<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 22, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(formerly known as Crescent Real Estate Equities, Inc.)
(Exact name of Registrant as specified in its Charter)
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive (Zip Code)
Offices)
(817) 877-0477
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
HOUSTON CENTER. On September 22, 1997, the Company acquired Houston
Center, an approximately 3.0 million square foot, mixed-use property located in
the Central Business District ("CBD") submarket of Houston, Texas. The Company
acquired fee simple title to Houston Center from an unaffiliated entity for an
aggregate purchase price of $327.6 million. The purchase price was funded
through a $100 million draw under the Company's unsecured $450 million credit
facility from a consortium of banks led by BankBoston, N.A. and $227.6 million
raised from the $400 million of senior unsecured debt issued by Crescent Real
Estate Equities Limited Partnership, the Company's operating partnership, in a
private placement which closed on September 22, 1997.
Houston Center consists of three high-rise Class A office buildings
aggregating approximately 2.8 million net rentable square feet ("HC Office
Properties"), approximately 191,000 net rentable square feet of retail space,
four parking garages aggregating 2,698 spaces, a leasehold interest in First
City Tower Garage for the use of 731 spaces (collectively with the HC Office
Properties, "HC Complex"), a 399-room Four Seasons Hotel, 114 luxury apartments
and approximately 20 acres of contiguous undeveloped commercial land which
currently contains eight surface parking lots which have an aggregate of 1,490
spaces used by the HC Complex. The Company has offered and expects an affiliate
of Crescent Operating, Inc. to accept the opportunity to become the lessee and
operator of the Four Seasons Hotel and 114 luxury apartments. The Company has
allocated approximately $250.1 million (approximately $84.63 per square foot of
net rentable area) of the purchase price to the HC Complex. Developed between
1974 and 1983, the HC Office Properties are situated on approximately 5.7
acres.
As of June 30, 1997, the HC Office Properties were 92% leased with a
weighted average base rental rate per square foot of $8.00 (a weighted average
full-service rental rate of $14.35). The HC Office Properties' leases are
primarily triple net, with the tenant responsible for payment or reimbursement
of, in addition to base rent, of most operating costs of the property,
including utilities, real estate taxes and insurance. The weighted average
remaining lease term for the HC Office Properties is approximately 4.1 years.
The HC Office Properties are leased to approximately 220 tenants, the major
tenants having principal businesses in the industry sectors of energy, as well
as professional services such as accounting, consulting, engineering and
legal. Major tenants include Chevron USA, Inc., Ernst & Young U.S., Lyondell
Petrochemical Company and American Exploration Company. None of the tenants in
the HC Office Properties leases more than 10% of the aggregate net rentable
area.
The Houston CBD submarket consists of 19.5 million square feet of
Class A office space, which was approximately 44% of Houston's total Class A
office space at June 30, 1997. At June 30, 1997, the Houston CBD Class A office
space was 90% occupied, and the average quoted full-service market rental rate
for such space was $15.85 per square foot.
2
<PAGE> 3
The aggregate tax basis for the HC Complex of depreciable real
property and improvements and personal property for federal income tax purposes
is $250.1 million. For federal income tax purposes, depreciation is computed
using the straight-line method over lives which range from 15 to 39 years for
the real property and improvements, and the double-declining balance method
over lives which range from 5 to 7 years for the personal property.
The 1996 realty tax rate, for HC Complex and the 20 acres of
undeveloped commercial land, was $2.92 per $100 of the $174 million assessed
value. The total amount of tax at this rate for 1996 was approximately $5.1
million.
For the year ended December 31, 1996 and the six months ended June 30,
1997, utility expense was approximately $4.6 million and $2.3 million,
respectively, and expenses for repairs, maintenance and contract services were
approximately $7.9 million and $3.4 million, respectively, for the HC Complex
and the 20 acres of undeveloped commercial land.
The Company has no immediate plans to renovate the HC Office
Properties, other than expenditures associated with the maintenance of the
property. Management believes that Houston Center is suitable and adequate for
continued use as Class A office properties, full-service hotel, retail space
and apartments and is adequately covered by insurance.
The following table sets forth HC Office Properties' year-end
occupancy and average base rent per leased square foot for the five years ended
December 31, 1996, and for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
YEAR OCCUPANCY AVERAGE BASE RENT(1)(2)
---- --------- -----------------
<S> <C> <C>
1992 88% $9.64
1993 79 9.41
1994 87 8.06
1995 88 7.58
1996 92 7.86
6/30/97 92 7.72
</TABLE>
(1) Represents annual base rental revenues (excluding scheduled rent increases
and free rent that would be taken into account under generally accepted
accounting principles) divided by average occupancy in square footage for
the year or period and excluding expenses payable by or reimbursable from
the tenants.
(2) Leases are primarily triple net, with the tenant responsible for payment,
or reimbursement of in addition to base rent, of most operating costs of
the property, including utilities, real estate taxes and insurance.
3
<PAGE> 4
The following table sets forth a schedule of lease expirations for leases
in place as of June 30, 1997, for the HC Office Properties, for each of the 10
years beginning with the remainder of 1997, assuming that none of the tenants
exercises renewal options and excluding 220,731 square feet of unleased space.
<TABLE>
<CAPTION>
ANNUAL BASE
PERCENTAGE PERCENTAGE OF RENT PER
NET RENTABLE OF LEASED TOTAL ANNUAL SQUARE FOOT
NUMBER OF AREA SUBJECT TO NET RENTABLE ANNUAL BASE BASE RENT FOR NET
TENANTS WITH EXPIRING AREA SUBJECT RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES TO EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1)(2) LEASES EXPIRING(1)(2)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 14 57,651 2.3% $ 450,656 2.1% $ 7.82
1998 69 206,898 8.1 1,170,379 5.3 5.66
1999 42 598,126 23.5 4,496,028 20.5 7.52
2000 30 171,993 6.8 1,204,020 5.5 7.00
2001 34 845,830 33.3 7,427,752 33.8 8.78
2002 12 185,500 7.3 2,957,751 13.5 15.94
2003 7 66,881 2.6 478,120 2.2 7.15
2004 5 76,569 3.0 606,890 2.8 7.93
2005 2 59,940 2.4 457,649 2.1 7.64
2006 2 60,665 2.4 595,288 2.7 9.81
2007 and thereafter 4 213,634 8.3 2,117,309 9.5 9.91
</TABLE>
- -------------------
(1) Calculated based on base rent payable as of the expiration date 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 excluding expenses payable by
or reimbursable from the tenants.
(2) Leases are triple net, with the tenant responsible for payment or
reimbursement of, in addition to base rent, of most operating costs of
the property, including utilities, real estate taxes and insurance.
Certain matters discussed within this Form 8-K may be interrupted to
be forward-looking statements within the meaning of the federal securities
laws. Although Crescent Real Estate Equities Company ("Crescent Equities" and,
collectively with its subsidiaries, the "Company") believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, there can be no assurance that these expectations will
be realized. Factors that could cause actual results to differ materially from
current expectations include the failure of pending investments to close,
changes in general economic conditions, changes in local real estate
conditions, changes in industries in which the Company's principal tenants
compete, the failure to timely lease unoccupied square footage, the failure to
timely re-lease occupied square footage upon expiration of leases, the
inability to generate sufficient revenues to meet debt service payments and
operating expenses, the unavailability of equity and debt financing and other
risks described in the Form 8-K.
4
<PAGE> 5
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-14 OF REGULATION S-X
Houston Center
Report of Independent Public Accountants
Statements of Excess of Revenues Over Specific Operating Expenses for
the year ended December 31, 1996 and the six month period ended June
30, 1997.
Notes to Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma financial statements for the Company as prescribed by
Article 11 of Regulation S-X will be provided in an amendment to this
8K.
(C) EXHIBITS
The following is a list of all exhibits filed as a part of this Form
8K.
Exhibit No. Description of Exhibit
----------- ----------------------
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated September 30, 1997
(filed herewith)
5
<PAGE> 6
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: September 30, 1997 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ Dallas. E Lucas
-------------------------------------
Dallas E. Lucas
Senior Vice President and Chief
Financial and Accounting Officer
6
<PAGE> 7
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
HOUSTON CENTER
<S> <C>
Report of Independent Public Accountants................................................. F-3
Statements of Excess of Revenues Over Specific Operating Expenses for the Year Ended
December 31, 1996 and the Six Month Period Ended June 30, 1997........................... F-4
Notes to Statements...................................................................... F-5
</TABLE>
F-1
<PAGE> 8
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-2
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statements of excess of revenues over specific
operating expenses (as defined in Note 2) of Houston Center for the year ended
December 31, 1996, and for the six month period ended June 30, 1997. These
statements and the supplemental schedules are the responsibility of the
Property's management. Our responsibility is to express an opinion on these
statements and the supplemental schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the excess of revenues over specific operating expenses of
Houston Center for the year ended December 31, 1996, and for the six month
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
statements taken as a whole. The supplemental schedules included on pages 4 and
5 are presented for the purposes of additional analysis and are not a required
part of the basic statements. This information has been subjected to the
auditing procedures applied in our audits of the basic statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 22, 1997
F-3
<PAGE> 10
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
<S> <C> <C>
REVENUES:
Office rent $ 21,761,693 $ 10,745,759
Stepped rent (30,158) (291,114)
Parking 4,909,768 2,739,939
Recoveries 16,762,064 8,569,720
Other 2,165,715 862,381
------------ ------------
45,569,082 22,626,685
------------ ------------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 5,094,126 2,520,371
Utilities 4,589,307 2,332,058
Repairs, maintenance, and contract services 7,939,089 3,406,810
Leasehold interest expense (First City Tower Garage) 995,832 493,972
Salaries 2,387,584 1,069,142
General and administrative 1,844,256 829,184
Management fees 1,962,873 958,472
Insurance 529,401 278,342
------------ ------------
25,342,468 11,888,351
------------ ------------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $ 20,226,614 $ 10,738,334
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 11
-2-
HOUSTON CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Houston Center (the "Property") is a combination of the following certain
assets located in downtown Houston, Texas.
<TABLE>
<CAPTION>
Asset Type Square Feet/No. of units
- ----- ---- ------------------------
<S> <C> <C>
1 Houston Center Office 1,065,215 sq. ft.
2 Houston Center Office 1,024,956 sq. ft.
4 Houston Center Office 674,247 sq. ft.
The Park Shops Retail 190,729 sq. ft.
Houston Center Garage 1,353 spaces
First City Tower Garage leasehold interest 731 spaces
Undeveloped Land 870,000 sq. ft.
</TABLE>
Use of Estimates
The preparation of statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Rental Income and Deferred Rent Concessions
In connection with obtaining certain tenants under long-term leases, property
management grants rent concessions. The aggregate rental payments due over the
terms of the leases are recognized as rental income on a straight-line basis
over the full term of the leases, including the periods of rent concessions.
Recoveries
A portion of the operating expenses is charged back to tenants on a monthly
basis based upon estimated expenses. These charges are adjusted at period-end,
based upon actual expenses.
2. BASIS OF ACCOUNTING:
The accompanying statements of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. These statements are
not intended to be a complete presentation of revenues and operating expenses
for the year ended December 31, 1996, and for the six months ended June 30,
1997, as certain items such as depreciation, amortization, interest, and
partnership administrative expenses have been excluded since they are not
comparable to the proposed future operations of the Property.
F-5
<PAGE> 12
-3-
3. PROPERTY MANAGEMENT:
The Property (except for The Park Shops) entered into a management agreement
with Heitman Properties of Texas Ltd. (the "Manager") on September 30, 1993.
The agreement with the Manager requires a management fee of 4.25% of gross
rental receipts, as defined. The Park Shops entered into a management agreement
with Urban Retail Properties Co. ("Urban"). Urban receives a management fee of
4.25% of gross rental receipts, as defined. Total management fees for the year
ended December 31, 1996, and for the six month period ended June 30, 1997, were
approximately $1,962,873 and $ 958,472, respectively. The agreements currently
expire September 30, 1999. However, in conjunction with the sale of the
Property, the agreements are being amended to expire on December 31, 1998.
4. SIGNIFICANT TENANTS:
There are no individual tenants that occupy more than 10% of the net rentable
square footage of the Property as of June 30, 1997.
5. FIRST CITY TOWER GARAGE LEASEHOLD INTEREST:
The Property's owner leases 731 spaces located in the First City Tower Garage
from an affiliate. The lease expires in 2019. The lease requires monthly
installments based on estimates of the garage's operations for each year. The
estimates of expenses are reconciled to actual expenses in the following year.
F-6
<PAGE> 13
-4-
SCHEDULE I
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1 Houston 2 Houston 4 Houston The Park
Center Center Center Shops
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Office rent $ 8,161,593 $ 7,274,383 $ 4,094,402 $ 2,231,315
Stepped rent 206,622 (157,294) (48,133) (31,353)
Parking (A) 387,759 673,414 211,222 --
Recoveries 5,695,959 6,180,408 3,775,454 1,110,243
Other 548,682 705,180 620,905 249,808
----------- ------------ ----------- -----------
15,000,615 14,676,091 8,653,850 3,560,013
----------- ------------ ----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 1,586,259 1,347,783 1,074,583 331,420
Utilities 1,563,791 1,557,007 972,075 375,831
Repairs, maintenance,
and contract services 2,337,064 2,702,426 1,610,049 1,038,962
Leasehold interest expense -- -- -- --
Salaries 693,682 815,513 548,190 318,786
General and administrative 576,957 395,332 269,810 536,424
Management fees 626,037 625,602 382,744 177,368
Insurance 156,642 193,887 93,758 34,686
----------- ------------ ----------- -----------
7,540,432 7,637,550 4,951,209 2,813,477
----------- ------------ ----------- -----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $ 7,460,183 $ 7,038,541 $ 3,702,641 $ 746,536
=========== ============ =========== ===========
<CAPTION>
Houston First City Undeveloped Consolidated
Center Garage Tower Garage Land Total
------------- ------------ ----------- ------------
<S> <C> <C> <C>
REVENUES:
Office rent $ -- $ -- $ -- $ 21,761,693
Stepped rent -- -- -- (30,158)
Parking (A) 1,819,681 1,218,419 599,273 4,909,768
Recoveries -- -- -- 16,762,064
Other 5,040 -- 36,100 2,165,715
---------- ---------- ----------- ------------
1,824,721 1,218,419 635,373 45,569,082
---------- ---------- ----------- ------------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 318,153 150,400 285,528 5,094,126
Utilities 49,770 -- 70,833 4,589,307
Repairs, maintenance,
and contract services 152,982 -- 97,606 7,939,089
Leasehold interest expense -- 995,832 -- 995,832
Salaries 7,184 -- 4,229 2,387,584
General and administrative -- -- 65,733 1,844,256
Management fees 74,451 48,550 28,121 1,962,873
Insurance 25,871 -- 24,557 529,401
---------- ---------- ----------- ------------
628,411 1,194,782 576,607 25,342,468
---------- ---------- ----------- ------------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $1,196,310 $ 23,637 $ 58,766 $ 20,226,614
========== ========== =========== ============
</TABLE>
(A) Parking is net of expenses paid by the third party operator.
F-7
<PAGE> 14
-5-
SCHEDULE II
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1 Houston 2 Houston 4 Houston The Park
Center Center Center Shops
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Office rent $ 4,366,484 $ 3,586,693 $ 1,720,578 $1,072,578
Stepped rent (67,273) (129,295) (67,218) (27,328)
Parking (A) 204,747 372,694 120,001 --
Recoveries 3,009,647 3,058,185 1,823,901 677,987
Other 292,612 122,024 323,661 114,364
----------- ----------- ----------- -----------
7,806,217 7,010,301 3,920,349 1,837,601
----------- ----------- ----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 793,130 666,990 537,291 141,398
Utilities 849,051 799,552 488,721 154,463
Repairs, maintenance,
and contract services 1,108,755 1,091,851 622,498 486,411
Leasehold interest expense -- -- -- --
Salaries 361,886 311,355 249,526 141,019
General and administrative 218,266 182,227 165,193 249,055
Management fees 330,183 309,292 149,475 86,442
Insurance 92,074 100,223 44,550 17,464
----------- ----------- ----------- -----------
3,753,345 3,461,490 2,257,254 1,276,252
----------- ----------- ----------- -----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $ 4,052,872 $ 3,548,811 $ 1,663,095 $ 561,349
=========== =========== =========== ===========
<CAPTION>
Houston First City Undeveloped Consolidated
Center Garage Tower Garage Land Total
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Office rent $ -- $ -- $ -- $ 10,745,759
Stepped rent -- -- -- (291,114)
Parking (A) 1,009,422 621,616 411,459 2,739,939
Recoveries -- -- -- 8,569,720
Other 2,520 -- 7,200 862,381
---------- -------- ----------- ------------
1,011,942 621,616 418,659 22,626,685
---------- -------- ----------- ------------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 160,574 77,854 143,134 2,520,371
Utilities 20,783 -- 19,488 2,332,058
Repairs, maintenance,
and contract services 42,294 -- 55,001 3,406,810
Leasehold interest expense -- 493,972 -- 493,972
Salaries 3,862 -- 1,494 1,069,142
General and administrative -- -- 14,443 829,184
Management fees 39,213 27,186 16,681 958,472
Insurance 12,360 -- 11,671 278,342
---------- -------- ----------- ------------
279,086 599,012 261,912 11,888,351
---------- -------- ----------- ------------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $ 732,856 $ 22,604 $ 156,747 $ 10,738,334
========== ======== =========== ============
</TABLE>
(A) Parking is net of expenses paid by the third party operator.
F-8
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated September 30, 1997 (filed herewith)
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated August 22, 1997 included in this Form 8-K into
Crescent Real Estate Equities Company's previously filed Registration
Statements No. 33-91438, No. 33-92548, No. 333-3450, No. 333-3452, No.
333-3454, No. 333-13521, No. 333-21905, No. 333-23005 and No. 333-33893.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 30, 1997
