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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 4
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 17, 1998
CRESCENT REAL ESTATE EQUITIES COMPANY
(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 Offices) (Zip Code)
(817) 321-2100
(Registrant's telephone number, including area code)
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On April 28, 1998, Crescent Real Estate Equities Company ("Crescent")
filed a Form 8-K dated April 17, 1998 listing certain factors that may affect
Crescent's operating results and, therefore, the accuracy of its forward-looking
statements. On June 22, 1998, August 13, 1998 and November 24, 1998, Crescent
amended and restated the disclosure contained in the Form 8-K. This Form 8-K/A
amends and restates the disclosure in the Form 8-K/A filed on November 24, 1998
to reflect certain changes in the factors that may affect Crescent's operating
results and, therefore, the accuracy of its forward-looking statements.
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Item 5. Other Events.
Crescent Real Estate Equities Company and its representatives may make
oral or written forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995 (the "Reform Act")) from time
to time. Crescent desires to invoke to the fullest extent possible the
protections of the Reform Act and the judicially created "bespeaks caution"
doctrine with respect to such statements. Accordingly, Crescent is filing this
Form 8-K, which lists certain factors that in some cases may have affected, and
in the future could affect, Crescent's actual operating results and could cause
such results to differ materially from those in such forward-looking statements.
This list is not necessarily exhaustive, and new risk factors emerge
periodically. There can be no assurance that this disclosure lists all material
risks to Crescent at any specific point in time. Many of the important factors
discussed below have been disclosed in Crescent's previous filings with the
Securities and Exchange Commission.
All references in this Form 8-K/A to "Cresent," the "Company", "we"
"us," or "our" mean, unless the context otherwise requires, Crescent Real Estate
Equities Company, a Texas real estate investment trust ("Crescent Equities"),
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), Crescent Real Estate Equities, Ltd.,
a Delaware corporation which is the sole general partner of the Operating
Partnership ("CREE Ltd."), and the other subsidiaries of Crescent Equities.
RISK FACTORS
REAL ESTATE RISKS SPECIFIC TO CRESCENT'S BUSINESS
INVESTMENTS AND INVESTMENT STRATEGIES SUBJECT CRESCENT TO RISKS FROM A
VARIETY OF ASSET CLASSES. In implementing our investment strategies, we have
invested in a broad range of real estate assets in several industry segments,
and in the future, we may invest in additional types of real estate assets not
currently included in our portfolio. As a result of our real estate investments,
we will be subject to risks, in addition to general real estate risks, relating
to the specific assets and asset types in which we invest (as of March 31, 1999,
office properties, retail properties, hotel properties, behavioral healthcare
facilities, refrigerated storage properties and residential property
developments). We are subject to the risks that, upon expiration, leases for
space in our office properties and retail properties may not be renewed, the
space may not be re-leased, or the terms of renewal or re-lease, including the
cost of required renovations or concessions to tenants, may be less favorable
than current lease terms. Similarly, we are subject to the risk that the success
of our investment in hotel properties will depend upon the ability of the hotel
properties to compete in such features as access, location, quality of
accommodations, room rate structure and, to a lesser extent, the quality and
scope of other amenities such as food and beverage facilities. In addition, we
are subject to risks relating to our behavioral healthcare facilities, including
the effect of any failure of the lessee of the behavioral healthcare facilities
to make the required lease payments, which equal more than 8% of Crescent's
current rental revenues; the effects of factors, such as regulation of the
healthcare industry and limitations on government reimbursement programs, on the
ability of the lessee to make the required lease payments; and the limited
number of replacement tenants if a default occurs under the lease or if the
lease is not renewed upon expiration in 2009. If any one or more of these risks
occurs, or if we are unable to implement our investment strategies successfully
in the future, it could adversely affect the value of your investment in
Crescent.
REGIONAL CONCENTRATION OF OUR ASSETS INCREASES EFFECTS OF ADVERSE TRENDS IN
CERTAIN MARKETS. As of March 31, 1999, approximately 72% of our office and
retail assets were located in the metropolitan areas of Dallas/Fort Worth and
Houston, Texas. Due to this geographic concentration, any deterioration in
economic conditions in the Dallas/Fort Worth or Houston metropolitan areas (or
in other geographic markets in which Crescent in the future may acquire
substantial assets) could adversely affect the value of your investment in
Crescent.
JOINT OWNERSHIP OF ASSETS LIMITS OUR FLEXIBILITY WITH INVESTMENTS. We have
the right to invest, and in certain cases have invested, in properties and
assets jointly with other persons or entities. Joint ownership of properties may
involve special risks, including the possibility that Crescent's partners or
co-investors might become bankrupt, that those partners or co-investors might
have economic or other business interests or goals which are unlike or
incompatible with the business interests or goals of Crescent, and that those
partners or co-investors may be in a position to take action contrary to the
instructions or requests of Crescent or in opposition to Crescent's policies or
objectives. Joint ownership gives a third party the opportunity to influence the
return Crescent can achieve on some of its investments and may adversely affect
the ability of Crescent to make distributions to its shareholders.
WE DO NOT CONTROL REVENUES FROM OUR HOTEL, BEHAVIORAL HEALTHCARE, REFRIGERATED
STORAGE OR RESIDENTIAL DEVELOPMENT INVESTMENTS
REVENUES FROM HOTELS DEPENDENT ON THIRD-PARTY OPERATORS AND HOSPITALITY
INDUSTRY. We lease our hotel properties to subsidiaries of Crescent Operating,
Inc., except the Omni Austin Hotel, which is leased to a nonaffiliated third
party. Each of those hotel operators, rather than Crescent, is entitled to
exercise all rights of the owner of the hotel it leases. Under the leases, which
expire between 2004 and 2012, the hotel operators will pay Crescent both minimum
rent and a percentage of gross receipts above a fixed amount. As a result, both
successful and unsuccessful operations at the hotel properties will affect
Crescent only if they affect the amount of rent we receive under the hotel
leases. The amount of
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that rent (and whether it exceeds the minimum rent) will depend on the ability
of the hotel operators and the managers of the hotel properties to maintain and
increase the gross receipts from the hotels. Accordingly, the value of your
investment in Crescent will be affected by such factors as changes in general
economic conditions, the level of demand for rooms and related services at the
hotel properties, competition in the hotel industry, changes in the expenses of
operating hotels and other factors relating to the operation of the hotel
properties. We expect to lease any hotel properties that we may acquire in the
future to Crescent Operating or a subsidiary on similar terms.
BEHAVIORAL HEALTHCARE FACILITIES OPERATED BY THIRD PARTIES. We lease our
behavioral healthcare facilities to Charter Behavioral Health Systems, LLC, or
CBHS, which is one of Crescent's two largest tenants in terms of rental revenue.
Crescent Operating owns a 50% interest in CBHS, and Magellan Health Services,
Inc. owns the other 50% interest. Under the terms of the CBHS limited liability
company agreement, Magellan now has the right to make all decisions relating to
the management and operation of CBHS other than certain major decisions that
require the approval of both Crescent Operating and Magellan. Major decisions
include approval of the annual budget and approval of limited liability company
agreement amendments. Because the facilities are leased to CBHS, both successful
and unsuccessful operations at the behavioral healthcare facilities will affect
Crescent only if they affect the amount of rent we receive under the lease with
CBHS. The ability of CBHS to pay its rent will depend on the ability of CBHS and
the managers of the behavioral healthcare facilities to maintain and increase
the gross receipts from the facilities. Risks relating to the behavioral
healthcare facilities include regulation of the healthcare industry and
limitations on government reimbursement programs, seasonal fluctuations in
income and the limited number of replacement tenants. There can be no assurance
that Magellan or Crescent Operating will operate CBHS in a way that will allow
CBHS to continue making rent payments to Crescent.
REFRIGERATED WAREHOUSE INVESTMENT CONTROLLED BY THIRD PARTIES. We own,
through two Crescent subsidiaries, a 39.6% interest in each of three
partnerships. Each of the partnerships owns one or more corporations or limited
liability companies that own an aggregate of approximately 19.2 million square
feet of public refrigerated warehouse space located in 92 refrigerated storage
properties throughout the United States. Crescent Operating owns a .4% interest
in each of the partnerships that own the refrigerated storage properties. The
remaining 60% interest in the partnerships is owned by two subsidiaries of
Vornado Realty Trust. We own approximately 99% of each of the Crescent
subsidiaries that own the interests in these partnerships, and Crescent
Operating owns approximately 1% of each of the Crescent subsidiaries. Crescent
Operating holds all of the voting power in each of the Crescent subsidiaries. We
do not have the authority to control the management or operation of the Crescent
subsidiaries or the partnerships. Under the terms of the existing partnership
agreements for each of the partnerships, Vornado has the right to make all
decisions relating to the management and operation of the partnerships other
than certain major decisions that require the approval of both Crescent
Operating and Vornado. Major decisions include approval of the annual capital
and operating budgets for each partnership, decisions to deviate from the
budgets by 10% or more and additional capital contributions. The partnership
agreement for each of the partnerships provides for a buy-sell arrangement if
Crescent Operating and Vornado cannot agree on any of the major decisions. If
Crescent Operating and Vornado fail to reach agreement on any of the major
decisions prior to November 1, 2000, Vornado may purchase Crescent's interest at
cost, less distributions, plus a 10% per annum return. During the seven years
thereafter, Vornado may set a price for the buy-sell arrangement, and Crescent
Operating then may elect either to sell our interest to Vornado, or to purchase
Vornado's interest, at the designated price. After October 31, 2007, either
Crescent Operating or Vornado may set a price for the buy-sell arrangement, and
the party who did not set the price may elect either to sell its interest to the
other party, or to purchase the other party's interest, at the designated price.
The exercise of the buy-sell arrangement in one partnership requires the
purchaser under the arrangement to purchase the interest of the selling party in
the other partnership on the same terms. The refrigerated storage properties are
operated, pursuant to triple-net master leases that provide for minimum rent
plus a percentage of gross revenues received from customers at the Refrigerated
Storage Properties above a specified amount, by a partnership owned 60% by an
affiliate of Vornado Realty Trust and 40% by Crescent Operating. As a result, we
do not have an interest in, or the ability to control, the partnership that
operates the refrigerated storage properties. Further, both successful and
unsuccessful operations at the refrigerated storage properties will affect
Crescent only if they affect the amount of rent we receive under the leases.
There can be no assurance that Vornado or Crescent Operating will operate the
partnerships or the refrigerated storage properties in a way that will allow the
lessee partnership to continue making rent payments to Crescent or that maximize
the return on our investment.
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LACK OF CONTROL OF RESIDENTIAL DEVELOPMENT CORPORATIONS AND DIVIDENDS. We
do not have the authority to control the management and operation of the
residential development corporations in which we invest. As a result, we do not
have the right to require that funds be distributed to us by any of these
entities at any time. The inability of Crescent to control its access to its
dividends from the residential development corporations increases the likelihood
that such dividends might not be available to Crescent when needed or desirable,
which may adversely affect the value of your investment in Crescent.
DEBT FINANCING CARRIES RISKS OF REFINANCING DIFFICULTIES, LOSS OF MORTGAGED
PROPERTIES, REDUCED ABILITY TO OBTAIN NEW FINANCING AND INCREASES IN INTEREST
DIFFICULTIES IN REFINANCING DEBT COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Our business is subject to risks normally associated with debt
financing. As of December 31, 1998, we had approximately $2.3 billion of debt
outstanding, of which approximately $1.3 billion was secured debt. Our cash flow
could be insufficient to meet required payments of principal and interest, and
we may not be able to refinance our existing indebtedness (which in many cases
requires substantial "balloon" payments of principal at maturity). If we are
able to refinance our debt, there is also a risk that the terms of the
refinancing will not be as favorable as the terms of existing indebtedness. If
principal payments due at maturity cannot be refinanced, extended or paid with
proceeds of other capital transactions, such as new equity capital, our cash
flow will not be sufficient in all years to repay all maturing debt. If
prevailing interest rates or other factors at the time of refinancing (such as
the possible reluctance of lenders to make commercial real estate loans) result
in higher interest rates, increased interest expense would adversely affect cash
flow and our ability to service debt and make distributions to our shareholders.
INABILITY TO MAKE SECURED DEBT PAYMENTS COULD RESULT IN LOSS OF MORTGAGED
PROPERTY. As of December 31, 1998, approximately 40.0% of Crescent's assets were
mortgaged to secure debt. If we cannot meet our secured debt obligations, the
lender could take the collateral and we would lose both the asset and the income
it produces. Foreclosure on mortgaged properties or an inability to refinance
existing indebtedness would likely have a negative impact on our financial
condition and results of operations.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING. Our organizational documents do not limit the level or amount of debt
that we may incur. Our policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of investment opportunities for which
capital is required and the cost of debt in relation to such investment
opportunities, the type of debt available (secured or unsecured), the effect of
additional debt on existing coverage ratios and the maturity of the proposed
debt in relation to maturities of existing debt. Our debt service coverage ratio
for the year ended December 31, 1998 was approximately 3.1. Debt service
coverage is generally calculated as net income plus depreciation and
amortization, plus interest expense, plus extraordinary or non-recurring losses,
minus extraordinary or non-recurring gains, divided by debt service (including
principal and interest payable during the period of calculation). The most
restrictive debt service coverage ratio we are required to maintain as
stipulated by our debt arrangements and calculated as described above is 1.5. In
addition, our credit facility requires a debt service coverage ratio (which is
calculated in a different manner) of 2.5. Under this calculation, our debt
service coverage ratio was 3.5. The degree of leverage could have important
consequences to shareholders, including affecting our ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, development or other general corporate purposes and making us more
vulnerable to a downturn in business or the economy generally. There can be no
assurance that the ratio of indebtedness to market capitalization (or any other
measure of asset value) or the incurrence of debt at any particular level would
not adversely affect the value of your investment in Crescent.
DEFAULT UNDER DEBT COVENANTS COULD PERMIT LENDER TO REQUIRE REPAYMENT. Our
secured debt generally contains customary covenants, such as requirements
relating to the maintenance of the property securing the debt, restrictions on
pledging and creating other liens on the property, restrictions on incurring
additional indebtedness and restrictions on transactions with affiliates. Our
unsecured debt generally contains customary covenants, such as requirements
relating to the maintenance of Crescent's properties, the maintenance of
financial ratios, including leverage and debt coverage ratios, restrictions on
incurring additional indebtedness, restrictions on additional investments and
restrictions on distributions. Our unsecured public
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notes cross-accelerate to other Company debt, and our unsecured credit facility
cross-defaults to other indebtedness of Crescent, which means that a default
under Crescent's other indebtedness may cause a default under the public notes
or credit facility. If we were to breach certain of our debt covenants, the
lender could require us to repay the debt immediately, and, if the debt is
secured, could immediately take possession of the property securing the loan. In
addition, if any other lender declared its loan due and payable as a result of a
default, the holders of our public notes and the lenders under our bank credit
facility might be able to require that those debts be paid immediately. As a
result, any default by Crescent under its debt covenants could have an adverse
effect on Crescent's financial condition and the value of your investment in
Crescent.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW. Of Crescent's
approximately $2.3 billion of debt outstanding as of December 31, 1998,
approximately $1.3 billion, or 56.8%, bore interest at variable rates, including
approximately $660 million outstanding under Crescent's credit facility. We also
may borrow additional money at variable interest rates in the future. Increases
in interest rates would increase our interest expense on our variable rate debt,
which would adversely affect cash flow and our ability to service our debt and
make distributions to shareholders. The weighted average interest rate on
Crescent's variable rate debt was 7.0% as of December 31, 1998. A 10% (70 basis
point) increase in the weighted average interest rate on such variable rate debt
would result in a decrease in net income and cash flows of approximately $9.1
million based on the variable rate debt outstanding as of December 31, 1998, as
a result of the increased interest expense associated with the change in rate.
Conversely, a 10% (70 basis point) decrease in the weighted average interest
rate on such variable rate debt would result in an increase in net income and
cash flows of approximately $9.1 million based on the variable rate debt
outstanding as of December 31, 1998, as a result of the decreased interest
expense associated with the change in rate.
CONFLICTS OF INTEREST COULD RESULT IN DECISIONS NOT IN SHAREHOLDERS' BEST
INTERESTS
COMMON MANAGEMENT AND OWNERSHIP MAY RESULT IN CONFLICTS OF
INTEREST. Certain members of senior management of Crescent are also members of
senior management of the Operating Partnership, Crescent Operating, or both.
Richard E. Rainwater and John C. Goff are, respectively, the Chairman of the
Board and the Vice Chairman of the Board of both Crescent and Crescent
Operating, and Gerald W. Haddock serves as the President, Chief Executive
Officer and a director of Crescent Operating, CREE Ltd., and Crescent. As a
result, Messrs. Rainwater, Goff and Haddock have fiduciary obligations to
Crescent, the Operating Partnership and Crescent Operating that may conflict
with one another. Decisions that are favorable to one of these companies will
not necessarily be favorable to all of them.
Messrs. Rainwater, Goff and Haddock, together with the other management of
Crescent and CREE Ltd. with a rank of Vice President or higher beneficially
owned, as of April 23, 1999, 7,745,576 common shares and 10,940,870 units of
ownership interest in the Operating Partnership, representing an approximately
14.1% equity interest in Crescent. As of April 16, 1999, Messrs. Rainwater, Goff
and Haddock beneficially owned approximately 15.1% of the outstanding common
stock of Crescent Operating through their ownership of 1,740,226 shares of
Crescent Operating common stock, including vested options. The common management
and ownership among these entities may lead to conflicts of interest in
connection with transactions among Crescent, the Operating Partnership or
Crescent Operating, because management of Crescent may not have the same
financial interests as the other shareholders or other investors in Crescent.
Members of management of Crescent who also own shares of Crescent Operating will
have a financial interest in the success of Crescent Operating that will not be
shared by shareholders of Crescent or investors in the Operating Partnership who
do not also own shares of Crescent Operating. There can be no assurance that, as
a result of such conflicts, the value of your investment in Crescent will not be
adversely affected.
These conflicts of interest and the material risks associated with them are
set forth below.
RELATIONSHIP WITH CRESCENT OPERATING. The Company and Crescent Operating
have entered into the Intercompany Agreement, which provides that we will
provide Crescent Operating with a right of first refusal to become the lessee of
any real property that we acquire if (i) we determine that, consistent with
Crescent's status as a REIT, it is required to enter into a master lease
arrangement, (ii) Crescent Operating and Crescent negotiate a mutually
satisfactory lease arrangement and (iii) we determine that Crescent Operating is
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qualified to be the lessee. The Intercompany Agreement provides that we must
provide Crescent Operating with written notice of the lessee opportunity. During
the 30 days following the notice, Crescent Operating has the right to accept the
offer to become a lessee and to negotiate with us on an exclusive basis
regarding the terms and conditions of the lease. If we cannot reach a mutually
satisfactory agreement with Crescent Operating within the 30 days, we may offer
the opportunity to others for one year on terms not more favorable than those
offered to Crescent Operating. After the one-year period, we again must offer
the opportunity to Crescent Operating. We also may offer any investment
opportunity, other than a lessee opportunity, to Crescent Operating. As long as
the Intercompany Agreement is in effect, the certificate of incorporation of
Crescent Operating generally prohibits Crescent Operating from engaging in
activities or making investments that a REIT could make, unless Crescent
Operating first gives the opportunity to Crescent and we elect not to pursue the
opportunity.
Subsidiaries of Crescent Operating are the lessees of each of Crescent's
hotel properties, except the Omni Austin Hotel. Crescent Operating owns a 50%
interest in CBHS, which is the lessee of our behavioral healthcare facilities
and Crescent's largest tenant in terms of base rental revenues. We own all of
the non-voting stock and Crescent Operating owns all of the voting stock of,
and controls, the various companies through which we made our investment in
refrigerated storage properties and our investments in the Desert Mountain and
The Woodlands residential development properties. Crescent Operating also owns
40% of the lessee and operator of the refrigerated storage properties. We expect
to offer Crescent Operating the opportunity to become a lessee and operator of
other assets in accordance with the Intercompany Agreement.
As of March 31, 1999, we had agreed to make available up to $63.8 million
in loans to Crescent Operating, and Crescent Operating had borrowed $54.9
million. In general, these loans are secured and have been made on terms which
our management believes are at least as favorable to us as if the loans had been
made to a third party.
Due to the common management and ownership between us and Crescent
Operating, our management could experience conflicts of interest in the event of
a dispute relating to any of the leases of which Crescent Operating is the
lessee or any loan from us to Crescent Operating, or if there were a default by
Crescent Operating under a lease or a loan arrangement. Conflicts of interest
also could arise in connection with the negotiation, renegotiation or renewal of
any lease or other agreement with Crescent Operating.
NEGOTIATION OF JOINT INVESTMENTS MAY NOT BE ARMS-LENGTH. We have in the
past and may in the future structure investments as joint investments with
Crescent Operating. We could experience potential conflicts of interest in
connection with the negotiation of the terms of such joint investments due to
our ongoing business relationship with Crescent Operating and the common
management and common ownership among Crescent, the Operating Partnership and
Crescent Operating.
COMPANY AND CRESCENT OPERATING COMPETE FOR MANAGEMENT TIME. Messrs.
Rainwater, Goff and Haddock currently are engaged, and will continue to engage,
in the management of other properties and business entities, including Crescent
Operating. Messrs. Rainwater, Goff and Haddock may experience conflicts of
interest in allocating management time, services and functions among Crescent
and the other business activities, including the operation of Crescent
Operating, in which any of them are or may become involved.
INTERESTS OF MAGELLAN HEALTH SERVICES, INC. MAY CONFLICT WITH COMPANY'S
INTERESTS. Mr. Rainwater, along with certain of his affiliates and family
members, owns INTERESTS approximately 19% of the outstanding common stock of
Magellan Health Services, Inc. A subsidiary of Magellan is a 50% owner, along
with Crescent Operating, of CBHS. Mr. Rainwater's spouse, Darla D. Moore, is a
member of the board of directors of Magellan. Through these relationships, Mr.
Rainwater may have the ability to influence decisions of Magellan in a manner
that may benefit Magellan to the detriment of Crescent Operating or Crescent, or
vice versa.
COMPANY AND CRESCENT OPERATING HAVE SAME LEGAL COUNSEL. Shaw Pittman Potts
& Trowbridge, which has served as securities and tax counsel to Crescent, also
serves as special counsel to Crescent Operating in connection with certain
matters. In the future, controversies may arise in which the interests of
Crescent appear to be in conflict with those of Crescent Operating. In that
event, counsel may experience
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conflicts in connection with the representation, and we and Crescent Operating
may choose to retain other counsel in an effort to address the conflicts.
WE MAY NOT BE ABLE TO MANAGE RAPID GROWTH AND ACQUISITION OF SUBSTANTIAL NEW
ASSETS EFFECTIVELY
From the time we commenced operations in May 1994 through March 31, 1999,
we have experienced rapid growth, increasing our total assets by approximately
1,567%. There can be no assurance that we will be able to manage our growth
effectively and the failure to do so may have an adverse effect on the financial
condition and results of operations of Crescent. If such an adverse effect were
great enough, it could adversely affect the value of your investment in
Crescent.
THE MARKET VALUE OF OUR PUBLICLY TRADED SECURITIES CAN BE ADVERSELY AFFECTED BY
A NUMBER OF FACTORS
THE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR PUBLICLY TRADED SECURITIES. The Company has entered into
various private placement transactions whereby units of ownership interest in
the Operating Partnership that are currently exchangeable for common shares of
Crescent on the basis of two shares for each one unit were issued in exchange
for properties or interests in properties. Upon exchange for common shares of
Crescent, those common shares may be sold in the public market pursuant to
registration rights. In addition, we have reserved a number of common shares for
issuance pursuant to our employee benefit plans, and such common shares will be
available for sale from time to time. We also have granted options to purchase
additional common shares to certain of our executive officers, employees, trust
managers and consultants. We can not predict the effect that future sales of
common shares, or the perception that such sales could occur, will have on the
market prices of our equity securities.
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
PUBLICLY TRADED SECURITIES. As with other publicly traded equity securities, the
value of our publicly traded securities depends on various market conditions,
which may change from time to time. Among the market conditions that may affect
the value of our publicly traded securities are the following: the extent of
institutional investor interest in Crescent; the reputation of REITs generally
and the attractiveness of our equity securities in comparison to other equity
securities (including securities issued by other real estate companies); our
financial condition and performance; and general financial market conditions.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
PUBLICLY TRADED SECURITIES. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions and is
secondarily based upon the real estate market value of the underlying assets.
For that reason, shares may trade at prices that are higher or lower than the
net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes, these retained
funds, while increasing the value of our underlying assets, may not
correspondingly increase the market price of our shares. Our failure to meet the
market's expectations with regard to future earnings and cash distributions
would likely adversely affect the market price of our publicly traded
securities.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY
TRADED SECURITIES. One of the factors that investors consider important in
deciding whether to buy or sell shares of a REIT is the distribution rate on
such shares (as a percentage of the price of such shares) relative to market
interest rates. If market interest rates go up, prospective purchasers of REIT
shares may expect a higher distribution rate. Higher interest rates would not,
however, result in more funds for us to distribute and, in fact, would likely
increase our borrowing costs and potentially decrease funds available for
distribution. Thus, higher market interest rates could cause the market price of
our publicly traded securities to go down.
GENERAL REAL ESTATE RISKS AFFECTING CRESCENT
The following paragraphs describe the material factors influencing the
general real estate risks to which we are subject.
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WE CANNOT CONTROL CERTAIN FACTORS AFFECTING PERFORMANCE AND VALUE. The
economic performance and value of our real estate assets will be subject to the
risks described below that are normally associated with changes in national,
regional and local economic and market conditions. Our properties are located
principally in the metropolitan areas of Dallas/Fort Worth and Houston, Texas.
The economic condition of each of these markets is dependent on a limited number
of industries, and an economic downturn in some or all these industries could
adversely affect Crescent's performance in that market. These factors may
adversely affect the ability of the tenants to pay rent. Other local economic
conditions that may affect the performance and value of Crescent's properties
include excess supply of office space and competition for tenants, including
competition based on rental rates, attractiveness and location of the property
and the quality of maintenance and management services. In addition, other
factors may affect the performance and value of a property adversely, including
changes in laws and governmental regulations (including those governing usage,
zoning and taxes), changes in interest rates (including the risk that increased
interest rates may result in decreased sales of lots in any residential
development property) and the availability of financing. Adverse changes in any
of these factors, each of which is beyond the control of Crescent, could reduce
the income that we receive from the properties, and adversely affect the value
of your investment in Crescent.
REAL ESTATE INVESTMENTS ARE ILLIQUID. Because real estate investments are
relatively illiquid, we may not be able to vary our portfolio promptly in
response to changes in economic or other conditions. In addition, economic
factors that might cause the income from our real estate portfolio to decrease
generally will not reduce significant expenditures, such as debt service, if
any, real estate taxes and operating and maintenance costs. Our inability, for
these or other reasons, to respond quickly to adverse changes in the performance
of our investments could have an adverse effect on the value of your investment
in Crescent.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY. Under various
federal, state and local laws, ordinances and regulations, we may be required to
investigate and clean up certain hazardous or toxic substances released on or in
properties we own or operate, and also may be required to pay other costs
relating to hazardous or toxic substances. This liability may be imposed without
regard to whether we knew about the release of these types of substances or were
responsible for their release. The presence of contamination or the failure to
remediate properly contaminations at any of Crescent's properties may adversely
affect our ability to sell or lease the properties or to borrow using the
properties as collateral. The costs or liabilities could exceed the value of the
affected real estate. We have not been notified by any governmental authority,
however, of any non-compliance, liability or other claim in connection with any
of our properties, and we are not aware of any other environmental condition
with respect to any of our properties that management believes would have a
material adverse effect on Crescent's business, assets or results of operations
taken as a whole.
The uses of any of Crescent's properties prior to our acquisition of the
property and the building materials used at the property are among the
property-specific factors that will affect how the environmental laws are
applied to Crescent's properties. In general, before we purchased each of our
properties, independent environmental consultants conducted or updated Phase I
environmental assessments, which generally do not involve invasive techniques
such as soil or ground water sampling. None of these Phase I assessments or
updates revealed any materially adverse environmental condition relating to any
particular property not known to us or the independent consultants preparing the
assessments. There can be no assurance, however, that environmental liabilities
have not developed since these environmental assessments were prepared, or that
future uses or conditions, including changes in applicable environmental laws
and regulations, will not result in imposition of environmental liability. If we
were subject to environmental liability, the liability could adversely affect
the value of your investment in Crescent.
CRESCENT COULD LOSE ITS QUALIFICATION AS A REIT
Crescent intends to continue to operate in a manner that allows it to meet
the requirements for qualification as a REIT under the Internal Revenue Code of
1986, as amended. A REIT generally is not taxed at the corporate level on income
it distributes to its shareholders, as long as it distributes at least 95
percent of its income to its shareholders annually and satisfies certain other
highly technical and complex requirements. Unlike many REITs, which tend to make
only one or two types of real estate investments, Crescent invests in a broad
range of real estate products. Several of Crescent's investments also are more
complicated than those
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of other REITs. As a result, Crescent is likely to encounter a greater number of
interpretative issues under the REIT qualification rules, and more issues which
lack clear guidance, than are other REITs. Crescent, as a matter of policy,
consults with outside tax counsel in structuring its new investments in an
effort to satisfy the REIT qualification rules. Shaw Pittman Potts & Trowbridge
has given Crescent an opinion stating that Crescent qualified as a REIT under
the Internal Revenue Code for its taxable years ending on or before December 31,
1998, that is organized in conformity with the requirements for qualification as
a REIT under the Internal Revenue Code and that its proposed manner of operation
will permit it to continue to meet the requirements for qualification as a REIT.
This opinion is based on representations made by Crescent and the Operating
Partnership as to factual matters and on existing law, which is subject to
change, both retroactively and prospectively, and to possibly different
interpretations. Shaw Pittman's opinion also is not binding on either the
Internal Revenue Service or the courts.
Crescent must meet the requirements of the Internal Revenue Code in order
to qualify as a REIT now and in the future, so it is possible that Crescent will
not continue to qualify as a REIT in the future. The laws and regulations
governing federal income taxation are the subject of frequent review and
amendment, and proposed or contemplated changes in the laws or regulations may
affect Crescent's ability to qualify as a REIT and the manner in which it
conducts its business. If Crescent fails to qualify as a REIT for federal income
tax purposes, it would not be allowed a deduction for distributions to
shareholders in computing taxable income and would be subject to federal income
tax at regular corporate rates. In addition to these taxes, Crescent may be
subject to the federal alternative minimum tax. Unless Crescent is entitled to
relief under certain statutory provisions, Crescent could not elect to be taxed
as a REIT for four taxable years following the year during which Crescent was
first disqualified. Therefore, if Crescent loses its REIT status, it could be
required to pay significant income taxes, which would reduce its funds available
for investments or for distributions to its shareholders. This would likely
adversely affect the value of your investment in Crescent. In addition, Crescent
would no longer be required by law or its operating agreements to make any
distributions to its shareholders.
MARKET PRICE RISK FROM TRANSACTIONS WITH AFFILIATES OF UBS, AG
On August 12, 1997, we entered into two transactions with affiliates of the
predecessor of UBS, AG, which are collectively referred to as UBS. In one
transaction, we sold 4,700,000 common shares to UBS for approximately $148
million and received approximately $145 million in net proceeds. In the other
transaction, we entered into a forward share purchase agreement with UBS. On
August 11, 1998, we paid a fee of approximately $3.0 million to UBS in
connection with the exercise by Crescent and UBS of the right to extend the term
of the forward share purchase agreement until August 12, 1999. Under the forward
share purchase agreement, we are committed to settle our obligations under the
agreement by purchasing 4,700,000 common shares from UBS by August 12, 1999. The
price to be paid by Crescent (the "Settlement Price") will be determined on the
date we settle the forward share purchase agreement and will be calculated based
on the gross proceeds received by Crescent from the original issuance of the
common shares, plus a forward accretion component equal to LIBOR plus 75 basis
points, minus an adjustment for Crescent's distributions paid to UBS. The
forward accretion component represents a guaranteed rate of return to UBS.
We may settle the forward share purchase agreement in cash or common
shares, at our option, on or before August 12, 1999. The Company currently
intends to fulfill its settlement obligations in cash, which will decrease our
liquidity. Accordingly, we will evaluate our sources of capital and the
potential uses of our capital at the time that settlement is required under the
forward share purchase agreement or at such earlier time as we determine to
settle the agreement.
In the event that we elect to settle in common shares, UBS will sell, on
behalf of Crescent, a sufficient number of common shares to realize the
Settlement Price. If, as a result of a decrease in the market price of the
common shares, the number of common shares required to be sold to achieve the
Settlement Price is greater than the number of common shares previously issued
to UBS, we will deliver additional common shares to UBS. In contrast, if, as a
result of an increase in the market price of the common shares, such number of
common shares is less than the number of common shares previously issued to UBS,
UBS will deliver common shares to Crescent.
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On a quarterly basis, if the number of common shares previously delivered
to UBS is not sufficient to permit UBS to realize the Settlement Price through
the sale of such common shares, we must deliver additional common shares to UBS.
On November 20, 1998, we issued an additional 1,852,162 common shares to UBS
and, on April 30, 1999, we issued an additional 747,598 common shares to UBS.
To the extent that we are obligated, as a result of a decline in the market
price of the common shares, to issue additional common shares in the future
under the terms of the forward share purchase agreement, the issuance will
reduce Crescent's net income per common share and net book value per common
share.
SHAREHOLDERS' ABILITY TO EFFECT CHANGES IN CONTROL OF CRESCENT IS LIMITED
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS COULD INHIBIT CHANGES IN
CONTROL. Certain provisions of our Declaration of Trust and Bylaws may delay or
prevent a change in control of Crescent or other transaction that could provide
the shareholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in the best interest of our security holders.
These include a staggered Board of Trust Managers and the Ownership Limit
described below. In addition, any future series of preferred shares may have
certain voting provisions that could delay or prevent a change of control or
other transaction that might involve a premium price or otherwise be good for
our security holders. The Declaration of Trust also establishes special
requirements with respect to "business combinations" (including certain
issuances of equity securities) between Crescent and an "interested shareholder"
of Crescent, and the procedure for obtaining voting rights with respect to
"control shares" of Crescent acquired in a control share acquisition.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES. To remain qualified
as a REIT for federal income tax purposes, not more than 50% in value of
Crescent's outstanding shares may be owned, directly or indirectly, by five or
fewer individuals (as defined in the federal income tax laws applicable to
REITs) at any time during the last half of any taxable year, and Crescent's
outstanding shares must be beneficially owned by 100 or more persons at least
335 days of a taxable year. To facilitate maintenance of our REIT qualification,
Crescent's Declaration of Trust, subject to certain exceptions, prohibits
ownership by any single shareholder of more than 8.0% of Crescent's issued and
outstanding common shares or more than 9.9% of Crescent's issued and outstanding
preferred shares. In addition, the Declaration of Trust prohibits ownership by
Mr. Rainwater, the Chairman of the Board of Trust Managers of Crescent, together
with certain of his affiliates or relatives, of more than 8.0% of Crescent's
issued and outstanding common shares. We refer to these limits collectively as
the "Ownership Limit." Under certain circumstances, Crescent's Declaration of
Trust permits the Board of Trust Managers to increase the Ownership Limit with
respect to any common shareholder, other than Mr. Rainwater, together with his
affiliates and relatives. Further, any transfer of shares may be null and void
if it causes a person to violate the Ownership Limit, and the intended
transferee or holder will acquire no rights in the shares. Those shares will
automatically convert into excess shares of Crescent, and the shareholder's
rights to distributions and to vote will terminate. The shareholder would have
the right to receive payment of the purchase price for the shares and certain
distributions upon liquidation of Crescent. Excess shares will be subject to
repurchase by Crescent at its election. While the Ownership Limit helps preserve
Crescent's status as a REIT, it could also delay or prevent any person or small
group of persons from acquiring, or attempting to acquire, control of Crescent
and, therefore, could adversely affect our shareholders' ability to realize a
premium over the then-prevailing market price for their shares.
CRESCENT'S BOARD CAN CHANGE POLICIES WITHOUT SHAREHOLDER APPROVAL
The Board of Trust Managers provides guidance to the senior management of
Crescent regarding our operating and financial policies and strategies,
including Crescent's policies and strategies relating to acquisitions, growth,
operations, indebtedness, capitalization and distributions. These policies and
strategies may be changed from time to time without shareholder approval.
Changes in Crescent's policies and strategies could adversely affect the value
of your investment in Crescent. In addition, we have the right and intend to
acquire additional real estate assets consistent with our investment strategies
and policies without shareholder approval.
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OUR SUCCESS DEPENDS ON KEY PERSONNEL
We are dependent on the efforts of senior management personnel of Crescent
and CREE Ltd. These senior management personnel include Richard E. Rainwater,
Chairman of the Board of Trust Managers of Crescent, John C. Goff, Vice Chairman
of the Board of Trust Managers of Crescent, and Gerald W. Haddock, President,
Chief Executive Officer and Trust Manager of Crescent, and President, Chief
Executive Officer and sole Director of CREE Ltd. While we believe that it would
be possible to find replacements for these key executives, the loss of their
services could adversely affect the operations of Crescent. Mr. Rainwater has no
employment agreement with Crescent and, therefore, is not obligated to remain
with Crescent for any specified period of time. Each of Messrs. Goff and Haddock
has entered into an employment agreement with Crescent, but only for one year
ending in April 1999. Each of Messrs. Rainwater, Goff and Haddock has entered
into a noncompetition agreement with Crescent, which prohibits them from
engaging in many of the types of activities in which Crescent currently engages
or may engage in the future. Neither Crescent nor CREE Ltd. has obtained key-man
insurance for any of their senior management personnel, which means that
Crescent will not receive any cash amounts as a result of the disability or
death of a member of senior management.
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SIGNATURES
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.
CRESCENT REAL ESTATE EQUITIES COMPANY
Dated: May 14, 1999
By: /s/ BRUCE A. PICKER
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Bruce A. Picker
Vice President and Treasurer
