain
exhibits in connection with the Company's public offering of
21,000,000 common shares.
The Company's Current Report on Form 8K dated May 8, 1997,
and filed May 12, 1997, for the purpose of filing certain
exhibits in connection with the Company's additional offering
of 500,000 common shares.
26
<PAGE> 27
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 COMPANY
/s/ Gerald W. Haddock
--------------------------------------
Date: August 13, 1997 Gerald W. Haddock, President and Chief
Executive Officer
/s/ Dallas E. Lucas
--------------------------------------
Date: August 13, 1997 Dallas E. Lucas, Senior Vice
President, Chief Financial Officer
and Chief Accounting Officer
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
3.03 Restated Declaration of Trust of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.01 to the Registrant's
Registration Statement on Form S-3 (File No. 333-21905) (the
"1997 S-3") and incorporated herein by reference)
3.04 Amended and Restated Bylaws of Crescent Real Estate Equities
Company (filed as Exhibit No. 4.02 to the Registrant's
Registration Statement on Form S-3 (File No. 333-23005) and
incorporated herein by reference)
4.02 Registration Rights Agreement, dated February 16, 1996, by and
among the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed as
Exhibit 4.02 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "1996 10-K") and
incorporated herein by reference)
4.03 Registration Rights Agreement dated January 20, 1997, by and
among the Registrant, Crescent Real Estate Equities Limited
Partnership and certain of the limited partners of Crescent Real
Estate Equities Limited Partnership named therein (filed as
Exhibit 4.03 to the 1996 10-K and incorporated herein by
reference)
4.04 Form of Registration Agreement relating to the acquisition of
the Greenway Plaza Portfolio (filed as Exhibit 4.01 to the
Registrant's Current Report on Form 8-K dated and filed
September 27,1996 (the "1996 Form 8-K") and incorporated herein
by reference)
4.05 Registration Rights Agreement, dated as of June 26, 1996,
relating to Canyon Ranch-Tucson (filed as Exhibit No. 4.02 to
the 1996 Form 8-K and incorporated herein by reference)
4.06 Form of Common Share Certificate (filed as Exhibit No. 4.03 to
the 1997 S-3 and incorporated herein by reference
4.07 Purchase Agreement, dated as of August 11, 1997, relating to
registration rights granted to the purchaser named therein
(filed as Exhibit 4.01 to the Registrant's Current Report on
Form 8-K dated August 11, 1997 and filed August 13, 1997 and
incorporated herein by reference).
10.01 First Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated May 5,
1994 (filed as Exhibit No. 10.01 to the Registrant's
Registration Statement on Form S-11 (File No. 33-75188) (the
"1994 S-11") and incorporated herein by reference)
10.03 Form of Noncompetition Agreement (Goff) (filed as Exhibit No.
10.03 to the Registrant's Registration Statement on Form S-11
(File No. 33-90226) (the "1995 S-11") and incorporated herein by
reference)
10.04 Form of Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1995 S-11 and incorporated herein by reference)
10.05 Form of Employment Agreement (Goff) (filed as Exhibit No. 10.05
to the 1995 S-11 and incorporated herein by reference)
10.06 Form of Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1995 S-11 and incorporated herein by reference)
10.07 Form of Registration Rights, Lock-Up and Pledge Agreement (filed
as Exhibit No. 10.05 to the 1994 S-11 and incorporated herein by
reference)
10.08 Form of Officers' and Trust Managers' Indemnification Agreement
as entered into between the Registrant and each of its executive
officers and trust managers (filed as Exhibit No. 10.08 to the
1995 S-11 and incorporated herein by reference)
10.09 Crescent Real Estate Equities Company 1994 Stock Incentive Plan
(filed as Exhibit No. 10.07 to the 1994 S-11 and incorporated
herein by reference)
10.10 Crescent Real Estate Equities, Ltd. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 and incorporated herein by
reference)
10.11 Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as Exhibit
No. 10.02 to the 1996 Form 8-K and incorporated herein by
reference)
10.12 Form of Amended and Restated Lease Agreement, dated January 1,
1996, among Crescent Real Estate Equities Limited Partnership,
Mogul Management, LLC and RoseStar Management, LLC, relating to
the Hyatt Regency Beaver Creek (filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K") and incorporated
herein by reference)
10.13 Real Estate Purchase and Sale Agreement, dated as of January 29,
1997, between Crescent Real Estate Equities Limited Partnership,
as purchaser, and Magellan Health Services, Inc., as seller,
relating to the acquisition of approximately 90 behavioral
healthcare facilities, as amended effective February 28, 1997
(filed as Exhibit 10.13 to the 1996 10-K and incorporated herein
by reference)
10.15 First Amended and Restated 1995 Crescent Real Estate Equities
Company Stock Incentive Plan (filed as Exhibit 10.15 to the 1996
10-K and incorporated herein by reference)
10.16 Lease Agreement, dated December 19, 1995 between Crescent Real
Estate Equities Limited Partnership and RoseStar Management,
LLC, relating to the Hyatt Regency Albuquerque (filed as Exhibit
10.16 to the 1995 10-K and incorporated herein by reference)
10.17 Amended and Restated Lease Agreement, dated June 30, 1995
between Crescent Real Estate Equities Limited Partnership and
RoseStar Management, LLC, relating to the Denver Marriott (filed
as Exhibit 10.17 to the 1995 10-K and incorporated herein by
reference)
10.18 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, and Amendment to Loan Agreement, dated October 19, 1995,
between Crescent Real Estate Funding I, L.P. and Nomura Asset
Capital Corporation (filed as Exhibit 10.15 to the 1995 10-K and
incorporated herein by reference)
10.19 Loan Agreement, dated August 24, 1995, including Form of Deed of
Trust, Assignment of Rents, Security Agreement and Fixture
Filing, between Crescent Real Estate Funding II, L.P. and Nomura
Asset Capital Corporation (filed as Exhibit 10.19 to the 1995
10-K and incorporated herein by reference)
10.20 Mortgage Loan Application and Agreement, dated October 3, 1995,
as amended by letter agreements dated October 10, 1995 and
October 30, 1995, between Crescent Real Estate Equities Limited
Partnership and CIGNA Investments, Inc. and Secured Promissory
Note dated December 11, 1995 (filed as Exhibit 10.20 to the 1995
10-K and incorporated herein by reference)
10.22 1995 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 99.01 to the Registrant's
Registration Statement on Form S-8 (File No. 333-3452) and
incorporated herein by reference)
10.23 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan (filed as Exhibit No. 10.01 to the 1996 Form 8-K
and incorporated herein by reference)
10.24 Lease Agreement, dated July 26, 1996, between Canyon Ranch, Inc.
and Canyon Ranch Leasing, L.L.C. (filed as Exhibit 10.24 to the
1996 10-K and incorporated herein by reference)
10.25 Lease Agreement, dated November 18, 1996, between Crescent Real
Estate Equities Limited Partnership and Wine Country Hotel, LLC.
(filed as Exhibit 10.25 to the 1996 10-K and incorporated herein
by reference)
10.26 Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P. and Vintage Resorts, LLC.
(filed as Exhibit 10.26 to the 1996 10-K and incorporated herein
by reference)
27.01 Financial Data Schedule (filed herewith)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENT 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 55,589
<SECURITIES> 0
<RECEIVABLES> 40,590
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 291,776
<PP&E> 2,628,792
<DEPRECIATION> (236,967)
<TOTAL-ASSETS> 2,779,780
<CURRENT-LIABILITIES> 62,206
<BONDS> 1,132,496
0
0
<COMMON> 970
<OTHER-SE> 1,437,094
<TOTAL-LIABILITY-AND-EQUITY> 2,779,780
<SALES> 0
<TOTAL-REVENUES> 183,203
<CGS> 0
<TOTAL-COSTS> 104,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,612
<INCOME-PRETAX> 49,431
<INCOME-TAX> 0
<INCOME-CONTINUING> 49,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,845
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
