ITEM 1. BUSINESS
THE COMPANY
Crescent Real Estate Equities Limited Partnership, a Delaware limited partnership ("CREELP" and, together with its direct and indirect ownership interests in limited partnerships, corporations and limited liability companies, the "Operating Partnership"), was formed under the terms of a limited partnership agreement dated February 9, 1994. The Operating Partnership is controlled by Crescent Real Estate Equities Company, a Texas real estate investment trust (the "Company"), through the Company's ownership of all of the outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation ("CREE, Ltd."), which owns an approximately 1% general partner interest in the Operating Partnership. In addition, the Company owns an approximately 89% limited partner interest in the Operating Partnership, with the remaining approximately 10% limited partner interest held by other limited partners. The Operating Partnership directly or indirectly owns substantially all of the economic interests in seven separate single purpose limited partnerships (all formed for the purpose of obtaining securitized debt), with the remaining interests owned indirectly by the Company through seven separate corporations, each of which is a wholly owned subsidiary of CREE, Ltd. and a general partner of one of the seven limited partnerships.
All of the limited partners of the Operating Partnership other than the Company own, in addition to limited partner interests, units. Each unit entitles the holder to exchange the unit (and the related limited partner interest) for two common shares of the Company or, at the Company's option, an equivalent amount of cash. For purposes of this report, the term "unit" or "unit of partnership interest" refers to the limited partner interest and, if applicable, related units held by a limited partner. Accordingly, the Company's approximately 89% limited partner interest has been treated as equivalent, for purposes of this report, to 60,160,990 units, and the remaining approximately 10% limited partner interest has been treated as equivalent, for purposes of this report, to 6,975,952 units. In addition, the Company's 1% general partner interest has been treated as equivalent, for purposes of this report, to 607,687 units.
As of December 31, 1999, the Operating Partnership's assets and operations were composed of five major investment segments:
o Office and Retail Segment;
o Hospitality Segment;
o Residential Development Segment;
o Temperature-Controlled Logistics Segment; and
o Behavioral Healthcare Segment.
Within these segments, the Operating Partnership owned directly or indirectly the following real estate assets (the "Properties") as of December 31, 1999:
o OFFICE AND RETAIL SEGMENT consisted of 89 office properties (collectively referred to as the "Office Properties") located in 31 metropolitan submarkets in nine states, with an aggregate of approximately 31.8 million net rentable square feet, and seven retail properties (collectively referred to as the "Retail Properties") with an aggregate of approximately 0.8 million net rentable square feet. See "Industry Segments - Office and Retail Segment - Recent Developments - Property Dispositions" for a description of the disposition of six of the Office Properties and four of the Retail Properties subsequent to December 31, 1999.
o HOSPITALITY SEGMENT consisted of five upscale business class hotels with a total of 2,168 rooms, three luxury resorts and spas with a total of 516 rooms and two Canyon Ranch destination fitness resorts and spas that can accommodate up to 462 guests daily (collectively referred to as the "Hotel Properties"). All Hotel Properties, except the Omni Austin Hotel, are leased to subsidiaries of Crescent Operating, Inc. ("COI"). The Omni Austin Hotel is leased to HCD Austin Corporation.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating Partnership's ownership of real estate mortgages and non-voting common stock representing interests ranging from 40% to 95% in five unconsolidated residential development corporations (collectively referred to as the "Residential Development Corporations"), which in turn, through joint venture or partnership arrangements, currently own 14 residential development properties (collectively referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT (FORMERLY THE REFRIGERATED STORAGE SEGMENT) consisted of the Operating Partnership's indirect 39.6% interest in three partnerships (collectively referred to as the "Temperature-Controlled Logistics Partnerships"), each of which owns one or more corporations or limited liability companies (collectively referred to as the "Temperature-Controlled Logistics Corporations") which, as of December 31, 1999, directly or indirectly owned 89 temperature-controlled logistics properties (collectively referred to as the "Temperature-Controlled Logistics Properties") with an aggregate of approximately 428.3 million cubic feet (17.0 million square feet). This segment was restructured in 1999, and the new ownership structure was effective as of March 12, 1999.
o BEHAVIORAL HEALTHCARE SEGMENT consisted of 88 properties in 24 states (collectively referred to as the "Behavioral Healthcare Properties") that were leased to Charter Behavioral Health Systems, LLC ("CBHS") and its subsidiaries. CBHS was formed to operate the behavioral healthcare business located at the Behavioral Healthcare Properties and is owned 10% by a subsidiary of Magellan Health Services, Inc. ("Magellan") and 90% by COI and an affiliate of COI. On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. Of the 88 Behavioral Healthcare Properties, 37 are designated as the "Core Properties" for the conduct of CBHS's business and remain subject to the master lease. Since December 31, 1999, CBHS has ceased or is planning to cease operations at the remaining 51 Behavioral Healthcare Properties which are designated as the "Non-Core Properties," and the Operating Partnership is actively marketing these Properties for sale. From January 1 through March 24, 2000, the Operating Partnership sold 11 of these Behavioral Healthcare Properties and entered into contracts or letters of intent to sell an additional six of these Behavioral Healthcare Properties. The Operating Partnership intends to sell the remaining 37 Core Behavioral Healthcare Properties or lease them to new tenants. See "Industry Segments - Behavioral Healthcare Segment" for a description of the current status of CBHS and the Operating Partnership's investment in the Behavioral Healthcare Properties.
See Note 4. Segment Reporting of Item 8. Financial Statements and Supplementary Data for a table showing revenues and funds from operations for the years ended December 31, 1999, 1998 and 1997 and identifiable assets for each of these investment segments at December 31, 1999 and 1998.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Operating Partnership's business objective is to provide its unitholders with attractive but predictable growth in cash flow and underlying asset value. In addition, the Operating Partnership seeks to create value by distinguishing itself as the leader in each of its investment segments through customer service and asset quality.
STRATEGIC PLAN
In August 1999, the Operating Partnership announced a strategic plan for the years 2000 - 2002. Under the plan, the Operating Partnership is focused, during this period on increasing:
o net asset value per share;
o funds from operations and cash available for distribution per share; and
o corresponding growth rates in net asset value per share, funds from operations and cash available for distribution per share.
The strategic plan also includes short-term goals designed to meet these objectives. These short-term goals are to:
o resolve the issues surrounding the Behavioral Healthcare Segment;
o refinance 2000 and 2001 debt maturities and reduce exposure to variable-rate debt;
o dispose of non-strategic or non-core assets within the investment segments;
o market certain of the Office Properties for joint ventures; and
o engage the Company in a share repurchase program.
OPERATING AND FINANCING STRATEGIES
Based on management's assessment of current conditions in the real estate and financial markets, the Operating Partnership will focus in 2000 on growth in revenues from its existing Property portfolio. The Operating Partnership seeks to enhance its operating performance and financial position by:
o continuing to operate the Office Properties as long-term investments, providing exceptional tenant services, improving occupancies, increasing in-place rents to market rates and seeking to increase revenues by providing tenants with a broad spectrum of additional services;
o achieving a high tenant retention rate at the Office Properties through quality service, individualized attention to its tenants and active preventive maintenance programs;
o seeking to sell the non-core, non-strategic Office Properties;
o seeking to sell, in cooperation with CBHS, the Non-Core Behavioral Healthcare Properties, and sell or lease the Core Behavioral Healthcare Properties;
o seeking, over the next two years, to reduce the Operating Partnership's investment in its upscale business class Hotel Properties;
o optimizing the use of various sources of capital, including the refinancing of existing debt and reducing exposure to variable-rate debt;
o entering into venture arrangements with private equity partners under arrangements where the Operating Partnership would hold a minority interest in the Properties and would continue to lease and manage the Properties;
o repurchasing and retiring up to $500 million of the Company's common shares over the next two years, which would decrease the Company's limited partner interest in the Operating Partnership, resulting in an increase in net income per unit and book value per unit;
o entering into arrangements with other businesses, such as venture capital and technology firms, to exchange office space, which is difficult to lease due to location, size, or configuration, for an equity interest in those businesses; and
o empowering management and employing compensation plans which are designed to continue to attract and retain the best talent available and are aligned with the interests of the Operating Partnership's unitholders.
INVESTMENT STRATEGIES
In 2000, the Operating Partnership intends to focus primarily on assessing investment opportunities within each of its existing investment segments that are consistent with its long-term investment strategy of acquiring value investments at a significant discount to replacement cost in an environment where the Operating Partnership believes values will appreciate to or above replacement cost, and acquiring investments offering growth in cash flow after applying management skills, renovation and expansion capital, and a strategic vision.
The Operating Partnership's investment strategies include:
o capitalizing on the luxury resorts and spas business through (a) the formation of an investment partnership headed by one of the Operating Partnership's former executives, which will acquire new resorts that can be converted into luxury spa destinations and operated under the "Sonoma Spa Resorts" brand and (b) investments in a management company which will operate and manage the property or assets of some of the Operating Partnership's Hotel Properties as well as any new resort properties acquired by the investment partnership;
o expansion of the Canyon Ranch franchise and capitalizing on the "Canyon Ranch" brand through the Operating Partnership's indirect approximately 20% equity ownership (the Operating Partnership has the opportunity to acquire an additional approximately 10% equity ownership through July 2000) in a management company that has all rights to develop and manage any new Canyon Ranch resorts or spa concepts, both in the United States and internationally;
o seeking, within the Office Property segment, to provide tenants a broad spectrum of services, such as telecommunication services, by providing the vendors of those services with access to the tenants of the Operating Partnership's Office Property portfolio in exchange for potential royalty income and an equity investment;
o seeking private equity partners for joint ventures, in which the Operating Partnership would invest for selected office property development; and
o continuing to monetize current development through the Operating Partnership's five Residential Development Corporations, and reinvesting in other land developments as capital is returned.
EMPLOYEES
As of March 24, 2000, the Operating Partnership had 634 employees. None of these employees are covered by collective bargaining agreements. The Operating Partnership considers its employee relations to be good.
ENVIRONMENTAL MATTERS
The Operating Partnership and its Properties are subject to a variety of federal, state and local environmental, health and safety laws, including:
o Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA");
o Resource Conservation & Recovery Act;
o Federal Clean Water Act;
o Federal Clean Air Act;
o Toxic Substances Control Act; and
o Occupational Safety & Health Act.
The application of these laws to a specific property that the Operating Partnership owns will be dependent on a variety of property-specific circumstances, including the former uses of the property and the building materials used at each property. Under certain environmental laws, principally CERCLA, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at the property. They may also be held liable to a governmental entity or third parties for property damage and for investigation and clean up costs such parties incur in connection with the contamination, whether or not the owner or operator knew of, or was responsible for, the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The owner or operator of a site also may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site. Such costs or liabilities could exceed the value of the affected real estate. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral.
Compliance by the Operating Partnership with existing environmental, health and safety laws has not had a material adverse effect on the Operating Partnership's financial condition and results of operations, and management does not believe it will have such an impact in the future. In addition, the Operating Partnership has not incurred, and does not expect to incur any material costs or liabilities due to environmental contamination at Properties it currently owns or has owned in the past. However, the Operating Partnership cannot predict the impact of new or changed laws or regulations on its current Properties or on properties that it may acquire in the future. Except as set forth below, the Operating Partnership has no current plans for substantial capital expenditures with respect to compliance with environmental, health and safety laws.
INDUSTRY SEGMENTS
OFFICE AND RETAIL SEGMENT
OWNERSHIP STRUCTURE
As of December 31, 1999, the Operating Partnership owned 89 Office Properties located in 31 metropolitan submarkets in nine states, with an aggregate of approximately 31.8 million net rentable square feet and seven Retail Properties with an aggregate of approximately 0.8 million net rentable square feet. The Operating
Partnership, as lessor, has retained substantially all of the risks and benefits of ownership of the Office and Retail Properties and accounts for its leases as operating leases. Additionally, the Operating Partnership provides management and leasing services for substantially all of its Office and Retail Properties. From January 1 through March 24, 2000, the Operating Partnership sold six of the Office Properties and four of the Retail Properties. See "Recent Developments - Property Dispositions" below.
See Item 2.
ITEM 2. PROPERTIES
The Operating Partnership considers all of its Properties to be in good condition, well-maintained and suitable and adequate to carry on the Operating Partnership's business.
OFFICE PROPERTIES
As of December 31, 1999, the Operating Partnership owned 89 Office Properties located in 31 metropolitan submarkets in nine states with an aggregate of approximately 31.8 million net rentable square feet. The Operating Partnership's Office Properties are located primarily in the Dallas/Fort Worth and Houston, Texas metropolitan areas. As of December 31, 1999, the Operating Partnership's Office Properties in Dallas/Fort Worth and Houston represented an aggregate of approximately 72% of its office portfolio based on total net rentable square feet (39% for Dallas/Fort Worth and 33% for Houston).
In pursuit of management's objective to dispose of non-strategic and non-core assets, the Operating Partnership was actively marketing for sale its wholly owned interests in 10 Office Properties at December 31, 1999. The Office Properties targeted for disposition represented an aggregate of approximately 2.9 million net rentable square feet in Dallas, Texas; Denver, Colorado; New Orleans, Louisiana; and Omaha, Nebraska. As of March 24, 2000, the Operating Partnership completed the sale of six of the 10 Office Properties. The Office Properties sold were: The Amberton, Concourse Office Park, The Meridian, and Walnut Green Office Properties located in Dallas, Texas; the Energy Centre Office Property located in New Orleans, Louisiana; and the Central Park Plaza Office Property located in Omaha, Nebraska.
In addition, the Operating Partnership has entered into contracts relating to the sale of two additional Office Properties; the AT&T Building located in Denver, Colorado; and One Preston Park located in Dallas, Texas. The sales of these Properties are expected to close by the end of the second quarter of 2000. Management expects to complete any economically justified sales of the remaining two Office Properties (Valley Centre located in Dallas, Texas; and 1615 Poydras located in New Orleans, Louisiana) by the end of the second quarter of 2000. Management is currently in the process of evaluating the bids for the remaining Properties to determine their economic viability as well as the credit-worthiness of the potential purchasers and their ability to close the transactions. The disposition of these Office Properties remains subject to the negotiation of acceptable terms and other customary conditions.
The Woodlands Commercial Properties Company, L.P., owned by the Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for sale certain office/venture tech properties located in The Woodlands, which includes the Operating Partnership's 12 Office Properties located in The Woodlands with an aggregate of approximately 0.8 million net rentable square feet. The sale of The Woodlands Office Properties is expected to close in the second quarter of 2000.
OFFICE PROPERTIES TABLES
The following table shows, as of December 31, 1999, certain information about the Operating Partnership's Office Properties. Based on rental revenues from office and retail leases in effect as of December 31, 1999, no single tenant accounted for more than 4% of the Operating Partnership's total Office and Retail segment rental revenues for 1999.
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(1) Calculated based on base rent payable as of December 31, 1999, without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP and including adjustments for expenses payable by or reimbursable from tenants.
(2) The Operating Partnership has a 49.5% limited partner interest and a 0.5% general partner interest in the partnership that owns Bank One Center.
(3) The Operating Partnership owns the principal economic interest in Trammell Crow Center through its ownership of fee simple title to the Property (subject to a ground lease and a leasehold estate regarding the building) and two mortgage notes encumbering the leasehold interests in the land and building.
(4) The Operating Partnership owns the principal economic interest in Spectrum Center through an interest in Spectrum Mortgage Associates L.P., which owns both a mortgage note secured by Spectrum Center and the ground lessor's interest in the land underlying the office building.
(5) Leases have been executed at certain Office Properties but had not commenced as of December 31, 1999. If such leases had commenced as of December 31, 1999, the percent leased for all Office Properties would have been 93%. The total percent leased for these Properties would have been as follows: Trammell Crow Center - 89%; Stanford Corporate Center - 92%; Palisades Central II - 69%; Palisades Central I - 95%; Valley Centre - 90%; Greenway Plaza Office Portfolio- 96%; 1800 West Loop South - 65%; Ptarmigan Place - 100%; AT&T Building - 89%; 55 Madison - 93%; Energy Centre - 86%; Miami Center - 87%; Datran Center - 95%; Washington Harbour - 100%; and Chancellor Park - 94%.
(6) The Operating Partnership has a 75% limited partner interest and an approximate 10% indirect general partner interest in the partnership that owns the 12 Office Properties that comprise The Woodlands Office Properties.
(7) The Property was primarily occupied by a major tenant until June 1999, at which time the tenant made a payment of $4.7 million in connection with its termination of the lease. Simultaneously with the lease termination, the Operating Partnership leased approximately 41% of the vacated space to a new tenant pursuant to a lease which commenced September 1, 1999. An additional 21% of the vacated space was leased and commenced prior to December 31, 1999.
(8) As of December 31, 1999, the Operating Partnership owned the principal economic interest in Three Westlake Park through its ownership of a mortgage note secured by Three Westlake Park. Effective January 7, 2000, the Property was conveyed to the Operating Partnership by a deed in lieu of foreclosure, and as a result, the Operating Partnership now owns Three Westlake Park in fee simple.
(9) The Operating Partnership has a 1% general partner interest and a 49% limited partner interest in the partnership that owns 301 Congress Avenue.
(10) The Operating Partnership owns Chancellor Park through its ownership of a mortgage note secured by the building and through its direct and indirect interests in the partnership which owns the building.
(11) The weighted average full-service rental rate per square foot calculated based on base rent payable for Operating Partnership Office Properties as of December 31, 1999, giving effect to free rent and scheduled rent increases that would be taken into consideration under GAAP and including adjustments for expenses payable by or reimbursed from tenants is $20.38.
The following table provides information, as of December 31, 1999, for the Operating Partnership's Office Properties by state, city, and submarket.
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(1) NRA means net rentable area in square feet.
(2) Market information is for Class A office space under the caption "Class A Office Properties" and market information is for Class B office space under the caption "Class B Office Properties." Sources are CoStar/Jamison, (for the Dallas CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas, Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central Expressway, Fort Worth CBD and the New Orleans CBD submarkets), The Baca Group (for the Houston Richmond-Buffalo Speedway, CBD and West Loop/Galleria and Katy Freeway submarkets), The Woodlands Operating Company, L.P. (for The Woodlands submarket), CB Richard Ellis (for the Austin CBD, Northwest and Southwest submarkets), Cushman & Wakefield of Colorado, Inc. (for the Denver Cherry Creek, CBD and DTC submarkets), Turner Commercial Research (for the Colorado Springs market), Grubb and Ellis Company (for the Phoenix Downtown/CBD, Camelback Corridor and San Francisco South of Market/CBD submarkets), Grubb and Ellis Company and the Company (for the Washington D.C. Georgetown submarket), Grubb and Ellis/Pacific Realty Group, Inc. (for the Omaha CBD submarket), Building Interests, Inc. (for the Albuquerque CBD submarket), RealData Information Systems, Inc. (for the Miami CBD and South Dade/Kendall submarkets) and CoStar/John Burnham & Company (for the San Diego UTC submarket).
(3) Represents full-service quoted market rental rates. These rates do not necessarily represent the amounts at which available space at the Office Properties will be leased. The weighted average subtotals and total are based on total net rentable square feet of Operating Partnership Office Properties in the submarket.
(4) For Office Properties, represents weighted average rental rates per square foot quoted by the Operating Partnership as of December 31, 1999, based on total net rentable square feet of Operating Partnership Office Properties in the submarket, adjusted, if necessary, based on management estimates, to equivalent full-service quoted rental rates to facilitate comparison to weighted average Class A or Class B, as the case may be, quoted submarket rental rates per square foot. These rates do not necessarily represent the amounts at which available space at the Operating Partnership's Office Properties will be leased.
(5) Calculated based on base rent payable for Operating Partnership Office Properties in the submarket as of December 31, 1999, without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP and including adjustments for expenses payable by or reimbursed from tenants, divided by total net rentable square feet of Operating Partnership Office Properties in the submarket.
(6) Leases have been executed at certain Properties in these submarkets but had not commenced as of December 31, 1999. If such leases had commenced as of December 31, 1999, the percent leased for all Office Properties in the Operating Partnership's submarkets would have been 93%. The total percent leased for these Class A Operating Partnership submarkets would have been as follows: Dallas CBD - 86%; Dallas Richardson/Plano - 88%; Houston Richmond - Buffalo Speedway - 96%; Miami CBD - 87%; Miami South Dade/Kendall - 95%; Washington D.C. Georgetown - 100%; and San Diego UTC - 94%.
(7) The weighted average full-service rental rate per square foot calculated based on base rent payable for Operating Partnership Office Properties as of December 31, 1999, giving effect to free rent and scheduled rent increases that would be taken into consideration under GAAP and including adjustments for expenses payable by or reimbursed from tenants is $20.38.
The following table shows, as of December 31, 1999, the principal businesses conducted by the tenants at the Operating Partnership's Office Properties, based on information supplied to the Operating Partnership from the tenants.
- ----------------- (1) Includes legal, accounting, engineering, architectural, and advertising services.
(2) Includes banking, title and insurance, and investment services.
(3) Of the 19% of energy tenants at the Operating Partnership's Office Properties, 63% are located in Houston, 24% are located in Dallas, 7% are located in Denver and 6% are located in New Orleans. Of the 63% of energy tenants located in Houston (approximately 3.7 million square feet), 66% (approximately 2.4 million square feet) are obligated under long-term leases (expiring in 2004 or later).
(4) Includes construction, real estate, transportation and other industries.
AGGREGATE LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following tables show schedules of lease expirations for leases in place as of December 31, 1999 for the Operating Partnership's total Office Properties and for Dallas and Houston, Texas, individually, for each of the 10 years beginning with 2000, assuming that none of the tenants exercises or has exercised renewal options.
TOTAL OFFICE PROPERTIES
- ----------------- (1) Calculated based on base rent payable under 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 GAAP and including adjustments for expenses payable by or reimbursable from tenants based on current levels.
(2) As of December 31, 1999, leases have been signed for approximately 1,655,276 net rentable square feet (including renewed leases and leases of previously unleased space) commencing in 2000.
(3) Reconciliation to the Operating Partnership's total Office Property net rentable area is as follows:
DALLAS OFFICE PROPERTIES
- ------------------ (1) Calculated based on base rent payable under 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 GAAP and including adjustments for expenses payable by or reimbursable from tenants based on current levels.
(2) As of December 31, 1999, leases have been signed for approximately 738,506 net rentable square feet (including renewed leases and leases of previously unleased space) commencing in 2000.
HOUSTON OFFICE PROPERTIES
- ------------------------ (1) Calculated based on base rent payable under 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 GAAP and including adjustments for expenses payable by or reimbursable from tenants based on current levels.
(2) As of December 31, 1999, leases have been signed for approximately 469,939 net rentable square feet (including renewed leases and leases of previously unleased space) commencing in 2000.
RETAIL PROPERTIES
As of December 31, 1999, the Operating Partnership owned seven Retail Properties, which in the aggregate contain approximately 779,000 net rentable square feet. Four of the Retail Properties, The Woodlands Retail Properties, with an aggregate of approximately 358,000 net rentable square feet, were located in The Woodlands, a master-planned development located 27 miles north of downtown Houston, Texas. On January 5, 2000, the sale of The Woodlands Retail Properties was completed. Two of the Retail Properties, Las Colinas Plaza, with approximately 135,000 net rentable square feet, and The Crescent Atrium with approximately 95,000 net rentable square feet, are located in submarkets of Dallas, Texas. The remaining Retail Property, The Park Shops at Houston Center, with an aggregate of approximately 191,000 net rentable square feet, is located in the CBD submarket of Houston, Texas. As of December 31, 1999, the Retail Properties were 95% leased.
HOTEL PROPERTIES
HOTEL PROPERTIES TABLES
The following table shows certain information for the year ended December 31, 1999 and 1998, about the Operating Partnership's Hotel Properties. The information for the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox, which are destination resorts and spas that measure their performance based on available guest nights.
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(1) Because of the Company's status as a REIT for federal income tax purposes, the Operating Partnership does not operate the Hotel Properties and has leased all of the Hotel Properties, except the Omni Austin Hotel, to COI pursuant to long term leases. As of January 1, 1999, the Omni Austin Hotel is leased pursuant to a separate long term lease, to HCD Austin Corporation.
(2) The hotel is undergoing a $5 million renovation of all guest rooms and common areas scheduled to be completed during the third quarter of 2000.
(3) The hotel is undergoing a $15 million renovation project scheduled to be completed in October 2000. The renovation includes improvements to all guest rooms, the lobby, corridor, and exterior and interior systems.
(4) As of December 31, 1999, 58 condominiums have been converted to hotel suites.
(5) In 1998, the number of rooms was reduced to 276 due to 19 rooms being converted into a 20,000 square foot spa.
(6) In February 1999, 20 rooms were taken out of commission for construction of the spa, which is part of an approximately $20 million expansion scheduled to be completed in April 2000. The expansion will also include the construction of 30 additional guest rooms. Rates were discounted during the construction period, which resulted in a lower average daily rate and revenue per available room in 1999, as compared to 1998.
(7) Temporarily closed from February 1, 1998 through May 1, 1998 due to flooding in the region, affecting the roadway passage to the hotel.
(8) Represents available guest nights, which is the maximum number of guests that the resort can accommodate per night.
(9) Represents the number of paying and complimentary guests for the period, divided by the maximum number of available guest nights for the period.
(10) Represents the average daily "all-inclusive" guest package charges for the period, divided by the average daily number of paying guests for the period.
(11) Represents the total "all-inclusive" guest package charges for the period, divided by the maximum number of available guest nights for the period.
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES TABLE
The following table shows the number and aggregate size of Temperature-Controlled Logistics Properties by state as of December 31, 1999:
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(1) As of December 31, 1999, the Operating Partnership held an indirect 39.6% interest in the Temperature-Controlled Logistics Partnerships, which own the Temperature-Controlled Logistics Corporations, which directly or indirectly owned the Temperature-Controlled Logistics Properties. The business operations associated with the Temperature-Controlled Logistics Properties are owned by AmeriCold Logistics, in which the Operating Partnership has no interest. The Temperature-Controlled Logistics Corporations are entitled to receive lease payments (base rent and percentage rent) from AmeriCold Logistics.
(2) Includes an underground storage facility, with approximately 33.1 million cubic feet.
(3) As of December 31, 1999, AmeriCold Logistics operated 104 temperature-controlled logistics properties with an aggregate of approximately 519.2 million cubic feet (19.9 million square feet).
RESIDENTIAL DEVELOPMENT PROPERTIES
RESIDENTIAL DEVELOPMENT PROPERTIES TABLE
The following table shows certain information as of December 31, 1999, relating to the Residential Development Properties.
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(1) The Operating Partnership has an approximately 95%, 95%, 90%, 94% and 94%, ownership interest in Desert Mountain Development Corp., The Woodlands Land Company, Inc., Crescent Development Management Corp., Mira Vista Development Corp., and Houston Area Development Corp., respectively, through ownership of non-voting common stock in each of these Residential Development Corporations.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); TS (Timeshare); and SFH (Single Family Homes).
(3) Based on lots/units closed during the Operating Partnership's ownership period.
(4) Based on existing inventory of developed lots and lots to be developed.
(5) Includes golf membership, which for 1999, is approximately $175,000.
(6) As of December 31, 1999, two units were under contract at Deer Trail representing $5.9 million in sales, two units were under contract at Buckhorn Townhomes representing $3.3 million in sales, 32 units were under contract at Bear Paw Lodge representing $43.6 million in sales, 11 units were under contract at QuarterMoon representing $24.7 million in sales, 73 lots were under contract at Eagle Ranch representing $10.5 million in sales, six units were under contract at Main Street Junction representing $2.5 million in sales, and 27 lots were under contract at Three Peaks representing $6.4 million in sales.
BEHAVIORAL HEALTHCARE PROPERTIES
BEHAVIORAL HEALTHCARE PROPERTIES
As of December 31, 1999, the Behavioral Healthcare Segment consisted of 88 Behavioral Healthcare Properties, all of which were leased to CBHS and its subsidiaries under a triple-net master lease. CBHS is a Delaware limited liability company which was formed to operate the behavioral healthcare businesses located at the Behavioral Healthcare Properties and is owned 10% by a subsidiary of Magellan and 90% by COI and an affiliate of COI. CBHS operates the Behavioral Healthcare Properties through wholly owned subsidiaries.
During the fourth quarter of 1999, the Operating Partnership purchased two Behavioral Healthcare Properties from Magellan for an aggregate purchase price of approximately $7.1 million in satisfaction of its obligations under an agreement with Magellan entered into in November 1998. In addition, during the fourth quarter of 1999, the Operating Partnership disposed of one Behavioral Healthcare Property for approximately $1.4 million in net proceeds.
On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. CBHS has stated in its bankruptcy petitions that it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by mid-May of 2000 or develop an appropriate liquidation procedure if the sales have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties ceased to be subject to the master lease, although the aggregate rent due under the master lease was not reduced as a result except with respect to the sales of Non-Core Properties. The Operating Partnership is actively marketing these Properties for sale. From January 1 through March 24, 2000, the Operating Partnership sold 11 Non-Core Properties for approximately $34.9 million in net proceeds. As a result of these sales and the sale of the one Behavioral Healthcare Property during the fourth quarter of 1999, the amount of rent due under the master lease was reduced in accordance with the amendments to the master lease. The Operating Partnership has also entered into contracts or letters of intent to sell an additional six Non-Core Properties. The Operating Partnership continues to actively market the remaining 34 Non-Core Properties for sale.
The Core Properties remain subject to the master lease. The Operating Partnership intends to sell the Core Properties or lease them to new tenants in connection with CBHS's bankruptcy proceedings.
For more information on CBHS, the voluntary filing of the Chapter 11 bankruptcy petitions, the Operating Partnership's investment in the Behavioral Healthcare Properties and the master lease, see Item 1. Business - Industry Segments - Behavioral Healthcare Segment and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Behavioral Healthcare Segment.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the Registrant's fiscal year ended December 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
MARKET INFORMATION AND DISTRIBUTIONS
There is no established public trading market for the Registrant's limited partner interests, including the associated units ("Units"). The following table sets forth the cash distributions paid per Unit during each quarter of fiscal years 1998 and 1999 Comparable cash distributions are expected in the future. As of March 24, 2000, there were 49 record holders of Units. The Company and CREE, Ltd. do not own Units.
SALES OF UNREGISTERED SECURITIES
In connection with the acquisition of real estate, the Operating Partnership from time to time issues Units, or commits to issue Units in the future, to sellers of real estate in reliance on exemptions from registration under the Securities Act of 1933, as amended (the "Act"). In 1999, the Operating Partnership issued 85,910 Units in offerings exempt from the registration requirements of the Act pursuant to agreements entered into in connection with property acquisitions in 1996 and 1998 as set forth below:
o On May 3, 1999, the Operating Partnership issued 48,410 Units to two unaffiliated third parties in satisfaction of certain obligations related to that certain Assignment and Assumption Agreement dated as of March 20, 1998 as amended, by and among Lano International, Inc., Armada/Hoffler Holding Company and Alan R. Novak.
o On June 3, 1999, the Operating Partnership issued 37,500 Units to an unaffiliated third party in satisfactions of certain obligations related to that certain Contribution Agreement dated as of September 13, 1996, as amended, by and among the Operating Partnership, the Company, Rahn Sonoma, Ltd., John H. Anderson and Peter H. Roberts, and that certain Waiver and Agreement dated as of June 3, 1999 by and among the Operating Partnership, the Company, John H. Anderson, Peter H. Roberts and Peter H. Henry.
The Operating Partnership exercised reasonable care to assure that each of the offerees of Units was an "accredited investor" under Rule 501 of the Act and that the investors were not purchasing the Units with a view to their distribution. Specifically, the Operating Partnership relied on the exemptions provided by Section 4(2) of the Act or Rule 506 under the Act. Each of the Units is exchangeable into common shares of the Company on a one-for-two basis at the option of the holder. In case of an attempted exchange, the Company may elect to pay to the converting holder the cash value of the common shares to be received upon exchange instead of delivering such shares.
ITEM 6
Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data, respectively, of this report. Historical results and percentage relationships set forth in these Items and this section should not be taken as indicative of future operations of the Operating Partnership or the Company. Capitalized terms used but not otherwise defined in this section, have the meanings given to them in Items 1 - 6 of this Form 10-K.
The limited partnership agreement of the Operating Partnership acknowledges that all of the Company's operating expenses are incurred for the benefit of the Operating Partnership and provides that the Operating Partnership shall reimburse the Company for all such expenses. Accordingly, expenses of the Company are reimbursed by the Operating Partnership.
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as "believe", "expect" and "may".
Although the Operating Partnership believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Operating Partnership's actual results could differ materially from those given in the forward-looking statements.
The following factors might cause such a difference:
o The Operating Partnership's ability to timely lease unoccupied square footage and timely re-lease occupied square footage upon expiration;
o Changes in real estate conditions (including rental rates and competition from other properties and new development of competing properties);
o The concentration of a significant percentage of the Operating Partnership's assets in Texas;
o Financing risks, such as the ability to generate revenue sufficient to service existing debt, increases in debt service associated with variable-rate debt, the ability to meet existing financial covenants and the Operating Partnership's ability to consummate planned financings and refinancings on the terms and within the time frames anticipated;
o The Operating Partnership's ability to close anticipated sales of assets or joint venture transactions or other pending transactions;
o The failure of CBHS as debtor in possession to negotiate or consummate an acceptable sale of its core operating assets in the on-going bankruptcy proceedings;
o The failure of CBHS, any successful purchaser or purchasers of such core operating assets out of bankruptcy, and the Operating Partnership to negotiate and consummate leases for the core facilities or the inability of the Operating Partnership to secure on a timely basis the release of hospital facilities from the debtor in possession;
o The failure of the purchaser or purchasers of the core operating assets of CBHS, following any purchase and bankruptcy restructuring, to fulfill all new lease obligations to the Operating Partnership over the long term;
o The Operating Partnership's ability to close sales of the Behavioral Healthcare Properties;
o The Operating Partnership's ability to find acquisition and development opportunities which meet the Operating Partnership's investment strategy;
o The existence of complex regulations relating to the Company's status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT;
o Adverse changes in the financial condition of existing tenants; and
o Other risks detailed from time to time in the Operating Partnership's and the Company's filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue reliance on such statements. The Operating Partnership is not obligated to update these forward-looking statements to reflect any future events or circumstances.
STRATEGIC PLAN UPDATE
John C. Goff, Vice-Chairman of the Board of Trust Managers of the Company, was appointed to the positions of President and Chief Executive Officer of the Company and CREE, Ltd. on June 11, 1999. As announced in August, 1999, Mr. Goff and the management team outlined the following immediate objectives:
o resolve the issues surrounding the Behavioral Healthcare Segment;
o reduce exposure to variable-rate debt;
o dispose of non-strategic or non-core assets within the investment segments;
o market certain of the Office Properties for joint ventures; and
o engage the Company in a share repurchase program.
CBHS
CBHS's business has been negatively affected by many factors, including adverse industry conditions. During 1999, CBHS failed to perform in accordance with its operating budget. In the fourth quarter of 1999, the Operating Partnership, COI, Magellan and CBHS completed a recapitalization of CBHS. Pursuant to the recapitalization, Magellan transferred its remaining hospital-based assets to CBHS, canceled its accrued franchise fees and terminated the franchise agreements, pursuant to which Magellan had provided certain services to CBHS in exchange for certain franchise fees. The Operating Partnership also deferred the monthly rental payments due from CBHS for November and December 1999 and amended its master lease with CBHS to provide a mechanism to terminate the master lease as to certain non-core Behavioral Healthcare Properties, and agreed that, upon each sale by the Operating Partnership of the non-core Behavioral Healthcare Properties, the monthly minimum rent due from CBHS under the master lease would be reduced by a specified percentage of the net proceeds of such sale. The non-core Behavioral Healthcare Properties consist of 51 Properties which CBHS has ceased operations or is planning to cease operations (the "Non-Core Properties").
As of December 31, 1999, the Behavioral Healthcare Segment consisted of 88 Behavioral Healthcare Properties in 24 states, all of which were leased to CBHS and its subsidiaries under a triple-net master lease. On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. CBHS has stated in its bankruptcy petitions that it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by mid-May of 2000 or develop an appropriate liquidation procedure if the sales have not taken place by that time.
Effective February 29, 2000, pursuant to the referenced amendments to the master lease, the Non-Core Properties ceased to be subject to the master lease, although the aggregate rent due under the master lease was not reduced as a result except as described above with respect to Non-Core Properties. The Operating Partnership is actively marketing these Properties for sale. From January 1 through March 24, 2000, the Operating Partnership sold 11 Non-Core Properties for approximately $34.9 million in net proceeds. As a result of these sales and the sale of the one Behavioral Healthcare Property during the fourth quarter of 1999, the amount of rent due under the master lease was reduced in accordance with the amendments to the master lease. The Operating Partnership has also entered into contracts or letters of intent to sell an additional six Non-Core Properties. The Operating Partnership continues to actively market the remaining 34 Non-Core Properties for sale.
As of December 31, 1999, the 37 Behavioral Healthcare Properties that were not designated as Non-Core Properties are designated as "Core-Properties." The Core Properties remain subject to the master lease. Payment and treatment of rent for the Behavioral Healthcare Properties is subject to a rent stipulation agreed to by certain of the parties involved in the CBHS bankruptcy proceeding.
The Operating Partnership intends to sell the Core Properties or lease them to new tenants.
On April 24, 2000, an auction will be held for the core operating assets of CBHS as part of the bankruptcy proceedings. The Operating Partnership has agreed to provide an acceptable sales price for each of the remaining 37 Behavioral Healthcare Properties and, to the extent possible, acceptable lease terms for continued operation of the Behavioral Healthcare Properties. Bidders will have the opportunity to bid for any or all of the core operating assets of CBHS and, in connection with a bid, either to bid to purchase the related Behavioral Healthcare Property or Properties or to seek approval from the Operating Partnership to lease the Property or Properties. Proceeds from the sale of core operating assets of CBHS will be available to pay creditors of CBHS. Proceeds from any sales of the Behavioral Healthcare Properties will belong to the Operating Partnership.
Exposure to Variable-rate Debt
Since the announcement of the Operating Partnership's Strategic Plan in August 1999, the Operating Partnership fixed or hedged approximately $400 million of its variable-rate debt in 1999. During the first quarter of 2000, the Operating Partnership repaid and retired its unsecured, variable-rate credit facility (the "Credit Facility") from a group of banks led by BankBoston, N.A ("BankBoston") and its term note with BankBoston primarily with the proceeds of a new secured, variable-rate facility (the "New Facility") from UBS AG ("UBS"). Effective February 4, 2000, the Operating Partnership entered into a three-year cash flow hedge agreement with Fleet Boston Financial, relating to a portion of the New Facility for a notional amount of $200.0 million. As a result, $200.0 million of the amount under the note, which was originally issued at a floating rate of LIBOR plus 250 basis points, was effectively converted to a fixed weighted average interest rate of 9.61% through maturity. The refinancings and cash flow hedges reduced the Operating Partnership's variable-rate debt exposure to less than 30% of total debt. See "Liquidity and Capital Resources - New Facility" and "Liquidity and Capital Resources - Interest Rate Hedging Transactions" for additional information.
Assets Held for Disposition
During 1999, the Operating Partnership identified the following assets for disposition. These assets are either non-strategic or non-core assets within the Operating Partnership's investment segments. The proceeds generated from the remaining assets held for disposition are expected to be used to further reduce the Operating Partnership's remaining variable-rate debt, make investments, fund a share repurchase program, or any combination of these options.
o Dallas Mavericks Interest - On October 27, 1999, the Operating Partnership completed the sale of its non-core equity and debt interests in the Dallas Mavericks, interest in the new Dallas sports arena development and surrounding mixed-use development projects and certain promissory notes related to the Dallas Mavericks for approximately $89 million in cash. In connection with the sale, the Operating Partnership recognized a net loss of approximately $0.7 million. The proceeds were primarily used to pay down variable-rate debt.
o The Woodlands Commercial Properties - The Woodlands Commercial Properties Company, L.P., owned by the Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for sale certain property assets (multi-family, retail and office/venture tech portfolios) located in The Woodlands. As of December 31, 1999, the multi-family portfolio had been sold, generating net proceeds of approximately $28.8 million, of which the Operating Partnership's portion was approximately $12.2 million. The sale generated a net gain of approximately $11.6 million, of which the Operating Partnership's portion was approximately $4.9 million. The sale of the retail portfolio, including the Operating Partnership's four Retail Properties located in The Woodlands, closed on January 5, 2000, and generated approximately $49.8 million of net proceeds, of which the Operating Partnership's portion was approximately $37.3 million. The Woodlands Retail Properties were sold at a net gain of approximately $9.0 million, of which the Operating Partnership's portion was approximately $7.7 million. The proceeds from these sales were used primarily to pay down variable-rate debt. In addition, the sale of the office/venture tech portfolio, consisting of the Operating Partnership's 12 Office Properties located in The Woodlands is expected to close in the second quarter of 2000.
o Office Properties - For the year ended December 31, 1999, the Operating Partnership recognized an impairment loss of approximately $16.8 million on one of the Office Properties held for disposition at December 31, 1999, which was sold during the first quarter of 2000. The impairment loss represented the
difference between the carrying value of the Office Property and the sales price less costs of the sale. As of March 24, 2000, the Operating Partnership completed the sale of six wholly-owned Office Properties which were included in the group of ten Office Properties held for disposition at December 31, 1999 and were being actively marketed for sale. The sales generated approximately $146.6 million of net proceeds. The proceeds were primarily used to pay down variable-rate debt. Excluding the impairment loss on one of the six Office Properties held for disposition at December 31, 1999, the Operating Partnership recognized a net gain of approximately $13.3 million in the first quarter of 2000, related to the sales of the other five Office Properties that were classified as held for disposition at December 31, 1999. The Operating Partnership has entered into contracts relating to the sale of two additional Office Properties. The sale of these Properties are expected to close by the end of the second quarter of 2000. Management expects to complete any economically justified sales of the remaining two Office Properties held for disposition as of December 31, 1999 by the end of the second quarter of 2000.
o Behavioral Healthcare Properties - The Behavioral Healthcare Segment consisted of 88 Properties in 24 states as of December 31, 1999. From January 1 through March 24, 2000, 11 Non-Core Properties were sold for approximately $34.9 million in net proceeds. The proceeds were primarily used to pay down variable-rate debt. The Operating Partnership has also entered into contracts or letters of intent to sell an additional six Non-Core Properties. The Operating Partnership continues to actively market the remaining 34 Non-Core Properties for sale. The Operating Partnership intends to sell the 37 Core Properties or lease them to new tenants.
Management is currently in the process of evaluating the bids for the remaining Properties held for disposition to determine their economic viability as well as the credit-worthiness of the potential purchasers and their ability to close the transactions. The disposition of these Properties remains subject to the negotiation of acceptable terms and other customary conditions.
Joint Ventures
The Operating Partnership is currently seeking to enter into venture arrangements with private equity partners for arrangements where the Operating Partnership would hold a minority interest in the Properties and would continue to lease and manage the Properties.
Share Repurchase Program
On November 5, 1999, the Company's Board of Trust Managers authorized the repurchase of a portion of its outstanding common shares from time to time in the open market or through privately negotiated transactions, in an amount not to exceed $500.0 million. The proposed repurchases will be subject to prevailing market conditions and other considerations. The repurchase of common shares by the Company would decrease the Company's limited partner interest, which would result in an increase of net income per unit and book value per unit. The Company expects the share repurchase program to be funded through a combination of asset sales and financing arrangements, which, in some cases, may be secured by the repurchased shares. The amount of shares that the Company actually will purchase will be determined from time to time, in its reasonable judgement, based on market conditions and the availability of funds, among other factors. There can be no assurance that any number of shares actually will be purchased within any particular time period.
On November 19, 1999, the Company entered into an agreement with UBS which was amended on January 4, 2000 and which, as amended, obligates the Company to repurchase approximately 5.8 million common shares from UBS, or settle in common shares, on specified terms, before January 4, 2001. See "Liquidity and Capital Resources - Share Repurchase Agreement" for a description of this transaction.
OFFICE AND RETAIL SEGMENT
The following tables show the same-store net operating income growth for the 27.1 million square feet of Office Property space owned as of January 1, 1998.
The following table shows selected leasing and rental rate information for the 31.8 million square feet of Office Property owned as of December 31, 1999.
- ------------------- (1) All of which have commenced or will commence during the next twelve months.
(2) Including free rent, scheduled rent increases taken into account under GAAP and expense recoveries.
(3) Calculated as weighted average full-service rental rate minus operating expenses.
o For the year ended December 31, 1999, leases executed for renewal or re-leased Office Property space required tenant improvements of $1.15 per square foot per year and leasing costs of $0.72 per square foot per year. "Renewal" refers to leases executed by existing tenants for exactly the same net rentable area currently occupied by those tenants. "Re-lease" refers to leases executed by new or existing tenants for net rentable area which has been vacant for six months or less.
o The overall office portfolio was approximately 92.7% leased, based on executed leases, or approximately 90.5% leased based on commenced leases, at December 31, 1999. Average occupancy for 1999 based on commenced leases was approximately 90.9%.
Investment in Broadband Office, Inc.:
In October 1999, the Operating Partnership, along with seven other real estate companies, joined with an unrelated third party venture capitalist as a founding shareholder in Broadband, a national telecommunications company. Broadband is dedicated to providing state of the art broadband telecommunications services to commercial office properties across the country. In addition to significantly improving the Operating Partnership's office tenant amenity package to take advantage of evolving technologies, the Operating Partnership received an equity interest and representation on the board of directors of Broadband in exchange for granting Broadband marketing access to the tenants within the Operating Partnership's Office Property portfolio.
HOSPITALITY SEGMENT
The following table shows the percentage increases in occupancy, average daily rate and revenue per available room for the Hotel Properties for the years ended December 31, 1999 and 1998.
o For the year ended December 31, 1999, hotel property rental income growth, including weighted average base rent(1) and percentage rent, was approximately 12.3%(2) compared with the same period of 1998, for the eight Hotel Properties owned as of January 1, 1998.
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(1) Including scheduled rent increases that would be taken into account under GAAP.
(2) This growth was impacted by returns generated on approximately $38 million of capital invested during 1998 and 1999 in connection with the construction of The Allegria Spa at the Hyatt Regency Beaver Creek hotel, the construction of The Allegria Spa at Ventana Inn & Spa, the Sonoma Mission Inn & Spa expansion and the renovation of guest rooms at the Four Seasons-Houston hotel.
Investment Partnership:
In February 2000, the Operating Partnership entered into an agreement with Sanjay Varma, a former senior executive officer of the Operating Partnership, to form an investment partnership, which will seek luxury spa resorts and hotels to acquire and manage under the "Sonoma Spa Resorts" brand and concept. The Operating Partnership and Mr. Varma acquired a 93% and 7% interest, respectively, in this new partnership. Mr. Varma has also established a new management company, which has contracted with COI to manage either the property or assets of the Operating Partnership's existing portfolio of Hotel Properties (excluding the Canyon Ranch resorts and the Hyatt Regency Beaver Creek), in addition to new properties the investment partnership acquires. The Operating Partnership currently holds a 30% non-voting interest in this management company.
CRL Investments, Inc.:
The Operating Partnership has a 95% economic interest, representing all of the non-voting stock in CRL Investments, Inc. ("CRL"), which has a 20% economic interest in CR License, LLC, the entity which owns the right to the future use of the "Canyon Ranch" name. CRL has the opportunity through July 2000 to pay $3.0 million to obtain an additional 10% interest in CR License, LLC. CRL also has an effective 60% economic interest in the Canyon Ranch Spa Club in the Venetian Hotel in Las Vegas, Nevada. The Canyon Ranch Spa Club opened in June 1999 and is the first project to expand the franchise value of the "Canyon Ranch" name.
RESIDENTIAL DEVELOPMENT SEGMENT
The Operating Partnership owns economic interests in five Residential Development Corporations through the residential development property mortgages and the non-voting common stock of these Residential Development Corporations. The Residential Development Corporations in turn, through joint ventures or partnership arrangements, currently own interests in 14 Residential Development Properties. The Residential Development Corporations are responsible for the continued development and the day-to-day operations of the Residential Development Properties. Management plans to maintain the Residential Development segment at its current investment level and reinvest returned capital into residential development projects that it expects to achieve comparable rates of return.
The Woodlands Land Development, L.P. and The Woodlands Commercial Properties Company, L.P. (collectively "The Woodlands"), The Woodlands, Texas:
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(1) Decrease in average sales price per lot between years is due to a change in product mix.
o Residential lot sales increased by 529 or 36%, in 1999 compared with 1998.
o Future buildout of The Woodlands is estimated at approximately 15,600 residential lots and approximately 1,972 acres of commercial land, of which 1,519 residential lots and 991 acres are currently in inventory.
o The Woodlands estimates that sales of approximately 2,000 to 2,100 residential lots and 75 to 85 acres of commercial land will close during 2000.
Desert Mountain Properties Limited Partnership ("Desert Mountain"), Scottsdale, Arizona:
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(1) Including equity golf memberships.
o The average price per lot for the year ended 1999 increased 24% compared to the year ended 1998, as a result of a higher price product mix sold in 1999 versus 1998.
o During 1999, Desert Mountain opened five new villages in Saguaro Forest consisting of 160 additional lots. Desert Mountain has sold 95 of these lots with an average sales price of $619,000 per lot.
o Future buildout of Desert Mountain is estimated at approximately 685 residential lots, of which 285 are currently in inventory.
o Desert Mountain is anticipating the release in the year 2000 of three new villages within Saguaro Forest consisting of approximately 106 lots with prices from $500,000 to $2.6 million per lot.
Crescent Development Management Corporation ("CDMC"), Beaver Creek, Colorado:
o On April 29, 1999, a partnership in which CDMC has a 64% economic interest finalized the purchase of Riverfront Park (previously known as "The Commons"), a master planned residential development on 23 acres in the Central Platte Valley near downtown Denver, Colorado for approximately $25 million. The development of Riverfront Park is expected to begin in the spring of 2000. The first phase will consist of one condominium project and two loft projects with prices ranging from $0.2 million to $2.5 million. One of the first residential projects, consisting of 71 lofts, commenced pre-selling in January 2000. As of March 24, 2000, contracts had been signed on 83% of the 71 lofts. In the first quarter of 2000, the partnership has entered into contracts relating to the sale of 9.7 acres of Riverfront Park, which is expected to close in the second quarter of 2000. The acreage is in close proximity to several major entertainment and recreational facilities including Coors Field (home to the Major League Baseball's Colorado Rockies), Elitch Gardens (an amusement park), the new Pepsi Center (home to the National Hockey League's Colorado Avalanche and the National Basketball Association's Denver Nuggets) and the new downtown Commons Park. An adjacent 28 acres is expected to be commercially developed by another company, thus providing a major mixed-use community adjacent to the lower downtown area of Denver.
o CDMC estimates the following sales for the year 2000 from its 10 active projects: 383 residential lots, 17 townhomes, 5 single-family homes, and 44 condominiums.
o 99% of the sales anticipated during the first quarter and 71% of the sales anticipated for the full year of 2000 have been pre-sold as of December 31, 1999.
Mira Vista Development Corp. ("Mira Vista"), Fort Worth, Texas:
Houston Area Development Corp. ("Houston Area Development"), Houston, Texas:
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of December 31, 1999, the Operating Partnership held an indirect 39.6% interest in the Temperature-Controlled Logistics Partnerships, which owns the Temperature-Controlled Logistics Corporations, which directly or indirectly owned the Temperature-Controlled Logistics Properties. The business operations associated with the Temperature-Controlled Logistics Properties are owned by AmeriCold Logistics, in which the Operating Partnership has no interest. The Temperature-Controlled Logistics Corporations are entitled to receive lease payments (base rent and percentage rent) from AmeriCold Logistics.
Management believes that earnings before interest, taxes, depreciation and amortization ("EBITDA") is a useful financial performance measure for assessing the relative stability of the financial condition of the AmeriCold Logistics, which is the sole lessee of the Temperature-Controlled Logistics Properties.
This table shows AmeriCold Logistics, pro forma EBITDA for the year ended December 31, 1999 and 1998, assuming that the acquisitions by one of the Temperature-Controlled Logistics Corporations of 14 Temperature-Controlled Logistics Properties had occurred on January 1, 1998.
- ------------ (1) EBITDA does not represent net income or cash flows from operating, financing or investing activities as defined by GAAP.
o During 1999, the Temperature-Controlled Logistics Corporations completed and opened $46 million of expansion and new product, representing approximately 15.1 million cubic feet (0.5 million square feet).
o The Temperature-Controlled Logistics Corporations currently have approximately $30.6 million of expansion and new temperature-controlled logistics facilities under construction, which management of AmeriCold Logistics expects will be completed in the second quarter of 2000, and which are expected to contain approximately 16.6 million cubic feet (0.8 million square feet).
o The Temperature-Controlled Logistics Corporations have approximately $50 to $75 million of expansion and new product temperature-controlled logistics facilities under review for development or acquisition during 2000.
BEHAVIORAL HEALTHCARE SEGMENT
During the year ended December 31, 1999, the Operating Partnership received cash rental payments of approximately $35.3 million from CBHS. CBHS's business has been negatively affected by many factors, including adverse industry conditions. During 1999, CBHS failed to perform in accordance with its operating budget. See "Strategic Plan Update - CBHS" above for a complete description of the current status of CBHS, the voluntary filing of Chapter 11 bankruptcy petitions by CBHS and its subsidiaries and the Operating Partnership's investment in the Behavioral Healthcare Properties.
The following financial statement charges were made with respect to the Operating Partnership's investment in the Behavioral Healthcare Properties for the year ended December 31, 1999:
o CBHS rent was reflected on a cash basis beginning in the third quarter of 1999 and CBHS rent will continue to be reflected on a cash basis going forward;
o The Operating Partnership wrote-off the rent that was deferred according to the CBHS lease agreement from the commencement of the lease in June of 1997 through June 30, 1999. The balance written-off totaled $25.6 million;
o The Operating Partnership wrote-down its behavioral healthcare real estate assets by approximately $103.8 million to a book value of $245.0 million;
o The Operating Partnership recorded approximately $15.0 million of additional expense to be used by CBHS as working capital; and
o The Operating Partnership has not recorded depreciation expense on the Non-Core Properties since November 1999 when such Properties were classified as held for disposition.
At December 31, 1999, the Operating Partnership's investment in the Behavioral Healthcare Properties represented approximately 5% of its total assets (after the impairment and other charges related to the behavioral healthcare assets) and approximately 5% of consolidated rental revenues for the year ended December 31, 1999 (after the write-off of the rent that was deferred for 1999).
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB No. 101 prohibits contingent revenue from being accrued until the thresholds upon which it is based have been met. In 1999, percentage rental income was recognized on an accrual basis. However, SAB No. 101 had no material impact on the Operating Partnership's financial statements for the year ended December 31, 1999 because all of the thresholds upon which percentage rental income is based had been met by December 31, 1999. In accordance with SAB No. 101, percentage rental income will not be recognized in the year 2000 until the thresholds upon which it is based are met. Management does not believe this change will have a material impact on its interim or annual financial statements.
RESULTS OF OPERATIONS
The following table shows the Operating Partnership's financial data as a percentage of total revenues for the three years ended December 31, 1999, 1998, and 1997 and the variance in dollars between the years ended December 31, 1999 and 1998 and the years ended December 31, 1998 and 1997. See Note 4. Segment Reporting included in Item 8. Financial Statements and Supplementary Data for financial information about investment segments.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
REVENUES
Total revenues increased $48.0 million, or 6.9%, to $746.3 million for the year ended December 31, 1999, as compared to $698.3 million for the year ended December 31, 1998.
The increase in Office and Retail Property revenues of $51.5 million, or 9.1%, compared to the year ended December 31, 1998, is attributable to:
o the acquisition of nine Office Properties in 1998, which contributed revenues for a full year in 1999, as compared with a partial year in 1998, resulting in $17.1 million in incremental revenues;
o increased revenues of $27.8 million from the 80 Office and Retail Properties acquired prior to January 1, 1998, primarily as a result of rental rate increases at these Properties; and
o increased revenues of $6.6 million as a result of the receipt of lease termination fees during 1999.
The increase in Hotel Property revenues of $11.9 million, or 22.3%, compared to the year ended December 31, 1998, is attributable to:
o the acquisition of one golf course affiliated with one of the Hotel Properties during 1998, which contributed to revenues for a full year in 1999, as compared with a partial year in 1998, resulting in $1.7 million of incremental revenues;
o the reclassification of the Renaissance Houston Hotel from the Office Property segment to the Hotel Property segment as a result of the restructuring of its lease on July 1, 1999, which contributed $2.8 million of incremental revenues under the new lease;
o increased revenues of $1.3 million from the re-leasing of the Omni Austin Hotel to HCD Austin Corporation as of January 1, 1999; and
o increased revenues of $6.1 million from the eight Hotel Properties acquired prior to January 1, 1998, as a result of an increase in base rents of $4.8 million because of lease amendments entered into in connection with contributions made by the Operating Partnership for capital improvements at some of the Hotel Properties, and an increase in percentage rent of $1.3 million.
The decrease in Behavioral Healthcare Property revenue of $14.2 million, or 25.7%, is attributable to the reflection of rent from CBHS on a cash basis beginning in the third quarter of 1999, and also is attributable to the deferral of the November and December 1999 rent payments from CBHS.
EXPENSES
Total expenses increased $246.7 million, or 44.5%, to $801.2 million for the year ended December 31, 1999, as compared to $554.5 million for the year ended December 31, 1998.
The increase in rental property operating expenses of $14.1 million, or 5.8%, compared to the year ended December 31, 1998, is attributable to:
o the acquisition of nine Office Properties during 1998, which incurred expenses during the full year of 1999, as compared to only a portion of the year of 1998, resulting in $7.1 million of incremental expenses; and
o increased expenses of $7.0 million from the 80 Office and Retail Properties acquired prior to January 1, 1998, primarily as a result of an increase in real estate taxes.
The increase in interest expense of $39.8 million, or 26.1%, compared to the year ended December 31, 1998, is primarily attributable to:
o $0.9 million of incremental interest payable under the Metropolitan Life Notes III and IV, which were assumed in connection with the acquisition of the Datran Center Office Property in May 1998;
o $5.9 million of incremental interest due to the promissory note secured by the Houston Center Office Property complex, contributing approximately eight months of interest in 1999 compared with only three months of interest in 1998. This promissory note was issued in conjunction with the termination of the equity swap agreement with Merrill Lynch International on September 30, 1998;
o $4.9 million of incremental interest payable due to the refinancing of the Houston Center Office Property complex in September 1999;
o $20.4 million of incremental interest payable due to draws under the Credit Facility and under the term loans with BankBoston N.A. (average balance outstanding on the Credit Facility and under the term loans for the year ended December 31, 1999 and 1998 was $1,043.3 million and $745.0 million, respectively); and
o $5.7 million of incremental interest payable due to the refinancing of the Greenway Plaza Office Property complex in June 1999 with a $280 million secured, fixed-rate note which generated $165.0 million in net proceeds which were primarily used to settle the Forward Share Purchase Agreement with UBS.
All of these financing arrangements were used to fund investments, obligations associated with investments, and to provide working capital.
The increase in amortization of deferred financing costs of $3.8 million, or 58.5%, compared to the year ended December 31, 1998, is primarily attributable to the incremental amortization of financing costs associated with new debt obtained during 1998 and 1999.
The increase in depreciation and amortization expense of $13.6 million, or 11.5%, compared to the year ended December 31, 1998, is primarily attributable to the acquisition during 1998 of nine Office Properties.
An additional increase in expenses of $175.4 million is attributable to:
o $162.0 million due to the impairment and other charges related to the Behavioral Healthcare Properties;
o $16.8 million due to the impairment charge on one of the Office Property assets held for disposition which represents the difference between the carrying value of this property and the subsequent sales price less costs of sale;
o non-recurring costs of $15.0 million associated with the settlement of litigation relating to the merger agreement entered into in January 1998 between the Company and Station Casinos, Inc.; and
o offset by a decrease of $18.4 million due to a non-recurring write-off in 1998 of costs associated with unsuccessful acquisitions.
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES
Equity in net income of unconsolidated companies increased $29.0 million, or 73.8%, to $68.3 million for the year ended December 31, 1999, as compared to $39.3 million for the year ended December 31, 1998.
The increase is attributable to:
o An increase in equity in net income of the unconsolidated office and retail properties of $1.1 million, or 26.2% compared to the year ended December 31, 1998, attributable to increased revenues at the Woodlands Commercial Properties Company L.P., due to the sale of the multi-family portfolio in the third quarter of 1999;
o an increase in equity in net income of the Temperature-Controlled Logistics Corporations of $14.5 million, or 2900.0%, compared to the year ended December 31, 1998, primarily as a result of the change in ownership. Prior to March 12, 1999 the Temperature-Controlled Logistics Corporations reflected its equity in the operations of the Temperature-Controlled Logistics Properties. Subsequent to March 12, 1999, the Temperature-Controlled Logistics Corporations receives rent from AmeriCold Logistics, the lessee and owner of business operations. In addition, the Operating Partnership's 1999 equity in net income includes 12 months of income from nine and five Temperature-Controlled Logistics Properties which were acquired in June 1998 and July 1998, respectively;
o an increase in equity in net income of the Residential Development Corporations of $9.4 million, or 28.1%, compared to the year ended December 31, 1998, primarily as a result of (i) the increased sales activity at CDMC, primarily due to increased residential lot sales, which resulted in $5.1 million of incremental equity in net income to the Operating Partnership; (ii) the increased lot sales and average price per lot sold and the sale of 16 acres at Houston Area Development, which resulted in $3.0 million of incremental equity in net income to the Operating Partnership, (iii) an increase in sales activity at The Woodlands, which resulted in $1.6 million of incremental equity in net income to the Operating Partnership, (iv) the increase in average sales price per lot at Desert Mountain with constant lot absorption between years, which resulted in $0.6 million of incremental equity in net income to the Operating Partnership; and (v) a decrease in lot sales at Mira Vista, which resulted in a decrease of $0.9 million in equity in net income to the Operating Partnership; and
o an increase in equity in net income of the other unconsolidated companies of $4.0 million, or 363.6%, compared to the year ended December 31, 1998, primarily attributable to the 7.5% dividend income from the $85 million preferred member interest in Metropolitan Partners, LLC, which the Operating Partnership purchased in May 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
REVENUES
Total revenues increased $250.9 million, or 56.1%, to $698.3 million for the year ended December 31, 1998, as compared to $447.4 million for the year ended December 31, 1997.
The increase in Office and Retail Property revenues of $199.7 million, or 55.0%, compared to 1997 is attributable to:
o the acquisition of nine Office Properties in 1998, which resulted in $54.7 million of incremental revenues;
o the acquisition of 26 Office Properties and one Retail Property in 1997, which contributed revenues for a full year in 1998, as compared to a partial year in 1997, resulting in $111.3 million of incremental revenues; and
o increased revenues of $33.7 million from the 59 Office and Retail Properties acquired prior to January 1, 1997, primarily as a result of rental rate and occupancy increases at these Properties.
The increase in Hotel Property revenues of $16.0 million, or 42.9%, compared to 1997 is primarily attributable to:
o the acquisition of one Hotel Property and a golf course in 1998, which resulted in $3.9 million of incremental revenues;
o the acquisition of two Hotel Properties in 1997, which contributed revenues for a full year in 1998, as compared to a partial year in 1997, resulting in $8.9 million of incremental revenues; and
o increased revenues of $3.3 million from the six Hotel Properties acquired prior to January 1, 1997, which resulted primarily from an increase in percentage rent.
The increase in Behavioral Healthcare Property revenues of $25.5 million, or 85.6%, compared to 1997 is primarily attributable to the fact that the Behavioral Healthcare Properties contributed revenues for a full year in 1998 as compared to approximately six months in 1997.
The increase in interest and other income of $9.7 million, or 57.1%, compared to 1997 is primarily attributable to:
o the sale of marketable securities in 1998; and
o the acquisition of certain notes included in the portfolio acquired from Carter-Crowley in May of 1997 and the extension of loans to COI, also in May of 1997, both of which earned interest for a full year in 1998 as compared to a partial year in 1997, resulting in incremental interest income on these notes receivable.
EXPENSES
Total expenses increased $218.4 million, or 65.0%, to $554.5 million for the year ended December 31, 1998, as compared to $336.1 million for the year ended December 31, 1997.
The increase in rental property operating expenses of $84.1 million, or 52.9%, compared to 1997 is attributable to:
o the acquisition of nine Office Properties in 1998, which resulted in $22.1 million of incremental expenses;
o the acquisition of 26 Office Properties and one Retail Property in 1997, which incurred expenses for a full year in 1998, as compared to a partial year in 1997, resulting in $52.4 million of incremental expenses; and
o increased expenses of $9.6 million from the 59 Office and Retail Properties acquired prior to January 1, 1997, primarily as a result of occupancy increases at these Properties.
The increase in depreciation and amortization expense of $43.7 million, or 58.7%, compared to 1997, is primarily attributable to the acquisitions of Office, Retail, Hotel and the Behavioral Healthcare Properties in 1997 and 1998.
The increase in interest expense of $65.8 million, or 76.2%, compared to 1997 is primarily attributable to:
o $21.6 million of interest payable under the Notes due 2002 and Notes due 2007, which were issued in a private offering in September 1997;
o $6.1 million of interest payable under the Chase Manhattan Note, which was assumed in connection with the acquisition of the Fountain Place Office Property in November 1997;
o $1.2 million of interest payable on the BankBoston Term Note I, which the Operating Partnership entered into in August 1997;
o $3.0 million of interest payable under the Metropolitan Life Note II, which was assumed in connection with the acquisition of the Energy Centre Office Property in December 1997;
o $2.3 million of interest payable under the Metropolitan Life Notes III and IV, which were assumed in connection with the acquisition of the Datran Center Office Property in May 1998;
o $3.3 million of interest payable under the promissory note payable to Merrill Lynch International issued in conjunction with the termination of the equity swap agreement with Merrill Lynch International on September 30, 1998; and
o $28.0 million of incremental interest payable due to draws under the Credit Facility and short-term borrowings with BankBoston (average balance outstanding for the year ended December 31, 1998 and 1997 was $728.3 million and $329.8 million, respectively).
All of these financing arrangements were used to fund investments and working capital.
The increase in corporate general and administrative expense of $3.4 million, or 26.4%, compared to 1997 is primarily attributable to the incremental costs associated with the operations of the Operating Partnership as a result of property acquisitions.
An additional increase in expenses of $18.4 million is attributable to a non-recurring write-off of costs associated with unsuccessful acquisitions.
EQUITY IN NET INCOME OF UNCONSOLIDATED COMPANIES
Equity in net income of unconsolidated companies increased $15.6 million, or 65.8%, to $39.3 million for the year ended December 31, 1998, as compared to $23.7 million for the year ended December 31, 1997.
The increase is primarily attributable to:
o an increase in equity in net income of the Residential Development Corporations of $14.7 million, or 78.2%, compared to 1997 which is primarily attributable to the investments in The Woodlands Land Company, Inc. in July 1997, and Desert Mountain Development Corporation in August 1997, which resulted in $14.2 million of incremental net income;
o an increase in equity in net income of other unconsolidated office and retail properties of $3.5 million, or 600.0%, compared to 1997, which is primarily attributable to the investment in The Woodlands Commercial Properties Company, L.P. in July 1997, which resulted in $4.0 million of incremental net income; partially offset by
o a decrease in equity in net income of the other unconsolidated companies of $2.0 million, or 64.5%, compared to 1997, which is primarily attributable to distributions of $3.1 million received in 1997 from the Operating Partnership's investment in HBCLP, Inc. (the primary asset of which is the investment in Hudson Bay Partners, L.P., an investment partnership in which the Operating Partnership holds an effective 95% economic interest).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $72.1 million and $109.8 million at December 31, 1999 and 1998, respectively. This 34.3% decrease is attributable to $164.7 million and $169.2 million used in investing and financing activities, respectively, partially offset by $296.1 million of cash provided by operating activities.
INVESTING ACTIVITIES
The Operating Partnership's cash used in investing activities of $164.7 million is primarily attributable to:
o $93.9 million for increased investments in unconsolidated companies primarily as a result of a $75.0 million preferred interest in Metropolitan Partners, LLC;
o $58.5 million for recurring and non-recurring tenant improvement and leasing costs for the Office and Retail Properties;
o $20.3 million for capital expenditures on rental properties, primarily attributable to non-recoverable building improvements for the Office and Retail Properties and replacement of furniture, fixtures and equipment for the Hotel Properties;
o $31.4 million attributable to increased restricted cash and cash equivalents primarily due to the escrow requirements related to the refinancings of the Greenway Plaza Office Property complex and the Houston Center Office Property complex. Escrow funds of $23.0 million will be released during the renovation phase of the Renaissance Houston Hotel over the next 12 to 18 months; and
o $27.8 million for the development of investment properties, including expansions and renovations at the Hotel Properties.
The cash used in investing activities is partially offset by:
o $53.9 million for decreased notes receivable primarily due to the sale of certain promissory notes related to the Dallas Mavericks; and
o $13.7 million for return of investment in the Residential Development Corporations.
OPERATING ACTIVITIES
The Operating Partnership's cash provided by operating activities of $296.1 million is primarily attributable to:
o $269.7 million from property operations;
o $21.5 million from an increase in accounts payable, accrued liabilities and other liabilities;
o $30.7 million from a decrease in other assets, primarily due to the sale of marketable securities; and
o $1.1 million from minority interests.
The cash provided by operating activities is partially offset by:
o $17.2 million from equity in earnings in excess of distributions received from unconsolidated companies; and
o $9.7 million from an increase in restricted cash and cash equivalents primarily as a result of increased property tax escrow amounts related to 1999 debt refinancings.
FINANCING ACTIVITIES
The Operating Partnership's use of cash for financing activities of $169.2 million is attributable to:
o distributions paid to common shareholders and unitholders of $299.8 million;
o distributions paid to preferred unitholders of $13.5 million;
o settlement of the Forward Share Purchase Agreement with UBS for $149.4 million;
o debt financing costs of $16.7 million primarily related to the refinancing of the Greenway Plaza Office Property complex, the Houston Center Office Property complex and the BankBoston Term Note II;
o net payments under the Credit Facility of $150.0 million; and
o capital distributions to a joint venture partner of $3.2 million.
The use of cash for financing activities is partially offset by:
o net proceeds under short-term and long-term facilities of $430.8 million primarily due to net proceeds from the refinancing of the Greenway Plaza Office Property complex of $165.0 million; net proceeds from the refinancing of the BankBoston Term Note I of $60.0 million; net proceeds from the refinancing of the BankBoston Term Note II of $200.0 million; net proceeds of $15.0 million from the refinancing of the Houston Center Office Property complex; and net payments of $7.1 million from the refinancing of the Datran Center Office Property; and
o capital contributions from the Company due to proceeds from the exercise of common share options of $32.6 million.
CBHS
In 1999, the Operating Partnership experienced a decrease in liquidity as a result of its investment in the Behavioral Healthcare Properties. The Behavioral Healthcare Properties were leased to CBHS and its subsidiaries under a triple-net lease. CBHS is a Delaware limited liability company which was formed to operate the behavioral healthcare business located at the Behavioral Healthcare Properties and is owned 10% by a subsidiary of Magellan and 90% by COI and an affiliate of COI. CBHS's business has been negatively affected by many factors, including adverse industry conditions. During 1999, CBHS failed to perform in accordance with its operating budget. On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. See "Strategic Plan Update - CBHS" above for a complete description of the current status of CBHS, the voluntary filing of Chapter 11 bankruptcy
petitions by CBHS and its subsidiaries, and the Operating Partnership's investment in the Behavioral Healthcare Properties.
SHELF REGISTRATION STATEMENT
On October 29, 1997, the Company filed a shelf registration statement (the "Shelf Registration Statement") with the SEC relating to the future offering of up to an aggregate of $1.5 billion of common shares, preferred shares and warrants exercisable for common shares. Management believes the Shelf Registration Statement will provide the Company with more efficient and immediate access to capital markets when considered appropriate. As of December 31, 1999, approximately $782.7 million was available under the Shelf Registration Statement for the issuance of securities. In connection with the issuances of securities pursuant to the Shelf Registration Statement, the Company contributes the net proceeds of these issuances to the Operating Partnership for its use in exchange for an increase in its limited partner interest in the Operating Partnership.
FORWARD SHARE PURCHASE AGREEMENT
On June 30, 1999, the Company settled the Forward Share Purchase Agreement with UBS. As settlement of the Forward Share Purchase Agreement, the Company made a cash payment of approximately $149.0 million to UBS in exchange for the return by UBS to the Company of 7,299,760 common shares. The payment was made with proceeds generated from the refinancing of the Greenway Plaza Office Property complex. The return of common shares to the Company in settlement of the Forward Share Purchase Agreement resulted in a decrease in the Company's limited partner interest, which resulted in an increase of net income per unit and net book value per unit.
The number of common shares returned to the Company is equal to the 4,700,000 common shares originally issued to UBS plus 2,599,760 common shares subsequently issued by the Company, because of a decline in its stock price. In connection with the issuance of additional common shares, the Company received additional limited partner interest, which resulted in a reduction of the Operating Partnership's net income per unit and net book value per unit. The additional shares were issued as collateral for the Company's obligation to purchase 4,700,000 common shares from UBS by August 12, 1999. The settlement price was calculated based on the gross proceeds the Operating Partnership received from the original issuance of 4,700,000 common shares to UBS, plus a forward accretion component equal to 90-day LIBOR plus 75 basis points, minus an adjustment for the Company's distributions paid to UBS. The forward accretion component represented a guaranteed rate of return to UBS.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized the repurchase of a portion of its outstanding common shares from time to time in the open market or through privately negotiated transactions, in an amount not to exceed $500.0 million. The proposed repurchases will be subject to prevailing market conditions and other considerations. The repurchase of common shares by the Company would decrease the Company's limited partner interest, which would result in an increase of net income per unit and net book value per unit. The Company expects the share repurchase program to be funded through a combination of asset sales and financing arrangements, which, in some cases, may be secured by the repurchased shares. The amount of shares that the Company actually will purchase will be determined from time to time, in its reasonable judgement, based on market conditions and the availability of funds, among other factors. There can be no assurance that any number of shares actually will be purchased within any particular time period.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to repurchase a portion of its common shares from UBS. As of December 31, 1999, the Company was obligated to repurchase 4,789,580 common shares, or approximately $84.1 million of the Company's common shares. The agreement was amended on January 4, 2000, increasing the number of common shares the Company was obligated to repurchase from UBS by January 4, 2001 to approximately 5,800,000 common shares, or approximately $102.0 million of the Company's common shares (as amended, the "Share Repurchase Agreement"). The price the Company will pay for the common shares (the "Settlement Price") will be calculated based on the average cost of the common shares purchased by UBS in connection with the Share Repurchase Agreement plus a return to UBS of 30-day LIBOR plus 250 basis points, minus an adjustment for the Company's distributions during the term of the Share Repurchase Agreement. The guaranteed rate of return to UBS under the agreement is equal to 30-day LIBOR plus 250 basis points.
The Company may settle the Share Repurchase Agreement in cash or common shares. The Company currently intends to settle the Share Repurchase Agreement to UBS in cash, by purchasing and retiring the shares with proceeds from Office Property joint ventures and financing arrangements. If the Company fulfills its settlement obligations in cash, the Operating Partnership will repurchase a portion of the Company's limited partner interest for an amount approximately equal to the cash required to settle the Company's obligations under the Share Repurchase Agreement. This will decrease the Operating Partnership's liquidity and result in an increase in the Operating Partnership's net income per unit and net book value per unit. The Company, however, will continue to evaluate its sources of capital and the potential uses of its capital until the time that settlement is required under the Share Repurchase Agreement or until such earlier time as it determines to settle the Share Repurchase Agreement.
In the event that the Company elects to fulfill the Share Repurchase Agreement in common shares, UBS will sell the common shares on behalf of the Company on the open market. 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 exceeds the number of common shares purchased by UBS in connection with the agreement, the Company will deliver additional cash or common shares to UBS. The issuance of additional common shares would increase the Company's limited partner interest, and result in a decrease in the Operating Partnership's net income per unit and net book value per unit. If the Company elects to fulfill the Share Repurchase Agreement in common shares, and the market price of the common shares is greater than the Settlement Price, UBS will return a portion of the common shares that it purchased in the open market to the Company. If UBS returns common shares to the Company, the Operating Partnership will repurchase a portion of the Company's limited partner interest in the Operating Partnership, which will result in an increase in net income per unit and net book value per unit.
If the common share price on the NYSE falls below the Settlement Price calculated approximately every two weeks, the Company is required to remit cash collateral to UBS equal to the product of the number of common shares purchased by UBS and 115% of the difference between the Settlement Price and the closing price of the common shares as reported on the NYSE. If the Company elects to settle the Share Repurchase Agreement in cash, any cash collateral held by UBS will be used to "pay-down" the Settlement Price. If the Company elects to settle the Share Repurchase Agreement in common shares, UBS will release all claims to any cash collateral they hold at that time. As of December 31, 1999, no cash collateral was due to UBS. On February 18, 2000, the Company posted cash collateral of $8.7 million to UBS, as a result of a decline in the common share price.
According to the terms of the Share Repurchase Agreement, had the agreement been settled, and the average cost of common shares to UBS on December 31, 1999 of approximately $17.55 been used, the Company would have had to repurchase the 4,789,580 common shares from UBS for approximately $84.1 million. In that event, the Operating Partnership's liquidity would have decreased and the Operating Partnership's net income - diluted per unit would have been approximately $(0.09) for the year ended December 31, 1999 and the net book value per unit outstanding at December 31, 1999 would have been approximately $29.95.
STATION CASINOS, INC. ("STATION")
On April 14, 1999, the Company and Station entered into a settlement agreement for the mutual settlement and release of all claims between the Company and Station arising out of the agreement and plan of merger between the Company and Station, which the Company terminated in August 1998. As part of the settlement agreement, the Company paid $15.0 million to Station on April 22, 1999.
METROPOLITAN
On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates Realty Corporation ("Reckson"), and Metropolitan Partners, LLC ("Metropolitan") entered into a revised agreement and plan of merger that superseded the merger agreement to which the Operating Partnership was a party. Under the revised agreement, Metropolitan agreed to acquire Tower for a combination of cash and Reckson exchangeable Class B common shares. The Operating Partnership, Reckson and Metropolitan agreed that the Operating Partnership's investment in Metropolitan would be an $85.0 million preferred member interest in Metropolitan. In connection with the revised agreement, the Operating Partnership contributed $10.0 million of the $85.0 million required capital contribution to Metropolitan in December 1998 and contributed the remaining $75.0 million to Metropolitan upon satisfaction of all of the conditions to the funding on May 19, 1999. The Operating Partnership's $85.0 million preferred member interest in Metropolitan at December 31, 1999 would equate to an approximate 20% equity interest.
The investment has a cash flow preference of 7.5% for a two-year period and may be redeemed by Metropolitan within the two-year period for $85.0 million, plus an amount sufficient to provide a 9.5% internal rate of return to the Operating Partnership. If Metropolitan does not redeem the preferred interest upon expiration of the two-year period, the Operating Partnership may convert the interest either into (i) a common equity interest in Metropolitan or (ii) shares of common stock of Reckson at a conversion price of $24.61.
CREDIT FACILITY
At December 31, 1999, the Operating Partnership's borrowing capacity under the Credit Facility was limited to $560.0 million, of which $510.0 million was outstanding. The interest rate on advances under the Credit Facility was the Eurodollar rate plus 137 basis points. As of December 31, 1999, the weighted average interest rate was 7.65%. The Credit Facility was unsecured and was scheduled to expire in June 2000. The Credit Facility required the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios based on book value and debt service coverage ratios, limitations on additional secured and total indebtedness and distributions, limitations on additional investments and the incurrence of additional liens, restrictions on real estate development activity and a minimum net worth requirement. The Operating Partnership was in compliance with the financial covenants related to the Credit Facility for the December 31, 1999 reporting period. During the first quarter of 2000, the Credit Facility was repaid and retired primarily with the proceeds of the New Facility described below.
NEW FACILITY
On February 4, 2000, the Operating Partnership repaid and retired the Credit Facility and the BankBoston Term Note I primarily with the proceeds of the New Facility, a new $850.0 million secured, variable-rate facility fully underwritten and funded by UBS. The New Facility is comprised of three tranches: a three-year $300.0 million revolving line of credit (the "UBS Line of Credit"), a $275.0 million three-year term loan ("UBS Term Loan I") and a $275.0 million four-year term loan ("UBS Term Loan II"). Borrowings under the UBS Line of Credit, the UBS Term Loan I and the UBS Term Loan II at March 24, 2000 were approximately $258.5 million, $257.2 million and $257.2 million, respectively. The UBS Line of Credit and the UBS Term Loan I bear interest at LIBOR plus 250 basis points. The UBS Term Loan II bears interest at LIBOR plus 275 basis points. The Operating Partnership also entered into a cash flow hedge agreement related to a portion of the New Facility in a separate transaction subsequent to December 31, 1999, which is intended to mitigate its exposure to variable rate debt as more fully described in "Interest Rate Hedging Transactions" below. The New Facility is secured by 41 Office Properties and four Hotel Properties.
INTEREST RATE HEDGING TRANSACTIONS
The Operating Partnership does not use derivative financial instruments for trading purposes, but utilizes them to manage exposure to variable rate debt. The Operating Partnership accounts for its derivative instruments under SFAS 133, which was adopted in the third quarter of 1999. On September 1, 1999, the Operating Partnership entered into a four-year cash flow hedge agreement with Salomon Brothers Holding Company, Inc. ("Salomon"), relating to the BankBoston Term Note II, for a notional amount of $200.0 million. The underlying note, which was originally issued at a floating interest rate of 30-day LIBOR plus 325 basis points was effectively converted to a fixed weighted average interest rate of 9.43% through maturity. Effective February 1, 2000, the Operating Partnership renegotiated certain terms and covenants under the BankBoston Term Note II. At such time, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points, and consequently increased the effective fixed weighted average interest rate to 10.18% through maturity. As of December 31, 1999, the cash flow hedge agreement with Salomon resulted in approximately $0.3 million of additional interest expense.
On February 4, 2000, the Operating Partnership entered into a three-year cash flow hedge agreement with Fleet Boston Financial, relating to a portion of the New Facility, for a notional amount of $200.0 million. As a result, $200.0 million of the amount due under the note, which was originally issued at a floating interest rate of LIBOR plus 250 basis points, was effectively converted to a fixed weighted average interest rate of 9.61% through maturity.
ASSET JOINT VENTURES
The Operating Partnership has entered into agreements with Chadwick Saylor & Co., Inc. and Warburg Dillon Read to provide investment advisory services to the Operating Partnership in the successful execution of the Operating Partnership's joint-venture strategy. The Operating Partnership intends to hold a minority interest in these assets and will continue to lease and manage these Properties.
LIQUIDITY REQUIREMENTS
As of December 31, 1999, the Operating Partnership's short-term liquidity requirements consisted of secured any unsecured debt maturities, its indirect obligations under the Share Repurchase Agreement with UBS and amounts payable in connection with the expansion or renovation of two Hotel Properties. The Operating Partnership had approximately $515.9 million of secured and unsecured debt that was scheduled to expire during 2000, consisting primarily of $510.0 million due under the Credit Facility with BankBoston, which was scheduled to expire in June 2000. In addition, the Operating Partnership, at that time, had approximately $445.0 million of secured debt that was scheduled to expire in 2001, consisting primarily of $320.0 million due under the BankBoston Term Note I. Effective January 31, 2000, the Operating Partnership entered into the New Facility. The Operating Partnership used the proceeds of the New Facility to retire the Credit Facility and BankBoston Term Note I, which made up 86% of the Operating Partnership's maturing debt in 2000 and 2001.
The Company's Share Repurchase Agreement with UBS, as described in "Share Repurchase Agreement" above, expires on January 4, 2001, at which time the Company is required to settle in cash or common shares. The Company currently intends to fulfill the Share Repurchase Agreement to UBS in cash, by purchasing and retiring the shares with proceeds from Office Property joint ventures and financing arrangements. If the Company fulfills its settlement obligations in cash, the Operating Partnership will repurchase a portion of the Company's limited partnership interest for an amount approximately equal to the cash required to settle the Company's obligations under the Share Repurchase Agreement. This will decrease the Operating Partnership's liquidity and will result in an increase in the Operating Partnership's net income per unit and net book value per unit. The Company, however, will continue to evaluate its sources of capital and the potential uses of its capital until the time that settlement is required under the Share Repurchase Agreement or until such earlier time as it determines to settle the Share Repurchase Agreement.
The Sonoma Mission Inn & Spa, located north of San Francisco, California, is scheduled to complete its estimated $20 million expansion consisting of 30 additional guest rooms and a 30,000 square foot full-service spa in April of 2000. The 389 guest room Renaissance Houston Hotel, located in the center of Greenway Plaza, will undergo substantial renovation including improvements to all guest rooms, the lobby, corridors and exterior and interior systems. The estimated $15.0 million renovation project is scheduled to be completed in October of 2000. Both of these projects will be funded from cash flows provided by operating activities, additional debt financing or combination thereof.
The Operating Partnership expects to meet its other short-term liquidity requirements primarily through cash flow provided by operating activities. The Operating Partnership believes that cash flow provided by operating activities will be adequate to fund normal recurring operating expenses, regular debt service requirements (including debt service relating to additional and replacement debt), recurring capital expenditures and distributions to shareholders and unitholders, as well as non-recurring capital expenditures, such as tenant improvement and leasing costs related to previously unoccupied space. To the extent that the Operating Partnership's cash flow from operating activities is not sufficient to finance non-recurring capital expenditures, the Operating Partnership expects to finance such activities with available cash or additional debt financing.
The Operating Partnership expects to meet its long-term liquidity requirements through long-term secured and unsecured borrowings and other debt and equity financing alternatives. As of December 31, 1999, the Operating Partnership's long-term liquidity requirements consisted primarily of maturities under the Operating Partnership's fixed and variable-rate debt.
Debt and equity financing alternatives currently available to the Operating Partnership to satisfy its liquidity requirements and commitments for material capital expenditures include:
o Additional proceeds from the refinancing of existing secured and unsecured debt;
o Additional debt secured by existing unencumbered properties, investment properties, or by investment property acquisitions or developments;
o Issuances of Operating Partnership units; and
o Joint venture arrangements.
DEBT FINANCING ARRANGEMENTS
The significant terms of the Operating Partnership's primary debt financing arrangements existing as of December 31, 1999 are shown below (dollars in thousands):
- ---------- (1) The outstanding principal balance at maturity of this note will be approximately $223 million.
(2) The note has a seven-year period during which only interest is payable (through August 2002), followed by principal amortization based on a 25-year amortization schedule through maturity. At the end of 12 years (August 2007), the interest rate increases, and the Operating Partnership is required to remit, in addition to the monthly debt service payment, excess property cash flow, to be applied first against principal until the note is paid in full and thereafter, against accrued excess interest. It is the Operating Partnership's intention to repay the note in full at such time (August 2007) by making a final payment of approximately $220 million. LaSalle Note I is secured by Properties owned by Funding I (See Note 1. Organization and Basis of Presentation of Item 8. Financial Statements and Supplementary Data). The note agreement restricts Funding I from engaging in certain activities, including incurring liens on the Properties securing the note, pledging the Properties securing the note, incurring certain other indebtedness canceling a material claim or debt owed to it, entering into certain transactions distributing funds derived from operation of the Properties securing the note (except as specifically permitted in the note agreement), or creating easements with respect to the Properties securing the note.
(3) On September 14, 1999, the Operating Partnership refinanced the $184,299 Salomon Brothers Realty Corp. Note with this note. The additional proceeds of $15,701 were used to pay indebtedness outstanding under the BankBoston Credit Facility. The refinancing did not include the Four Seasons Hotel - Houston that had served as partial collateral for the Salomon Brothers Realty Corp. Note. At the end of seven year (October 2006), the loan reprices based on current interest rates at this time. It is the Operating Partnership's intention to repay the note in full at such time (October 2006) by making a final payment of approximately $179.0 million.
(4) The note has a seven-year period during which only interest is payable (through March 2003), followed by principal amortization based on a 25-year amortization schedule through maturity. At the end of 10 years (March 2006), the interest rate increases, and the Operating Partnership is required to remit, in addition to the monthly debt service payment, excess property cash flow, as defined, to be applied first against principal until the note is paid in full and thereafter, against accrued excess interest, as defined. It is the Operating Partnership's intention to repay the note in full at such time (March 2006) by making a final payment of approximately $154.0 million. LaSalle Note II is secured by Properties owned by Funding II (See Note 1. Organization and Basis of Presentation of Item 8. Financial Statements and Supplementary Data). The note agreement restricts Funding II from engaging in certain activities, including incurring liens on the Properties securing the note, pledging the Properties securing the note, incurring certain other indebtedness canceling a material claim or debt owed to it, entering into certain affiliate transactions, distributing funds derived from operation of the Properties securing the note (except as specifically permitted in the note agreement), or creating easements with respect to the Properties securing the note.
(5) The note requires payments of interest only during its term. The CIGNA Note is secured by the MCI Tower and Denver Marriott City Center Hotel Property. The note agreement has no negative covenants. The deed of trust requires the Operating Partnership to maintain the Properties that secure the note, and requires approval to grant liens, transfer the Properties, or issue new leases.
(6) The note requires monthly payments of principal and interest based on 20-year amortization schedule through maturity, at which time the outstanding principal balance is due and payable. The Metropolitan Note I is secured by five of The Woodlands Office Properties which are under contract for sale. The note agreement has no negative covenants.
(7) The note was assumed in connection with an acquisition and was not subsequently retired by the Operating Partnership because of prepayment penalties.
(8) The note requires monthly payments of principal and interest based on a 25-year amortization schedule through maturity, at which time the outstanding principal balance is due and payable. The Metropolitan Life Note II is secured by the Energy Centre Office Property. The note agreement requires the Operating Partnership to maintain compliance with a number of customary covenants, including maintaining the Property that secures the note and not creating any lien with respect to or otherwise encumbering such Property. This note was transferred to the new owner of Energy Centre upon its sale on January 18, 2000.
(9) On December 1, 1999, the Operating Partnership refinanced the Metropolitan Life Note III with the Metropolitan Life Note V. The original note of $40 million had a fixed interest rate of 7.74% and was scheduled to mature on December 1, 1999. The Metropolitan Life Note V requires monthly principal and interest payments based on a 25-year amortization schedule through maturity, at which time the outstanding principal balance is due and payable. The Metropolitan Note is secured by the Datran Center Office Property.
(10) The note requires payments of interest only during its term. The Northwestern Life Note is secured by the 301 Congress Avenue Office Property. The note agreement requires the Operating Partnership to maintain compliance with a number of customary covenants, including maintaining the Property that secures the note and not creating any lien with respect to or otherwise encumbering such Property.
(11) Under the terms of the note, principal and interest are payable based on a 25-year amortization schedule. Beginning in July 1998, the Operating Partnership obtained the right to defease the note by purchasing Treasury obligations in an amount sufficient to pay the note without penalty. The Nomura Funding VI Note is secured by Canyon Ranch-Lenox, the Property owned by Funding VI (see Note 1. Organization and Basis of Presentation of Item 8. Financial Statements and Supplementary Data). In July of 2010, the interest rate due under the note will change to a 10-year Treasury yield plus 500 basis points or, if the Operating Partnership so elects, it may repay the note without penalty. The note agreement requires Funding VI to maintain compliance with a number of customary covenants, including a debt service coverage ratio for the Property that secures the note, a restriction on the ability to transfer or encumber the Property that secures the note, and covenants related to maintaining its single purpose nature, including restrictions on ownership by Funding VI of assets other than the Property that secures the note, restrictions on the ability to incur indebtedness and make loans, and restrictions on operations.
(12) The note requires quarterly payments of principal and interest based on a 15-year amortization schedule through maturity, at which time the outstanding principal balance is due and payable. The Rigney Promissory Note is secured by a parcel of land owned by the Operating Partnership and located across from an Office Property. The note agreement has no negative covenants.
(13) For the method of calculation of the interest rate for the Operating Partnership's variable-rate debt (other than the Credit Facility), see Note 7. Notes Payable and Borrowings under Credit Facility of Item 8. Financial Statements and Supplementary Data.
(14) This note requires payments of interest only during its term. The note bears interest at the Operating Partnership's election of Base Rate plus 100 basis points or Eurodollar plus 325 basis points. On February 10, 1999, this loan was increased to $320 million based on the inclusion of The Addison and Reverchon Plaza Office Properties in the pool of Properties securing this note. The note is secured by a first lien on the 3333 Lee Parkway, Frost Bank Plaza, Four Westlake, Central Park Plaza, Bank One Tower, Washington Harbour and Greenway I and IA Office Properties in addition to the two Properties listed above. The term loan requires the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios based on book value and debt service coverage ratios, limitations on additional secured and total indebtedness and distributions, limitations on additional investments and the incurrence of additional liens, restrictions on real estate development activity and a minimum net worth requirement.
(15) The Operating Partnership entered into the BankBoston Term Note II on September 14, 1999. The loan bears interest at LIBOR plus 325 basis points. This loan is secured by partnership interests in two pools of underleveraged assets. The term loan requires the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios based on book value and debt service coverage ratios, limitations on additional secured and total indebtedness and distributions, limitations on additional investments and the incurrence of additional liens, restrictions on real estate development activity and a minimum net worth requirement. The proceeds were used to repay the $150 million BankBoston Bridge Loan, and to repay $50 million of outstanding indebtedness under the BankBoston Credit Facility. On February 1, 2000, the Operating Partnership renegotiated certain terms and covenants under this note. As a result, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points. The Operating Partnership entered into a four-year $200 million cash flow hedge agreement with Salomon in a separate transaction related to the BankBoston Term Note II. Pursuant to this agreement, the Operating Partnership will pay Salomon on a quarterly basis a 6.183% fixed interest rate, and Salomon will pay the Operating Partnership a floating 90-day LIBOR rate based on the same quarterly reset dates.
(16) The note bears interest at the rate of LIBOR plus 175 basis points and requires payment of interest only during its term. The SFT Note is secured by Fountain Place. The note agreement requires that the Operating Partnership maintain compliance with customary covenants including maintaining the Property that secures the note.
(17) The notes are unsecured and require payments of interest only during their terms. The indenture requires the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios and debt service coverage ratios, limitations on the incurrence of additional indebtedness and maintaining the Operating Partnership's Properties. The notes were issued in an offering registered with the SEC.
(18) At December 31, 1999, the Operating Partnership's borrowing capacity under the Credit Facility was limited to $560.0 million, of which $510.0 million was outstanding. The interest rate on advances under the Credit Facility was the Eurodollar rate plus 137 basis points. The Credit Facility required the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios based on book value and debt service coverage ratios, limitations on additional secured and total indebtedness and distributions, limitations on additional investments and the incurrence of additional liens, restrictions on real estate development activity and a minimum net worth requirement. The Operating Partnership was in compliance with the financial covenants related to the Credit Facility for the December 31, 1999 reporting period. On February 4, 2000, the Credit Facility and the BankBoston Term Note I were repaid and retired primarily with the proceeds from the New Facility, a new $850.0 million secured, variable-rate facility from UBS. See "Liquidity and Capital Resources - New Facility" for a description of the New Facility.
Below are the aggregate principal amounts due as of December 31, 1999 under the Credit Facility and other indebtedness of the Operating Partnership by year. Scheduled principal installments and amounts due at maturity are included.
See "Liquidity and Capital Resources - New Facility" above for a description of the repayment and retiring of the Credit Facility subsequent to December 31, 1999, primarily with the proceeds of the New Facility.
The Operating Partnership's policy with regard to the incurrence and maintenance of debt is based on a review and analysis of:
o investment opportunities for which capital is required and the cost of debt in relation to such investment opportunities;
o the type of debt available (secured or unsecured);
o the effect of additional debt on existing coverage ratios;
o the maturity of the proposed debt in relation to maturities of existing debt; and
o exposure to variable-rate debt and alternatives such as interest rate swaps and cash flow hedges to reduce this exposure.
The Operating Partnership's debt service coverage ratio for the years ended December 31, 1999 and 1998 was approximately 2.8 and 3.1, respectively. Debt service coverage for a particular period 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 debt service coverage ratio the Operating Partnership is required to maintain as stipulated by the Operating Partnership's debt arrangements and calculated as described above is 1.5. The Operating Partnership's New Facility requires a debt service coverage ratio of 2.0.
SIGNIFICANT DEBT REFINANCINGS
On June 30, 1999, the Operating Partnership refinanced the Greenway Plaza Office Property complex with a $280 million, secured, fixed-rate mortgage loan, bearing interest at a fixed rate of 7.53%. The proceeds were primarily used to repay the $115 million existing note on the complex and to pay approximately $149 million in settlement of the Forward Share Purchase Agreement with UBS.
On September 14, 1999, the Operating Partnership obtained a $200 million note from BankBoston ("BankBoston Term Note II") secured by partnership interests in two pools of assets which also secure the La Salle Notes I and II. This new loan has a four-year term and a floating interest rate based on 30-day LIBOR plus 325 basis points. On February 1, 2000, the Operating Partnership renegotiated certain term and covenants under this note. As a result, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points. The proceeds were used to repay the $150 million short-term Bridge Loan with BankBoston in full and reduce the amount outstanding under the BankBoston Credit Facility by $50 million. The Operating Partnership has entered into a four-year $200 million cash flow hedge agreement with Salomon in a separate transaction related to this financing. Pursuant to this agreement, the Operating Partnership will pay Salomon a 6.183% fixed interest rate on a quarterly basis, and Salomon will pay the Operating Partnership a floating 90-day LIBOR rate based on the same quarterly reset dates.
On September 15, 1999, the Operating Partnership refinanced the $184 million Salomon Brothers Note which secured the Houston Center mixed-use Office Property complex, with a $200 million, secured, fixed-rate mortgage loan
through J.P. Morgan Investment Management, Inc. The replacement loan has a seven-year term and bears interest at a fixed rate of 8.31%. The Houston Center mixed-use Office Property secures the replacement loan but the Four Seasons Hotel - Houston, which served as partial collateral for the original loan, does not serve as collateral for the replacement loan. The proceeds of the replacement loan were primarily used to repay the $184 million Salomon Brothers Note in full and to reduce the amount outstanding under the BankBoston Credit Facility by approximately $15 million.
FUNDS FROM OPERATIONS
FFO, based on the definition adopted by the Board of Governors of the NAREIT and as used in this document, means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from debt restructuring and sales of property;
o excluding adjustments not of a normal or recurring nature;
o plus depreciation and amortization of real estate assets; and
o after adjustments for unconsolidated partnerships and joint ventures.
NAREIT developed FFO as a relative measure of performance and liquidity of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. The Operating Partnership considers FFO an appropriate measure of performance of an equity REIT. However, FFO:
o does not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income);
o is not necessarily indicative of cash flow available to fund cash needs; and
o should not be considered as an alternative to net income determined in accordance with GAAP as an indication of the Operating Partnership's operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or the Operating Partnership's ability to make distributions.
The Operating Partnership has historically distributed an amount less than FFO, primarily due to reserves required for capital expenditures, including leasing costs. The aggregate cash distributions paid to shareholders and unitholders for the year ended December 31, 1999 and 1998 were $298.1 and $220.6 million, respectively.
An increase or decrease in FFO does not necessarily result in an increase or decrease in aggregate distributions because the Company's Board of Trust Managers is not required to increase distributions on a quarterly basis unless necessary for the Company to maintain REIT status. However, the Company must distribute 95% of its REIT taxable income (as defined in the Code). Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders and unitholders although not necessarily on a proportionate basis.
Accordingly, the Operating Partnership believes that to facilitate a clear understanding of the consolidated historical operating results of the Operating Partnership, FFO should be considered in conjunction with the Operating Partnership's net income (loss) and cash flows reported in the consolidated financial statements and notes to the financial statements. However, the Operating Partnership's measure of FFO may not be comparable to similarly titled measures of other REITs because these REITs (other than the Company) may apply the definition of FFO in a different manner than the Operating Partnership.
STATEMENTS OF FUNDS FROM OPERATIONS (DOLLARS AND UNITS IN THOUSANDS)
- ----------------- (1) Includes interest and other income, net of gain on behavioral healthcare facility dispostion, less depreciation and amortization of non-real assets and amortization of deferred financing costs.
(2) See calculations for the amounts presented in the reconciliation following this table.
The following schedule reconciles the Operating Partnership's basic weighted average units to the diluted weighted average units presented above:
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES (DOLLARS IN THOUSANDS)
HISTORICAL RECURRING OFFICE AND RETAIL PROPERTY CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring capital expenditures (excluding those expenditures which are recoverable from tenants) and tenant improvement and leasing costs for the years ended December 31, 1999, 1998 and 1997, attributable to signed leases, all of which have commenced or will commence during the next twelve months (i.e., the renewal or replacement tenant began or will begin to pay rent) for the Office and Retail Properties consolidated in the Operating Partnership's financial statements during each of the periods presented. Tenant improvement and leasing costs for signed leases during a particular period do not necessarily equal the cash paid for tenant improvement and leasing costs during such period due to timing of payments.
- -------------------------
(1) Excludes leasing activity for leases that have less than a one-year term (i.e., storage and temporary space).
Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to be made in the Operating Partnership's Office and Retail Property portfolio. The Operating Partnership maintains an active preventive maintenance program in order to minimize required capital improvements. In addition, certain capital improvement costs are recoverable from tenants.
Tenant improvement and leasing costs also may fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease (renewal or replacement tenant), the involvement of external leasing agents and overall competitive market conditions. Management believes that future recurring tenant improvements and leasing costs for the Operating Partnership's existing Office and Retail Properties will approximate on average for "renewal tenants" $6.00 to $10.00 per square foot, or $1.20 to $2.00 per square foot per year based on an average five-year lease term, and, on average for "replacement tenants," $12.00 to $16.00 per square foot, or $2.40 to $3.20 per square foot per year based on an average five-year lease term.
YEAR 2000 COMPLIANCE
OVERVIEW
The year 2000 issue related to whether computer systems will properly recognize date-sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. In addition, the year 2000 issue related to whether non-Information Technology ("IT") systems that depend on embedded computer technology would recognize the year 2000. Systems that did not properly recognize such information could generate erroneous information or fail.
In early 1998, the Operating Partnership assigned a group of individuals with the task of creating a program to identify, understand and address the myriad issues associated with the year 2000 problem. The group completed its assessment of the Operating Partnership's year 2000 readiness by way of a comprehensive review of IT and non-IT systems at the Operating Partnership's principal executive offices and at the Operating Partnership's Properties. The group completed its remediation and testing of any systems that were identified as being date sensitive.
YEAR 2000 DISCLOSURE
The Operating Partnership did not experience any significant disruptions as a result of the year 2000 issues. The Operating Partnership dismantled the year 2000 command center and re-deployed the members of the year 2000 project team. However, the Operating Partnership will continue to monitor all areas of the Operating Partnership for any year 2000 related issues that may surface, but with the passing of time, the likelihood of an issue is negligible.
The total costs to repair and replace IT and Non-IT systems were $0.75 million, which was below the estimated costs of $1.2 million, and did not have a material adverse effect on the Operating Partnership's financial condition or results of operations.
Although unlikely, given that the Operating Partnership has not experienced any year 2000 problems to date, there can be no certainty that any future unforeseen year 2000 problem will not adversely affect the Operating Partnership's results of operations, liquidity or financial position or adversely affect the Operating Partnership's relationships with its customers, suppliers, vendors or others.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Operating Partnership's and the Company's use of financial instruments, such as debt instruments and its Share Repurchase Agreement with UBS, subject the Operating Partnership to market risk which may affect the Operating Partnership's future earnings and cash flows as well as the fair value of its assets. Market risk generally refers to the risk of loss from changes in interest rates and market prices. The Operating Partnership manages its market risk by attempting to match anticipated inflow of cash from its operating, investment and financing activities with anticipated outflow of cash to fund debt payments, distributions to shareholders, investments, capital expenditures and other cash requirements. The Operating Partnership does not enter into financial instruments for trading purposes.
The following discussion of market risk is based solely on hypothetical changes in interest rates related to the Operating Partnership's variable-rate debt and the Company's Share Repurchase Agreement and in the market price of the Company's common shares as such changes relate to the Share Repurchase Agreement. This discussion does not purport to take into account all of the factors that may affect the financial instruments discussed in this section.
INTEREST RATE RISK
The Operating Partnership's interest rate risk is most sensitive to fluctuations in interest rates on its short-term variable-rate debt. The Operating Partnership had total outstanding debt of approximately $2.6 billion at December 31, 1999, of which approximately $0.9 billion, or 34.6%, was variable-rate unhedged debt. The weighted average interest rate on such variable-rate debt was 8.22% as of December 31, 1999. A 10% (82.2 basis point) increase in the weighted average interest rate on such variable-rate debt would result in an annual decrease in net income and cash flows of approximately $7.6 million based on the variable-rate debt outstanding as of December 31, 1999, as a result of the increased interest expense associated with the change in rate. Conversely, a 10% (82.2 basis point) decrease in the weighted average interest rate on such variable-rate debt would result in an annual increase in net income and cash flows of approximately $7.6 million based on the variable rate debt outstanding as of December 31, 1999, as a result of the decreased interest expense associated with the change in rate.
In September 1999, the Operating Partnership entered into a four-year cash flow hedge agreement with Salomon Brothers Holding Company, Inc. ("Salomon"). The cash flow hedge agreement has a notional amount of $200.0 million relating to the BankBoston Term Note II. Pursuant to this agreement, the Operating Partnership will pay Salomon on a quarterly basis at 6.183% fixed interest rate and Salomon will pay the Operating Partnership at a floating 90-day LIBOR rate based on the same quarterly reset dates. The underlying note, which was originally issued at a floating interest rate of 30-day LIBOR plus 325 basis points, was effectively converted to a fixed weighted average interest rate of 9.43% through maturity. Effective February 1, 2000, the Operating Partnership renegotiated certain terms and covenants under the BankBoston Term Note II. At such time, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points, and consequently increased the effective fixed weighted average interest rate to 10.18% through maturity. As of December 31, 1999, the cash flow hedge agreement resulted in $0.3 million of additional interest expense.
In addition, the Company's settlement obligations under the Share Repurchase Agreement with UBS described in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Sole Director of Crescent Real Estate Equities, Ltd:
We have audited the accompanying consolidated balance sheets of Crescent Real Estate Equities Limited Partnership and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Crescent Real Estate Equities Limited Partnership and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas, March 24, 2000
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
The accompanying notes are in integral part of these financial statements.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited partnership ("CREELP" and, together with its direct and indirect ownership interests in limited partnerships, corporations and limited liability companies, the "Operating Partnership"), was formed under the terms of a limited partnership agreement dated February 9, 1994. The Operating Partnership is controlled by Crescent Real Estate Equities Company, a Texas real estate investment trust (the "Company"), through the Company's ownership of all of the outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation ("CREE, Ltd."), which owns an approximately 1% general partner interest in the Operating Partnership. In addition, the Company owns an approximately 89% limited partner interest in the Operating Partnership, with the remaining approximately 10% limited partner interest held by other limited partners. The Operating Partnership directly or indirectly owns substantially all of the economic interests in seven separate single purpose limited partnerships (all formed for the purpose of obtaining securitized debt), with the remaining interests owned indirectly by the Company through seven separate corporations, each of which is a wholly owned subsidiary of CREE, Ltd. and a general partner of one of the seven limited partnerships.
All of the limited partners of the Operating Partnership other than the Company own, in addition to limited partner interests, units. Each unit entitles the holder to exchange the unit (and the related limited partner interest) for two common shares of the Company or, at the Company's option, an equivalent amount of cash. For purposes of this report, the term "unit" or "unit of partnership interest" refers to the limited partner interest and, if applicable, related units held by a limited partner. Accordingly, the Company's approximately 89% limited partner interest has been treated as equivalent, for purposes of this report, to 60,160,990 units, and the remaining approximately 10% limited partner interest has been treated as equivalent, for purposes of this report, to 6,975,952 units. In addition, the Company's 1% general partner interest has been treated as equivalent, for purposes of this report, to 607,687 units.
SEGMENTS
As of December 31, 1999, the Operating Partnership's assets and operations were composed of five major investment segments:
o Office and Retail Segment;
o Hospitality Segment;
o Residential Development Segment;
o Temperature-Controlled Logistics Segment; and
o Behavioral Healthcare Segment.
Within these segments, the Operating Partnership owned directly or indirectly the following real estate assets (the "Properties") as of December 31, 1999:
o OFFICE AND RETAIL SEGMENT consisted of 89 office properties (collectively referred to as the "Office Properties") located in 31 metropolitan submarkets in nine states, with an aggregate of approximately 31.8 million net rentable square feet and seven retail properties (collectively referred to as the "Retail Properties") with an aggregate of approximately 0.8 million net rentable square feet. See Note 17. Dispositions.
o HOSPITALITY SEGMENT consisted of five upscale business class hotels with a total of 2,168 rooms, three luxury resorts and spas with a total of 516 rooms and two Canyon Ranch destination fitness resorts and spas that can accommodate up to 462 guests daily (collectively referred to as the "Hotel Properties"). All Hotel Properties, except the Omni Austin Hotel, are leased to subsidiaries of Crescent Operating, Inc. ("COI"). The Omni Austin Hotel is leased to HCD Austin Corporation.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating Partnership's ownership of real estate mortgages and non-voting common stock representing interests ranging from 40% to 95% in five unconsolidated residential development corporations (collectively referred to as the "Residential Development Corporations"), which in turn, through joint venture or partnership arrangements, currently own 14 residential development properties (collectively referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT (FORMERLY THE REFRIGERATED STORAGE SEGMENT) consisted of the Operating Partnership's indirect 39.6% interest in three partnerships (collectively referred to as the "Temperature-Controlled Logistics Partnerships"), each of which owns one or more corporations or limited liability companies (collectively referred to as the "Temperature-Controlled Logistics Corporations") which, as of December 31, 1999, directly or indirectly owned 89 temperature-controlled logistics properties (collectively referred to as the "Temperature-Controlled Logistics Properties") with an aggregate of approximately 428.3 million cubic feet (17.0 million square feet). This segment was restructured in 1999, and the new ownership structure was effective as of March 12, 1999. See Note 5. Investments in Real Estate Mortgages and Equity of Unconsolidated Companies.
o BEHAVIORAL HEALTHCARE SEGMENT consisted of 88 properties in 24 states (collectively referred to as the "Behavioral Healthcare Properties") that were leased to Charter Behavioral Health Systems, LLC. ("CBHS") and its subsidiaries. CBHS was formed to operate the behavioral healthcare business located at the Behavioral Healthcare Properties and is owned 10% by a subsidiary of Magellan Health Services, Inc. ("Magellan") and 90% by COI and an affiliate of COI. On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. Of these 88 Behavioral Healthcare Properties, 37 are designated as the "Core Properties" for the conduct of CBHS's business and remain subject to a master lease. The other 51 Behavioral Healthcare Properties, at which CBHS has ceased operations or is planning to cease operations, are designated as the "Non-Core Properties", and were being actively marketed for sale at December 31, 1999. See Note 17. Dispositions and Note 18. CBHS for a description of the current status of CBHS and the Operating Partnership's investment in the Behavioral Healthcare Properties.
The Company owns its assets and carries on its operation and other activities through the Operating Partnership and its other subsidiaries. The limited partnership agreement of the Operating Partnership acknowledges that all of the Company's operating expenses are incurred for the benefit of the Operating Partnership and provides that the Operating Partnership shall reimburse the Company for all such expenses. Accordingly, expenses of the Company are reimbursed by the Operating Partnership.
See Note 4. Segment Reporting for a table showing revenues and funds from operations for each of these investment segments for the years ended December 31, 1999, 1998, and 1997 and identifiable assets for each of these investment segments at December 31, 1999 and 1998.
The following table shows, by entity, the Properties Cresent Equities and its subsidiaries owned as of December 31, 1999:
Operating Partnership: 62 Office Properties, six Hotel Properties and five Retail Properties
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Funding I, L.P.: Citadel, The Crescent Atrium, The Crescent ("Funding I") Office Towers, Regency Plaza One, UPR Plaza and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Funding II, L.P.: Briargate Office and Research Center, Hyatt ("Funding II") Regency Albuquerque, Hyatt Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I & II, MacArthur Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance Square and 12404 Park Central
Crescent Real Estate Greenway Plaza Office Properties and Funding III, IV and V, L.P.: Renaissance Houston Hotel(1) ("Funding III, IV and V")
Crescent Real Estate Canyon Ranch-Lenox Funding VI, L.P.: ("Funding VI")
Crescent Real Estate 88 Behavioral Healthcare Properties Funding VII, L.P. ("Funding VII")
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(1) Funding III owns nine of the 10 Office Properties in the Greenway Plaza Office portfolio and the Renaissance Houston Hotel; Funding IV owns the central heated and chilled water plant building located at Greenway Plaza; and Funding V owns Coastal Tower, the remaining Office Property in the Greenway Plaza Office portfolio.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Operating Partnership include all direct and indirect subsidiary entities. The equity interests in those direct and indirect subsidiaries the Operating Partnership does not own are reflected as minority interests. All significant intercompany balances and transactions have been eliminated.
Certain amounts in prior year financial statements have been reclassified to conform with current year presentation.
All information relating to the Company's common shares has been adjusted to reflect the two-for-one stock split effected in the form of a 100% share dividend paid on March 26, 1997 to shareholders and unitholders of record on March 20, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NET INVESTMENTS IN REAL ESTATE
Real estate is carried at cost, net of accumulated depreciation. Betterments, major renovations, and certain costs directly related to the acquisition, improvements and leasing of real estate are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
Buildings and Improvements 5 to 40 years Tenant Improvements Terms of leases Furniture, Fixtures and Equipment 3 to 10 years
An impairment loss is recognized on a property by property basis on Properties classified as held for use, when expected undiscounted cash flows are less than the carrying value of the Property. In cases where the Operating Partnership does not expect to recover its carrying costs on a Property, the Operating Partnership reduces its carrying costs to fair value, and for Properties held for disposition, the Operating Partnership reduces its carrying costs to the fair value less costs to sell. See Note 17. Dispositions and Note 18. CBHS for a description of impairment losses recognized during 1999 for one of the Office Properties and the Behavioral Healthcare Properties.
Depreciation expense is not recognized on Properties once classified as held for disposition.
CONCENTRATION OF REAL ESTATE INVESTMENTS
The Operating Partnership's Office Properties are located primarily in the Dallas/Fort Worth and Houston, Texas metropolitan areas. As of December 31, 1999, the Office Properties in Dallas/Fort Worth and Houston represented approximately 72% of the Operating Partnership's office portfolio based on total net rentable square feet. The Dallas/Fort Worth Office Properties accounted for approximately 39% of that amount, and the Houston Office Properties accounted for the remaining approximately 33%. As a result of the geographic concentration, the operations of the Operating Partnership could be adversely affected by a recession or general economic downturn in the areas where these Properties are located.
CASH AND CASH EQUIVALENTS
The Operating Partnership considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash includes escrows established pursuant to certain mortgage financing arrangements for real estate taxes, insurance, security deposits, ground lease expenditures, capital expenditures and monthly interest carrying costs paid in arrears.
OTHER ASSETS
Other assets consist principally of leasing costs, deferred financing costs, and marketable securities. Leasing costs are amortized on a straight-line basis during the terms of the respective leases, and unamortized leasing costs are written off upon early termination of lease agreements. Deferred financing costs are amortized on a straight-line basis over the terms of the respective loans. Marketable securities are considered available-for-sale and are marked to market value on a monthly basis. The corresponding unrealized gains and losses are included in accumulated other comprehensive income.
DEFERRED COMPENSATION ON RESTRICTED SHARES
Deferred compensation on restricted shares relates to the issuance of restricted shares to employees of the Company. Such restricted shares are amortized to expense during the applicable vesting period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Operating Partnership does not use derivative financing instruments for trading purposes, but utilizes them to manage exposure to variable rate debt. The Operating Partnership accounts for its derivative instruments under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was adopted in the third quarter of 1999.
Under SFAS No. 133, the Operating Partnership's derivatives are considered cash flow hedges which are used to mitigate the variability of cash flows. On a monthly basis, the cash flow hedge is marked to fair value through comprehensive income (outside earnings), and on a monthly basis the cash flow hedge's gain or loss is reported in earnings when the interest on the underlying debt affects earnings.
On November 19, 1999, the Company entered into an agreement with UBS AG ("UBS") that UBS would purchase the Company's common shares, and the Company would be obligated to repurchase a portion of its common shares from UBS. The Company may settle the agreement in cash or common shares at its option. Therefore, the Operating Partnership accounts for the
transaction as an equity transaction. The guaranteed return to UBS is equal to 30-day LIBOR plus 250 basis points, and is accounted for as a preferred dividend.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents and short-term investments are reasonable estimates of their fair values because of the short maturities of these instruments. The fair value of notes receivable, which approximates carrying value, is estimated based on year-end interest rates for receivables of comparable maturity. Notes payable and borrowings under the Operating Partnership's line of credit with BankBoston N.A. ("Credit Facility") have aggregate carrying values which approximate their estimated fair values based upon the current interest rates for debt with similar terms and remaining maturities, without considering the adequacy of the underlying collateral. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1999 and 1998.
REVENUE RECOGNITION
OFFICE & RETAIL PROPERTIES The Operating Partnership, as a lessor, has retained substantially all of the risks and benefits of ownership of the Office and Retail Properties and accounts for its leases as operating leases. Income on leases, which includes scheduled increases in rental rates during the lease term and/or abated rent payments for various periods following the tenant's lease commencement date, is recognized on a straight-line basis. Deferred rent receivable represents the excess of rental revenue recognized on a straight-line basis over cash received pursuant to the applicable lease provisions.
HOTEL PROPERTIES The Operating Partnership cannot, consistent with the Company's status as a REIT, operate the Hotel Properties directly. It has leased all of the Hotel Properties except The Omni Austin Hotel to subsidiaries of COI pursuant to nine separate leases (See Note 16. Formation and Capitalization of COI). As of January 1, 1999, the Omni Austin Hotel has been leased under a separate lease to HCD Austin Corporation. The leases provide for the payment by the lessee of the Hotel Property of (i) base rent, with periodic rent increases if applicable, (ii) percentage rent based on a percentage of gross receipts or gross room revenues, as applicable, above a specified amount, and (iii) a percentage of gross food and beverage revenues above a specified amount for certain Hotel Properties. Base rental income under these leases is recognized on a straight-line basis over the terms of the respective leases. In 1999, percentage rental income was recognized on an accrual basis. In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which prohibits contingent revenue from being accrued until the thresholds upon which it is based have been met. However, SAB No. 101 had no material impact on the Operating Partnership's financial statements for the year ended December 31, 1999, because all of the thresholds upon which percentage rental income is based had been met by December 31, 1999. In accordance with SAB No. 101, percentage rental income will not be recognized in the year 2000 until the thresholds upon which it is based are met. Management does not believe this change will have a material impact on its interim or annual financial statements.
BEHAVIORAL HEALTHCARE PROPERTIES The Operating Partnership has leased the Behavioral Healthcare Properties to CBHS and its subsidiaries under a triple-net lease. CBHS's business has been negatively affected by many factors, including adverse industry conditions. During 1999, CBHS failed to perform in accordance with its operating budget. In the third quarter of 1999, the Operating Partnership began to reflect CBHS rent on a cash basis, and will continue to reflect rent on a cash basis going forward. In the third quarter of 1999, the Operating Partnership wrote-off the rent that was deferred according to the CBHS lease agreement from the commencement of the lease in June 1997 through June 30, 1999. The balance written-off totaled $25,600. The Operating Partnership deferred cash rent payments for November and December 1999 due from CBHS. See Note 18. CBHS for further discussion regarding the status of CBHS, including the filing of voluntary Chapter 11 bankruptcy petitions subsequent to December 31, 1999, and the status of the Operating Partnership's investment in the Behavioral Healthcare Properties.
INCOME TAXES
No provision has been made for federal or state income taxes, because each partner's proportionate share of income or loss from the Operating Partnership will be passed through on such partner's tax return.
EARNINGS PER UNIT OF PARTNERSHIP INTEREST
SFAS No. 128 "Earnings Per Share" ("EPS") specifies the computation, presentation and disclosure requirements for earnings per share. Basic EPS excludes all dilution while Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares.
The effect of the conversion of the Series A Convertible Cumulative Preferred Units is not included in the computation of Diluted EPS for the years ended December 31, 1999 and 1998, since the effect of their conversion is antidilutive.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, all highly liquid investments purchased with an original maturity of 90 days or less are included in cash and cash equivalents.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Operating Partnership adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for the reporting and presentation of comprehensive income and its components (generally, total nonowner changes in equity). As a result of the adoption of SFAS No. 130, comprehensive income has been presented as part of the statements of shareholders' equity. At December 31, 1999, the Operating Partnership's comprehensive income balance was $12,459, primarily attributable to unrealized gains on marketable securities. In 1998, the Operating Partnership's comprehensive income balance was ($5,037), primarily attributable to unrealized losses on marketable securities. Prior to 1998, the Operating Partnership's comprehensive income was not material to the Operating Partnership's financial statements.
Beginning with the fiscal year ended December 31, 1998, the Operating Partnership adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. This statement was effective for financial statements for periods beginning after December 15, 1997. See Note 4. Segment Reporting.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, which provides that all derivative instruments should be recognized as either assets or liabilities depending on the rights or obligations under the contract and that all derivative instruments be measured at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133", which deferred the effective date of SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Operating Partnership elected to implement SFAS No. 133 in the third quarter of 1999. See Note 8. Cash Flow Hedges for a description of the impact on the Operating Partnership's financial statements for the year ended December 31,1999.
In December 1999, the SEC staff released SAB No. 101, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB No. 101 prohibits contingent revenue from being accrued until the thresholds upon which it is based have been met. In 1999, percentage rental income was recognized on an accrual basis. However, SAB No. 101 had no material impact on the Operating Partnership's financial statements for the year ended December 31, 1999, because all of the thresholds upon which percentage rental income is based had been met by December 31, 1999. In accordance with SAB No. 101, percentage rental income will not be recognized in the year 2000 until the thresholds upon which it is based are met. Management does not believe this change will have a material impact on its interim or annual financial statements.
3. PROPERTIES HELD FOR DISPOSITION:
Office and Retail Segment
In pursuit of management's objective to dispose of non-strategic or non-core assets, at December 31, 1999, the Operating Partnership was actively marketing for sale its wholly-owned interests in 10 Office Properties, which are included in the Net Investment in Real Estate of $3,588,054. The carrying value of these Properties at December 31, 1999 was approximately $183,323. The Operating Partnership continually evaluates the portfolio of Properties held for disposition. In the fourth quarter of 1999, two Properties in Dallas, Texas were removed from the original pool of 12 Properties held for disposition. Six of the Properties are located in Dallas, Texas, two are located in New Orleans, Louisiana, one is located in Denver, Colorado and one is located in Omaha, Nebraska. During the year ended December 31, 1999, bids were received on these Properties either individually or in various combinations. Management is currently in the process of evaluating the bids for the remaining Office Properties to determine their economic viability as well as the credit-worthiness of the potential purchasers and their ability to close the transactions. The disposition of these Properties remains subject to the negotiation of acceptable terms and other customary conditions. The Operating Partnership anticipates completing any economically justified sales of these Office Properties by the end of the second quarter of 2000.
The following table summarizes the condensed results of operations for the year ended December 31, 1999 and 1998 for the 10 Office Properties held for disposition. These Properties are classified as held for sale, and depreciation expense has not been recognized since June 30, 1999.
See Note 17. Dispositions for a description of the impairment loss recognized on one of these Office Properties and a description of the disposition of certain properties subsequent to December 31, 1999.
Behavioral Healthcare Segment
The 51 Non-Core Behavioral Healthcare Properties were classified as held for disposition at December 31, 1999, and depreciation expense has not been recognized since November 10, 1999. The carrying value for these Properties at December 31, 1999 was approximately $124,700. The Operating Partnership is actively marketing the Non-Core Properties for sale. See Note 17. Dispositions for a description of the sale of certain Non-Core Properties.
Other
The Woodlands Commercial Properties Company, L.P., owned by the Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for sale certain Property assets (multi-family, retail and office/venture tech portfolios) located in The Woodlands. These assets include the Operating Partnership's 12 Office Properties and four Retail Properties located in The Woodlands.
4. SEGMENT REPORTING
The Operating Partnership adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" beginning with the year ended December 31, 1998. The Operating Partnership currently has five major investment segments: the Office and Retail Segment; the Hospitality Segment; the Temperature-Controlled Logistics Segment; the Residential Development Segment; and the Behavioral Healthcare Segment. Management organizes the segments within the Operating Partnership based on property type for making operating decisions and assessing performance. Investment segments for SFAS No. 131 are determined on the same basis.
The Operating Partnership uses funds from operations ("FFO") as the measure of segment profit or loss. FFO, based on the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") and as used in this document, means:
o Net Income (Loss) - determined in accordance with GAAP;
o excluding gains (or losses) from debt restructuring and sales of property;
o excluding adjustments not of a normal or recurring nature;
o plus depreciation and amortization of real estate assets; and
o after adjustments for unconsolidated partnerships and joint ventures.
NAREIT developed FFO as a relative measure of performance and liquidity of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. The Operating Partnership considers FFO an appropriate measure of performance for an equity REIT, and for its operating segments. However, the Operating Partnership's measure of FFO may not be comparable to similarly titled measures of REITs (other than the Company) because these REITs may apply the definition of FFO in a different manner than the Operating Partnership.
Selected financial information related to each segment for the years ended December 31, 1999, 1998 and 1997 is presented below.
During 1999, COI and CBHS were the Operating Partnership's two largest lessees in terms of total consolidated rental revenues derived from leases. Total rental revenues from COI and total cash rental revenues from CBHS for the year ended December 31, 1999 were approximately 8% and 5% respectively, of the Operating Partnership's total consolidated rental revenues. COI was the lessee for nine of the Hotel Properties for the year ended December 31, 1999, and CBHS was the sole lessee of the Behavioral Healthcare Properties during that period. Due to its reorganization and bankruptcy proceedings, CBHS will no longer be one of the Operating Partnership's largest lessees. See Note 18. CBHS.
See Note 5. Investments in Real Estate Mortgages and Equity of Unconsolidated Companies for a description of the sole lessee of the Temperature-Controlled Logistics Properties.
5. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:
The following is a summary of the Operating Partnership's ownership in significant unconsolidated companies:
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(1) See Item 2. Properties and the Residential Development Properties Table included in that section for the Residential Development Corporation's ownership interest in the Residential Development Properties.
(2) The Crescent Subsidiaries have a 39.6% interest in each of the Temperature-Controlled Logistics Partnerships. Accordingly, each of the Crescent Subsidiaries has an indirect 39.6% interest in the Temperature-Controlled Logistics Properties. See "Temperature-Controlled Logistics" section below.
(3) See the "Office and Retail Segment" section below for more information regarding certain commercial property assets that the Operating Partnership intends to sell.
(4) See Note 17. Dispositions for more information regarding certain interests that the Operating Partnership has sold. (5) See "Other" section below for a description of the Operating Partnership's investment in Metropolitan Partners, LLC.
RESIDENTIAL DEVELOPMENT PROPERTIES
On April 29, 1999, a partnership in which Crescent Development Management Corporation ("CDMC") has a 64% economic interest finalized the purchase of Riverfront Park (previously known as "The Commons"), a master planned residential development on 23 acres in the Central Platte Valley near downtown Denver, Colorado for approximately $25,000. In the first quarter of 2000, the partnership has entered into contracts relating to the sale of 9.7 acres of Riverfront Park, which is expected to close in the second quarter of 2000. The acreage is in close proximity to several major entertainment and recreational facilities including Coors Field (home to the Major League Baseball's Colorado Rockies), Elitch Gardens (an amusement park) the new Pepsi Center (home to the National Hockey League's Colorado Avalanche and the National Basketball Association's Denver Nuggets), and the new downtown Commons Park.
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of December 31, 1999, the Operating Partnership held an indirect 39.6% interest in the Temperature-Controlled Logistics Partnerships, which own the Temperature-Controlled Logistics Corporations, which directly or indirectly own the Temperature-Controlled Logistics Properties. The business operations associated with the Temperature-Controlled Logistics Properties are owned by AmeriCold Logistics, which is owned 60% by Vornado Operating L.P. and 40% by a subsidiary of COI, in which the Operating Partnership has no interest. COI holds an indirect 0.4% interest in the Temperature-Controlled Logistics Partnerships. COI has an option to require the Operating Partnership to purchase COI's remaining 1% economic interest, representing all of the voting stock, in each of the Crescent Subsidiaries at such time as the purchase would not, in the opinion of counsel to the Company, adversely affect the status of the Company as a REIT, for an aggregate price, payable by the Operating Partnership, of approximately $3,400.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled Logistics Properties, entered into triple-net master leases of the Temperature-Controlled Logistics Properties with certain of the Temperature-Controlled Logistics Corporations. Each of the Temperature-Controlled Logistics Properties is subject to one or more of the leases, each of which has an initial term of 15 years, subject to two, five-year renewal options. Under the leases, AmeriCold Logistics is required to pay for all costs arising from the operation, maintenance, and repair of property as well as property capital expenditures in excess of $5,000 annually. For the period of March 12, 1999 to December 31, 1999, base rent and percentage rent was approximately $135,800 of which base rent represented approximately 80%. AmeriCold Logistics has the right to defer a portion of the rent for up to three years beginning on March 12, 1999 to the extent that available cash, as defined in the leases, is insufficient to pay such rent, and pursuant thereto, rent was deferred as of December 31, 1999, of which the Operating Partnership's share was $2,138.
OFFICE AND RETAIL PROPERTIES
The Woodlands Commercial Properties Company, L.P., owned by the Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for sale certain property assets (multi-family, retail and office/venture tech portfolios) located in The Woodlands. As of December 31, 1999, the multi-family portfolio had been sold. See Note 17. Dispositions for a description of the sale of these properties.
OTHER
Metropolitan
On December 8, 1998, Tower Realty Trust ("Tower"), Reckson Associates Realty Corporation ("Reckson"), and Metropolitan Partners, LLC ("Metropolitan") entered into a revised agreement and plan of merger that superseded the merger agreement to which the Operating Partnership was a party. Under the revised agreement, Metropolitan agreed to acquire Tower for a combination of cash and Reckson exchangeable Class B common shares. The Operating Partnership, Reckson and Metropolitan agreed that the Operating Partnership's investment in Metropolitan would be an $85,000 preferred member interest in Metropolitan. In connection with the revised agreement, the Operating Partnership contributed $10,000 of the $85,000 required capital contribution to Metropolitan in December 1998 and contributed the remaining $75,000 to Metropolitan upon satisfaction of all of the conditions to the funding on May 19, 1999. The Operating Partnership's $85,000 preferred member interest in Metropolitan at December 31, 1999 would equate to an approximate 20% equity interest.
The investment has a cash flow preference of 7.5% for a two-year period and may be redeemed by Metropolitan within the two-year period for $85,000, plus an amount sufficient to provide a 9.5% internal rate of return to the Operating Partnership. If Metropolitan does not redeem the preferred interest upon expiration of the two-year period, the Operating Partnership may convert the interest either into (i) a common equity interest in Metropolitan or (ii) shares of common stock of Reckson at a conversion price of $24.61.
CRL Investments, Inc.
The Operating Partnership has a 95% economic interest, representing all of the non-voting stock in CRL Investments, Inc. ("CRL"), which has a 20% economic interest in CR License, LLC, the entity which owns the right to the future use of the "Canyon Ranch" name. CRL has the opportunity through July 2000 to pay $3,000 to obtain an additional 10% interest in CR License, LLC. CRL also has an effective 60% economic interest in the Canyon Ranch Spa Club in the Venetian Hotel in Las Vegas, Nevada. The Canyon Ranch Spa Club opened in June 1999 and is the first project to expand the franchise value of the "Canyon Ranch" name.
The Operating Partnership reports its share of income and losses based on its ownership interest in its respective equity investments. The following summarized information for all unconsolidated companies is presented on an aggregate basis and classified under the captions "Residential Development Corporations", "Temperature-Controlled Logistics Corporations", "Office and Retail" and "Other", as applicable, as of December 31, 1999, 1998, and 1997.
BALANCE SHEETS:
SUMMARY STATEMENTS OF OPERATIONS:
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(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum of the Total Combined Assets).
BALANCE SHEETS:
SUMMARY STATEMENTS OF OPERATIONS:
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(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum of the Total Combined Assets).
SUMMARY STATEMENTS OF OPERATIONS:
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(1) Inclusive of the management fee paid to Vornado Realty Trust (1% per annum of the Total Combined Assets).
6. OTHER ASSETS, NET:
Other assets, net consist of the following:
7. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
The following is a summary of the Operating Partnership's debt financing at December 31, 1999 and 1998:
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(1) On February 4, 2000, the BankBoston Term Note I and the Credit Facility were repaid and retired primarily with the proceeds of a new facility ("New Facility"), an $850,000 secured, variable-rate facility from UBS described in greater detail below.
(2) The outstanding principal balance at maturity of this note will be approximately $223,000.
(3) In August 2007, the interest rate increases, and the Operating Partnership is required to remit, in addition to the monthly debt service payment, excess property cash flow, as defined, to be applied first against principal until the note is paid in full and thereafter, against accrued excess interest, as defined. It is the Operating Partnership's intention to repay the note in full at such time (August 2007) by making a final payment of approximately $220,000.
(4) The Operating Partnership entered into the BankBoston Term Note II on September 14, 1999. This loan is secured by partnership interests in two pools of underleveraged assets. The proceeds were used to repay the $150,000 BankBoston Bridge Loan and to repay $50,000 of outstanding indebtedness under the BankBoston Credit Facility. On February 1, 2000, the Operating Partnership renegotiated certain terms and covenants under this note. As a result, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points. The Operating Partnership entered into a four-year $200,000 cash flow hedge agreement effective September 1, 1999 with Salomon Brothers Holding Company, Inc. in a separate transaction related to the BankBoston Term Note II. See Note 8. Cash Flow Hedges.
(5) On September 14, 1999, the Operating Partnership refinanced the $184,299 Salomon Brothers Realty Corp. Note with this note. The additional proceeds of $15,701 were used to pay indebtedness outstanding under the BankBoston Credit Facility. The refinancing did not include the Four Seasons Hotel that had served as partial collateral for the Salomon Brothers Realty Corp. Note. At the end of seven years (October 2006), the loan reprices based on current interest rates at this time. It is the Operating Partnership's intention to repay the note in full at such time (October 2006) by making a final payment of approximately $179,000.
(6) In March 2006, the interest rate increases, and the Operating Partnership is required to remit, in addition to the monthly debt service payment, excess property cash flow, as defined, to be applied first against principal until the note is paid in full and thereafter, against accrued excess interest, as defined. It is the Operating Partnership's intention to repay the note in full at such time (March 2006) by making a final payment of approximately $154,000.
(7) In June, 1999, the Operating Partnership refinanced the Greenway Plaza Office Property complex with a $280,000 AEGON Note, which was used to repay this note.
(8) In the first quarter of 2000, this note was paid off with proceeds from the disposition of the Energy Centre Office Property.
(9) On December 1, 1999, the Operating Partnership refinanced the Metropolitan Life Note III with the Metropolitan Life Note V.
(10) The Operating Partnership has the option to defease the note, by purchasing Treasury obligations in an amount sufficient to pay the note, without penalty. In July 2010, the interest rate due under the note will change to a 10-year Treasury yield plus 500 basis points or, if the Operating Partnership so elects, it may repay the note without penalty at that date.
(11) The notes were issued in an offering registered with the SEC.
Below are the aggregate principal amounts due as of December 31, 1999 under the Credit Facility and other indebtedness of the Operating Partnership by year. Scheduled principal installments and amounts due at maturity are included.
The Operating Partnership had approximately $515,913 of secured and unsecured debt that was scheduled to expire during 2000, consisting primarily of $510,000 due under the Credit Facility with BankBoston, which was scheduled to expire in June 2000. In addition, the Operating Partnership had approximately $444,975 of secured debt scheduled to expire in 2001, consisting primarily of $320,000 due under the BankBoston Term Note I. Effective January 31, 2000, the Operating Partnership entered into the New Facility, a $850,000 secured, variable-rate facility from UBS which refinanced and extended these debt maturities described in greater detail below.
CREDIT FACILITY
At December 31, 1999, the Operating Partnership's borrowing capacity under the Credit Facility was limited to $560,000, of which $510,000 was outstanding. The interest rate on advances under the Credit Facility was the Eurodollar rate plus 137 basis points. As of December 31, 1999, the weighted average interest rate was 7.65%. The Credit Facility was unsecured and was scheduled to expire in June 2000. The Credit Facility required the Operating Partnership to maintain compliance with a number of customary financial and other covenants on an ongoing basis, including leverage ratios based on book value and debt service coverage ratios, limitations on additional secured and total indebtedness and distributions, limitations on additional investments and the incurrence of additional liens, restrictions on real estate development activity and a minimum net worth requirement. The Operating Partnership was in compliance with the financial covenants related to the Credit Facility for the December 31, 1999 reporting period. During the first quarter of 2000, the Credit Facility was repaid and retired primarily with the proceeds of the New Facility described below.
NEW FACILITY
On February 4, 2000, the Operating Partnership repaid and retired the Credit Facility and the BankBoston Term Note I primarily with the proceeds of the New Facility, a new $850,000 secured, variable-rate facility fully underwritten and funded by UBS. The New Facility is comprised of three tranches: a three-year $300,000 revolving line of credit (the "UBS Line of Credit"), a $275,000 three-year term loan ("UBS Term Loan I") and a $275,000 four-year term loan ("UBS Term Loan II"). Borrowings under the UBS Line of Credit, the UBS Term Loan I and the UBS Term Loan II at March 24, 2000 were approximately $258,527, $257,213 and $257,213, respectively. The UBS Line of Credit and the UBS Term Loan I bear interest at LIBOR plus 250 basis points. The UBS Term Loan II bears interest at LIBOR plus 275 basis points. The New Facility is secured by 41 Office Properties and four Hotel Properties. The Operating Partnership has also entered into a cash flow hedge agreement related to a portion of the New Facility in a separate transaction subsequent to December 31, 1999, which is intended to mitigate its exposure to variable-rate debt. See Note 8. Cash Flow Hedges for a description of this agreement.
8. CASH FLOW HEDGES
The Operating Partnership does not use derivative financial instruments for trading purposes, but occasionally utilizes them to manage exposure to variable rate debt. The Operating Partnership accounts for its derivative instruments under SFAS No. 133, which was adopted in the third quarter of 1999.
In September 1999, the Operating Partnership entered into a four-year cash flow hedge agreement with Salomon Brothers Holding Company, Inc. ("Salomon"). The cash flow hedge agreement is designated as such because it is intended to mitigate the variability of cash flows. On a monthly basis, the cash flow hedge is marked to fair value and the cash flow hedge's gain or loss is reported in earnings when the interest on the underlying debt affects earnings. The cash flow hedge agreement has a notional amount of $200,000, relating to the BankBoston Term Note II. Pursuant to this agreement, the Operating Partnership will pay Salomon on a quarterly basis at 6.183% fixed interest rate and Salomon will pay the Operating Partnership a floating 90-day LIBOR rate based on the same quarterly reset dates. The underlying note, which was originally issued at a floating interest rate of 30-day LIBOR plus 325 basis points, was effectively converted to a fixed weighted average interest rate of 9.43% through maturity. Effective February 1, 2000, the Operating Partnership renegotiated certain terms and covenants under the BankBoston Term Note II. At such time, the interest rate on the facility increased to 30-day LIBOR plus 400 basis points, and consequently increased the effective fixed weighted average interest rate to 10.18% through maturity. As of December 31, 1999, the cash flow hedge agreement resulted in $344 of additional interest expense.
Effective February 4, 2000, the Operating Partnership entered into a three-year cash flow hedge agreement with Fleet Boston Financial, for a notional amount of $200,000, relating to a portion of the New Facility. As a result, $200,000 of the amount under the note, which was originally issued at a floating interest rate of LIBOR plus 250 basis points, was effectively converted to a fixed weighted average interest rate of 9.61% through maturity.
9. RENTALS UNDER OPERATING LEASES:
The Operating Partnership receives rental income from the leasing of Office Property, Retail Property, Hotel Property and Behavioral Healthcare Property space under operating leases. For noncancelable operating leases that were in effect as of December 31, 1999 for Properties owned as of March 24, 2000, future minimum rentals (base rents) during the next five years and thereafter (excluding tenant reimbursements of operating expenses for Office and Retail Properties) are as follows:
For purposes of this Note, the Operating Partnership has assumed that it will not receive any future minimum rental revenues from the Behavioral Healthcare Properties, due to the status of the bankruptcy proceedings of CBHS. See Note 18. CBHS.
Generally, the Office and Retail Property leases also require that tenants reimburse the Operating Partnership for increases in operating expenses above operating expenses during the base year of the tenants lease. These amounts totaled $92,865, $78,708, and $42,385 for the years ended December 31, 1999, 1998 and 1997, respectively. These increases are generally payable in equal installments throughout the year, based on estimated increases, with any differences adjusted at year end based upon actual expenses.
The Operating Partnership recognized percentage rental income from the Hotel Properties of approximately $19,648, $13,848, and $9,678 for the years ended December 31, 1999, 1998 and 1997, respectively.
See Note 2. Summary of Significant Accounting Policies, for further discussion of revenue recognition, and Note 4. Segment Reporting, for further discussion of significant tenants. 10.
10. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Operating Partnership has 14 Properties located on land that is subject to long-term ground leases which expire between 2015 and 2080. The Operating Partnership also leases parking spaces in a parking garage adjacent to one of its Properties pursuant to a lease expiring in 2021. Lease expense associated with these leases during each of the three years ended December 31, 1999, 1998, and 1997 was $2,642, $2,482, and $1,247, respectively. Future minimum lease payments due under such leases as of December 31, 1999, are as follows:
CONTINGENCIES
ENVIRONMENTAL MATTERS
All of the Properties have been subjected to Phase I environmental assessments, and some properties have been subjected to Phase II soil and ground water sampling as part of the Phase I assessments. Such assessments have not revealed, nor is management aware of, any environmental liabilities that management believes would have a material adverse effect on the financial position or results of operations of the Operating Partnership.
11. STOCK AND UNIT BASED COMPENSATION PLANS:
STOCK OPTION PLANS
The Company has two stock incentive plans, the 1995 Stock Incentive Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994 Plan"). In June 1996, the shareholders amended the 1995 Plan, which increased the maximum number of options and/or restricted shares that the Company may grant to 2,850,000 shares. The maximum aggregate number of shares available for grant under the 1995 Plan increases automatically on January 1 of each year by an amount equal to 8.5% of the increase in the number of common shares and units outstanding since January 1 of the preceding year, subject to certain adjustment provisions. As of January 1, 2000, the number of shares the Company may grant under the 1995 Plan is 9,650,505. Under the 1995 Plan, the Company had granted, net of forfeitures, options and restricted shares of 7,275,494 and 23,718 respectively, through December 31, 1999. Due to the approval of the 1995 Plan, additional options and restricted shares will no longer be granted under the 1994 Plan. Under the 1994 Plan, the Company had granted, net of forfeitures, 2,509,800 options and no restricted shares. Under both Plans, options are granted at a price not less than the market value of the shares on the date of grant and expire ten years from the date of grant. The options that have been granted under the 1995 Plan vest over five years, with the exception of 500,000 options that vest over two years, 250,000 options that vest over three and a half years and 60,000 options that vest six months from the initial date of grant. The options that have been granted under the 1994 Plan vest over periods ranging from one to five years.
A summary of the status of the Company's 1994 and 1995 Plans as of December 31, 1999, 1998 and 1997 and changes during the years then ended is presented in the table below:
STOCK OPTIONS PLANS
The following table summarizes information about the options outstanding and exercisable at December 31, 1999:
UNIT PLANS
The Operating Partnership has two unit incentive plans, the 1995 Unit Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the "1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not trust managers, officers or 10% shareholders of the Company. An aggregate of 100,000 common shares are reserved for issuance upon the exchange of 50,000 units available for issuance to employees and advisors under the 1995 Unit Plan. As of December 31, 1999, an aggregate of 7,012 units had been distributed under the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of options. There was no activity in the 1995 Unit Plans in 1999. The 1996 Unit Plan provides for the grant of options to acquire up to 2,000,000 units, all of which were granted. The unit options granted under the 1996 Unit Plan were priced at fair market value on the date of grant, vest over seven years, and expire ten years from the date of grant. Pursuant to the terms of the unit options granted under the 1996 Unit Plan, because the fair market value of the Company's common shares equaled or exceeded $25 for each of ten consecutive trading days, the vesting of an aggregate of 500,000 units was accelerated and such units became immediately exercisable in 1996. Under the 1996 Unit Plan, each unit that may be purchased is exchangeable, as a result of shareholder approval in June 1997, for two common shares. In June 1999, Gerald Haddock forfeited approximately 322,000 units as part of his resignation as an officer and director of the Company and Crescent Real Estate Equities, Ltd. These options are available for grant to participants. In addition, the 1996 Unit Plan was amended in November 1999, to provide for an additional grant of 100,000 unit options, available from such forfeitures, and to allow such unit options to vest over five years.
A summary of the status of the Operating Partnership's 1996 Unit Plan as of December 31, 1999, 1998 and 1997, and changes during the years then ended is presented in the table below (assumes each unit is exchanged for two common shares):
1996 UNIT INCENTIVE OPTION PLAN
STOCK OPTION AND UNIT PLANS
The Operating Partnership applies APB No. 25 in accounting for options granted pursuant to the 1995 Plan, the 1994 Plan and the 1996 Unit Plan (collectively, the "Plans"). Accordingly, no compensation cost has been recognized for the Plans. Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards under the Plans, consistent with SFAS No. 123, the Operating Partnership's net income and earnings per unit would have been reduced to the following pro forma amounts:
Because SFAS No. 123 was not required to be applied to options granted prior to January 1, 1995, the resulting compensation cost may not be representative of what is to be expected in future years.
At December 31, 1999, 1998 and 1997, the weighted average fair value of unit options granted was $5.60, $10.02, and $13.04, respectively. The fair value of each option is estimated at the date of grant using the Black-Scholes option-pricing model using the following expected weighted average assumptions in the calculation.
PARTNERS' CAPITAL:
In connection with its issuances of securities, the Company contributes the net proceeds of these issuances to the Operating Partnership for its use in exchange for an increase in its limited partner interest in the Operating Partnership. Each unit may be exchanged for either two common shares or, at the election of the Company, cash equal to the fair market value of the two common shares at the time of the exchange. When a unitholder exchanges a unit, the Company's percentage interest in the Operating Partnership increases. During the years ended December 31, 1999, there were 226,914 units exchanged for 453,828 common shares of the Company.
PREFERRED SHARE OFFERINGS
On February 19, 1998, the Company completed an offering (the "February 1998 Preferred Offering") of 8,000,000 shares of 6 3/4% Series A convertible cumulative preferred shares (the "Series A Preferred Shares") with a liquidation preference of $25 per share. Series A Preferred Shares are convertible at any time, in whole or in part, at the option of the holders thereof into common shares of the Company at a conversion price of $40.86 per common share (equivalent to a conversion rate of .6119 common share per Series A Preferred Share based on the original offering price), subject to adjustment in certain circumstances. In connection with the February 1998 Preferred Offering, the Operating Partnership created a comparable class of preferred units (the "Class A Units") which are owned by the Company. Net proceeds contributed to the Operating Partnership from the February 1998 Preferred Offering after underwriting discounts of $8,000 and other offering costs of $750 were approximately $191,250, resulting in a corresponding increase in the Company's limited partner interest. The net proceeds from the February 1998 Preferred Offering were used by the Operating Partnership to repay borrowings under the BankBoston Credit Facility. Dividends on the Series A Preferred Shares and Class A Units are cumulative from the date of original issuance and are payable quarterly in arrears commencing on May 15, 1998. The dividend represents an annualized dividend of $1.69 per share and Class A Unit, or $.42 per share and Class A Unit per quarter.
On June 30, 1998, the Company completed an offering (the June 1998 Preferred Offering") of 6,948,734 Series B convertible preferred shares at $32.38 per share (the "Series B Preferred Shares") for aggregate total offering proceeds of approximately $225,000 to The Prudential Insurance Company of America and certain of its affiliates. In connection with the June 1998 Preferred Offering, the Operating Partnership created a comparable class of preferred units (the "Class B Units") which are owned by the Company. The net proceeds, contributed to the Operating Partnership from the offering were approximately $224,750, resulting in a corresponding increase in the Company's limited partner interest. The net proceeds from the June 1998 Preferred Offering were used by the Operating Partnership to repay approximately $170,000 of short-term indebtedness and to make an indirect investment of approximately $55,900 in five additional Temperature-Controlled Logistics Properties. On October 7, 1998, the Series B Preferred Shares became convertible at any time, at the option of the holder. On November 30, 1998, upon the election of the holder, the Series B Preferred Shares were converted into 8,400,582 of the Company's common shares at a conversion rate which was calculated by comparing the investment return produced by the common shares of the Company and an investment return of a portfolio of equity REIT's as computed by NAREIT. The Class B Units were simultaneously converted into an additional limited partner interest held by the Company.
COMMON SHARE OFFERING
On April 23, 1998, the Company completed an offering of 1,365,138 common shares at $32.27 per share (the "April 1998 Unit Investment Trust Offering") to Merrill Lynch & Co. Net proceeds to the Company contributed to the Operating Partnership from the April 1998 Unit Investment Trust Offering were approximately $43,959, resulting in a corresponding increase in the Company's limited partner interest. The net proceeds were used to reduce borrowings outstanding under the BankBoston Credit Facility.
On March 25, 1999, the Company issued 12,356 additional common shares to the former holder of the Series B Preferred Shares, settling a dispute regarding the calculation of the conversion rate used in the conversion of the Series B Preferred Shares into the Company's common shares on November 30, 1998. In connection with the issuance of additional common shares, the Company received an additional limited partner interest, which resulted in a reduction of the Operating Partnership's net income per unit and net book value per unit.
FORWARD SHARE PURCHASE AGREEMENT
On August 12, 1997, the Company entered into two transactions with affiliates of the predecessor of UBS AG ("UBS"). In one transaction, the Company sold 4,700,000 common shares to UBS for approximately $148,000 and the Company received approximately $145,000 in net proceeds. In the other transaction, the Company entered into a forward share purchase agreement (the "Forward Share Purchase Agreement") with UBS. On August 11, 1998, the Company paid a fee of approximately $3,000 to UBS in connection with the exercise by the Company and UBS of the right to extend the term of the Forward Share Purchase Agreement until August 12, 1999.
On June 30, 1999, the Company settled the forward share purchase agreement (the "Forward Share Purchase Agreement") with affiliates of the predecessor of UBS. As settlement of the Forward Share Purchase Agreement, the Company made a cash payment of approximately $149,000 to UBS in exchange for the return by UBS to the Company of 7,299,760 common shares.
The number of common shares returned to the Company is equal to the 4,700,000 common shares originally issued to UBS plus 2,599,760 common shares subsequently issued by the Company, because of a decline in its stock price. In connection with the issuance of additional common shares, the Company received additional limited partner interest, which resulted in a reduction of the Operating Partnership's net income per unit and net book value per unit. The additional shares were issued as collateral for the Company's obligation to purchase 4,700,000 common shares from UBS by August 12, 1999. The settlement price was calculated based on the gross proceeds the Company received from the original issuance of 4,700,000 common shares to UBS, plus a forward accretion component equal to 90-day LIBOR plus 75 basis points, minus an adjustment for the Company's distributions paid to UBS. The forward accretion component represented a guaranteed rate of return to UBS.
EQUITY SWAP AGREEMENT
On December 12, 1997, the Company entered into two transactions with Merrill Lynch. In one transaction, pursuant to which the Company obtained additional equity capital through the issuance of common shares, the Company sold 5,375,000 common shares at $38.125 per share to Merrill Lynch for $204,900 ($199,900 in net proceeds) (the "Merrill Lynch Offering"). The net proceeds contributed to the Partnership from the Merrill Lynch Offering were used to repay borrowings under the BankBoston Credit Facility. In the other transaction, the Company entered into an equity swap agreement (the "Swap Agreement") with Merrill Lynch relating to 5,375,000 common shares (the "Settlement Shares"), pursuant to which Merrill Lynch would sell, as directed by the Company on or before December 12, 1998, a sufficient number of common shares to achieve net sales proceeds equal to the market value of the Settlement Shares on December 12, 1997, plus a forward accretion component, minus an adjustment for the Company's distribution rate.
On February 20, 1998, and June 25, 1998, the Company issued 525,000 common shares and 759,254 common shares, respectively, to Merrill Lynch, pursuant to the terms of the Swap Agreement, as a result of the decline in market price of the common shares from December 12, 1997 through February 12, 1998 and June 12, 1998, respectively. The issuance of these common shares did not have a material impact on the Company's net income per common share or net book value per common share or the Operating Partnership's net income per unit or net book value per unit.
Effective September 30, 1998, the Company terminated the Swap Agreement with Merrill Lynch. As of that date, the Company repurchased the 6,659,254 common shares that Merrill Lynch held and terminated the additional contingent share obligation provided for under the Swap Agreement by the Operating Partnership issuing a $209,299 promissory note (the "Merrill Lynch Note") due December 14, 1998. The Merrill Lynch Note, which provided for interest at the rate of 75 basis points above 30-day LIBOR, is secured by a first mortgage lien on the Houston Center mixed-use Property complex. On December 14, 1998, the Company and Merrill Lynch modified the Merrill Lynch Note. In connection with the modification, (i) the Operating Partnership made a payment of $25,000 of principal, (ii) the term of the Merrill Lynch Note was extended to September 14, 1999, and (iii) the interest rate was increased to an initial rate of 200 basis points above 30-day LIBOR. In connection with this extension, the Operating Partnership paid an extension fee of $1,800. On September 14, 1999, this note was refinanced with the JP Morgan Mortgage Note.
SHARE REPURCHASE PROGRAM
On November 5, 1999, the Company's Board of Trust Managers authorized the repurchase of a portion of its outstanding common shares from time to time in the open market or through privately negotiated transactions, in an amount not to exceed $500,000. The proposed repurchases will be subject to prevailing market conditions and other considerations. The repurchase of common shares by the Company would decrease the Company's limited partner interest, which would result in an increase of net income per unit and net book value per unit.
The Company expects the share repurchase program to be funded through a combination of asset sales and financing arrangements, which, in some cases, may be secured by the repurchased shares. The amount of shares that the Company actually will purchase will be determined from time to time, in its reasonable judgment, based on market conditions and the availability of funds, among other factors. There can be no assurance that any number of shares actually will be purchased within any particular time period.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement with UBS to repurchase a portion of its common shares from UBS. As of December 31, 1999, the Company was obligated to repurchase 4,789,580 common shares, or approximately $84,100 of the Company's common shares. The agreement was amended on January 4, 2000, increasing the number of common shares the Company was obligated to repurchase from UBS by January 4, 2001 to approximately 5,800,000 common shares, or approximately $102,000 of the Company's common shares (as amended, the "Share Repurchase Agreement"). The price the Company will pay for the common shares (the "Settlement Price") will be calculated based on the average cost of the common shares purchased by UBS in connection with the Share Repurchase Agreement plus 30-day LIBOR plus 250 basis points, minus an adjustment for the Company's distributions during the term of the Share Repurchase Agreement. The guaranteed rate of return under the agreement is equal to 30-day LIBOR plus 250 basis points.
The Company may settle the Share Repurchase Agreement in cash or common shares. If the Company fulfills its settlement obligations in cash, the Operating Partnership will repurchase a portion of the Company's limited partner interest for an amount approximately equal to the cash required to settle the Company's obligations under the Share Repurchase Agreement. In the event that the Company elects to fulfill the Share Repurchase Agreement in common shares, UBS will sell the common shares on behalf of the Company on the open market. 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 exceeds the number of common shares purchased by UBS in connection with the agreement, the Company will deliver additional cash or common shares to UBS. The issuance of additional common shares would increase the Company's limited partner interest, which would result in a reduction of the Operating Partnership's net income per unit and net book value per unit. If the Company elects to fulfill the Share Repurchase Agreement in common shares, and the market price of the common shares is greater than the Settlement Price, UBS will return a portion of the common shares that it purchased in the open market to the Company. If UBS returns common shares to the Company, the Operating Partnership will repurchase a portion of the Company's limited partner interest in the Operating Partnership, which will result in an increase in net income per unit and net book value per unit.
If the common share price on the NYSE falls below the Settlement Price calculated approximately every two weeks, the Company is required to remit cash collateral to UBS equal to the product of the number of common shares purchased by UBS and 115% of the difference between the Settlement Price and the closing price of the common shares as reported on the NYSE. If the Company elects to settle the Share Repurchase Agreement in cash, any cash collateral held by UBS will be used to "pay-down" the Settlement Price. If the Company elects to settle the Share Repurchase Agreement in common shares, UBS will release all claims to any cash collateral they hold at that time. As of December 31, 1999, no cash collateral was due to UBS. On February 18, 2000, the Company posted cash collateral of $8,700 to UBS, as a result of a decline in the common share price.
DISTRIBUTIONS
Units
The distribution to partners paid during the year ended December 31, 1999, was $299,878.
The distribution to partners paid during the year ended December 31, 1998, was $220,618.
Following is the income tax status of dividends paid by the Company on common shares and distributions paid by the Operating Partnership on equivalent units during the years ended December 31, 1999 and 1998 to common shareholders and unitholders:
Preferred Units
For the year ended December 31, 1999, the Operating Partnership paid cash distributions on its Series A Preferred Units of $13,500 to the Company, which was the sole holder of record.
For the year ended December 31, 1998, the Operating Partnership paid cash distributions on its Series A Preferred Units of $11,500 to the Company, which was the sole holder of record.
Following is the income tax status of dividends paid by the Company and distributions paid by the Operating Partnership during the years ended December 31, 1999 and 1998 to preferred shareholders and unitholders:
13. SETTLEMENT OF MERGER DISPUTE:
STATION CASINOS, INC. ("STATION")
As of April 14, 1999, the Company and Station entered into a settlement agreement for the mutual settlement and release of all claims between the Company and Station arising out of the agreement and plan of merger between the Company and Station, which the Company terminated in August 1998. As part of the settlement agreement, the Company paid $15,000 to Station on April 22, 1999.
14. MINORITY INTEREST:
Minority interest represents joint ventures interests held by third parties.
15. RELATED PARTY INVESTMENT:
As of December 31, 1999, the Operating Partnership, upon the approval of the independent members of the Board of Trust Managers of the Company, contributed approximately $22,500 of a $25,000 commitment to DBL Holdings, Inc. ("DBL"). The Operating Partnership has a 95% non-voting interest in DBL.
The contribution was used by DBL to invest in DBL-ABC, Inc., which, in turn, acquired a limited partnership interest of 12.5% in the G2 Opportunity Fund, LP ("G2"). G2 was formed for the purpose of investing in commercial mortgage backed securities and is managed by an entity that is owned equally by Goff Moore Strategic Partners, LP ("GMSP") and GMAC Commercial Mortgage Corporation. John Goff, Vice-Chairman of the Board of Trust Managers and President and Chief Executive Officer of the Company and member of the Strategic Planning Committee of Crescent Real Estate Equities, Ltd., and Darla Moore, who is married to Richard Rainwater, Chairman of the Board of Trust Managers of the Company and member of the Strategic Planning Committee of Crescent Real Estate Equities, Ltd., each own 50% of the entity that ultimately controls GMSP. Mr. Rainwater is a limited partner of GMSP. At December 31, 1999, DBL's primary holdings consisted of the 12.5% investment in G2.
16. FORMATION AND CAPITALIZATION OF COI
In April 1997, the Company established a new Delaware corporation, COI. All of the outstanding common stock of COI, valued at $0.99 per share, was distributed, effective June 12, 1997, to those persons who were limited partners of the Operating Partnership or shareholders of the Company on May 30, 1997, in a spin-off.
COI was formed to become a lessee and operator of various assets to be acquired by the Company and to perform the "Intercompany Agreement" between COI and the Company, pursuant to which each has agreed to provide the other with rights to participate in certain transactions. As a result of the formation of COI and the execution of the "Intercompany Agreement", persons who own equity interests in both the Operating Partnership and COI have the opportunity to participate in the benefits of both the real estate investments of the Operating Partnership (including ownership of real estate assets) and the lease of certain of such assets and the ownership of other non-real estate assets by COI. The certificate of incorporation, as amended and restated, of COI generally prohibits COI, for so long as the Intercompany Agreement remains in effect, from engaging in activities or making investments that a REIT could make, unless the Company was first given the opportunity, but elected not to pursue such activities or investments.
In connection with the formation and capitalization of COI, the Operating Partnership provided to COI approximately $50,000 in the form of cash contributions and loans to be used by COI to acquire certain assets. The Operating Partnership also made available to COI a line of credit to be used by COI to fulfill certain ongoing obligations associated with these assets. As of December 31, 1999, COI had $36,700 and $22,824 outstanding under the line of credit and term loans, respectively, with the Operating Partnership.
17. DISPOSITIONS:
Office & Retail Segment
For the year ended December 31, 1999, the Operating Partnership recognized an impairment loss of approximately $16,800 on one of the Office Properties held for disposition, which was sold during the first quarter of 2000. The impairment loss represented the difference between the carrying value of the Office Property and the sales price less costs of the sale. As of March 24, 2000, the Operating Partnership completed the sale of six wholly-owned Office Properties, which were included in the group of ten Office Properties held for disposition at December 31, 1999 and were being actively marketed for sale. The sales generated approximately $146,600 of net proceeds. The proceeds were primarily used to pay down variable-rate debt. Excluding the impairment loss on one of the six Office Properties held for disposition at December 31, 1999, the Operating Partnership recognized a net gain of approximately $13,300 in the first quarter of 2000, related to the sales of the other five Office Properties that were classified as held for disposition at December 31, 1999. In addition, the Operating Partnership has entered into contracts relating to the sale of two additional Office Properties.
Behavioral Healthcare Segment
The Operating Partnership is actively marketing the Non-Core Properties for sale. The Non-Core Properties were classified as held for disposition at December 31, 1999, and depreciation expense has not been recognized since November 10, 1999. From January 1 through March 24, 2000, the Operating Partnership completed the sale of 11 Non-Core Properties. The sales generated approximately $34,900 in net proceeds. The proceeds were primarily used to pay down variable-rate debt. The Operating Partnership has also entered into contracts or letters of intent to sell an additional six Non-Core Properties. See Note 18. CBHS.
Other
On October 27, 1999, the Operating Partnership completed the sale of its non-core equity and debt interests in the Dallas Mavericks, interest in the new Dallas sports arena development and surrounding mixed-use development projects, and certain promissory notes related to the Dallas Mavericks for approximately $89,000 in cash. In connection with the sale, the Operating Partnership recognized a net loss of approximately $700. The proceeds were primarily used to pay down variable-rate debt.
The Woodlands Commercial Properties Company, L.P., owned by the Operating Partnership and Morgan Stanley Real Estate Fund II, L.P., has been actively marketing for sale certain property assets (multi-family, retail and office/venture tech portfolios) located in The Woodlands. As of December 31, 1999, the multi-family portfolio had been sold, generating net proceeds of approximately $28,800, of which the Operating Partnership's portion was approximately $12,200. The sale generated a net gain of approximately $11,600, of which the Operating Partnership's portion was approximately $4,900. The sale of the retail portfolio, including the Operating Partnership's four Retail Properties located in The Woodlands, closed on January 5, 2000, and generated approximately $49,800 of net proceeds, of which the Operating Partnership's portion was approximately $37,300. The Woodlands Retail Properties were sold at a net gain of approximately $9,000, of which the Operating Partnership's portion was approximately $7,700. All of the proceeds were primarily used to pay down variable-rate debt.
18. CBHS:
BEHAVIORAL HEALTHCARE SEGMENT
During the year ended December 31,1999, the Operating Partnership received cash rental payments of approximately $35,300 from CBHS. CBHS's business has been negatively affected by many factors, including adverse industry conditions. During 1999, CBHS failed to perform in accordance with its operating budget.
In the fourth quarter of 1999, the Operating Partnership, COI, Magellan and CBHS completed a recapitalization of CBHS. Pursuant to the recapitalization, Magellan transferred its remaining hospital-based assets to CBHS, canceled its accrued franchise fees and terminated the franchise agreements, pursuant to which Magellan had
provided certain services to CBHS in exchange for certain franchise fees. The Operating Partnership also deferred the monthly rental payments due from CBHS for November and December 1999 and amended its master lease with CBHS to provide a mechanism to terminate the master lease as to the Non-Core Properties, and agreed that, upon each sale by the Operating Partnership of a Non-Core Property, the monthly minimum rent due from CBHS under the master lease would be reduced by a specified percentage of the net proceeds of such sale. In addition, the Operating Partnership obtained appraisals of the underlying behavioral healthcare real estate assets completed in November 1999.
In connection with the above events, the following financial statement charges were made with respect to the Operating Partnership's investment in the Behavioral Healthcare Properties for the year ended December 31, 1999:
o CBHS rent was reflected on a cash basis beginning in the third quarter of 1999 and CBHS rent will continue to be reflected on a cash basis going forward;
o The Operating Partnership wrote-off the rent that was deferred according to the CBHS lease agreement from the commencement of the lease in June of 1997 through June 30, 1999. The balance written-off totaled $25,600;
o The Operating Partnership wrote-down its behavioral healthcare real estate assets by approximately $103,800, to a book value of $245,000;
o The Operating Partnership recorded approximately $15,000 of additional expense to be used by CBHS as working capital; and
o The Operating Partnership has not recorded depreciation expense on the Non-Core Properties since November 1999, when such Properties were classified as held for disposition.
As of December 31, 1999, the Behavioral Healthcare Segment consisted of 88 Behavioral Healthcare Properties in 24 states, all of which were leased to CBHS and its subsidiaries under a triple-net master lease. Of these 88 Behavioral Healthcare Properties, 51 are designated as Non-Core Properties and the remaining 37 are designated as Core Properties. The 51 Non-Core Properties, which are the Properties at which CBHS has ceased operations or is planning to cease operations, were being actively marketed for sale at December 31, 1999.
On February 16, 2000, CBHS and all of its subsidiaries that are subject to the master lease with the Operating Partnership filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. CBHS has stated in its bankruptcy petitions that it intends to sell all of the ongoing businesses of CBHS and its subsidiaries by mid-May of 2000 or develop an appropriate liquidation procedure if the sales have not taken place by that time.
Effective February 29, 2000, the Non-Core Properties were terminated from the master lease, although the aggregate rent due under the master lease was not reduced as a result, except as described above with respect to sales of Non-Core Properties. See Note 17. Dispositions for a description of recent dispositions of Non-Core Properties. The Core Properties remain subject to the master lease. Payment and treatment of rent for the Behavioral Healthcare Properties is subject to a rent stipulation agreed to by certain of the parties involved in the CBHS bankruptcy proceeding.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
SCHEDULE III
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (dollars in thousands)
SCHEDULE III
- ------------------- (1) Depreciation of the real estate assets is calculated over the following estimated useful lives using the straight-line method:
Building and improvements 5 to 40 years Tenant improvements Terms of leases Furniture, fixtures, and equipment 3 to 10 years
(2) Depreciation on these Office Properties held for sale ceased from 7/1/99 through 12/31/99 (the period over which these properties were held for sale).
(3) Depreciation on Behavioral Healthcare Properties held for sale ceased from 11/11/99 through 12/31/99 (the period over which these properties were held for sale).
(4) Write-down on Behavioral Healthcare Properties represents adjustment to estimated fair value.
(5) Write-down on Energy Centre represents the difference between the carrying value of the asset and the expected selling price less costs to sell.
A summary of combined real estate investments and accumulated depreciation is as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Certain information Part III requires is omitted from the Report. The Company will file a definitive proxy statement with the SEC pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information to be included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER OF THE REGISTRANT
The information this Item requires is incorporated by reference to the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held in June 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information this Item requires is incorporated by reference to the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held in June 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information this Item requires is incorporated by reference to the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held in June 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information this Item requires is incorporated by reference to the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held in June 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Report of Independent Public Accountants
Crescent Real Estate Equities Limited Partnership Consolidated Balance Sheets at December 31, 1999 and 1998.
Crescent Real Estate Equities Limited Partnership Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.
Crescent Real Estate Equities Limited Partnership Consolidated Statements of Partners' Capital for the years ended December 31, 1999, 1998 and 1997.
Crescent Real Estate Equities Limited Partnership Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.
Crescent Real Estate Equities Limited Partnership Notes to Financial Statements.
(a)(2) Financial Statement Schedules
Schedule III - Crescent Real Estate Equities Limited Partnership Consolidated Real Estate Investments and Accumulated Depreciation at December 31, 1999.
All other schedules have been omitted either because they are not applicable or because the required information has been disclosed in the Financial Statements and related notes included in the consolidated and combined statements.
(a)(3) Exhibits
(b) Reports on Form 8-K
None.
(c) Exhibits
See Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of April, 2000.
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP (Registrant)
By: CRESCENT REAL ESTATE EQUITIES, LTD., ------------------------------------------ its General Partner
By: /s/ JOHN C. GOFF ------------------------------------------ John C. Goff Chief Executive Officer and President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE EXCHANGE ACT
No annual report to security holders covering the Registrant's last fiscal year or proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders has been sent to security holders or is to be furnished to security holders subsequent to the filing of this annual report on Form 10-K.
INDEX TO EXHIBITS