<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): October 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 5. OTHER EVENTS
BANK ONE CENTER. On October 22, 1997, Crescent Real Estate Equities
Company ("Crescent Equities" and, collectively with its subsidiaries, the
"Company"), together with affiliates of TrizecHahn Corporation ("Trizec")
acquired Bank One Center, a 60-story Class A office property located in the
Central Business District ("CBD") submarket of Dallas, Texas. Construction of
the office property was completed in 1987. Situated on a 2.88-acre site, Bank
One Center contains approximately 1.5 million square feet of net rentable area
with a three-level underground parking structure that accommodates
approximately 667 cars and a seven-level offsite parking garage that
accommodates approximately 885 cars.
The acquisition was made by Main Street Partners, L.P. (the
"Partnership"), a Texas limited partnership in which the Company and Trizec each
own a 50% interest. Crescent 1717 Main, L.L.C., a Texas limited liability
company that is wholly owned by Crescent Real Estate Equities Limited
Partnership, and TrizecHahn 1717 Main St., Inc., a Delaware corporation, serve
as the general partners of the Partnership.
One land parcel underlying the building is leased by the Partnership
pursuant to a long-term ground lease expiring in May 2042. The annual rental
under this lease effective as of June 1997 is approximately $285,541, escalating
at 6% per year through May 2011 and at 7% per year through May 2028. Ground
rent will be re-determined in 2028 (based on an appraisal mechanism set forth in
the ground lease), with the "calculated rent" (as such term is defined in the
ground lease) due for the remainder of the ground lease term. The ground lease
provides four, 10-year renewal options. The Partnership owns the remaining land
parcels underlying the building in fee simple. Management believes that Bank One
Center is suitable and adequate for continued use as a Class A office property
and is adequately covered by insurance.
The Partnership acquired Bank One Center for approximately $238 million
from two unaffiliated entities. The purchase price was funded with (i) proceeds
of $125 million of debt ("Note One") and $30 million of debt ("Note Two")
provided by The Travelers Insurance Company and (ii) capital contributions of
$41.5 million from each of the Company and Trizec partner groups. The Company's
capital contribution of $41.5 million was funded through a draw under the
Company's unsecured $450 million credit facility from a consortium of banks led
by BankBoston, N.A. Note One, a nonrecourse loan, bears interest at the LIBOR
rate (as defined in the loan agreement) plus 1.55%, adjusted monthly (subject to
an interest rate cap of 8% for the first year and 8.7% for the second year), and
has a four-year term. Note One provides for an initial two-year interest only
period (through October 1999) followed by principal amortization based on a
25-year amortization schedule through maturity in November 2001, at which time
the outstanding principal balance is due and payable. Note Two, a nonrecourse
loan, bears interest at the LIBOR rate (as defined in the loan agreement) plus
2.75%, adjusted monthly, and has a four-year term. Note Two provides for an
initial two-year interest only period (through October 1999) followed by
principal amortization based on a 25-year amortization schedule through maturity
in November 2001, at which time the outstanding principal balance is due and
payable. Both Notes may be prepaid in whole or in part subject to certain
prepayment conditions in the first and second year.
Bank One Center was 70% leased as of August 31, 1997, with a weighted
average full-service rental rate per square foot of $19.52. Bank One Center is
leased to approximately 41 tenants, the major tenants having principal
businesses in the industry sectors of banking and professional services
(consulting and law). One tenant in Bank One Center leases more than 10% of the
total net rentable square footage. As of August 31, 1997, Bank One Texas, N.A.,
a bank, leased approximately 350,000 net rentable square feet (approximately
22.8% of the net rentable square footage of Bank One Center) pursuant to a lease
that expires in January 2010. The lease with Bank One Texas, N.A., is a triple
net lease, in which the tenant is responsible for payment, in addition to base
rent, of most operating costs of the property, including utilities, real estate
taxes and insurance. The current base rental rate per square foot is $12.75
which increases to 90% of "market", as such term is defined in the lease, (but
not in excess of $20.00 per square foot or less than $16.00 per square foot)
effective February 1, 2000 through January 31, 2004 and to 90% of "market" (but
not in excess of $24.50 per square foot or less than $20.00 per square foot)
effective February 1, 2005 through the termination of the lease. The lease
provides for four, 5-year renewal options for all or a portion of the premises
(not less than 50%) at the greater of the rental rate then due under the lease
or the "renewal fair market rental value", as defined in the lease. In
addition, the lease provides the lessee with various options to lease additional
space.
The Dallas CBD submarket consists of 18.3 million square feet of Class
A office space, which was approximately 30.6% of Dallas' total Class A office
space at September 30, 1997. At September 30,
2
<PAGE> 3
1997, the Dallas CBD Class A office space was 80% occupied, and the average
quoted market rental rate for such space was $19.68 per square foot.
Upon completion of this acquisition, the aggregate tax basis of
depreciable real property and improvements and personal property for Bank One
Center for federal income tax purposes will be approximately $238 million. For
federal income tax purposes, depreciation is computed using the straight-line
method over lives which range from 15 to 39 years for 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 real property was $2.68 per $100 of the
$88.0 million assessed value. The total amount of tax at this rate for 1996
was approximately $2.4 million.
For the year ended December 31, 1996, and the eight months ended
August 31, 1997, utility expense was approximately $1.9 million and $1.3
million, respectively, and expenses for repairs, maintenance and contract
services were approximately $3.7 million and $2.8 million, respectively.
The Partnership does not plan to renovate Bank One Center, other than
expenditures associated with the routine maintenance of the property.
The following table sets forth year-end occupancy and average
full-service rental rate per leased square foot (excluding storage space) for
the years ended December 31, 1995 and 1996, and for the eight months ended
August 31, 1997. Information relating to prior periods is not available.
AVERAGE FULL-SERVICE
YEAR OCCUPANCY RENTAL RATE(1)
---- --------- -----------
1995 70% $20.29
1996 70% $20.15
8/31/97 70% $19.78
(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 including adjustments for
expenses payable by or reimbursed from the tenants.
3
<PAGE> 4
The following table sets forth a schedule of lease expirations for leases
in place as of August 31, 1997, for Bank One Center, for each of the 10 years
beginning with the remainder of 1997, assuming that none of the tenants
exercises renewal options and excluding 452,418 square feet of unleased space.
<TABLE>
<CAPTION>
ANNUAL
FULL-
SERVICE
RENT PER
NET RENTABLE PERCENTAGE PERCENTAGE OF SQUARE
AREA SUBJECT OF LEASED ANNUAL FULL- TOTAL FULL- FOOT FOR
NUMBER OF TO NET RENTABLE SERVICE RENT SERVICE RENT NET
TENANTS WITH EXPIRING AREA SUBJECT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING (SQUARE TO EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES FEET) LEASES LEASES(1) LEASES Expiring(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 9 25,636 2.4% $ 574,540 2.1% $22.41
1998 4 6,580 .6 171,440 .6 26.05
1999 9 98,634 9.2 1,417,833 5.2 14.37
2000 4 135,120 12.5 3,544,943 12.9 26.24
2001 4 38,180 3.5 547,627 2.0 14.34
2002 3 51,866 4.8 1,016,811 3.7 19.60
2003 1 4,686 .4 85,613 .3 18.27
2004 2 77,443 7.2 2,456,305 8.9 31.72
2005 0 0 0.0 0 0.0 0.00
2006 1 22,249 2.1 392,168 1.4 17.63
2007 and thereafter 4 618,145 57.3 17,290,589 62.9 27.97
</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
or reimbursable from the tenants based on current levels.
Certain matters discussed within this Form 8-K may be interpreted to
be forward-looking statements within the meaning of the federal securities
laws. Although 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
Bank One Center
Report of Independent Public Accountants
Statements of Excess of Revenues Over Specific Operating Expenses for
the year ended December 31, 1996 and the eight month period ended
August 31, 1997.
Notes to Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet as of June 30, 1997 (unaudited)
and notes thereto.
Pro Forma Consolidated Statements of Operations for the six months
ended June 30, 1997 and the year ended December 31, 1996 (unaudited)
and notes thereto.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this Form
8-K.
Exhibit No. Description of Exhibit
----------- ----------------------
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated October 27, 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: October 28, 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
----
<S> <C>
BANK ONE CENTER
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 Eight Month Period Ended August 31, 1997 . . . . . . . . . F-4
Notes to Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of June 30, 1997 and notes thereto . . . . . . F-7
Pro Forma Consolidated Statements of Operations for the Six Months Ended June 30, 1997
and the Year Ended December 31, 1996 and notes thereto . . . . . . . . . . . . . . . . F-10
</TABLE>
F-1
<PAGE> 8
BANK ONE CENTER
STATEMENT OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE EIGHT MONTH PERIOD ENDED AUGUST 31, 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
and TrizecHahn Office Properties, Inc.:
We have audited the accompanying statements of excess of revenues over specific
operating expenses (as defined in Note 2) of Bank One Center for the year ended
December 31, 1996, and the eight month period ended August 31, 1997. These
statements are the responsibility of the Property's management. Our
responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Bank One Center for the year ended December 31, 1996, and the eight month
period ended August 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 15, 1997
F-3
<PAGE> 10
BANK ONE CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE EIGHT MONTH PERIOD ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
December 31, August 31,
1996 1997
----------- -----------
<S> <C> <C>
REVENUES:
Office rent $15,443,972 $10,498,563
Parking 1,950,290 1,251,984
Recoveries 6,816,286 4,614,930
Other 831,886 584,718
----------- -----------
25,042,434 16,950,195
----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 2,366,374 2,103,054
Utilities 1,861,291 1,290,853
Repairs, maintenance, and contract services 3,688,396 2,754,971
Salaries 908,148 610,310
General and administrative 1,393,094 797,074
Management fees 231,581 165,582
Insurance 212,121 130,749
Ground rent 264,033 183,626
----------- -----------
10,925,038 8,036,219
----------- -----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $14,117,396 $ 8,913,976
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 11
BANK ONE CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
AUGUST 31, 1997, AND DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Bank One Center (the "Property") is a 60-story office tower located in the
central business district of Dallas, Texas. The Property contains
approximately 1,531,000 rentable square feet as well as underground and
attached above ground parking garages. A parcel of the Property's land is
subject to a ground lease dated December 28, 1981, which expires May 31, 2042.
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 future minimum 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 the eight month period ended August
31, 1997, as certain items such as depreciation, amortization, and interest
expense have been excluded since they are not comparable to the proposed future
operations of the Property.
3. PROPERTY MANAGEMENT:
The Property entered into a management agreement with LaSalle Partners
Management Limited (the "Manager") in November 1995. The Manager requires a
management fee of 1% of gross rental receipts, as defined. Total management
fees for the year ended December 31, 1996, and the eight month period ended
August 31, 1997, were approximately $232,000 and $166,000, respectively.
4. SIGNIFICANT TENANT:
The largest tenant of the Property occupies approximately 350,000 square feet,
or 23%, of the total square footage. This lease expires in January 2010.
F-5
<PAGE> 12
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) Crescent Real Estate Equities Company's (the "Company")
public offering of its common shares in October 1996 (the "October 1996
Offering") and the additional public offering of 450,000 common shares that
closed on October 9, 1996 and the use of the net proceeds therefrom to repay
approximately $168,000 of indebtedness and to fund approximately $289,000 of
Property acquisitions in the fourth quarter of 1996 and the first quarter of
1997, (ii) the Company's public offering of its common shares in April 1997
(the "April 1997 Offering") and the additional public offering of 500,000
common shares that closed on May 14, 1997 and the use of the net proceeds
therefrom to fund approximately $593,500 of Property acquisitions and other
investments in the second quarter of 1997, (iii) the Company's offering of
4,700,000 common shares to an affiliate of Union Bank of Switzerland (the "UBS
Offering") and the use of the net proceeds therefrom to repay approximately
$145,000 of indebtedness under the Credit Facility, (iv) Crescent Real Estate
Equities Limited Partnership's, the Company's operating partnership, issuance
of $400,000 of senior unsecured debt issued in a private placement on September
22, 1997 ("Note Offering") and the use of the net proceeds therefrom to fund
approximately $327,600 of the acquisition of the Houston Center mixed-use
property complex including the Four Seasons Hotel ("Houston Center"), to repay
approximately $50,000 of indebtedness incurred under the Credit Facility, to
fund approximately $10,000 of the purchase price of Miami Center office
property and to repay approximately $7,200 of short-term indebtedness, (v) the
Company's issuance of 307,831 common shares on September 22, 1997 in connection
with the acquisition of Houston Center ("Private Placement") and the use of the
net proceeds therefrom to repay approximately $10,000 of indebtedness under the
Credit Facility, (vi) the Company's public offering of 10,000,000 common shares
in October 1997 (the "Offering") and the use of the net proceeds therefrom to
fund approximately $45,000 of the acquisition of U.S. Home Building and to
repay approximately $325,100 of short-term indebtedness and indebtedness
incurred under the Credit Facility, (vii) assumed indebtedness of $97,100 in
connection with the purchase of one Pending Investment, (viii) indebtedness of
$155,000 in connection with the purchase of Bank One Center and the Company's
capital contribution of $41,500 funded under the Credit Facility, and (ix)
Pending Investments and Property acquisitions and other investments made during
1996 and 1997. The pro forma information for the year ended December 31, 1996
does not include the Company's proposed investment in Vornado Realty Trust
("VNO").
The pro forma information for the six months ended June 30, 1997 assumes
completion, in each case as of January 1, 1997 in determining operating and
other data, and, in each case as of June 30, 1997 in determining balance sheet
data, of (i) the April 1997 Offering and the additional public offering of
500,000 common shares that closed on May 14, 1997 and the use of the net
proceeds therefrom to fund approximately $593,500 of Property acquisitions and
other investments in the second quarter of 1997, (ii) the UBS Offering and the
use of the net proceeds therefrom to repay approximately $145,000 of
indebtedness under the Credit Facility, (iii) the Note Offering and the use of
the net proceeds therefrom to fund approximately $327,600 of the acquisition of
Houston Center, to repay approximately $50,000 of indebtedness incurred under
the Credit Facility, to fund approximately $10,000 of the purchase price of
Miami Center office property and to repay approximately $7,200 of short-term
indebtedness, (iv) the Private Placement and the use of the net proceeds
therefrom to repay approximately $10,000 of indebtedness under the Credit
Facility, (v) the Offering and the use of the net proceeds therefrom to fund
approximately $45,000 of the acquisiton of U.S. Home Building and to repay
approximately $325,100 of short-term indebtedness and indebtedness incurred
under the Credit Facility, and (vi) assumed indebtedness of $97,100 in
connection with the purchase of one Pending Investment, (vii) indebtedness of
$155,000 in connection with the purchase of Bank One Center and the Company's
capital contribution of $41,500 funded under the Credit Facility, and (viii)
Pending Investments and the Property acquisitions and other investments made
during 1997. The Pro forma information for the six months ended June 30, 1997
does not include the Company's proposed investment in VNO.
The unaudited pro forma Consolidated Balance Sheet and Statements of
Operations should be read in conjunction with the historical audited financial
statements of the Company included in its Annual Report on Form 10-K for the
year ended December 31, 1996. In management's opinion, all adjustments necessary
to reflect the above discussed transactions have been made. The unaudited pro
forma Consolidated Balance Sheet and Statements of Operations are not
necessarily indicative of what actual results of operations of the Company would
have been for the period, nor does it purport to represent the Company's results
of operations for future periods.
F-6
<PAGE> 13
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
COMPANY PRO FORMA PRO FORMA
HISTORICAL(A) ADJUSTMENTS CONSOLIDATED
--------------- ----------- ------------
<S> <C> <C> <C>
Investments in real estate.......................... $2,628,792 $ 856,100(B) $3,484,892
Less -- accumulated depreciation.................... (236,967) -- (236,967)
---------- ---------- ----------
Net investment in real estate............. 2,391,825 856,100 3,247,925
Cash and cash equivalents........................... 55,589 21,724(C) 77,313
Restricted cash and cash equivalents................ 28,429 -- 28,429
Accounts receivable, net............................ 17,324 -- 17,324
Deferred rent receivable............................ 23,266 -- 23,266
Investments in real estate mortgages and common
stock of unconsolidated subsidiaries.............. 41,993 289,754(D) 331,747
Notes receivable, net............................... 122,992 23,700(E) 146,692
Other assets, net................................... 98,362 5,231(F) 103,593
---------- ---------- ----------
Total assets.............................. $2,779,780 $1,196,509 $3,976,289
========== ========== ==========
LIABILITIES
Borrowings under Credit Facility.................... $ 339,700 $ (54,900)(G) $ 284,800
Notes payable....................................... 792,796 32,709(H) 1,477,605
652,100(I)
Accounts payable, accrued expenses and other
liabilities....................................... 62,206 1,500(J) 63,706
---------- ---------- ----------
Total liabilities......................... 1,194,702 631,409 1,826,111
---------- ---------- ----------
MINORITY INTERESTS:
Operating partnership............................. 118,645 -- 118,645
Investment joint ventures......................... 28,369 41,500(K) 69,869
---------- ---------- ----------
Total minority interests.................. 147,014 41,500 188,514
---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Common shares..................................... 970 150 1,120
Additional paid-in capital........................ 1,499,477 523,450 2,022,927
Deferred compensation on restricted shares........ (283) -- (283)
Retained deficit.................................. (62,100) -- (62,100)
---------- ---------- ----------
Total shareholders' equity................ 1,438,064 523,600(L) 1,961,664
---------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $2,779,780 $1,196,509 $3,976,289
========== ========== ==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-7
<PAGE> 14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Reflects Crescent Real Estate Equities Company unaudited
consolidated historical balance sheet as of June 30,
1997...................................................... --
(B) Increase reflects the following:
Acquisition of Houston Center mixed-use property.......... $ 327,600
Acquisition of Miami Center office property............... 131,500
Acquisition of U.S. Home Building office
property............................................... 45,000
Acquisition of Bank One Center office Property............ 238,000
Pending acquisition of Fountain Place office property..... 114,000
---------
$ 856,100
=========
(C) Net increase reflects the following:
Equity investment in The Woodlands........................ $ (5,000)
Draw on the Credit Facility for working capital........... 22,700
Proceeds from Crescent Operating, Inc., ("COI") as a
result of COI's acquisition of the voting common stock
in The Woodlands and Desert Mountain................... 4,146
Proceeds from the Note Offering........................... 394,769
Acquisition of Houston Center mixed-use property.......... (327,600)
Acquisition of Miami Center office property............... (10,000)
Repayment of Texas Commerce Bank Note using proceeds from
the Note Offering and excess cash...................... (7,291)
Partial repayment under the Credit Facility using proceeds
from the Note Offering................................. (50,000)
Net proceeds from the Offering............................ 370,100
Acquisition of U.S. Home Building office Property......... (45,000)
Partial repayment under the Credit Facility using net
proceeds from the Offering............................. (325,100)
---------
$ 21,724
=========
(D) Net increase reflects the following:
42.5% equity investment in The Woodlands.................. $ 80,000
Sale of 100% of voting common stock to COI representing 5%
equity interest in The Woodlands....................... (1,915)
93% equity investment in Desert Mountain.................. 213,900
Sale of 100% of voting common stock to COI representing 5%
equity interest in Desert Mountain..................... (2,231)
---------
$ 289,754
=========
(E) Increase reflects the following:
Note Receivable from Desert Mountain...................... $ 23,700
=========
(F) Increase reflects the following:
Capitalized Note Offering costs........................... $ 5,231
=========
</TABLE>
F-8
<PAGE> 15
<TABLE>
<S> <C> <C>
(G) Net decrease in borrowings under the Credit Facility as a
result of:
Partial repayment using the UBS Offering proceeds......... $(145,000)
Working capital draws..................................... 22,700
Equity investment in Desert Mountain...................... 13,900
Note Receivable from Desert Mountain...................... 23,700
Partial repayment using the net proceeds of the Note
Offering............................................... (50,000)
Partial repayment using the proceeds from the Private
Placement.............................................. (10,000)
Acquisition of Miami Center office property............... 121,500
Partial repayment using the net proceeds from the
Offering............................................... (325,100)
Draw to repay the BankBoston Note I....................... 235,000
Acquisition of Bank One Center office property............ 41,500
Pending acquisition of Fountain Place office property..... 16,900
---------
$ (54,900)
=========
(H) Net increase in short-term borrowings as a result of:
Equity investment in The Woodlands........................ $ 75,000
Equity investment in Desert Mountain...................... 200,000
Repayment of Texas Commerce Bank Note using proceeds from
the Note Offering and excess cash...................... (7,291)
Repayment of BankBoston Note I through a draw on the
Credit Facility........................................ (235,000)
---------
$ 32,709
=========
(I) Increase in notes payable reflects the following:
Note Offering............................................. $ 400,000
Assumption of Note relating to a Pending Investment....... 97,100
Indebtedness in conjunction with the Bank One Center
acquisition............................................. 155,000
---------
$ 652,100
=========
(J) Increase reflects the following:
Estimated costs of the Offering........................... $ 1,500
=========
(K) Increase reflects the following:
Investment in joint venture - Bank One Center............. $ 41,500
=========
(L) Increase reflects the following:
Proceeds of the UBS Offering.............................. $ 145,000
Net proceeds from the Private Placement................... 10,000
Proceeds of the Offering (10.0 million shares of common
stock at $39 per share)................................ 390,000
Estimated costs of the Offering........................... (1,500)
Underwriter's discount for the Offering................... (19,900)
---------
$ 523,600
=========
</TABLE>
F-9
<PAGE> 16
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES 1997 ACQUIRED ACQUISITION
COMPANY AND PENDING OF BANK ONE OTHER PRO FORMA
HISTORICAL(A) INVESTMENTS(B) CENTER(C) ADJUSTMENTS CONSOLIDATED
--------------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental property....................... $174,882 $87,924 $ 12,713 $ -- $275,519
Interest and other income............. 8,321 -- -- 4,821(D) 13,142
-------- -------- -------- -------- --------
Total revenues................ 183,203 87,924 12,713 4,821 288,661
-------- -------- -------- -------- --------
EXPENSES:
Real estate taxes..................... 17,622 7,489 1,578 -- 26,689
Repairs and maintenance............... 10,943 8,901 2,066 -- 21,910
Other rental property operating....... 36,600 14,190 2,384 (283)(E) 52,383
(508)(F)
Corporate general and
administrative..................... 7,483 -- -- -- 7,483
Interest expense...................... 31,612 -- -- 32,152(G) 63,764
Depreciation and amortization......... 30,291 16,063 2,975 -- 49,329
Amortization of deferred financing
costs.............................. 1,220 -- -- 360(H) 1,580
-------- -------- -------- -------- --------
Total expenses................ 135,771 46,643 9,003 31,721 223,138
-------- -------- -------- -------- --------
Operating income (loss)....... 47,432 41,281 3,710 (26,900) 65,523
-------- -------- -------- -------- --------
OTHER INCOME:
Equity in net income of unconsolidated
subsidiaries.......................... 1,999 13,367 -- -- 15,366
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS............................. 49,431 54,648 3,710 (26,900) 80,889
Minority interests...................... (7,586) -- (1,855) 1,104 (I) (8,337)
-------- -------- -------- -------- --------
NET INCOME (LOSS)....................... $ 41,845 $ 54,648 $ 1,855 $(25,796) $ 72,552
======== ======== ======== ======== ========
NET INCOME PER COMMON SHARE(J).......... $ 0.65
========
</TABLE>
See accompanying notes to Pro Forma Consolidated Statement of Operations.
F-10
<PAGE> 17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
(A) Reflects Crescent Real Estate Equities Company unaudited consolidated
historical statement of operations for the six months ended June 30,
1997..................................................................... --
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with acquired investments and pending investments, all
investments acquired or proposed to be acquired in 1997, assuming the
investments were acquired at the beginning of the period................. --
ACQUISITION
PROPERTY DATE
Greenway II office property............................ 1/17/97
Trammell Crow Center office property................... 2/28/97
Three Denver office properties......................... 2/28/97
Carter-Crowley Real Estate Assets...................... 5/09/97
Magellan Real Estate Assets (i)........................ 6/17/97
The Woodlands (ii)(iii)................................ 7/31/97
Desert Mountain (iv)................................... 8/29/97
Houston Center mixed-use property complex.............. 9/22/97
Four Seasons Hotel (v)................................. 9/22/97
Miami Center office property........................... 9/30/97
U.S. Home Building office property..................... 10/15/97
Fountain Place office property......................... pending
--------------------
(i) Calculated to reflect the lease payment from the behavioral
healthcare facilities' lessee to the Company by applying the rent
provisions (as set forth in the facilities' lease agreement).
(ii) The Company has a 40.375% (after sale of voting common stock
to COI) non-voting equity investment in the limited partnership whose
primary holding consists of The Woodlands land assets.
(iii) The Company has a 42.5% equity investment in the limited
partnership whose primary holding consists of The Woodlands
commercial property assets.
(iv) The Company has a 88.350% (after sale of voting common stock to
COI) non-voting equity investment in the limited partnership
that owns Desert Mountain.
(v) Historical operations of the hotel were adjusted to reflect the
lease payment from the hotel lessee to the Company calculated
on a pro forma basis.
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with Bank One Center office property, assuming Bank One Center
was acquired at the beginning of the period.............................. --
(D) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
Carter-Crowley Notes ($55,500 @ 10%) = $5,550
COI Note ($25,697 @ 12%) = $3,084
Desert Mountain Note ($23,700 @ 12%) = $2,844
Total.................................................. $11,478
Prorated for six months................................ 5,739
Less: Historical interest income....................... (918)
-----------
Total.................................................. $4,821
======
</TABLE>
F-11
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C>
(E) Reflects the elimination of historical ground lessee's expense, as a
result of the Company acquiring the land underlying Trammell Crow Center,
assuming Trammell Crow Center was acquired at the beginning of the
period................................................................... $ (283)
======
(F) Decrease as a result of the elimination of third party property
management fees which terminated subsequent to acquisition of certain of
the properties........................................................... $ (508)
======
(G) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the Offering,
the Private Placement, the Note Offering, Equity Offering to UBS in
August 1997 and April and May 1997 Equity Offerings, assuming the
borrowings to finance investment acquisitions and the assumption of debt
and repayment, had all occurred at the beginning of the period.
Credit Facility.................... $ 284,800 @ 6.89% $ 19,623
Note Offering --
6.625% Notes due 2002............ 150,000 @ 6.625% 9,938
Note Offering --
7.125% Notes due 2007............ 250,000 @ 7.125% 17,813
Travelers Note 1 .................. 125,000 @ 7.24% 9,050
Travelers Note 2 .................. 30,000 @ 8.43% 2,529
Pending Investment Note
Assumption....................... 97,100 @ 7.46% 7,244
BankBoston Note II................. 200,000 @ 6.89% 13,780
LaSalle Note I..................... 239,000 @ 7.83% 18,714
LaSalle Note II.................... 161,000 @ 7.79% 12,542
Cigna Note......................... 63,500 @ 7.47% 4,743
Metropolitan Life Note............. 12,264 @ 8.88% 1,089
LaSalle Note III................... 115,000 @ 7.82% 8,993
Nomura Funding VI Note............. 8,741 @ 10.07% 880
Northwestern Life Note............. 26,000 @ 7.66% 1,992
---------- --------
Total annual amount................ $1,762,405 $128,930
Prorated for six months............ 64,465
Less: Capitalized interest......... (701)
Historical interest expense........ (31,612)
--------
$ 32,152
========
(H) Amortization of capitalized costs associated with the Note Offering for
initial purchasers' discounts ($4,731) and other costs ($500).
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION
OF FEES
NOTE ------------
<S> <C> <C> <C>
Note Offering -- 6.625% Notes due 2002................. $392
Note Offering -- 7.125% Notes due 2007................. 327
----
Total.................................................. $719
Prorated for six months................................ $ 360
=======
(I) Reflects adjustment needed to reflect minority partners' weighted average
10.57% interest in the net income of the Operating Partnership less joint
venture minority interests assuming completion of the Equity Offerings at
the beginning of the period............................................... $ 1,104
=======
(J) Reflects net income per share based on 112,336,027 weighted average common
shares assumed to be outstanding during the six months ended June 30,
1997...................................................................... --
</TABLE>
F-12
<PAGE> 19
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES 1997 ACQUIRED ACQUISITION
COMPANY 1996 ACQUIRED AND PENDING OF BANK OTHER PRO FORMA
HISTORICAL(A) PROPERTIES(B) INVESTMENTS(C) ONE CENTER(D) ADJUSTMENTS CONSOLIDATED
--------------- ------------- --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property................ $202,003 $89,185 $212,344 $ 25,042 $ -- $528,574
Interest and other income...... 6,858 -- -- -- 11,478(E) 18,336
-------- ------- -------- -------- -------- --------
Total revenues......... 208,861 89,185 212,344 25,042 11,478 546,910
-------- ------- -------- -------- -------- --------
EXPENSES:
Real estate taxes.............. 20,606 8,176 18,140 2,366 -- 49,288
Repairs and maintenance........ 12,292 8,403 22,588 3,688 -- 46,971
Other rental property
operating................... 40,915 21,346 37,246 4,870 (1,700)(F) 101,244
-- (1,433)(G)
Corporate general and
administrative.............. 4,674 -- -- -- 5,326(H) 10,000
Interest expense............... 42,926 -- -- -- 84,902(I) 127,828
Depreciation and
amortization................ 40,535 12,727 38,743 5,950 -- 97,955
Amortization of deferred
financing costs............. 2,812 -- -- -- 719(J) 3,531
-------- ------- -------- -------- -------- --------
Total expenses......... 164,760 50,652 116,717 16,874 87,814 436,817
-------- ------- -------- -------- -------- --------
Operating income
(loss)............... 44,101 38,533 95,627 8,168 (76,336) 110,093
OTHER INCOME:
Equity in net income of
unconsolidated
subsidiaries................ 3,850 -- 17,270 -- -- 21,120
-------- ------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND EXTRAORDINARY
ITEM........................... 47,951 38,533 112,897 8,168 (76,336) 131,213
Minority interests............... (9,510) (533) -- (4,084) 872 (K) (13,255)
-------- ------- -------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY
ITEM........................... 38,441 38,000 112,897 4,084 (75,464) 117,958
Extraordinary item............... (1,306) -- -- -- -- (1,306)
-------- ------- -------- -------- -------- --------
NET INCOME (LOSS)................ $ 37,135 $38,000 $112,897 $ 4,084 $(75,464) $116,652
======== ======= ======== ======== ======== ========
PER SHARE DATA(L):
Income before extraordinary
item........................... $ 1.05
Extraordinary item............... (0.01)
--------
Net income....................... $ 1.04
========
</TABLE>
See accompanying notes to Pro Forma Consolidated Statement of Operations.
F-13
<PAGE> 20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
(A) Reflects Crescent Real Estate Equities Company consolidated historical
statement of operations for the year ended December 31, 1996............. --
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all properties acquired in 1996, assuming the properties
were acquired at the beginning of the period............................. --
ACQUISITION
PROPERTY DATE
3333 Lee Parkway office property....................... 1/05/96
301 Congress Avenue office property(i)................. 4/18/96
Central Park Plaza office property..................... 6/13/96
Canyon Ranch -- Tucson resort(ii)...................... 7/26/96
The Woodlands office properties(iii)................... 7/31/96
Three Westlake Park office property.................... 8/16/96
1615 Poydras office property........................... 8/23/96
Greenway Plaza Portfolio............................... 10/07/96
Chancellor Park office property........................ 10/24/96
The Woodlands retail properties(iii)................... 10/31/96
Sonoma Mission Inn & Spa(ii)........................... 11/18/96
Canyon Ranch -- Lenox resort(ii)....................... 12/11/96
160 Spear Street office property....................... 12/13/96
Greenway I and IA office properties.................... 12/18/96
Bank One Tower office property......................... 12/23/96
Frost Bank Plaza office property....................... 12/27/96
--------------------
(i) The Company has a 1% general partner and a 49% limited partner
interest in the partnership that owns 301 Congress Avenue.
(ii) Historical operations of the hotel or/resort property were
adjusted to reflect the lease payments from the hotel lessee to the
Company calculated on a pro forma basis by applying the rent
provisions (as defined in the lease agreements).
(iii) The Company has a 75% interest in the partnership that owns
these properties.
</TABLE>
F-14
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with acquired investments in 1997, assuming the investments
were acquired at the beginning of the period............................. --
Acquisition
Property Date
-------- -----------
Greenway II office property............................ 1/17/97
Trammell Crow Center office property................... 2/28/97
Three Denver office properties......................... 2/28/97
Carter-Crowley Real Estate Assets...................... 5/09/97
Magellan Real Estate Assets (i)........................ 6/17/97
The Woodlands (ii)(iii)................................ 7/31/97
Desert Mountain (iv)................................... 8/29/97
Houston Center mixed-use property complex.............. 9/22/97
Four Seasons Hotel (v)................................. 9/22/97
Miami Center office property........................... 9/30/97
U.S. Home Building office property..................... 10/15/97
Fountain Place office property......................... pending
--------------------
(i) Calculated to reflect the lease payment from the behavioral
healthcare facilities' lessee to the Company by applying the
rent provisions (as set forth in the facilities' lease
agreement).
(ii) The Company has a 40.75% (after sale of voting common stock to
COI) non-voting equity investment in the limited partnership
whose primary holding consists of The Woodlands land assets.
(iii) The Company has a 42.5% equity investment in the limited
partnership whose primary holding consists of The Woodlands
commercial property assets.
(iv) The Company has a 88.50% (after sale of voting common stock to
COI) non-voting equity investment in the limited partnership
that owns Desert Mountain.
(v) Historical operations of the hotel were adjusted to reflect the
lease payment from the hotel lessee to the Company calculated on
a pro forma basis.
(D) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on the acquisition price
associated with Bank One Center office property, assuming Bank One Center
was acquired at the beginning of the period.............................. --
(E) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
Carter-Crowley Notes ($55,500 @ 10%) = $5,550
COI Note ($25,697 @ 12%) = $3,084
Desert Mountain Note ($23,700 @ 12%) = $2,844
Total............................................................... $11,478
=======
(F) Reflects the elimination of historical ground lessee's expense, as a
result of the Company acquiring the land underlying Trammell Crow Center,
assuming Trammell Crow Center was acquired at the beginning of the
period................................................................... $(1,700)
=======
(G) Decrease as a result of the elimination of third party property
management fees which terminated subsequent to acquisition of certain of
the properties........................................................... $(1,433)
=======
(H) Increase reflects the estimated incremental general and administrative
costs associated with the increase in personnel due to numerous
acquisitions in 1996 and 1997 and pending investments in 1997............ $ 5,326
=======
</TABLE>
F-15
<PAGE> 22
<TABLE>
<S> <C>
(I) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the Offering,
the Private Placement, the Note Offering, Equity Offering to UBS in
August 1997, April and May 1997 Equity Offerings and the October 1996
Equity Offerings, assuming the borrowings to finance investment
acquisitions and the assumption of debt and repayment, had all occurred
at the beginning of the period.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Credit Facility.......................... $284,800 @ 6.89% $19,623
Note Offering --
6.625% Notes due 2002.................. 150,000 @ 6.625% 9,938
Note Offering --
7.125% Notes due 2007.................. 250,000 @ 7.125% 17,813
Travelers Note 1......................... 125,000 @ 7.24% 9,050
Travelers Note 2......................... 30,000 @ 8.43% 2,529
Pending Investment Note Assumption....... 97,100 @ 7.46% 7,244
BankBoston Note II....................... 200,000 @ 6.89% 13,780
LaSalle Note I........................... 239,000 @ 7.83% 18,714
LaSalle Note II.......................... 161,000 @ 7.79% 12,542
Cigna Note............................... 63,500 @ 7.47% 4,743
Metropolitan Life Note................... 12,264 @ 8.88% 1,089
LaSalle Note III......................... 115,000 @ 7.82% 8,993
Nomura Funding VI Note................... 8,741 @ 10.07% 880
Northwestern Life Note................... 26,000 @ 7.66% 1,992
---------- --------
Total annual amount...................... $1,762,405 $128,930
Less: Capitalized interest............... (1,102)
Historical interest expense.............. (42,926)
--------
$84,902
=======
(J) Amortization of capitalized costs associated with the Note Offering for
initial purchasers' discounts ($4,731) and other costs ($500).
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION
NOTE OF FEES
---- ------------
<S> <C> <C> <C>
Note Offering -- 6.625% Notes due 2002................. $392
Note Offering -- 7.125% Notes due 2007................. 327
-----------
Total.................................................. $ 719
=======
</TABLE>
<TABLE>
<S> <C> <C>
(K) Reflects adjustment needed to reflect minority partners' weighted average
10.57% interest in the net income of the Operating Partnership less joint
venture minority interests assuming completion of the Equity Offerings at
the beginning of the period............................................... $ 872
=======
(L) Reflects net income per share based on 112,336,027 weighted average common
shares assumed to be outstanding during the year ended December 31,
1996......................................................................
</TABLE>
F-16
<PAGE> 23
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
[S] [C]
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated October 27, 1997 (filed herewith)
<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 October 15, 1997 included in this Form 8-K into
Crescent Real Estate Equities Company's previously filed Registration
Statements No. 333-91438, No. 333-92548, No. 333-3450, No. 333-3452, No.
333-3454, No. 333-13521, No. 333-21905, No. 333-23005, No. 333-33893, No.
333-37273, No. 333-38071, and No. 333-37565.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 27, 1997
