<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 15, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer Identification Number)
</TABLE>
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive (Zip Code)
Offices)
(817) 321-2100
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
U.S. HOME BUILDING. On October 15, 1997, Crescent Real Estate Equities
Company ("Crescent Equities" and, collectively with its subsidiaries, the
"Company") acquired U.S. Home Building, a 21-story Class A office property
located in the West Loop/Galleria submarket of Houston, Texas. Construction of
the office property was completed in 1982. Situated on a 1.9-acre site, U.S.
Home Building contains approximately 400,000 square feet of net rentable area
with a 12-story attached parking structure that accommodates approximately
975 cars.
The Company acquired fee simple title to U.S. Home Building from an
unaffiliated entity for approximately $45 million funded though a draw under
the Company's unsecured $550 million credit facility from a consortium of banks
led by BankBoston, N.A.
U.S. Home Building was 83% leased as of March 31, 1998, with a weighted
average full-service rental rate per square foot of $14.67. U.S. Home Building
is leased to approximately 50 tenants, the major tenant having principal
business in the home building sector. The weighted average remaining lease term
for U.S. Home Building tenants is approximately 2.5 years. As of March 31, 1998,
one tenant leased 10% or more of the total net rentable area of the property.
As of March 31, 1998, U.S. Home Corporation, a home building company,
leased approximately 49,000 net rentable square feet (approximately 12% of the
net rentable area of the U.S. Home Building), pursuant to a lease that expires
in February 1999. The current base rental rate per square foot for approximately
49,000 net rentable square feet is $12.00. The lease provides for one five-year
renewal option at 100% of the then prevailing market rental rate.
The West Loop/Galleria submarket consists of 12.9 million square feet
of Class A office space, which was approximately 20% of Houston's total Class A
office space at March 31, 1998. At March 31, 1998, the West Loop/Galleria Class
A office space was 94% occupied, and the average quoted full-service market
rental rate was $20.54 per available square foot. The above submarket
information has been provided by Baca Landata, Inc.
The aggregate tax basis of depreciable real property and improvements
and personal property for U.S. Home Building for federal income tax purposes is
$45 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 1997 realty tax rate for real property was $2.67 per $100 of the
$21 million assessed value. The total amount of tax at this rate for 1997 was
approximately $.6 million.
For the year ended December 31, 1996 and the six months ended June 30,
1997, utilities expense was approximately $.5 million and $.3 million,
respectively, and expenses for repairs, maintenance and contract services were
approximately $.7 million and $.4 million, respectively.
The Company does not plan to renovate U.S. Home Building, other than
expenditures associated with the routine maintenance of the property.
2
<PAGE> 3
The following table sets forth year-end occupancy and average full-
service rental rate per leased square foot (excluding storage space) for U.S.
Home Building for the years ended December 31, 1996 and 1997. Information for
prior periods is not available.
<TABLE>
<CAPTION>
AVERAGE FULL-SERVICE
YEAR OCCUPANCY RENTAL RATE (1)
---- --------- --------------------
<S> <C> <C>
1996 83.3% $ 13.84
1997 81.0% $ 14.44
</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 feet for
the year or period and including adjustments for expenses payable by or
reimbursed from the tenants.
The following table sets forth a schedule of lease expirations for
leases in place as of March 31, 1998, for U.S. Home Building, for each of the 10
years beginning with the remainder of 1998, assuming that none of the tenants
exercises renewal options and excluding 69,826 square feet of unleased space.
<TABLE>
<CAPTION>
PERCENTAGE OF ANNUAL
NET RENTABLE PERCENTAGE TOTAL ANNUAL FULL-SERVICE
AREA REPRESENT- OF LEASED ANNUAL FULL-SERVICE RENT PER
NUMBER OF ED BY NET RENTABLE FULL-SERVICE RENT NET
TENANTS WITH EXPIRING AREA REPRESENT- RENT UNDER REPRESENTED RENTABLE
EXPIRING LEASES ED BY EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 15 63,372 19.2% $ 1,000,991 19.2% $15.80
1999 12 103,951 31.5 1,594,818 30.5 15.34
2000 7 35,448 10.7 535,820 10.3 15.12
2001 6 67,030 20.3 1,055,022 20.2 15.74
2002 10 60,373 18.3 1,038,300 19.8 17.20
</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 adjustments for expenses
payable by or reimbursable from the tenants based on current levels.
AUSTIN CENTRE. On January 23, 1998, the Company acquired Austin Centre.
Austin Centre is a mixed-use property, including a Class A office property
containing approximately 344,000 net rentable square feet and the Omni Austin
Hotel consisting of 314 rooms and 61 apartments, located in the CBD submarket of
Austin, Texas. Construction of the office property was completed in 1986.
The Company acquired fee simple title to the Austin Centre property
from an unaffiliated entity for approximately $96.4 million. The purchase price
was funded through a draw under the Company's unsecured $550 million credit
facility from a consortium of banks led by BankBoston, N.A.
The Austin Centre office property was 98% occupied as of March 31,
1998, with a weighted average full-service rental rate per square foot of
$19.21. Austin Centre office property is leased to approximately 37 tenants, the
one major tenant having its principal business in the industry sector of title
and insurance. The weighted average remaining lease term for the Austin Centre
office property tenants is approximately 4 years. As of March 31,1998, one
tenant leased 10% or more of the total net rentable area of the Austin Centre
office property.
As of March 31, 1998, Investors Life Insurance Company of North America
(DBA FIC Insurance Group) leased approximately 66,000 net rentable square feet
(approximately 19% of the net rentable area of the Austin Centre office
property, pursuant to a triple-net lease that expires in September of 2002. The
current base rental rate per square foot for the approximately 66,000 net
rentable square feet is $11.00. The lease provides for three five-year renewal
options at $19.00, $20.00 and $21.00 per square foot, respectively.
The Austin CBD submarket consists of 3.6 million square feet of Class A
office space, which was approximately 45% of Austin's total Class A office space
at March 31, 1998. At March 31, 1998, the Austin CBD Class A office space was
94% occupied, and the average quoted full-service market rental rate
3
<PAGE> 4
was $23.68 per available square foot. The above submarket information has been
provided by CB Commercial.
The aggregate tax basis of depreciable real property and improvements
and personal property for the Austin Centre property for federal income tax
purposes is approximately $96.4 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 1997 realty tax rate for the Austin Centre office property was
$2.4849 per $100 of the $33.4 million assessed value. The total amount of tax at
this rate for 1997 was approximately $.8 million.
For the year ended December 31, 1996 and the ten months ended
October 31, 1997, utilities expense was approximately $.8 million and $.6
million, respectively and expenses for repairs, maintenance and contract
services were approximately $.7 million for both periods.
The Company does not plan to renovate Austin Centre office property,
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 Austin
Centre office property for the year ended December 31, 1997. Information for
prior periods is not available.
<TABLE>
<CAPTION>
AVERAGE FULL-SERVICE
YEAR OCCUPANCY RENTAL RATE(1)
---- --------- --------------
<S> <C> <C>
1997 92.0% $17.99
</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 feet for
the year or period and including adjustments for expenses payable by or
reimbursed from the tenants.
The following table sets forth a schedule of lease expirations for leases
in place as of March 31, 1998, for the Austin Centre office property, for each
of the 10 years beginning with the remainder of 1998, assuming that none of the
tenants exercises renewal options and excluding 68,144 square feet of unleased
space.
<TABLE>
<CAPTION>
PERCENTAGE OF ANNUAL
NET RENTABLE PERCENTAGE TOTAL ANNUAL FULL-SERVICE
AREA REPRESENT- OF LEASED ANNUAL FULL-SERVICE RENT PER
NUMBER OF ED BY NET RENTABLE FULL-SERVICE RENT NET
TENANTS WITH EXPIRING AREA REPRESENT- RENT UNDER REPRESENTED RENTABLE
EXPIRING LEASES ED BY EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 2 16,634 6.0% $ 294,558 5.7% $17.71
1999 8 72,307 26.2 1,290,732 24.8 17.85
2000 7 42,583 15.4 847,808 16.3 19.91
2001 5 8,641 3.1 175,995 3.4 20.37
2002 10 102,153 37.0 1,998,383 38.2 19.56
2003 1 3,172 1.2 70,482 1.4 22.22
2004 -- -- -- -- -- --
2005 -- -- -- -- -- --
2006 -- -- -- -- -- --
2007 -- -- -- -- -- --
2008 and thereafter 2 30,366 11.1 533,610 10.2 17.57
</TABLE>
4
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- ----------
(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 adjustments for expenses
payable by or reimbursable from the tenants based on current levels.
DATRAN CENTER. On May 1, 1998, the Company acquired Datran Center, two
Class A office buildings located in the South Dade/Kendall submarket of Miami,
Florida. Construction of the office properties was completed in 1986 and 1988.
Datran Center contains approximately 472,000 square feet of net rentable area
and two attached parking garages. One Datran Center has an eight-level attached
parking structure that accommodates approximately 676 cars and Two Datran has a
nine-level parking structure that accommodates approximately 836 cars.
The Company acquired Datran Center, subject to a ground lease,
from an unaffiliated entity for approximately $70.6 million. The purchase price
was funded through (i) the assumption of two mortgage notes encumbering the
leasehold interests in the land and the building which aggregate $47 million
and (ii) a draw of $23.6 million under the Company's unsecured $550 million
credit facility from a consortium of banks led by BankBoston, N.A.
Datran Center was 91% leased as of March 31, 1998, with a weighted
average full-service rental rate per square foot of $20.29. Datran Center is
leased to approximately 100 tenants, the major tenants having principal
businesses in the financial services industry sector. The weighted average
remaining lease term for Datran Center tenants is approximately 6.9 years. The
major tenants include Prudential Securities, Incorporated, Stephens, Lynn, Klein
and McNicholas, P.A. and Equitable Life Assurance Society of the US. As of
March 31, 1998, none of the tenants in Datran Center leased 10% or more of the
total net rentable area of the property.
The South Dade/Kendall submarket consists of .5 million square feet of
Class A office space, which was approximately 5.6% of Miami's total Class A
office space at March 31, 1998. The above submarket information has been
provided by Real Data Information Systems, Inc.
The aggregate tax basis of depreciable real property and improvements
and personal property for Datran Center for federal income tax purposes is
$70.6 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 1997 realty tax rate for real property was 2.3885% of the $33
million assessed value. The total amount of tax at this rate for 1997 was
approximately $.8 million.
For the year ended December 31, 1997, utilities expense was
approximately $.8 million, and expenses for repairs, maintenance and contract
services were approximately $.7 million.
5
<PAGE> 6
The Company does not plan to renovate Datran 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
Datran Center for the years ended December 31, 1996 and 1997. Information for
prior periods is not available.
<TABLE>
<CAPTION>
AVERAGE FULL-SERVICE
YEAR OCCUPANCY RENTAL RATE(1)
---- --------- --------------
<S> <C> <C>
1996 82.8% $19.59
1997 91.4% $20.29
</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 feet for
the year or period and including adjustments for expenses payable by or
reimbursed from the tenants.
The following table sets forth a schedule of lease expirations for
leases in place as of March 31, 1998, for Datran Center, for each of the 10
years beginning with the remainder of 1998, assuming that none of the tenants
exercises renewal options and excluding 40,770 square feet of unleased space.
<TABLE>
<CAPTION>
PERCENTAGE OF ANNUAL
NET RENTABLE PERCENTAGE TOTAL ANNUAL FULL-SERVICE
AREA REPRESENTED OF LEASED ANNUAL FULL-SERVICE RENT PER
NUMBER OF BY NET RENTABLE FULL-SERVICE RENT NET
TENANTS WITH EXPIRING AREA REPRESENTED BY RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRATION EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING AREA
LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 24 57,271 13.3% $ 938,241 11.5% $16.38
1999 14 61,599 14.4 859,544 10.5 13.95
2000 20 69,550 16.1 1,393,744 17.0 20.04
2001 15 38,537 8.9 832,601 10.2 21.61
2002 13 37,575 8.7 794,074 9.7 21.13
2003 8 48,023 11.1 1,034,923 12.6 21.55
2004 9 74,017 17.1 1,445,719 17.6 19.53
2005 1 1,415 0.3 32,545 0.4 23.00
2006 1 6,093 1.4 130,512 1.6 21.42
2007 1 2,164 0.5 34,461 0.4 15.92
2008 and thereafter 4 35,222 8.2 694,098 8.5 19.71
</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 adjustments for expenses
payable by or reimbursable from the tenants based on current levels.
6
<PAGE> 7
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS UNDER RULE 3-14 OF REGULATION S-X
US HOME BUILDING
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.
AUSTIN CENTRE
Report of Independent Public Accountants
Statements of Excess of Revenues Over Specific Operating
Expenses for the nine month period ended December 31, 1996
and the ten month period ended October 31, 1997
Notes to Statements.
DATRAN CENTER
Report of Independent Public Accountants
Statement of Excess of Revenues Over Specific Operating
Expenses for the year ended December 31, 1997.
Notes to Statement.
(B) PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet as of March 31, 1998
(unaudited) and notes thereto.
Pro Forma Consolidated Statements of Operations for the three
months ended March 31, 1998 (unaudited) and the year ended
December 31, 1997 (unaudited) and notes thereto.
(C) EXHIBITS
The following is a list of all exhibits filed as a part of
this Form 8-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated June 24, 1998
(filed herewith).
</TABLE>
7
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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: June 22, 1998 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ Dallas. E Lucas
---------------------------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial and
Accounting Officer
8
<PAGE> 9
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
US HOME BUILDING
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
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-3
Notes to Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
AUSTIN CENTRE
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Excess of Revenues Over Specific Operating Expenses for the Nine Month Period Ended
December 31, 1996 and the Ten Month Period Ended October 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
DATRAN CENTER
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Statement of Excess of Revenues Over Specific Operating Expenses for the Year Ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
Notes to Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of March 31, 1998 and notes thereto . . . . . . . . . . . . . . . F-15
Pro Forma Consolidated Statements of Operations for the Three Months Ended March
31, 1998 and the Year Ended December 31, 1997 and notes thereto . . . . . . . . . . . . . . . . . . . . . F-17
</TABLE>
F-1
<PAGE> 10
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 US Home Building for the
year ended December 31, 1996, and for the six month period ended June 30, 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 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 presents fairly, in all
material respects, the excess of revenues over specific operating expenses of US
Home Building for the year ended December 31, 1996, and for the six month period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 29, 1997
F-2
<PAGE> 11
US HOME BUILDING
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............................................... $4,648,997 $2,439,965
Parking................................................... 201,828 112,859
Recoveries................................................ 42,142 63,407
Other..................................................... 122,972 70,698
---------- ----------
5,015,939 2,686,929
---------- ----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 525,036 262,518
Utilities................................................. 510,952 258,536
Repairs, maintenance, and contract services............... 719,870 381,675
Salaries.................................................. 315,013 171,130
General and administrative................................ 259,751 179,320
Management fees........................................... 126,701 69,230
Insurance................................................. 64,894 37,514
---------- ----------
2,522,217 1,359,923
---------- ----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $2,493,722 $1,327,006
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 12
US HOME BUILDING
NOTES TO STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
US Home Building (the "Property") is a 21-story office tower located in
Houston, Texas. The Property contains approximately 400,000 rentable square feet
as well as a 12-story parking garage which contains approximately 975 parking
stalls.
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 are 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 and interest expenses
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 Transwestern Property
Company (the "Manager"). The agreement with the Manager requires a management
fee of 2.5% 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 $126,701 and $69,230, respectively.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 49,000 square
feet, or 12%, of the total leasable square footage. This lease expires in
February 1999. The second largest tenant of the Property occupies approximately
39,000 square feet, or 10%, of the total leasable square footage. This lease
expires in July 2001.
F-4
<PAGE> 13
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 Austin Centre for the
nine-month period ended December 31, 1996, and the ten-month period ended
October 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
Austin Centre for the nine-month period ended December 31, 1996, and the
ten-month period ended October 31, 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 I and II are presented
for the purpose 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,
December 12, 1997
F-5
<PAGE> 14
AUSTIN CENTRE
STATEMENTS OF EXCESS REVENUES
OVER SPECIFIC OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TEN MONTHS
ENDED ENDED ENDED
MARCH 31, DECEMBER 31, OCTOBER 31,
1996 1996 1997
------------ ------------ -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
REVENUES:
Rent.................................................. $ 900,181 $2,612,422 $3,260,481
Parking............................................... 138,233 473,810 558,889
Recoveries............................................ 282,593 824,100 1,137,884
Other................................................. 103,426 293,896 224,685
---------- ---------- ----------
1,424,433 4,204,228 5,181,939
---------- ---------- ----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes..................................... 192,901 580,763 700,316
Utilities............................................. 235,947 526,947 573,554
Repairs, maintenance, and contract services........... 173,931 488,262 687,680
Salaries.............................................. 124,051 393,127 500,925
General and administrative............................ 48,572 152,229 198,464
Management fees....................................... 37,058 114,949 155,139
Insurance............................................. 24,069 60,276 58,690
---------- ---------- ----------
836,529 2,316,553 2,874,768
---------- ---------- ----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES..... $ 587,904 $1,887,675 $2,307,171
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 15
AUSTIN CENTRE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND OCTOBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF PROPERTY
Austin Centre (the "Property") is a 16-story office tower located in the
central business district of Austin, Texas. The Property contains approximately
343,664 rentable square feet of office space, 61 condominium units, and an
underground parking garage. Austin Centre also includes a hotel which it
currently leases under a triple-net lease to the Omni Hotel. The Hotel contains
an additional 247,355 square feet (314 guestrooms). Lease income related to the
Hotel of approximately $2.9 million for the ten-months ended October 31, 1997,
and $2.4 million for the nine months ended December 31, 1996, has been excluded
from the accompanying statements of excess of revenues over specific operating
expenses of the Property. The lease with the Hotel expires April 1, 2001. The
Property currently provides comprehensive telecommunications services (Entelcom)
to several tenants of the Austin Centre Business Complex.
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 nine-month period ended December 31, 1996, and the ten-month period
ended October 31, 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.
The Property was acquired on April 1, 1996, and, therefore, the
accompanying statements include unaudited information for the three-month period
ended March 31, 1996.
F-7
<PAGE> 16
AUSTIN CENTRE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES -- (CONTINUED)
3. PROPERTY MANAGEMENT:
T. Stacy and Associates (the "Manager"), has had an arrangement to manage
the Property since April 1996. The Manager requires a management fee of 2.5% for
1996 and 3.0% for 1997, of net rental receipts, as defined. Total management
fees for the nine-month period ended December 31, 1996, and the ten-month period
ended October 31, 1997, were approximately $114,949 and $155,139, respectively.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 65,865 square
feet, or 10%, of the total rentable square footage. This lease expires in
October 2002.
F-8
<PAGE> 17
SCHEDULE I
AUSTIN CENTRE
STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CONSOLIDATED
OFFICE CONDOMINIUMS ENTELCOM GARAGE TOTAL
---------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rent............................ $2,008,995 $603,427 $ -- $ -- $2,612,422
Parking......................... -- -- -- 473,810 473,810
Recoveries...................... 824,100 -- -- -- 824,100
Other........................... 2,498 9,335 282,063 -- 293,896
---------- -------- -------- -------- ----------
2,835,593 612,762 282,063 473,810 4,204,228
---------- -------- -------- -------- ----------
SPECIFIC OPERATING EXPENSES
Real estate taxes............... 482,310 98,453 -- -- 580,763
Utilities....................... 507,151 19,796 -- -- 526,947
Repairs, maintenance, and
contract services............ 421,781 44,274 4,868 17,339 488,262
Salaries........................ 195,241 32,356 35,453 130,077 393,127
General and administrative...... 75,832 14,442 11,468 50,487 152,229
Management fees................. 74,772 14,365 6,986 18,826 114,949
Insurance....................... 34,444 4,818 -- 21,014 60,276
---------- -------- -------- -------- ----------
1,791,531 228,504 58,775 237,743 2,316,553
---------- -------- -------- -------- ----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES.............. $1,044,062 $384,258 $223,288 $236,067 $1,887,675
========== ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-9
<PAGE> 18
SCHEDULE II
AUSTIN CENTRE
STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE TEN-MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATED
OFFICE CONDOMINIUMS ENTELCOM GARAGE TOTAL
---------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rent....................... $2,660,814 $599,667 $ -- $ -- $3,260,481
Parking.................... -- -- -- 558,889 558,889
Recoveries................. 1,137,884 -- -- -- 1,137,884
Other...................... 18,833 11,859 193,993 -- 224,685
---------- -------- -------- -------- ----------
3,817,531 611,526 193,993 558,889 5,181,939
---------- -------- -------- -------- ----------
SPECIFIC OPERATING EXPENSES
Real estate taxes.......... 588,956 111,360 -- -- 700,316
Utilities.................. 546,876 26,678 -- -- 573,554
Repairs, maintenance, and
contract services....... 550,084 45,810 36,086 55,700 687,680
Salaries................... 247,768 26,831 48,254 178,072 500,925
General and
administrative.......... 88,465 21,387 15,501 73,111 198,464
Management fees............ 101,534 15,649 23,303 14,653 155,139
Insurance.................. 33,774 5,830 -- 19,086 58,690
---------- -------- -------- -------- ----------
2,157,457 253,545 123,144 340,622 2,874,768
---------- -------- -------- -------- ----------
EXCESS OF REVENUES OVER
SPECIFIC OPERATING
EXPENSES................... $1,660,074 $357,981 $ 70,849 $218,267 $2,307,171
========== ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-10
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statement of excess of revenues over
specific operating expenses (as defined in Note 2) of Datran Center for the year
ended December 31, 1997. This statement is the responsibility of the Property's
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is 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 audit
provides a reasonable basis for our opinion.
In our opinion, the statement referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Datran Center for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 4, 1998
F-11
<PAGE> 20
DATRAN CENTER
STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
----------
<S> <C>
REVENUES:
Office rent............................................... $8,283,138
Parking................................................... 626,821
Recoveries................................................ 145,236
Other..................................................... 9,958
----------
9,065,153
----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 857,437
Utilities................................................. 812,168
Salaries.................................................. 759,649
Repairs, maintenance, and contract services............... 710,775
General and administrative................................ 291,236
Management fees........................................... 360,274
Insurance................................................. 217,909
Ground lease.............................................. 295,000
----------
4,304,448
----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $4,760,705
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE> 21
DATRAN CENTER
NOTES TO STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF PROPERTY
Datran Center (the "Property") contains two office towers, One Datran and
Two Datran, and is owned by M. D. Datran, Ltd., a Florida Limited Partnership,
and located south of downtown Miami. One Datran and Two Datran are 18-floor and
20-floor towers, respectively. The Property contains approximately 472,000
rentable square feet as well as an attached parking garage.
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.
2. BASIS OF ACCOUNTING:
The accompanying statement of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. This statement is not
intended to be a complete presentation of revenues and operating expenses for
the year ended December 31, 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.
3. PROPERTY MANAGEMENT:
The Property entered into a management agreement with M.D. Datran
Management, Inc. (the "Manager") in November 1996 to manage the Property. Prior
to this agreement, the Manager was operating under a management agreement for
Two Datran effective September 30, 1991, and the agreement was amended October
21, 1994, to include One Datran. The agreement with the Manager requires a
monthly management fee of 4% of gross revenues, as defined. Total management
fees for the year ended December 31, 1997, were approximately $360,000. The
agreement may be terminated at any time by either party in accordance with the
management agreement.
F-13
<PAGE> 22
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The pro forma information for the three months ending March 31, 1998 and
year ended December 31, 1997 assumes completion, as of January 1, 1997 in
determining operating and other data, and March 31, 1998 in determing balance
sheet data, of (i) the Crescent Real Estate Equities Company's (the "Company")
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 net proceeds therefrom to fund approximately $593,500 of
Property acquisitions and other investments in the second quarter of 1997, (ii)
the Company's offering of 4,700,000 Common Shares to an affiliate of Union Bank
of Switzerland (the "UBS Offering") and the net proceeds therefrom to repay
approximately $145,000 of indebtedness under the Credit Facility, (iii) the
Operating Partnership's public offering of an aggregate principal amount of
$400 million of senior notes (the "September 1997 Note Offering") and the use
of the net proceeds therefrom to fund approximately $337,600 of the purchase
price of two Properties and to repay approximately $57,200 of indebtedness
incurred under the Credit Facility and other short-term indebtedness, (iv) the
Company's public offering of its Common Shares in October 1997 (the "October
1997 Offering") and the net proceeds therefrom to fund approximately $45,000 of
the purchase price of one Property and to repay approximately $325,100 of
short-term indebtedness and indebtedness incurred under the Credit Facility,
(v) the Company's offering of 5,375,000 Common Shares to Merrill Lynch (the
"Merrill Offering") and the net proceeds therefrom to repay approximately
$199,900 of indebtedness under the Credit Facility, (vi) the Company's public
offering of 8,000,000 Preferred Shares in February 1998 ("February 1998
Preferred Offering") and the net proceeds therefrom to repay approximately
$191,250 of indebtedness under the Credit Facility, (vii) the Company's public
offering of 1,365,138 Common Shares to Merrill Lynch & Co. in April 1998 which
Merrill Lynch & Co. deposited with the trustee of a unit investment trust
("Unit Investment Trust Offering") and the net proceeds therefrom to repay
approximately $43,960 of indebtedness under the Credit Facility, (viii)
Property acquisitions, other investments and related financing and share
issuances during 1997 and 1998, and (ix) proposed acquisition of a corporation
that owns primarily four full-service casino/hotels and two riverboat casinos
and related financing, including $1,035,200 for refinancing and/or assumption
of indebtedness, and associated refinancing and transaction costs, in
connection with the merger with Station (the "Pending Investment").
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 for the year ended December 31, 1997, filed herein.
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-14
<PAGE> 23
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
COMPANY PRO FORMA PRO FORMA
HISTORICAL(A) ADJUSTMENTS CONSOLIDATED
------------------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Investments in real estate.................... $3,877,013 $1,801,510(B) $5,678,523
Less -- accumulated depreciation.............. (302,826) -- (302,826)
---------- ---------- ----------
Net investment in real estate....... 3,574,187 1,801,510 5,375,697
Cash and cash equivalents..................... 68,548 8,360(C) 76,908
Restricted cash and cash equivalents.......... 26,519 -- 26,519
Accounts receivable, net...................... 24,047 -- 24,047
Deferred rent receivable...................... 48,397 -- 48,397
Investments in real estate mortgages and
equity of unconsolidated companies.......... 583,262 27,750(D) 611,012
Notes receivable, net......................... 148,482 148,482
Other assets, net............................. 118,286 -- 118,286
---------- ---------- ----------
Total assets........................ $4,591,728 $1,837,620 $6,429,348
========== ========== ==========
LIABILITIES
Borrowings under Credit Facility.............. $ 457,000 $ 15,650(E) $ 472,650
Notes payable................................. 1,517,927 1,082,200(F) 2,600,127
Accounts payable, accrued expenses and other
liabilities................................. 79,222 79,222
---------- ---------- ----------
Total liabilities................... 2,054,149 1,097,850 3,151,999
---------- ---------- ----------
MINORITY INTERESTS
Operating partnership....................... 121,806 -- 121,806
Investment joint ventures................... 27,815 -- 27,815
---------- ---------- ----------
Total minority interests............ 149,621 -- 149,621
---------- ---------- ----------
SHAREHOLDER'S EQUITY
7% Series B convertible preferred shares.... -- 103,500 103,500
6.75% Series A convertible cumulative
preferred shares $.01 par value, authorized
100,000,000 shares, 8,000,000 shares issued
and outstanding............................ 200,000 -- 200,000
Common shares, $.01 par value, authorized
250,000,000 shares........................ 1,186 179 1,365
Additional paid-in capital.................. 2,248,628 636,091 2,884,719
Deferred compensation on restricted shares.. (281) -- (281)
Retained deficit............................ (61,575) -- (61,575)
---------- ---------- ----------
Total shareholder's equity.......... 2,387,958 739,770(G) 3,127,728
---------- ---------- ----------
Total liabilities and shareholders'
equity............................ $4,591,728 $1,837,620 $6,429,348
========== ========== ==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-15
<PAGE> 24
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
March 31, 1998............................................ --
(B) Increase reflects the following:
Acquisition of Datran office property....................... $ 70,500
Pending acquisition of Station's casino/hotel properties.... 1,731,010
----------
$1,801,510
==========
(C) Net increase reflects the following:
Net proceeds from the April 1998 Unit Investment Trust
Offering................................................. $ 43,960
Partial repayment of Credit Facility........................ (44,100)
Borrowings under the Credit Facility for working capital.... 8,500
----------
$ 8,360
==========
(D) Increase reflects the following:
Additional investment in Refrigerated Warehouse
partnerships.............................................. $ 27,750
----------
$ 27,750
==========
(E) Net increase in borrowings under the Credit Facility as a
result of:
Additional investment in Refrigerated Warehouse
partnerships.............................................. $ 27,750
Partial repayment of Credit Facility........................ (44,100)
Borrowings for the acquisition of Datran office property and
working capital........................................... 32,000
----------
$ 15,650
==========
(F) Increase in notes payable as a result of:
Debt relating to the pending acquisition of Station's
casino/hotel properties................................... $1,035,200
Assumption of notes as a part of the acquisition of Datran
office property........................................... 47,000
----------
$1,082,200
==========
(G) Increase reflects the following:
The Company's issuance of preferred shares in conjunction
with the pending acquisition of Station's
casino/hotel properties................................... $ 103,500
The Company's issuance of common shares in conjunction with
the pending acquisition of Stations's casino/hotel
properties................................................ 592,310
Net proceeds from the April 1998 Unit Investment Trust
Offering................................................. 43,960
----------
$ 739,770
==========
</TABLE>
F-16
<PAGE> 25
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES 1998 ACQUIRED
COMPANY AUSTIN DATRAN AND PENDING OTHER PRO FORMA
HISTORICAL(A) CENTRE(B) CENTER(B) INVESTMENT(B) ADJUSTMENTS CONSOLIDATED
--------------- ------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property............................ $153,125 $ 346 $ 2,266 $ 50,692 $ -- $206,429
Interest and other income.................. 8,024 -- -- -- -- 8,024
-------- ---------- --------- -------- --------- --------
Total revenues..................... 161,149 346 2,266 50,692 -- 214,453
-------- ---------- --------- -------- --------- --------
EXPENSES:
Real estate taxes.......................... 16,097 45 214 492 -- 16,848
Repairs and maintenance.................... 8,700 44 178 599 -- 9,521
Other rental property operating............ 29,891 99 684 795 (132)(C) 31,337
Corporate general and administrative....... 3,147 -- -- -- -- 3,147
Interest expense........................... 34,283 -- -- -- 21,386(D) 55,669
Depreciation and amortization.............. 26,582 72 441 19,786 -- 46,881
Amortization of deferred financing
costs................................... 1,140 -- -- -- -- 1,140
-------- ---------- --------- -------- --------- --------
Total expenses..................... 119,840 260 1,517 21,672 21,254 164,543
-------- ---------- --------- -------- --------- --------
Operating income (loss)............ 41,309 86 749 29,020 (21,254) 49,910
OTHER INCOME:
Equity in net income of unconsolidated
companies............................... 5,845 -- -- 486 -- 6,331
-------- ---------- --------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY INTERESTS...... 47,154 86 749 29,506 (21,254) 56,241
Minority interests........................... (4,746) -- -- -- (456)(E) (5,202)
-------- ---------- --------- -------- --------- --------
NET INCOME (LOSS)............................ 42,408 86 749 $ 29,506 $ (21,710) $ 51,039
Preferred dividend(F)........................ (1,575) -- - -- (3,611) (5,186)
-------- ---------- --------- -------- --------- --------
Net income applicable to common shareholders. $ 40,833 $ 86 $ 749 $ 29,506 $ (25,321) $ 45,853
======== ========== ========= ======== ========= ========
PER COMMON SHARES DATA: (G)
Net Income -- Basic.......................... $ .34
========
Net Income -- Dilutive....................... $ .32
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-17
<PAGE> 26
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Company's unaudited consolidated
historical statement of operations for the three months ended March 31,
1998.
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with the 1998 acquired and pending investment, assuming the
investments were acquired at the beginning of the period.
<TABLE>
<S> <C> <C> <C>
Austin Centre office property............................... 1/23/98
Omni Austin Hotel property(i)............................... 1/23/98
Post Oak Central office property complex.................... 2/13/98
Washington Harbour office properties........................ 2/25/98
Datran office property...................................... 5/01/98
Station's casino/hotel properties(ii)....................... pending
(i) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent)
from the hotel lessee to the Company calculated by applying
the rent provisions (as defined in the lease agreement) to
the historical revenues of the hotel property.
(ii) Calculated estimated lease payment using the historical
operating results of the casino/hotel properties for the
quarter ended March 31, 1998. Current negotiations provide
for a lease payment equal to 98% of Station's operating
income for the three months ended March 31, 1998, plus
depreciation, amortization, preopening expenses for the
three month period, and a historical equipment rental
lease payment which will be eliminated upon consummation of
the Company's Merger with Station ("Adjusted Operating
Income"). The definitive terms of the lease agreement have
not yet been finalized. The following reflects the
components of the calculation of Adjusted Operating Income.
Operating income............................................ $ 27,684
Adjusted for depreciation and amortization.................. 17,019
Elimination of historical equipment rental lease payment, as
a result of the Company's Merger with Stations.............. 2,063
--------
Adjusted Operating Income................................... $ 46,766
98% of Adjusted Operating Income............................ $ 45,831
========
(C) Decrease as a result of the elimination of third party property management
fees which terminated subsequent to acquisition of certain of the
properties................................................................... $ (132)
========
</TABLE>
F-18
<PAGE> 27
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(D) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the April 1998
Unit Investment Trust Offering and the February 1998 Preferred Offering,
assuming the borrowings to finance investment acquisitions and the
assumption of debt and repayment, had all occurred at the beginning of the
period.
<TABLE>
<S> <C> <C> <C> <C> <C>
Credit Facility......................... $ 472,650 @ 6.89% $ 32,566
Bridge Loan............................. 250,000 @ 6.89% 17,225
BankBoston Note II...................... 100,000 @ 6.89% 6,890
Note Offering -- 7.125% Notes due
2007.................................. 250,000 @ 7.125% 17,813
Note Offering -- 6.625% Notes due
2002.................................. 150,000 @ 6.625% 9,938
Station's Refinanced Debt............... 1,035,200 @ 7.50% 77,640
LaSalle Note I.......................... 239,000 @ 7.83% 18,714
LaSalle Note II......................... 161,000 @ 7.79% 12,542
LaSalle Note III........................ 115,000 @ 7.81% 8,982
Chase Manhattan Note.................... 97,123 @ 7.44% 7,226
Cigna Note.............................. 63,500 @ 7.47% 4,743
Metropolitan Life Note II............... 44,831 @ 6.93% 3,107
Metropolitan Life Note III.............. 40,000 @ 7.74% 3,096
Metropolitan Life Note IV............... 7,000 @ 7.11% 498
Northwestern Life Note.................. 26,000 @ 7.66% 1,992
Metropolitan Life Note I................ 12,030 @ 8.88% 1,068
Nomura Funding VI Note.................. 8,666 @ 10.07% 873
Rigney Note............................. 777 @ 8.50% 66
---------- ------------
Total annual amount..................... $3,072,777 $ 224,979
Prorated for three months............... 56,244
Less: Capitalized interest.............. (575)
Historical interest expense............. (34,283)
------------
$ 21,386
========
</TABLE>
<TABLE>
<S> <C>
(E) Reflects adjustment needed to reflect minority partners' weighted average
8.6% 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................................................ $ (456)
========
</TABLE>
(F) Reflects the following:
<TABLE>
<S> <C>
7% preferred dividend for the $103.5 million of preferred
shares issued in connection with the Station
transaction............................................... $ 7,245
6.75% preferred dividend for the February 1998 Preferred
Offering.................................................. 13,500
-------
$20,745
=======
Prorated for three months................................... $ 5,186
=======
</TABLE>
(G) Reflects net income per share based on 136,519,512 weighted average Common
Shares -- basic and 141,670,829 weighted average Common shares -- diluted
assumed to be outstanding during the three months ended March 31, 1998.
F-19
<PAGE> 28
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES 1997
COMPANY US HOME ACQUIRED AUSTIN
HISTORICAL(A) BUILDING(B) INVESTMENTS(B) CENTRE(C)
--------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental property.............. $430,383 $ 4,254 $121,041 $ 6,219
Interest and other income.... 16,990 -- -- --
-------- ---------- -------- ----------
Total revenues....... 447,373 4,254 121,041 6,219
-------- ---------- -------- ----------
EXPENSES:
Real estate taxes............ 44,154 416 10,861 840
Repairs and maintenance...... 27,783 605 12,712 825
Other rental property
operating................. 86,931 841 21,133 1,785
Corporate general and
administrative............ 12,858 -- -- --
Interest expense............. 86,441 -- -- --
Depreciation and
amortization.............. 74,426 890 21,664 1,297
Amortization of deferred
financing costs........... 3,499 -- -- --
-------- ---------- -------- ----------
Total expenses....... 336,092 2,752 66,370 4,747
-------- ---------- -------- ----------
Operating income
(loss)............. 111,281 1,502 54,671 1,472
OTHER INCOME:
Equity in net income of
unconsolidated companies.. 23,743 -- 10,590 --
-------- ---------- -------- ----------
INCOME (LOSS) BEFORE MINORITY
INTERESTS.................... 135,024 1,502 65,261 1,472
Minority interests............. (17,683) -- -- --
-------- ---------- -------- ----------
NET INCOME (LOSS).............. $117,341 $ 1,502 $ 65,261 $ 1,472
======== ========== ======== ==========
Preferred dividend(J)..........
Net income applicable to
common shareholders..........
PER COMMON SHARE DATA(K):
Net income -- Basic............
Net income -- Dilutive.........
<CAPTION>
1998 ACQUIRED
DATRAN AND PENDING OTHER PRO FORMA
CENTER(C) INVESTMENTS(C) ADJUSTMENTS CONSOLIDATED
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental property.............. $ 9,065 $195,174 $ -- $766,136
Interest and other income.... -- -- 6,363(D) 23,353
-------- -------- --------- --------
Total revenues....... 9,065 195,174 6,363 789,489
-------- -------- --------- --------
EXPENSES:
Real estate taxes............ 857 3,527 -- 60,655
Repairs and maintenance...... 711 4,241 -- 46,877
Other rental property
operating................. 2,736 5,658 (283)(E) 117,223
-- (1,578)(F)
Corporate general and
administrative............ -- -- -- 12,858
Interest expense............. -- -- 136,505(G) 222,946
Depreciation and
amortization.............. 1,763 83,306 -- 183,346
Amortization of deferred
financing costs........... -- -- 539(H) 4,038
-------- -------- --------- --------
Total expenses....... 6,067 96,732 135,183 647,943
-------- -------- --------- --------
Operating income
(loss)............. 2,998 98,442 (128,820) 141,546
OTHER INCOME:
Equity in net income of
unconsolidated companies.. -- 1,943 -- 36,276
-------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS.................... 2,998 100,385 (128,820) 177,822
Minority interests............. -- -- 1,080 (I) (16,603)
-------- -------- --------- --------
NET INCOME (LOSS).............. $ 2,998 $100,385 $(127,740) $161,219
======== ======== ========= ========
Preferred dividend(J).......... (20,745)
--------
Net income applicable to
common shareholders.......... $140,474
========
PER COMMON SHARE DATA(K):
Net income -- Basic............ $ 1.03
========
Net income -- Dilutive......... $ 1.00
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-20
<PAGE> 29
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Company's audited consolidated
historical statement of operations for the year ended December 31, 1997.
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1997, assuming the investments
were acquired at the beginning of the period.
<TABLE>
<CAPTION>
ACQUISITION
INVESTMENT DATE
---------- -----------
<S> <C>
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 -- Houston hotel property(v)............. 9/22/97
Miami Center office property................................ 9/30/97
U.S. Home Building office property.......................... 10/15/97
Bank One Center office property(vi)......................... 10/22/97
Refrigerated Warehouse Investment(vii)...................... 10/31/97
Fountain Place office property.............................. 11/07/97
Ventana Country Inn hotel property(v)....................... 12/19/97
Energy Centre office property............................... 12/22/97
</TABLE>
(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). Rent provisions include no percentage rent
component.
(ii) The Company has an indirect 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 an indirect 88.35% (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 property were adjusted to
reflect the lease payment (base rent and percentage rent) from
the hotel lessee to the Company calculated by applying the rent
provisions (as defined in the lease agreement) to the
historical revenues of the hotel property.
(vi) The Company has a 50% equity investment in the partnership that
owns Bank One Center office property.
(vii) The Company has an indirect 38% (after the sale of voting
common stock to COI) non-voting equity investment in two
corporations that own the refrigerated warehouse properties.
F-21
<PAGE> 30
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with the 1998 acquired and pending investments, assuming the
investments were acquired at the beginning of the period.
<TABLE>
<S> <C> <C> <C>
Austin Centre office property............................... 1/23/98
Omni Austin Hotel property(i)............................... 1/23/98
Post Oak Central office property complex.................... 2/13/98
Washington Harbour office properties........................ 2/25/98
Datran office property...................................... 5/01/98
Station's casino/hotel properties(ii)....................... pending
(i) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent)
from the hotel lessee to the Company calculated by applying
the rent provisions (as defined in the lease agreement) to
the historical revenues of the hotel property.
(ii) Calculated estimated lease payment using the historical
operating results of the casino/hotel properties for the
twelve months ended December 31, 1997. Current negotia-
tions provide for a lease payment equal to 100% of Station's
operating income for the twelve months ended December 31,
1997, plus depreciation, amortization, preopening expenses,
a one-time restructuring charge for the twelve-month
period, and a historical equipment rental lease payment which
will be eliminated upon consummation of the Company's Merger
with Station ("Adjusted Operating Income"). The definitive
terms of the lease agreement have not yet been finalized.
The following reflects the components of the calculation
of Adjusted Operating Income.
Operating income............................................ $ 46,467
Adjusted for depreciation, amortization, preopening expenses
and a one-time restructuring charge....................... 108,719
Elimination of historical equipment rental lease payment, as
a result of the Company's Merger with Station............. 4,178
--------
Adjusted Operating Income................................... $159,364
========
</TABLE>
(D) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
<TABLE>
<S> <C> <C> <C> <C>
Carter Crowley Notes............................... ($53,365 @ 10%) $ 5,336
Ritz Note.......................................... ($ 8,850 @ 18%) 1,593
COI Note........................................... ($33,924 @ 12%) 4,070
Residential Development Corp Note.................. ($ 7,800 @ 10%) 780
Desert Mountain Note............................... ($23,251 @ 12%) 2,790
-------
Total.............................................. $14,569
Less: Historical interest income................... (8,206)
-------
Total.............................................. $ 6,363
========
(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................................................................... $ (1,578)
========
</TABLE>
F-22
<PAGE> 31
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(G) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the April 1998
Unit Investment Trust Offering, the February 1998 Preferred Offering, the
Equity Offering to Merrill Lynch in December 1997, the October 1997 Equity
Offering, the September 1997 Note Offering, the Equity Offering to UBS in
August 1997 and the 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Credit Facility......................... $ 472,650 @ 6.89% $ 32,566
Bridge Loan............................. 250,000 @ 6.89% 17,225
BankBoston Note II...................... 100,000 @ 6.89% 6,890
Note Offering -- 7.125% Notes due
2007.................................. 250,000 @ 7.125% 17,813
Note Offering -- 6.625% Notes due
2002.................................. 150,000 @ 6.625% 9,938
Station's Refinanced Debt............... 1,035,200 @ 7.50% 77,640
LaSalle Note I.......................... 239,000 @ 7.83% 18,714
LaSalle Note II......................... 161,000 @ 7.79% 12,542
LaSalle Note III........................ 115,000 @ 7.81% 8,982
Chase Manhattan Note.................... 97,123 @ 7.44% 7,226
Metropolitan Life Note II............... 44,831 @ 6.93% 3,107
Cigna Note.............................. 63,500 @ 7.47% 4,743
Metropolitan Life Note III.............. 40,000 @ 7.74% 3,096
Metropolitan Life Note IV............... 7,000 @ 7.11% 498
Northwestern Life Note.................. 26,000 @ 7.66% 1,992
Metropolitan Life Note I................ 12,030 @ 8.88% 1,068
Nomura Funding VI Note.................. 8,666 @ 10.07% 873
Rigney Note............................. 777 @ 8.50% 66
---------- ------------
Total annual amount..................... $3,072,777 $ 224,979
Less: Capitalized interest.............. (2,033)
Historical interest expense............. (86,441)
------------
$136,505
========
</TABLE>
(H) Amortization of capitalized costs associated with the September 1997 Note
Offering ($4,731 purchaser's discount and $500 other costs).
<TABLE>
<CAPTION>
AMORTIZATION OF
FEES
---------------
<S> <C> <C>
Note Offering -- 6.625% Notes due 2002...................... $392
Note Offering -- 7.125% Notes due 2007...................... 327
----
Total....................................................... $719
----
Prorated for nine months.................................... $ 539
========
</TABLE>
(I) Reflects adjustment needed to reflect minority partners'
weighted average 8.6% 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. $ 1,080
========
(J) Reflects the following:
<TABLE>
<S> <C> <C>
7% preferred dividend for the $103.5 million of preferred
shares issued in connection with the Station
transaction............................................... $ 7,245
6.75% preferred dividend for the February 1998 Preferred
Offering.................................................. 13,500
-------
$ 20,745
========
</TABLE>
(K) Reflects net income per share based on 136,519,512 weighted average Common
Shares -- basic and 141,120,366 weighted average Common Shares -- diluted
assumed to be outstanding during the year ended December 31, 1997.
F-23
<PAGE> 32
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated June 24, 1998 (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 reports dated August 29, 1997, on US Home Building, December
12, 1997, on Austin Centre, and March 4, 1998, on Datran Center included in this
Form 8-K into Crescent Real Estate Equities Company's previously filed
Registration Statements No. 33-91438, 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, No. 333-37565, No. 333-41049, No. 333-42417 and
No. 333-56809.
ARTHUR ANDERSEN LLP
Dallas, Texas
June 24, 1998
