Crescent Real Estate Equities Company
Bryan Connell – bryan.m.connell@ttu.edu
Kevin Brownlee – k_brownlee1@yahoo.com
Marshall Estes – marshestes@gmail.com
Daniel Cisneros – daniel.j.cisneros@ttu.edu
Valuation as of April 1, 2005
Crescent Real Estate Valuation
Table of Contents
Executive Summary ………………………………………3
Industry and Business Overview………………………...6
Industry Overview…………………………………6
Business Overview………………………………..7
5-Forces……………………………………………8
Key Success Factors……………………………..13
Accounting Analysis………………………………………16
Key Accounting Policies………………………….16
Accounting Flexibility……………………………..18
Accounting Strategy………………………………20
Quality of Disclosure………………………………..........22
Sales Manipulation Screening Ratios…………..23
Expense Manipulation Screening Ratios……….26
Potential “Red Flags”……………………………..28
Ratio Analysis &
Forecasted Financial Statements……………………….30
Liquidity Ratio Analysis…………………………..31
Profitability Ratio Analysis……………………….35
Capital Structure Analysis……………………….41
Ratio Analysis Summary…………………………43
Forecasting………………………………………..43
Valuation Analysis………………………………………..46
Method of Comparables…………………………46
Discounted Dividend Model……………………..48
Discounted Free Cash Flow Model……………..50
Residual Income Valuation Model………………51
Abnormal Earnings Growth Model……………...52
Valuation Summary……………………………….53
Appendix…………………………………………………..54
2
Executive Summary
PCS Research Corporation
Crescent Real Estate Company (CEI)
Investment Recommendation:
Undervalued - Buy
Stock Data
April 1, 2004
Valuation Ratio Comparison
Crescent
Industry
Current Price (NYSE)
52 week Price Range
Revenue (2004)
Market Capitalization
Dividend Yield
9.13
$16.35
$14.62-$19.36
$978,761,000
1.64 Billion
6.23
Trailing P/E
Forward P/E
Forward PEG
M/B
Shares Outstanding
Dividend Yield
3-month Avg. Daily Trading Volume
Institutional Ownership %
99,820,000
9.19%
583,454
32.0%
Valuation Estimates
Book Value Per Share
ROE
ROA
Est. 5 year EPS Growth Rate
13.03
10.85%
3.5%
5.2%
32.08
12.69
2.44
1.80
26.08
9.77
2.06
1.78
Actual Current Price (April 1, 2005)
Ratio Based Valuations
P/E Trailing
P/E Forward
PEG Forward
Dividend Yield
M/B
Ford Epic Valuation
$16.35
32.08
12.69
2.44
9.19%
1.80
$28.37
Discounted Dividends
$28.46
Residual Income
Abnormal Earnings Growth
Long-run Residual Income Perpetuity
$28.41
$28.41
$28.89
Intrinsic Valuations
Cost of Capital Estimates
Free Cash Flows
$28.54
Estimated
Beta
R^2
Ke
5-year
3-year
2-year
Published
Kd
WACC
0.388
0.723
1.379
0.369
0.073
0.304
0.323
4.34%
5.36%
7.33%
4.30%
7.03%
7.12%
Altman Z-Score
EPS Forecast
EPS
15.43
1-year Share Closing an d Volume Chart
3
2004
$1.73
2005
$-0.36
2006
$0.46
2007
$1.03
Recommendation – Buy (Undervalued)
Our research shows that Crescent is currently undervalued and we strongly recommend
a “buy” for the company’s stock. After computing the five valuation models, it is apparent that
Crescent is undervalued.
Company Strategy
Crescent’s property portfolio consists of first-class assets located in markets which
show the potential for long-term rental growth. These “Class A” properties are selected so that
Crescent will be able to attract and retain the highest quality tenants who are willing to pay
premium rents. Crescent’s three segments all focus on the high end of the market. Crescent’s
primary goal is to offer “Class A” properties to its customers; therefore, in order to compete in a
market similar to Crescent’s, large amounts of capital are required. Crescent management
believes that ownership of a significant percentage of office space in a particular market
reduces property operating expenses. Crescent has approximately 30 million rentable square
feet; certainly an amount that will be extremely hard for any new entrant to match. By carefully
selecting premium properties in strong submarkets, they are able to make profitable
investments.
Company Risks
By owning premium properties, Crescent faces the risk that their properties will not be
as affordable to as many current or potential clients during times of economic recession. Exit
barriers in the real estate industry are low because if you own the property you can simply sell
4
it. However, if the market goes into a deep recession like it has before then you will be stuck
with an expensive property. You will have tenants who will break their leases because they
can not pay their rent. Then you have to sell a premium property for a loss.
Switching costs are very high; this can work for and against a company like Crescent.
Companies face the task of moving expenses, time, and money loss from switching to new
contracts and relocating to new office space. Therefore, companies currently contracted with
Crescent will be more reluctant to end their lease term short. On the flip side,
companies/individuals interested in property offered by Crescent face the same restrictions.
Financial Position
In 2004, Crescent’s revenues rose 12% and earned $141,138,000 in net income, a nice
rebound from 2003 performance where the firm actually saw negative earnings. This is a sure
sign of Crescent being able to overcome the previous real estate economic recession.
Crescent’s ability to maintain its client base and remain involved in its current joint ventures in
acquiring new development properties, has enabled the company to retain and build upon its
current market share.
5
Industry Overview
The Real Estate Investment and Equities market is highly saturated with many small
players in the industry. Even the largest firm in the industry, owns less than one percent
market share. Much of this market saturation can be explained by Real Estate Investment
Trusts (REIT’s). REIT’s have made it possible for many investors to pool their resources
allowing for large investments and capital expenditures while most of the investors could not
make such investments allocating their resources individually. The government is also
encouraging the formation of these REIT’s by allowing them to use the corporate benefits of
the REIT to avoid double taxation.
Competitors in the industry vary greatly including billion dollar investment firms such as
Crescent down to individuals looking to make a higher return off their personal savings. Being
a highly saturated market, competition is intense. Proper planning and strategy are essential.
Those in the industry who compete solely on product differentiation or low cost are much more
likely to be profitable than those who try to compete using both.
Under the current trend, the industry is growing, but at a decreasing rate. This trend
could quite possibly be explained by the recent recession in the economy. With interest rates
extraordinarily low, returns on real estate investment are not what they could be, and looking to
the future only extra revenue and growth will be realized as the market continues to recover
and interest rates rise.
6
Business Overview
Crescent Real Estate Equities Co. (CEI) is a real estate investment trust that
owns/invests and manages properties primarily located in the southwest. Crescent has a
market Capitalization of about $1.6 billion. Crescent invests in assets and operations in four
disciplines or segments: Office, Resort/Hotel, Residential Development, and TemperatureControlled Logistics. The office division is the largest portion of business for Crescent,
providing over 50 percent of their yearly revenue. Crescent has 77 total office properties
located in Houston, Dallas, Denver, Austin, Miami, Phoenix, and Las Vegas. CEI owns 9
Resort/Hotel Properties. There are 4 Upscale Business Class Hotels, 3 Luxury Resorts and
Spas, and 2 Destination Fitness Resorts and Spas. These are located in Denver,
Albuquerque, Austin, Houston, Beaver Creek Colorado, Sonoma and Big Spur California,
Tucson, and Lenox, MA. The Hotel/Resort segment accounts for about 25 percent of annual
income. Crescent’s residential development division consists of four development
corporations. These developments are located in Texas, Colorado, Arizona, and California.
There are 23 residential developments which Crescent owns in whole or in part. This segment
of business accounts for about 25 percent of annual revenue for crescent. As for the
Temperature-Controlled Logistics Segment, Crescent has a 40 percent unconsolidated interest
in 87 temperature controlled logistics properties.
7
Five Forces Model
Rivalry among Existing Firms
Rivalry in the real estate industry is market driven and depends heavily on which type of
property you are involved in (office, resort/hotel, residential), as well as, which market you are
located in and the quality of the property. As previously stated, Crescent owns and invests in
office space, hotels and resorts, and residential property. The majority of the properties that
Crescent holds are in the Southwest, along with a few on the Atlantic coast. Crescent’s
property portfolio consists of first-class assets located in markets which show the potential for
long-term rental growth. These “Class A” properties are selected so that Crescent will be able
to attract and retain the highest quality tenants who are willing to pay premium rents.
The real estate industry is growing at a decreasing rate. Key elements to the success
of this industry are population growth, job creation, and economic growth. Crescent focuses
heavily on these factors when considering potential submarkets. Industry growth is very
cyclical and it varies by submarket. Concentration in the real estate industry is very low and
highly fragmented. In fact, the leading 6 firms in the real estate operations industry only make
up 4.2 percent of the market value. The top 5 companies hold less than one fifth of the market
share in the commercial real estate and property management industry.
The majority of the
market is made up of small to medium sized businesses, but there is a slight movement toward
consolidation in the industry. CEI differentiates itself based on luxury, customer relations,
premier locations, quality services, property amenities, and preventive maintenance.
Customers who lease Crescent office space or stay will pay premium rents because they know
they are going to get a premium property and receive grade A service. There are high costs
8
associated with moving or relocating such as lost time, moving expenses, telecommunication
expenses, and additional construction costs. Therefore, tenants who lease office space will
prefer a long-term relationship and lease renewal as long as the opportunity cost of moving to
another property is higher. CEI management believes that ownership of a significant
percentage of office space in a particular market reduces property operating expenses.
Crescent has a high fixed to variable cost ratio; variable costs are few. When dealing with real
estate, there is always excess capacity, it depends on the submarket and the type of property.
As for the luxury markets, there is excess capacity unless there is a recession. Exit barriers in
the real estate industry are low because if you own the property you can simply sell it.
However, if the market goes into a deep recession like it has before then you will be stuck with
an expensive property. You will have tenants who will break their leases because they can not
pay their rent. Then you have to sell a premium property for a loss. Crescent has found their
niche in the real estate industry. By carefully selecting premium properties in strong
submarkets, they are able to make profitable investments.
Threat of New Entrants
We do not foresee an immediate threat to Crescent by a new entrant any time soon.
Crescent’s primary goal is to offer “Class A” properties to its customers; therefore, in order to
compete in a market similar to Crescent’s, large amounts of capital are required. Today,
Crescent has approximately 30 million rentable square feet; certainly an amount that will be
extremely hard for any new entrant to match.
Probably one of the most important aspects of competing in real estate is location.
Thus, being able to acquire a premier property located in a downtown area of a metropolis is
9
an advantage. As you would suspect, Crescent’s customers/tenants sign multi-year contracts
worth thousands to millions of dollars. Therefore, if Crescent is able to capture the trust and
loyalty from its customers, strong relationships will be built. This will make it much harder for
new competitors to break into Crescent’s market share, thus creating a barrier.
Certain important relationships among contactors, brokers and even cities exist as well.
All of which are important in the beginning stages of residential development. Finding
reputable sub-contractors is very important, especially considering that Crescent’s primary
success factor is being able to offer the highest quality properties without compromises. Hiring
contractors with whom they have no previous relationship can be a huge gamble for Crescent.
Complying with environmental protection agencies, various zoning restrictions, and city codes
are the legal barriers that surround the real estate market. Failing to meet certain
requirements can not only lead to substantial fines, but it can halt the entire building project as
well. To gain approval for certain codes and building guidelines can take time and money; this
is certainly an area that is of great importance for Crescent (but note that part of this obligation
rests on the hands of their sub-contractors as well).
Threat of Substitute Products
The threat of substitute products is moderate. Though no two real estate properties are
exactly alike, potential customers still have an eye out for certain offices, hotels, or residential
developments that may suit their needs more so than those offered by Crescent. Developers
are always constructing newer and more innovative buildings, especially in the larger cities like
Dallas, Austin, and Las Vegas. So the threat of alternative office, hotel/resort, and residential
10
properties being offered is of great concern to Crescent. Individuals and corporations also
have the option of building their own properties as well.
Bargaining Power of Buyers
Buyers do not hold much bargaining power. Crescent is in the business of offering
high-dollar luxury properties, thus demanding a higher premium from its customers. Large law
firms for example demand luxury office spaces located in the central area of the city. In a
business where image is key (like in the situation of a law firm), negotiating a price is not going
to be of much concern for the buyers; they will be willing to pay the higher price in exchange
for the ideal property location. However, if someone is able to offer property just as nice but
for a lower rate, Crescent’s business will dwindle. It is important to note that, no single tenant
(either individual or corporation) holds more than 5% of the office segment, and the top five
accounts for less than 11%. In a situation like this, Crescent is able to hold power over its
tenants and not fear the possibility of losing large amounts of revenue should a single contract
go sour.
Switching costs are very high; this can work for and against a company like Crescent.
Companies face the task of moving expenses, time, and money loss from switching to new
contracts and relocating to new office space. Therefore, companies currently contracted with
Crescent will be more reluctant to end their lease term short. On the flip side,
companies/individuals interested in property offered by Crescent face the same restrictions.
11
Bargaining Power of Suppliers
The bargaining power of suppliers is low. With most construction materials being
generic (i.e. Non-specialized) and sub-contractors in great supply, suppliers are not able to
demand anymore than the next guy. Luxury properties, however, may be scarce in certain
areas and landowners will be in the position to control price negotiations and such.
12
Key Success Factors for Competitive Advantage
Crescent Real Estate has a unique operating strategy that not only differentiates the
company, but also allows them to compete on cost in their submarkets. The company has
three main operations of business that include office holdings, resorts and hotels, and
residential developments. These three segments all focus on the high end of the market.
The overall operating strategy is to enhance the company’s performance through its
asset quality, customer service and economies of scale to achieve a dominant market share.
Properties are long-term investments, so they are less affected by the cyclical nature of the
real estate market. All of there properties are differentiated as high end luxury products that
focus on customer service and brand recognition. Only demand driven markets are
considered for investment. Those markets include high in-migration by corporations, centrally
located travel hubs, and have a moderate cost of living. In these sectors there is much room
for industry growth due to the fact that the sectors have relatively high population and
economic growth when compared to the rest of the U.S.
Crescent follows a strict set of financing strategies to reduce their cost of capital.
Funding of operating expenses is paid by cash flow from operations. The company refinances
their debt if there is an opportunity to reduce the interest cost and maintain a conservative debt
maturity schedule. CEI minimizes their interest risk through the use of fixed rate debt and
interest rate swaps when appropriate. Overall Crescent has very strict capital management to
reduce costs and increase the profitability of the company.
13
Office Segment
As of December 31, 2003 Crescent owned or has an interest in 72 office properties
mainly in the south west. These properties can be divided into 27 metropolitan submarkets in
seven states. This portfolio of offices reflects the company’s strategy of obtaining first-class
assets “Class A”. These premier locations are able to command premium rents and high
quality tenants. A well defined leasing strategy is employed to maximize rental growth from
occupancy gains.
The Crescent properties are all highly recognized and respected making
them desirable. The extremely large amount of capital required to enter into this high end
luxury office segment significantly reduces the competition. Demographic and economic data
is constantly analyzed to key in to markets expected to benefit from significant long-term
employment and population growth. These investments have helped push Crescent up to one
of the largest REIT's in the market.
No single tenant makes up for more that five percent of the total office segment
revenue. The company is not subject to any one tenant’s demands and therefore has more
power over price. The office segments top 5 tenants, in terms of revenue, account for less
than 11 percent. The loss of any one tenant would not have a significant long-term impact on
the company.
Resort/Hotel Segment
Crescent owns or has interest in nine resort/hotel properties, mainly business and
convention center hotels. Demand for this market overall is highly dependent upon the global
economy and volume of business travel. These properties are in the “upper scale” segment of
14
the market. This quality differentiation allows this segment to not be as sensitive to the
economy and charge a premium. The location of these properties helps to restrict competition,
since there is limited land available in those areas. Many of the resort properties are located in
mountain areas which further reduces the threat of competition.
Residential Development
Currently the company is engaged in 23 residential developments, through its 4
residential development companies. Crescent Development invests primarily in mountain
resort residential real estate in Colorado and California, and residential real estate in Denver,
CO. These properties limit competition because of the unique locations, limited land, upper
scale, and restrictive development rights. The demand is subject to the economy, mortgage
interest rates, and home sales.
Desert Mountain represents the company’s most significant investment in residential
development. Desert Mountain is a luxury residential and recreational private community is in
Scottsdale, Arizona. Six 18 hole Jack Nicklaus signature golf courses are offered in the form
of an amenity package. This development has few competitors due to its superior
environmental attributes and the amenity package that is offered to its members. Future
residential golf developments in Scottsdale are extremely limited due to the significant lack of
water available for golf course use.
15
Accounting Analysis
Key Accounting Policies
The most important policy is their revenue recognition because multiple types of
revenue recognition are employed. In the office properties segment Crescent is a property
lessor and accounts for their leases as operating leases. Income is recognized on a strait line
basis with the remaining revenue due placed into a deferred rent receivable and recognized
when applicable. In Crescent’s resort/hotel segment the accrual method is used to
acknowledge revenue. The residential development segment uses accrual or deferral
methods for recognition. If the buyer of the property has obtained ownership, then the accrual
method is used. Deferral is used as a “percentage of completion” when the company receives
the money up front and revenue is deferred if the client has not made adequate minimum
payments on the property; a sale on a real estate asset classified an investment property is
reported as a gain in accordance with SFAS No. 66, “Accounting for Sales of Real Estate".
Impairments are the second most important to Crescent because of its massive real
estate holdings. Impairment losses are recognized when the expected undiscounted future
cash flows from a property is less than the carrying value of the property. Impairments are
only used for real estate holdings classified as long-lived assets held for sale or long-lived
assets to be held and used. In the operating properties real estate and other long term assets
are booked at historical cost, net of accumulated depreciation. Depreciation is not recognized
on properties classified as held for disposition. This is the company’s estimated useful life of its
assets.
16
Buildings and Improvements
Tenant Improvements
Furniture, Fixtures and Equipment
5 to 40 years
Terms of leases
3 to 5 years
Real estate also includes land and capitalized project costs associated with the
acquisition and development of the land. Interest costs are capitalized as a part of the
historical cost of acquiring the specific assets.
Crescent has multiple investments in unconsolidated companies and joint ventures.
These investments are accounted for under the equity method because Crescent does not
have any controlling interest in any of the companies. Investments are initially recorded at cost
and then adjusted for equity in earnings, cash contributions and cash distributions. An
impairment loss is recognized when a non-temporary decline in the carrying value occurs.
Derivative financial instruments are used extensively to control their interest rate risk.
Cash flow hedges gains or losses are reported in other comprehensive income and are
reclassified into earnings when the hedge impacts earnings. Derivative instruments not
classified as hedges are recognized in earnings during the affected period.
Crescent does employ the use of the stock-based compensation and as of Jan.31, 2003
the company adopted the fair value expense recognition provisions of SFAS No. 123. The
intrinsic method was used in the prior years.
Accounting Flexibility
Crescent’s involvement in real estate gives managers the ability to make valuable
estimates such as, allocating property purchase prices, aggregate values of intangible assets
(and to some extent, tangible assets), asset impairments, revenue recognition, and “customer
17
relationship values”. Management’s decisions must follow GAAP (Generally Accepted
Accounting Policies) and FASB accounting standards, however, Crescent is given the
responsibility of making such estimates and several others based on good faith.
Once the fair value of an asset falls below the company’s carrying/book value,
impairment must be recognized immediately. Management, however, has the ability to delay
or fail to recognize an impairment at all. The carrying values of the assets themselves are a
direct result of management’s decisions concerning depreciation, amortization schedules, and
expected undiscounted future cash flows from property. Therefore, we consider Crescent to
have a high degree of accounting flexibility in determining asset carrying values and
recognizing impairments. This in turn allows the company to alter important financial
statement data (i.e. net income) to their specific liking.
When acquiring operating property, Crescent is given the task of estimating the fair
value purchase price based on tangible and intangible assets. Estimating tangible assets is
relatively straight forward. Determining the fair values of tangible assets is usually based upon
independent third party appraisals and recent market activity. Intangible asset valuation, by
Crescent’s definition, is measured based on the difference between “(i) the purchase price and
(ii) the value of the tangible assets acquired”-as noted in the previous sentence. Further, the
value is “allocated among above-market and below-market in-place lease values, costs to
execute similar leases, in-place lease values and customer relationship values”. For a
company such as Crescent, we understand that there can be great intangible value associated
with strong customer relationship values. However, overstating such values will distort their
financial statements and become misleading. On the other hand, Crescent’s estimates of
certain intangible values can be valuable to investors seeking “insider information”.
18
Crescent’s valuation of “cost of goods sold” is an area that must be highlighted as well.
Upon the sale of a residential property, the total costs associated with that property are derived
using a percentage of the total sales revenue and/or estimated development costs. We find
that management is given great flexibility in determining residential cost of sales and hence,
income manipulation can be easily achieved based on these company estimates.
The allowance for doubtful accounts is another area that contains a great amount of
accounting flexibility. There is nothing unique that pertains to Crescent in this regard, but the
policy for estimating uncollectible accounts is important regardless and we would just like to
address management’s flexibility in this area. It is vital that Crescent make truthful estimates
of the allowance account. Underestimating estimates could call for future write-offs that would
result in decreases of net income and vise versa.
Asset depreciation schedules are implemented under the decisions of company
management. Because Crescent is given great flexibility in this regard, a potential for income
distortion exists. The adoption of the company’s depreciation schedules is of great importance
and an area that is highly important for Crescent, especially considering that nearly all of the
company’s assets are depreciable.
We can conclude that Crescent is given a fair amount of accounting flexibility. Note that
all of the areas mentioned in this section are governed to an extent by the FASB and GAAP
policies, but as we highlighted, there are areas in which Crescent is able to select those most
relevant to its company structure and in turn, is beneficial to shareholders and current or
potential investors.
19
Accounting Strategy
In the previous sections, we explained the key accounting policies and how they affect
Crescent’s operations. We also discussed the amount of flexibility Crescent is allowed. Our
analysis of Crescent indicates that they are reporting truthful information through their financial
statements. Crescent’s accounting is similar to comparable REITs in the industry. Given the
amount of accounting flexibility given to REITs, we would classify their accounting strategy as
being more conservative.
Crescent did adopt new accounting standards in 2003, as outlined by FASB guidlines.
These new standards concern with issues like reporting gains and losses on the early
extinguishment of debt, accounting for and reporting for derivative instruments, and
classification and measurement of financial instruments which have both liability and equity
characteristics. The FASB also issued interpretations of previous rules already established by
FASB. It was reported in Crescent’s 10K that none of these “New Accounting Standards”
impacted the company financially or materially.
We don’t foresee a situation where management is attempting to manipulate earnings.
In the previous section we stated that Crescent did have a large degree of accounting
flexibility. Most of this flexibility comes in the form of estimating allocated property
development costs, valuing intangible assets, revenue recognition, and customer relationship
values. Crescent recognizes impairments to their real estate assets, and this allows for a
better valuation of the company’s assets.
There are numerous opportunities for managers to manipulate these estimates to
influence net income. One major indication of this would be large fourth quarter adjustments.
Managers will overstate revenues and/or withhold expenses during the first three quarters of a
20
given year. The company ends up making large adjustments during the auditing process at
the end of the year. We found a potential Red Flag when reviewing the quarterly earnings
report for 2003. Shown below in table 2.1 are the Quarterly earnings for Crescent. There is a
sharp increase in Net Income in the fourth quarter. We investigated this substantial earnings
increase and believe it is the result of the sale of real estate assets and gains in minority
interest investments.
Quarterly Income (in thousands)
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Net Sales
$228,157
$435,856
$637,641
$949,244
Interest Expense
$43,208
$86,254
$129,298
$172,116
Income Before Tax
($5,087)
($11,785)
($10,072)
$72,025
Net Income
($12,755)
($12,233)
($8,963)
$26,022
21
Evaluation of the Quality of Disclosure
Crescent Real Estate has many potential areas for improvement in the quality of their
disclosures. In the real estate industry it is important to be able to match operating assets to
operating liabilities. Crescent’s balance sheet does not separate their liabilities from current
and non-current, the footnotes that are given don’t give any additional information. This makes
it very difficult to derive their numbers for ratio comparisons. We are unable to determine
unearned revenues, accrued expenses, pension expenses, and other employment expenses.
In the liability section Crescent aggregates accounts payable, accrued expenses, and
other liabilities. This account totals to 374,195,000 or 12% of total liabilities which may be the
reason the accounts are not split up. Corporate general and administrative expenses are also
aggregated with a current total of $172,116,000. They do a fairly good job for revenue
recognition and regularly impairments of their long-term land holdings from which they don’t
believe future benefits equal the carrying cost of those assets.
Crescent’s management discussion and analysis does give an informative overview of
their current performance and reasons related to their performance. They break down the
different business segments and how economic conditions have affected the different
segments. The continued weak economic conditions have negatively impacted their office
properties rental with there being a overall lower demand for office space. They expect the
future to be stabilizing without growth. The resulting operations in resort/hotel segment have
been stable and they believe slow growth as the economy and travel industry recover. The
residential segment has been stable and they believe it will continue with minimal growth in the
future. Crescent does a good job of showing where and why revenue totals have significant
decreases and again it is broken down by the different segments and the net decreases
22
occurred. Their expenses are also broken down by segments. New accounting policies did
have a positive affect of 9 million that appropriately stated the adoption of FASB 142 and the
implications it had. Crescent’s liquidity and capital resources are stated and broken down into
operating, financing, and investing activities. They give their liquidity requirements and their
future expectations of being able to satisfy them. They currently believe they are in good
standing and will be able to meet future requirements. Crescent discloses the commitment
arrangements that they are involved in and give a good explanation of their guarantees. When
bad news occurs they do give a fairly good explanation of their reasoning for why bad events
occurred. The majority of bad news explanations are given because of economic conditions.
While this seems to be an accurate reason they do not ever seem to fault their own practices
or the strategies they seek to improve performance.
As noted earlier, Crescent does do a good job of generally disclosing their different
segments and its subsidiaries. The product segments are broken down into office,
resort/hotel, and residential developments. They then go into further details of each area and
the geographic location of each. The geographic locations are broken down to show the
particular economic conditions in the locations and where their operating successes and
failures are taking place. We would like to see the segments more broken down in order to
see where their expenses are incurred.
Overall Crescent seems to portray their financial information in a way that makes it hard
to get a good understanding of their true standing. Too much information is aggregated
making it difficult to grasp a good understanding of how they derive the numbers. This might
be due to the large cost associated with preparing reports for each of the multiple categories.
In examining other large REITs, this grouping of accounts is persistent throughout the industry
23
and the relatively low amounts make this practice not as important to the quality of the
statements. Compared to the industry Crescent gives a relatively good picture of their financial
status and does not seem to try and hide information from potential investors.
Sales Manipulation Diagnostics
Net Sales/Cash from Sales
1.3000
1.2500
1.2000
1.1500
1.1000
Crescent
Carramerica
Parkway
1.0500
HRPT
1.0000
0.9500
0.9000
1999
2000
2001
2002
2003
Net Sales/Net Accounts Recievable
35.0000
30.0000
25.0000
Crescent
20.0000
15.0000
Carramerica
Parkway
HRPT
10.0000
5.0000
0.0000
1999
2000
2001
2002
24
2003
Net sales/Inventory
5.0000
4.5000
4.0000
3.5000
3.0000
Crescent
Carramerica
2.5000
Parkway
2.0000
HRPT
1.5000
1.0000
0.5000
0.0000
1999
2000
Crescent Sales Manipulation:
2001
2002
2003
2003
2002
2001
2000
1999
1.0445
1.0438
1.0429
1.0624
1.0525
23.4497
23.8424
24.2917
17.0238
20.0591
Net sales/Unearned revenues**
NA
NA
NA
NA
NA
Net sales/Warranty liabilities**
NA
NA
NA
NA
NA
3.9119
4.4774
2.6207
2.3152
1.8715
Net sales/Cash from sales
Net sales/Net accounts recievable
Net sales/inventory*
*Note: Land was used as our basis for inventory.
**Sufficient data was not presented in the financial statements or in the supplemental reports to derive these equations.
Judging from the data, Crescent seems to be doing a better job than their competitors at
collecting cash relative to their sales. As a result, Crescent has less of their assets tied up in
accounts receivable and places them at less risk for credit default. Net sales/Inventory for
Crescent is substantially greater than any of its competitors. We attribute this in large part to a
44% increase in total sales. The reason for this unusually large increase in revenue was due
to the consolidation of three residential development companies DMDC, TWLC and CRDI.
25
Expense Manipulation Diagnostics
Asset Turnover
0.2500
0.2000
0.1500
Crescent
Carramerica
Parkway
0.1000
HRPT
0.0500
0.0000
1999
2000
2001
2002
2003
Changes in CFFO/OI
35.0000
30.0000
25.0000
20.0000
15.0000
Crescent
Carramerica
10.0000
Parkway
5.0000
0.0000
1999
2000
2001
2002
2003
( 5.0000)
( 10.0000)
( 15.0000)
26
HRPT
Changes in CFFO/NOA
0.8000
0.6000
0.4000
Crescent
0.2000
0.0000
1999
2000
2001
2002
2003
Carramerica
Parkway
HRPT
( 0.2000)
( 0.4000)
( 0.6000)
Total accruals/Changes in sales
30.0000
20.0000
10.0000
Crescent
Carramerica
0.0000
1999
2000
2001
2002
Parkway
2003
( 10.0000)
( 20.0000)
( 30.0000)
27
HRPT
Crescent Expense Manipulation:
2003
2002
2001
2000
1999
Asset turnover
0.2198
0.2338
0.1501
0.1581
0.1507
Changes in CFFO/OI
(2.1785)
0.7481
(2.3814)
(0.1991)
4.4207
Changes in CFFO/NOA
(0.0497)
0.0228
(0.0236)
(0.0193)
0.0164
Total accruals/Changes in sales
(1.8421)
0.6308
(9.6065)
(0.9899)
6.7820
Pension expense/SG&A**
NA
NA
NA
NA
NA
Other employment expenses/SG&A**
NA
NA
NA
NA
NA
*Note: Land was used as our basis for inventory.
**Sufficient data was not presented in the financial statements or in the supplemental reports to derive these equations.
Crescent saw a rather large increase in its asset turnover (sales/assets) in year 2002
because, as mentioned earlier, revenue increased greatly due to the consolidation of three
residential development companies. Though Crescent’s cash flow from operations was
negative for three of the five years, their competitors showed similar performance numbers so
we do not see this a major drawback for Crescent.
Potential Red Flags
As stated in the accounting strategy section there is a potential red flag when looking at
net income on the quarterly reports for 2003. In the first three quarters Crescent showed a loss
or negative net income; however in the last quarter they reported a substantial gain. Through
investigation it can be found that Crescent liquidated a large portion of their assets in the last
quarter, partially in selling interest in their Woodlands development. Crescent disclosed this
information openly in their 10–K report, and this liquidation of assets is evident in their financial
statements. Being a Real Estate Investment Trust, this liquidation of assets should not be a
28
cause of concern, but instead looked upon as larger revenues from operating expenses and
the potential for higher growth and profitability in the future.
29
Ratio Analysis and Forecasted Financials
In this section, we will attempt to extract in-dept data on Crescent Real Estate Co. by
computing and analyzing liquidity, profitability, and capital structure ratios for the previous five
years. These financial ratios will allow us to judge how well Crescent is doing in its particular
industry by comparing them to its three main competitors. Based on the apparent trends of
Crescent, the overall industry, and our own educated assumptions, we will be able to forecast
the company’s financial statements 10 years into the future. This data is especially important
to current or potential investors/shareholders for obvious reasons.
Ratio Analysis
Our ratio analysis will involve 12 key financial ratios that will be useful in determining
Crescents 2000-2004 performance (5-year span). Please note that the current ratio, quick
asset ratio, working capital turnover, and the debt service margin were excluded in our
analysis due to the fact that Crescent failed to report their current and long-term liabilities
separately.
In order to set a benchmark upon which Crescent will be judged, we have also
analyzed the ratios of the company’s three closest competitors (all of whom are also classified
as REIT companies), HRPT Properties Trust (HRPT), Parkway Properties Inc. (PKY), and
CarrAmerica Realty Corporation (CarrAmerica).
30
Liquidity
When analyzing Crescent’s level of liquidity (i.e. the company’s ability to repay its debt,
or more precisely, current liabilities) we will compute the following ratios: accounts receivable
turnover, day’s supply of receivables ratio, inventory turnover and day’s supply of inventory
turnover.
Accounts Recievable Turnover -
Sales
Accounts Recievable
Accounts Recievable Turnover
45.00
40.00
35.00
Industry Average
30.00
PKY
25.00
20.00
Crescent
15.00
CarrAmerica
10.00
HRPT
5.00
0.00
2000
2001
2002
2003
2004
Other than the dip in 2004, Crescent has shown very strong performance in regards to
its accounts relievable turnover ratio and days supply of receivables turnover ratio (data
supplied in appendix A-1 and A-2); indicating that Crescent’s credit/payment policies have
been more efficient when compared to the industry average. However, CarrAmerica’s
accounts receivable turnover numbers have steadily been improving and has been the top
31
performer for the last two years. Although, Crescent is above average in this regard, we would
like to see their numbers approach the levels that they have shown in the past.
Days Supply of Recievables -
365
Accounts receivable turnover
Days Supply of Recievables
120.00
100.00
80.00
HRPT
CarrAmerica
60.00
PKY
40.00
Industry
Crescent
20.00
0.00
2000
2001
2002
2003
2004
Crescent’s days supply of receivables performance has been stellar from 2000-2003.
They did experience a notable increase in days supply when they went from 15.57 days in
2003 to 22.05 days in 2004 (appendix A-2). However, these numbers are still much better
than the industry average of 34.77 days supply of receivables.
32
Inventory Turnover -
Cost of good sold
Inventory
Inventory T urnover
0.80
0.70
0.60
HRPT
CarrAmerica
PKY
Industry
Crescent
0.50
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
We now take a look at the total cost of goods sold and how it relates to Crescent’s
inventory. Crescent’s inventory turnover has been decreasing slightly since 2001, indicating
that the company is improving their inventory management (i.e. real estate/land) by keeping
costs of goods sold to a minimum. Crescent’s 2003 and 2004 performance is second to only
HRPT, but still better than the industry average. (data information found in appendix A-3)
33
Days Supply of Inventory -
365
Inventory turnover
Days Supply of Inventory
12000.00
10000.00
HRPT
CarrAmerica
8000.00
6000.00
PKY
Industry
4000.00
Crescent
2000.00
0.00
2000
2001
2002
2003
2004
Similar to their inventory turnover ratio, Crescent’s days supply of inventory is indicating
that the company is doing a better job of managing its inventory and costs of goods sold.
Crescent is showing a trend of year-to-year improvement and we suspect that this trend will
continue into the near future.
34
Profitability
Profitability ratios allow us to examine the company’s ability to earn profits and asses
how efficient they are at doing so. We will take a look at the gross profit margin, operating
expense ratio, net profit margin, asset turnover return on assets (ROA), and return on equity
(ROE) ratios.
Gross Profit Margin - Gross profit
Sales
Gross Profit Margin
0.90
0.80
0.70
0.60
HRPT
CarrAmerica
0.50
0.40
PKY
0.30
Industry
Crescent
0.20
0.10
0.00
2000
2001
2002
2003
20004
Since 2001, Crescent did a great job of generating gross profit relative to its sales.
However, in 2004 their gross profit margin decreased by about half of what it was a year
earlier; certainly not a good sign. On the other hand, Crescent’s 2004 performance still
outperformed PKY and HRPT. CarrAmerica is the industry leader with an average of about
80% gross profit on all their sales (or .80 cents for every one dollar generated by sales, refer to
appendix A-5).
35
Operating Expense Ratio - Operating expenses
Sales
Operating Expense Ratio
0.90
0.80
0.70
0.60
HRPT
0.50
CarrAmerica
PKY
Industry
Crescent
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
The company has managed to reduce the amount of expenses relative to their sales by
a significant amount since 2001; indicating that Crescent’s management has found ways to
reduce their annual operating expenses. Crescent has been the industry leader for the past
two years (refer to appendix A-6 for additional information).
36
Net Profit Margin - Net income
Sales
Net Profit Margin
0.40
0.35
0.30
0.25
HRPT
0.20
CarrAmerica
0.15
0.10
PKY
Industry
0.05
Crescent
0.00
-0.05
2000
2001
2002
2003
2004
Crescent’s net profit margin (NPM) performance has fluctuated greatly over the
previous five years (appendix A-7). Though, they seemed to recover somewhat from 2003’s
poor performance, their current NPM is still below the industry average. We would like to see
Crescent increase their future NPM figures by at least 3-6% in the years to come.
37
Asset Turnover -
Sales
Total assets
Asset Turnover
2.00
1.80
1.60
1.40
HRPT
1.20
CarrAmerica
PKY
Industry
Crescent
1.00
0.80
0.60
0.40
0.20
0.00
2000
2001
2002
2003
2004
Crescent’s asset turnover improved greatly in 2002 and 2003 keeping an average
greater than the industry (appendix A-8). Although they suffered greatly in 2004, falling below
the industry average, sales were consistent. Crescent’s total assets increased more rapidly
than sales decreasing their asset turnover. Their asset turnover will need to increase by 6-8%
to keep up with the industry.
38
Return on Assets (ROA) -
Net Income
Sales
Return on Assets
0.60
0.50
HRPT
0.40
CarrAmerica
0.30
PKY
Industry
0.20
Crescent
0.10
0.00
2000
2001
2002
2003
2004
-0.10
Crescent’s ROA is really lagging behind the competition and the industry averages.
They have been bouncing all around without any consistency. In 2004 they did show
improvement with an ROA around 1%, but they will have to improve to 1-3% to keep up with
the industry (additional information found in appendix A-9).
39
Return on Equity (ROE) -
Net income
Equity
Return on Equity
0.60
0.50
HRPT
0.40
CarrAmerica
0.30
PKY
Industry
0.20
Crescent
0.10
0.00
2000
2001
2002
2003
2004
-0.10
Crescent’s ROE is also lagging behind the competition. The industry has been
averaging around 10% and Crescent has only had an ROE one time in the last five years that
has outperformed the average (appendix A-10). Crescent will have to improve in this area as
well to keep their financial structure competitive with the industry.
40
Capital Structure
The capital structure analysis involves computing the debt to equity ratio, times interest
earned ratio, and the debt service margin to determine Crescent’s credit risk, interest expense
charges and the company’s overall ability to meet current and long-term debt.
Debt to Equity Ratio - Total liabilities
Owner’s Equity
Debt to Equity
3.00
2.50
HRPT
2.00
1.50
CarrAmerica
PKY
1.00
Industry
Crescent
0.50
0.00
2000
2001
2002
2003
2004
Crescent’s total liabilities relative to its owner’s equity has been rising each year
(appendix A-11). This especially sends “red flags” to current and future creditors and lenders,
which may make borrowing money in the future a little difficult and costly on Crescent’s behalf.
41
Times Interest Earned - Operating income
Interest expense
Tim es Interest Earned
20.00
18.00
16.00
14.00
CarrAmerica
12.00
PKY
10.00
Industry
8.00
Crescent
6.00
4.00
2.00
0.00
2000
2001
2002
2003
20004
Here we take a look at the company’s ability to cover their interest charges generated
from borrowing money and funds. From looking at the data (appendix A-12), we see that
Crescent’s figures are significantly lower than those of PKY, whom is now doing a remarkable
job of “covering” their interest charges. We feel that it is very important for Crescent to
improve their current management of interest expenses.
42
Ratio Analysis Summary
Crescent has done a great job at managing its inventory and keeping their cost of goods
sold down, as evidenced by their inventory turnover and day’s supply of inventory ratios. The
company’s accounts receivable turnover ratio is also better than the industry average, meaning
that they are doing well at managing their credit and payment policies. Crescent is also
excelling at controlling their operating expenses (relative to sales) where they are currently the
leader amongst their three other competitors.
Crescent has shown excellent gross profit margin performance, however, the company
showed a notable decline in 2004. A similar trend can be seen in their net profit margin, asset
turnover, ROE, and ROA ratios. Though these ratios have shown significant improvement in
2004, we would like to see the company achieve numbers similar to their 2002 figures.
Finally, we have found that Crescent’s current capital structure is in need of some major
changes. Both their debt to equity and times interest earned ratios highlight this fact.
Forecasting
In forecasting our revenue growth, we decided to use a cyclical growth pattern. The
nature of real estate operations makes for a very uneven growth pattern, there is a lot of
capital sunk into properties at the beginning and a large return is incurred in one year. We
used one year of high growth followed by two years of low growth to establish the cycle. Once
the total revenue was established, we segmented the revenue and matched each segment’s
revenue with the segment’s operating expenses. For other income and other expenses we
treated them as independent from revenue and grew them out separately. Amounts that were
consistent we approximated as a percentage of the total other expenses. These included
43
corporate and administrative, depreciation, amortization, and impairments to real estate
assets. In the equity section of the income statement a separate declining growth rate from 5
to 3 percent. We chose to grow this section because Crescent has indicated that they plan to
employ joint ventures in the future. Minority interests averaged around 20 percent of income
from continuing operations and the income tax provision was based on the amount of expected
net income for each year. All of these factors were used in determining Crescent’s net income
and the result is consistent with historical net profit margins.
The sustainable growth rate for our company was computed and it is not relevant to
Crescent. Using the standard formula we came up with a two percent SGR. This is not
reasonable and so we tried to modify the formula by substituting cash flows from operating
activities for net income. This result was also thrown out because we came up with six to eight
percent. The historical average growth for Crescent is 23 percent. We feel that because of
the way the business is organized as a REIT and the nature of the industry and competitors
that the SGR does not apply to our company or its competitors. REITs must distribute at least
90 percent of their earnings and so money is reinvested internally. There is not any indication
of the actual amount of capital being put back into the company, but due to the low net income
numbers and high historical growth we believe that Crescent is plowing back funds and heavily
financed to allow growth.
44
Balance Sheet
In order to forecast the balance sheet we based our total assets off of our yearly
revenue. We said that on average our revenue would be about 20 percent of our total assets.
In order to grow our assets in we multiplied the sales growth rate times 20 percent and grew
our assets at the resulting rate. Next, we computed each individual component of total assets
as a percentage of total assets. In order to do this we used averages of the previous five
years. Some of the percentages we estimated ourselves when we thought that the calculated
average did not represent what percentage each component actually made up of total assets.
Next, we calculated total liabilities, total minority interests, and total stockholders’ equity all as
percentages of the total of the three categories to the right side of the balance sheet. Since
the left and right sides of the balance sheet are equal, the growth of all of the components of
the balance sheet is based on the growth of total sales.
Valuation Analysis
In this section we will be using five valuation methods to forecast the intrinsic value for
Crescent Real Estate. The valuation methods include the Method of Comparables, Discounted
Dividend Model, Discounted Free Cash Flows, Discounted Residual Income, and the
Abnormal Earnings Growth. The purpose of performing these five valuations is to get our
intrinsic value estimates, see how they compare with one another, and perform a sensitivity
analysis for each valuation model (excluding the comparables) in order to judge how sensitive
our cost of capital and growth estimates are in determining our intrinsic value.
45
Valuation Analysis
Method of Comparables
We begin Crescent’s valuation by using the method of comparables. The first step
involves computing each of CEI’s competitors (CarrAmerica, Parkway, and HRPT)
Price/Earnings (P/E), Price/Book (P/B), Dividend/Price (D/P), and Price/Sales (P/S) ratios.
Price/Earnings (Trailing)
HRPT(HRP)
Parkway (PKY)
CarrAmerica (CRE)
Industry Average
Crescent's Implied P/E
$17.99
$27.34
$32.92
$26.08
$32.08
Price/Earnings (Forward)
HRPT
Parkway
CarrAmerica
Industry Average
Crescent's Implied P/E
$9.15
$9.68
$10.47
$9.77
$12.69
Price/Book
HRPT
Parkway
CarrAmerica
Industry Average
Crescent's Implied P/B
$1.18
$1.69
$2.44
$1.77
$16.01
Dividend/Price
HRPT
Parkway
CarrAmerica
Industry Average
Crescent's Implied D/P
$0.07
$0.06
$0.06
$0.06
$22.68
Price/Sales
HRPT
Parkway
CarrAmerica
Industry Average
Crescent's Implied P/S
$3.56
$3.98
$3.63
$3.72
$36.11
After performing our calculations, we find that the Price/Book valuation of $16.01
comes closest to Crescent’s current share value of $16.35. The rest of the comparables
valuations showed major fluctuation between share prices. The highest share price was given
by the Price/Sales ratio of $36.11 for Crescent, with the trailing Price/Earnings valuation
46
nearby with a projected share price of $32.08. The forward Price/Earnings valuation gives us
the lowest share price of the five comparable methods, which assumes that our current share
price should be $12.69. And finally, the Dividend/Price comparable gives us a share price of
$22.68. A table showing our calculations can be seen in appendix B.
You can see by the data above that the method of comparables gives us share prices
that are not very consistent and thus, we feel that these numbers are not a good indicator of a
company’s true value. From our experience, the method of comparables has shown us signs
that display inaccurate and non-consistent data. Therefore, we have decided to take the
values obtained by the method of comparables with a “grain of salt” and basically disregard
further use of this information.
47
Discounted Dividend Model
The discount dividend model is one of the five methods used to obtain an intrinsic value
for Crescent. This valuation model uses the firm’s current dividends and their growth
discounted to today’s prices. The Discounted Dividend model is as follows:
Value = (Current Dividend * (1 + Dividend Growth)) / (Cost of Equity - Dividend Growth)
In the base model we used a cost of equity of 7.33% with no growth rate. We forecasted our
dividends at $1.50 per share, with no growth, for nine years with the present value of future
dividends to be $9.64. The present value for the terminal value of future dividends was $18.33
with an estimated value per share of $20.83. The intrinsic value is about $12 higher than the
actual share price of $16.35.
Sensitivity Analysis
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
0
$28.51
$24.06
$20.83
$18.01
$16.44
g
0.01
$32.64
$26.66
$22.57
$19.59
$17.32
0.02
$39.24
$30.46
$24.96
$21.20
$18.45
0.03
51.51
36.54
28.46
$23.40
$19.93
In the above sensitivity analysis diagram, we display Crescent’s share price values by
adjusting both the growth rate and cost of equity from 5.3% to 9.3% and the growth rate
ranged from 0 to 3%. To capture the actual share price for CEI, the implied cost of equity
would equal 9.38%.
48
The intrinsic values that we derived using the Discount Dividend model far exceeded
our actual share price. Those in the financial industry do not believe the discount dividend
model is the best tool to use when allocating a firm’s intrinsic value. Research has been done
showing that the discount dividend model has a R^2 of 10%, some even suggest 5% of the
actual share price is captured in the discount dividend model.
49
Discounted Free Cash Flows to the Firm Valuation
In order to value Crescent by way of its discounted future cash flows we had to forecast
Cash Flows from Operating activities and Cash Flows from Investing activities. This proved to
be a difficult task, since each account consists of many components. We analyzed several
forecasting methods before settling with a forecast that, we felt, reasonably depicted future
cash flows for our firm. We calculated a WACC of 7.12. We valued the firm’s continuous cash
flows in the terminal year with no growth and a calculated WACC of 7.12, resulting in an
intrinsic value of $28.54, implying that our firm is undervalued.
Sensitivity Analysis
WACC
6.82
7.02
7.12
7.22
7.42
g
0.01
$35.13
$34.24
$33.81
$33.37
$32.52
0
$29.73
$28.94
$28.54
$28.15
$27.38
50
0.015
$38.54
$37.60
$37.14
$36.68
$35.77
0.02
$42.63
$41.62
$41.13
$40.63
$39.66
Residual Income Valuation Model
With the residual income valuation model (RIM) we are able to compute Crescent’s
current share value to a fairly accurate degree. Without going into much detail, the RIM model
involves using Crescent’s book value of equity (BVE), dividends per share (DPS), earnings per
share (EPS), our calculated cost of equity (Ke) and a perpetuity value. A residual income
amount is then calculated for each of the forecasted years and the present value residual
value is then added to our 2004 ending BVE. From here, we calculate the present value of our
perpetuity and we are then able to arrive at CEI’s estimated share price.
We have decided to use a cost of equity of 7.33%. With this Ke and assuming no
growth, we see that Crescent’s share price should be $28.41 implying that the company is
significantly overvalued (current share price is $16.35).
Sensitivity Analysis
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
0
$40.57
$33.50
$28.41
$24.58
$21.60
g
0.01
$45.51
$36.40
$30.21
$25.74
$22.37
0.015
$48.95
$38.30
$31.34
$26.44
$22.82
0.02
$53.43
$40.63
$32.68
$27.26
$23.34
We feel that the residual income model is accurate and is able to give a good
representation of our firm’s current value. Therefore, we are comfortable with our estimated
Ke of 7.33% and feel that Crescent is slightly undervalued.
51
Abnormal Earnings Growth Model
The abnormal earnings growth model is able to display the effects of earnings gained
on dividends reinvested into the company (17% in this case). The model also includes our
earnings per share, dividends per share, and then takes into effect the difference between
Crescent’s “normal earnings” and cumulative dividend earnings. The present value of our
forecasted figure are computed then tallied to arrive at our estimated price per share of $28.41
for Crescent. Please note that when doing this calculation, we assumed a perpetuity value of
zero, but for the purposes of completing a sensitivity analysis (shown below) for Crescent, we
factored in a $0.10 perpetuity.
Sensitivity Analysis
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
0
$40.05
$33.50
$28.41
$24.58
$21.60
g
0.01
$68.65
$51.92
$40.87
$33.39
$28.05
0.015
$73.33
$53.83
$41.93
$34.03
$28.46
0.02
$78.24
$56.17
$43.20
$34.78
$28.93
You see by the numbers displayed in our sensitivity analysis diagram that a slight
increase in growth results in a substantial rise in the company’s share prices. Though this
calculation is not shown above, the abnormal earnings growth (AEG) model implies that our
cost of equity should be 8.09%. This information, as well as the full AEG model layout can be
seen in the appendix F.
52
We notice that the AEG model share price is very similar, in fact identical, to the one
calculated by the residual income valuation model; thus, further assuring ourselves that
Crescent is slightly undervalued.
Valuation Summary
After calculating our five valuation methods Crescent Real Estate is consistently
undervalued. Although we feel that a couple of our valuation methods do not seem pertinent
to our share price, such as the method of comparables valuation, we tend to put more
emphasis on the abnormal growth and residual income models. The four valuation models
and Ford Epic Research show a value of about $28. We feel this consistency indicates the
true value of Crescent. Our results show that Crescent is undervalued and we strongly
recommend a “buy” for Crescent Real Estate shares.
53
Appendix A: Financial Ratios
A-1: Accounts Receivable Turnover
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
16.68
41.22
14.85
3.41
19.83
2001
21.69
N/A
7.78
4.41
6.09
2002
23.84
N/A
15.04
4.58
9.81
2003
23.45
N/A
23.89
5.93
14.91
2004
16.56
N/A
27.23
6.50
16.87
*Note: Data for HRPT not available after
2000.
A-2: Days Supply of Receivables
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
21.88
8.86
24.57
106.97
46.80
2001
16.82
N/A
46.93
82.78
64.86
2002
15.31
N/A
24.26
79.76
52.01
2003
15.57
N/A
15.28
61.57
38.43
2004
22.05
N/A
13.40
56.15
34.77
*Note: Data for HRPT not available after
2000
A-3: Inventory Turnover
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
0.20
0.05
0.62
0.08
0.25
2001
0.09
0.05
0.69
0.08
0.27
2002
0.08
0.05
0.51
0.07
0.21
2003
0.07
0.04
0.50
0.08
0.21
2004
0.05
0.03
0.50
0.08
0.20
A-4: Days Supply of Inventory
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
1783.65
7996.92
593.34
4862.87
4484.38
2001
4091.68
7484.15
530.80
4461.34
4158.77
54
2002
4563.37
7444.43
722.66
5563.38
4576.82
2003
5092.94
8751.68
726.71
4838.72
4772.37
2004
6960.13
11069.20
729.02
4834.20
5544.14
A-5: Gross Profit Margin
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
36.63%
25.34%
82.74%
20.75%
42.94%
2001
60.11%
21.11%
81.78%
20.24%
41.04%
2002
63.95%
22.20%
83.85%
18.91%
41.65%
2003
64.33%
21.33%
79.67%
20.80%
40.60%
2004
32.33%
18.16%
78.48%
22.34%
39.66%
2000
63.37%
27.22%
80.41%
43.41%
50.35%
2001
39.89%
34.30%
80.59%
42.25%
52.38%
2002
36.05%
35.67%
63.15%
41.40%
46.74%
2003
35.67%
36.60%
68.91%
40.41%
48.64%
2004
34.92%
38.51%
71.20%
41.51%
50.40%
2000
8.75%
26.63%
27.76%
29.57%
27.99%
2001
-0.75%
35.13%
32.64%
18.91%
28.89%
2002
35.78%
21.01%
15.26%
19.13%
18.46%
2003
1.52%
25.60%
22.44%
28.48%
25.51%
2004
17.41%
22.86%
15.02%
23.03%
20.30%
A-6: Operating Expense Ratio
Crescent
HRPT
CarrAmerica
PKY
Industry
A-7: Net Profit Margin
Crescent
HRPT
CarrAmerica
PKY
Industry
A-8: Asset Turnover
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
0.14
0.14
1.85
0.18
0.73
2001
0.14
0.14
0.18
0.20
0.17
55
2002
0.24
0.14
0.19
0.17
0.16
2003
0.22
0.13
0.17
0.19
0.16
2004
0.06
0.12
0.17
0.18
0.16
A-9: Return on Assets
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
2.05%
3.86%
51.46%
0.00%
18.44%
2001
-0.11%
4.91%
5.84%
3.87%
4.87%
2002
5.46%
2.95%
2.85%
3.16%
2.99%
2003
0.22%
3.31%
3.88%
5.33%
4.17%
2004
0.98%
2.85%
2.57%
4.05%
3.16%
2000
6.47%
7.48%
53.43%
10.58%
23.83%
2001
-0.33%
9.30%
10.90%
7.83%
9.34%
2002
14.33%
5.00%
6.71%
7.07%
6.26%
2003
0.53%
5.54%
10.95%
10.71%
9.07%
2004
3.18%
5.69%
8.04%
8.20%
7.31%
A-10: Return of Equity
Crescent
HRPT
CarrAmerica
PKY
Industry
A-11: Debt to Equity Ratio
Crescent
HRPT
CarrAmerica
PKY
Industry
2000
0.99
0.94
0.04
0.97
0.33
2001
1.37
0.90
0.87
0.00
0.59
2002
1.64
0.69
1.36
1.24
1.10
2003
1.90
0.67
1.82
1.01
1.17
2004
2.49
1.00
2.12
1.02
1.38
2001
1.03
N/A
3.39
3.39
2002
1.53
N/A
10.95
10.95
2003
1.42
N/A
5.92
5.92
2004
1.08
N/A
13.25
13.25
A-12: Times Interest Earned
Crescent
CarrAmerica
PKY
Industry
2000
0.98
1.13
18.06
9.60
*Note: Data for HRPT and CarrAmerica
(after 2000) was not available
56
Appendix B: Method of Comparables Multiples
Crescent (CEI)
HRPT
Parkway (PKY)
CarrAmerica (CRE)
Industry Average
EPS Trailing EPS Forward BPS DPS
1.23
1.30
9.04
0.67
1.31 10.29
1.69
4.77 27.59
0.98
3.08 13.22
PPS
1.50
0.84
2.60
2.00
Sales
16.35
11.98
46.15
32.26
9.70
3.37
11.60
8.89
57
P/E Trailing P/E Forward P/B
D/P
P/S
PEG
32.08
12.69 16.01 22.68 36.11
17.99
9.15
1.18
0.07
3.56
3.20
27.34
9.68
1.69
0.06
3.98
1.47
32.92
10.47
2.44
0.06
3.63
4.44
26.08
9.77
1.77
0.06
3.72
Appendix C: Discounted Dividend Model
Years from valuation date
1
2005
2
2006
3
2007
4
2008
5
2009
6
2010
7
2011
8
2012
9
2013
Perpetuity
Dividends per share
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
Present Value Factor
0.932
0.868
0.809
0.754
0.702
0.654
0.609
0.568
0.529
Present Value of Future Dividends
$1.40
$1.30
$1.21
$1.13
$1.05
$0.98
$0.91
$0.85
$0.79
Perpetuity Value
$34.64
2004
Total Present Value of Forecast Future Dividends
Continuing (Terminal) Value (assume no growth)
Present Value of Continuing (Terminal) Value
$9.64
$18.33
Estimated Value per Share
Value as of April 1, 2005
$27.97
28.46
Actual Price per share
Cost of Equity
Growth rate
$16.35
0.0733
0.03
Implied Cost of Equity with no growth
0.0938
Sensitivity Analysis
Growth
0
0.01
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
58
$28.51
$24.06
$20.83
$18.01
$16.44
$32.64
$26.66
$22.57
$19.59
$17.32
0.02
0.03
$39.24
$30.46
$24.96
$21.20
$18.45
51.51
36.54
28.46
$23.40
$19.93
Appendix D: Discounted Free Cash Flows Model
Cash Flows Valuation
2004
Cash Flow from Operations
Cash From by Investing Activities
Free Cash Flow (to firm)
discount rate (7.12% WACC)
Present Value of Free Cash Flows
Total PV of Annual Cash Flows
Continuing (Terminal) Value
PV of Continuing (Terminal) Value
Value of the Firm (end of 2004)
BV of Debt and Preferred Stock
Value of Equity (end of 2004)
Estimated Value per Share
Value @ April 1, 2005
Actual Price per share
1
2
3
4
5
6
7
8
9
2005
2006
2007
2008
2009
2010
2011
2012
2013
$112,249,597
($121,147,500)
($8,897,903)
0.9335
($8,306,482)
$150,119,175
$330,683,500
$480,802,675
0.8715
$419,011,312
$178,641,818
$347,217,675
$525,859,493
0.8136
$427,816,989
$196,506,000
$364,578,559
$561,084,559
0.7595
$426,133,877
$174,890,340
($128,416,350)
$46,473,990
0.7090
$32,950,131
$232,604,153
$382,807,487
$615,411,639
0.6619
$407,326,178
$276,798,941
$401,947,861
$678,746,803
0.6179
$419,385,923
$304,478,836
$422,045,254
$726,524,090
0.5768
$419,068,972
$270,986,164
($136,121,331)
$134,864,833
0.5385
$72,621,237
2,616,008,136
Perpetuity Value
3,160,317,843
5,776,325,979
2,975,692,000
2,800,633,979
$28.06
$28.54
$16.35
Sensitivity Analysis
Growth
Cost of Debt
7.00%
Cost of Equity
7.50%
WACD
5.38%
WACE
1.74%
WACC
7.12%
Implied WACC
10.705
WACC
6.82
7.02
7.12
7.22
7.42
0
$29.73
$28.94
$28.54
$28.15
$27.38
59
0.01
$35.13
$34.24
$33.81
$33.37
$32.52
0.015
$38.54
$37.60
$37.14
$36.68
$35.77
0.02
$42.63
$41.62
$41.13
$40.63
$39.66
5869023374.962
Appendix E: Residual Income Model
1
2
3
4
5
6
7
8
9
Perpetuity
Forecast Years
2005
2006
2007
2008
2009
2010
2011
2012
2013
13.03
(0.36)
$1.50
11.17
11.17
0.46
$1.50
10.13
10.13
1.03
$1.50
9.66
9.66
1.34
$1.50
9.50
9.50
0.72
$1.50
8.72
8.72
1.96
$1.50
9.18
9.18
2.88
$1.50
10.56
10.56
3.39
$1.50
12.45
12.45
2.46
$1.50
13.42
0.95
0.82
0.74
0.71
0.70
0.64
0.67
0.77
0.91
Residual Income (RI)
(1.31)
(0.36)
0.29
0.64
0.03
1.32
2.20
2.62
1.55
Present Value of RI
(1.22)
(0.31)
0.23
0.48
0.02
0.87
1.34
1.49
0.82
Perpetuity Value
21.12
2004
Beginning BVE (per share)
Earnings Per Share
Dividends per share
Ending BVE (per share)
Ke
"Normal" Income
13.03
0.0733
BV Equity (per share) 2004
Total PV of RI (end 2004)
Continuation (Terminal) Value
PV of Terminal Value (end 2004)
Estimated Value (2004)
11.18
$
27.91
April 1, 2005 Value
$
Actual Price per share
Growth
13.0259467
3.71
28.41
$16.35
0
Sensitivity Analysis
Growth
0
0.01
0.015
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
60
$40.57
$33.50
$28.41
$24.58
$21.60
$45.51
$36.40
$30.21
$25.74
$22.37
$48.95
$38.30
$31.34
$26.44
$22.82
0.02
$
$
$
53.43
40.63
32.68
$27.26
$23.34
1.55
Appendix F: Abnormal Earnings Growth Model
2004
2005
1
2
2006
2007
3
4
5
Forecast Years
2008
2009
2010
6
7
8
2011
2012
2013
EPS
($0.36)
$0.46
$1.03
$1.34
$0.72
$1.96
$2.88
$3.39
$2.46
DPS
DPS invested at Ke
Cum-Dividend Earnings
Normal Earnings
Abnormal Earning Growth (AEG)
$1.50
$1.50
$0.11
$0.57
($0.38)
$0.95
$1.50
$0.11
$1.14
$0.49
$0.65
$1.50
$0.11
$1.45
$1.11
$0.35
$1.50
$0.11
$0.83
$1.44
($0.61)
$1.50
$0.11
$2.07
$0.77
$1.30
$1.50
$0.11
$2.99
$2.11
$0.88
$1.50
$0.11
$3.50
$3.09
$0.42
$1.50
$0.11
$2.57
$3.64
($1.07)
0.932
0.868
0.809
0.754
0.702
0.654
0.609
0.568
$0.89
$0.56
$0.28
($0.46)
$0.91
$0.58
$0.25
($0.61)
PV Factor
PV of AEG
Core EPS
Total PV of AEG
Continuing (Terminal) Value
PV of Terminal Value
Total PV of AEG
Average Perpetuity
Capitalization Rate (perpetuity)
($0.36)
$2.40
Value Per Share
Cost of Equity
Growth
Actual Price per share
$28.41
0.0733
0
$16.35
Implied Cost of Equity
11.895%
Perpetuity Value
$0.00
$0.00
Sensitivity Analysis
Growth
0
0.01
0.015
$2.05
0.0733
Ke
0.0533
0.0633
0.0733
0.0833
0.0933
61
$40.05
$33.50
$28.41
$24.58
$21.60
$68.65
$51.92
$40.87
$33.39
$28.05
$73.33
$53.83
$41.93
$34.03
$28.46
0.02
$78.24
$56.17
$43.20
$34.78
$28.93
Perpetuity
$0.00
Appendix G: Five-Year Historical Income Statement
62
Dec. 1999
Dec. 2000
Dec. 2001
Dec. 2002
Dec. 2003
Dec. 2004
$614,493,000
$65,237,000
$41,091,000
$720,821,000
$606,040,000
$72,114,000
$15,367,000
$693,521,000
$575,883,000
$45,748,000
$621,631,000
$538,781,000
$203,128,000
$260,569,000
$1,002,478,000
$495,468,000
$225,562,000
$228,214,000
$949,244,000
$484,049,000
$183,515,000
$311,197,000
$978,761,000
$84,401,000
$172,747,000
$257,148,000
$463,673,000
$83,939,000
$166,102,000
$250,041,000
$443,480,000
$79,186,000
$168,798,000
$247,984,000
$373,647,000
$72,710,000
$165,870,000
$157,987,000
$238,745,000
$635,312,000
$367,166,000
$65,220,000
$170,219,000
$182,648,000
$202,162,000
$620,249,000
$328,995,000
$60,390,000
$173,969,000
$155,812,000
$271,819,000
$661,990,000
$316,771,000
$25,458,000
$25,458,000
$128,932,000
$24,884,000
$153,816,000
$204,000
$7,577,000
$37,635,000
$45,416,000
$22,591,000
$18,166,000
$13,036,000
$53,793,000
$86,186,000
$13,038,000
$100,000
$5,737,000
$105,061,000
$18,879,000
$265,772,000
$18,005,000
$302,656,000
($16,274,000)
($192,033,000)
($10,283,000)
($131,657,000)
($15,000,000)
($162,038,000)
($16,800,000)
($544,085,000)
($54,954,000)
($24,073,000)
($203,197,000)
($9,497,000)
($123,839,000)
($9,349,000)
($369,955,000)
$227,341,000
($3,356,000)
($23,116,000)
($182,194,000)
($9,327,000)
($10,802,000)
($117,988,000)
($25,332,000)
($92,782,000)
($464,897,000)
($45,834,000)
($803,000)
($26,435,000)
($179,059,000)
($10,178,000)
($138,604,000)
($13,216,000)
($11,389,000)
($379,684,000)
$41,275,000
($33,300,000)
($172,116,000)
($10,925,000)
($157,204,000)
($8,624,000)
($4,637,000)
($386,806,000)
$47,250,000
($38,889,000)
($176,771,000)
($13,056,000)
($42,608,000)
($163,630,000)
($4,094,000)
($725,000)
($439,773,000)
$179,654,000
$5,265,000
$42,871,000
$15,039,000
$5,122,000
$68,297,000
$13,343,000
($2,384,000)
$10,959,000
$10,959,000
($13,500,000)
($583,000)
($4,317,000)
($7,441,000)
$3,164,000
$53,470,000
$7,432,000
$11,645,000
$75,711,000
$303,052,000
($51,002,000)
$252,050,000
($3,928,000)
$248,122,000
($13,500,000)
($2,906,000)
$231,716,000
$6,124,000
$41,014,000
$1,136,000
$2,957,000
$51,231,000
$5,397,000
($19,398,000)
($14,001,000)
$9,342,000
($4,659,000)
($13,501,000)
($18,160,000)
$23,431,000
($115,000)
$39,778,000
($2,933,000)
($6,609,000)
$53,552,000
$94,827,000
($21,762,000)
$4,424,000
$77,489,000
$12,978,000
($3,984,000)
$10,397,000
($9,172,000)
$87,708,000
($16,702,000)
($5,047,000)
$65,959,000
$10,469,000
$5,760,000
$10,427,000
$2,172,000
($4,053,000)
$24,775,000
$72,025,000
($7,110,000)
($26,325,000)
$38,590,000
$1,616,000
($24,471,000)
$10,287,000
$26,022,000
($18,225,000)
($8,075,000)
($278,000)
$6,262,000
($245,000)
($2,266,000)
$6,153,000
($280,000)
$9,624,000
$189,278,000
($37,211,000)
$12,937,000
$165,004,000
$10,221,000
($2,978,000)
$1,052,000
($363,000)
$172,936,000
($23,723,000)
($8,075,000)
$141,138,000
Revenues:
Office Property
Resort/Hotel Property
Residential Development Property
Behavioral healthcare properties
Total Property Revenue
Operating Expenses:
Office Property real estate taxes
Office Property operating expenses
Resort/Hotel Property expense
Residential Development Property expense
Total Property expense
Income from Property Operations
Other Income:
Income from sale of investment in unconsolidated company, net
Income from investment land sales, net
Gain on joint venture of properties, net
Gain on property sales, net
Interest and other income
Total Other Income
Other Expenses
Loss on property sales, net
Corporate general and administrative
Interest expense
Amortization of deferred financing costs
Extinguishment of debt
Depreciation and amortization
Settlement of merger dispute
Impairments related to real estate assets
Impairments related to COPI
Impairments related to the behavioral healthcare
Carrying value in excess of market value of asset held for sale
Other expenses
Total Other Expenses
Net Operating Income (loss)
Equity in Net Income (loss) of Unconsolidated Companies:
Office Properties
Resort/Hotel Properties
Residential Development Properties
Temperature-Controlled Logistics Properties
Other
Total Equity in Net Income of Unconsolidated Companies
INCOME from Continuing Ops. before Minority Interests & Inc. Taxes
Minority interests
Income tax (provision) benefit
INCOME (loss) Before Disc. Ops. & Cum. Effect of a Change in Acct.
Income from discontinued operations, net of minority interests
Impairment charges from R/E assets from disc. ops, net of minority
Gain on real estate from discontinued operations, net of minority in
Extraordinary item - extinguishment of debt
Cumulative effect of a change in accounting principle
NET INCOME (loss)
Series A Preferred Share distributions
Series B Preferred Share distributions
Share repurchase agreement return
Forward share purchase agreement return
NET INCOME (loss) Available to common shareholders
63
Appendix H: Forecasted Income Statement
Dec. 2005
Dec. 2006
Dec. 2007
Dec. 2008
Dec. 2009
Dec. 2010
Dec. 2011
Dec. 2012
Dec. 2013
Revenues:
Office Property
Resort/Hotel Property
Residential Development Property
Total Property Revenue
$435,548,645
$174,219,458
$261,329,187
$871,097,290
$579,279,698
$689,342,840
$758,277,124
$674,866,641
$897,572,632 $1,068,111,432 $1,174,922,576 $1,045,681,092
$266,468,661
$317,097,707
$348,807,477
$310,438,655
$412,883,411
$491,331,259
$540,464,385
$481,013,302
$312,811,037
$372,245,134
$409,469,647
$364,427,986
$484,689,221
$576,780,173
$634,458,191
$564,667,790
$1,158,559,396 $1,378,685,681 $1,516,554,249 $1,349,733,282 $1,795,145,265 $2,136,222,865 $2,349,845,151 $2,091,362,185
Operating Expenses:
Office Property real estate taxes
Office Property operating expenses
Resort/Hotel Property expense
Residential Development Property expense
Total Property expense
Income from Property Operations
$58,799,067
$124,131,364
$135,891,177
$222,129,809
$540,951,417
$330,145,873
$78,202,759
$165,094,714
$207,845,556
$265,889,381
$717,032,410
$441,526,986
$93,061,283
$196,462,710
$247,336,211
$316,408,364
$853,268,568
$525,417,113
$102,367,412
$216,108,980
$272,069,832
$348,049,200
$938,595,425
$577,958,824
$91,106,997
$192,336,993
$242,142,151
$309,763,788
$835,349,928
$514,383,354
$121,172,305
$144,195,043
$158,614,548
$141,166,947
$255,808,200
$304,411,758
$334,852,934
$298,019,111
$322,049,060
$383,238,382
$421,562,220
$375,190,376
$411,985,838
$490,263,147
$539,289,462
$479,967,621
$1,111,015,404 $1,322,108,331 $1,454,319,164 $1,294,344,056
$684,129,860
$814,114,534
$895,525,987
$797,018,129
$94,892,790
$100,349,125
$105,868,327
$111,426,415
$116,997,735
$122,555,128
$128,070,108
$133,513,088
$138,853,612
Other Income:
Total Other Income
Other Expenses
Corporate general and administrative
Interest expense
Amortization of deferred financing costs
Depreciation and amortization
Impairments related to real estate assets
Other expenses
Total Other Expenses
Net Operating Income (loss)
($31,367,093) ($32,621,777)
($201,645,600) ($209,711,424)
($10,306,331) ($10,718,584)
($143,392,427) ($149,128,124)
($6,721,520)
($6,990,381)
($54,668,363) ($56,855,097)
($448,101,333) ($466,025,387)
($23,062,670) $75,850,724
($33,926,648)
($218,099,881)
($11,147,327)
($155,093,249)
($7,269,996)
($59,129,301)
($484,666,402)
$146,619,038
($35,283,714)
($226,823,876)
($11,593,220)
($161,296,979)
($7,560,796)
($61,494,473)
($504,053,058)
$185,332,181
($36,695,063)
($235,896,831)
($12,056,949)
($167,748,858)
($7,863,228)
($63,954,252)
($524,215,181)
$107,165,908
($38,162,865)
($245,332,704)
($12,539,227)
($174,458,812)
($8,177,757)
($66,512,422)
($545,183,788)
$261,501,200
($39,689,380)
($255,146,013)
($13,040,796)
($181,437,165)
($8,504,867)
($69,172,919)
($566,991,139)
$375,193,503
($41,276,955)
($265,351,853)
($13,562,428)
($188,694,651)
($8,845,062)
($71,939,836)
($589,670,785)
$439,368,290
($42,928,033)
($275,965,927)
($14,104,925)
($196,242,437)
($9,198,864)
($74,817,429)
($613,257,616)
$322,614,124
Equity in Net Income (loss) of Unconsolidated Companies:
Office Properties
Resort/Hotel Properties
Residential Development Properties
Temperature-Controlled Logistics Properties
Other
Total Equity in Net Income of Unconsolidated Companies
INCOME from Continuing Ops. before Minority Interests & Inc. Taxes
Minority interests
Income tax (provision) benefit
NET INCOME (loss)
Series A Preferred Share distributions
Series B Preferred Share distributions
NET INCOME (loss) Available to common shareholders
$6,636,857
$3,846,668
$6,311,787
$902,974
$361,190
$18,059,475
($5,003,195)
($1,000,639)
$2,018,750
($3,985,085)
($23,723,000)
($8,075,000)
($35,783,085)
$7,264,953
$4,210,707
$6,909,118
$988,429
$395,372
$19,768,579
$166,387,617
($33,277,523)
$2,038,988
$135,149,081
($24,199,832)
($8,155,952)
$102,793,297
$7,573,713
$4,389,662
$7,202,756
$1,030,437
$412,175
$20,608,743
$205,940,924
($41,188,185)
$2,049,183
$166,801,922
($24,441,831)
($8,196,732)
$134,163,360
$7,876,662
$4,565,249
$7,490,866
$1,071,655
$428,662
$21,433,093
$128,599,001
($25,719,800)
$2,059,429
$104,938,630
($24,686,249)
($8,237,715)
$72,014,666
$8,172,036
$4,736,446
$7,771,773
$1,111,842
$444,737
$22,236,834
$283,738,034
($56,747,607)
$2,069,726
$229,060,153
($24,933,111)
($8,278,904)
$195,848,138
$8,458,058
$4,902,221
$8,043,786
$1,150,756
$460,302
$23,015,123
$398,208,626
($79,641,725)
$2,080,075
$320,646,975
($25,182,443)
($8,320,298)
$287,144,234
$8,732,945
$5,061,543
$8,305,209
$1,188,156
$475,262
$23,763,115
$463,131,405
($92,626,281)
$2,090,475
$372,595,599
($25,434,267)
($8,361,900)
$338,799,432
$8,994,933
$5,213,390
$8,554,365
$1,223,800
$489,520
$24,476,008
$347,090,132
($69,418,026)
$2,100,927
$279,773,033
($25,688,610)
($8,403,709)
$245,680,714
$6,952,108
$4,029,385
$6,611,596
$945,865
$378,346
$18,917,300
$94,768,025
($18,953,605)
$2,028,844
$77,843,263
($23,960,230)
($8,115,375)
$45,767,658
64
Appendix I: Five-Year Historical Balance Sheet
65
Dec. 1999
Dec. 2000
Dec. 2001
Dec. 2002
Dec. 2003
Dec. 2004
398,754,000
278,975,000
249,266,000
223,897,000
242,656,000
209,392,000
-
-
-
54,804,000
105,236,000
69,086,000
3,529,344,000
3,163,129,000
2,938,669,000
2,205,143,000
2,253,405,000
1,835,662,000
71,716,000
60,420,000
72,247,000
50,878,000
51,168,000
43,465,000
95,760,000
116,480,000
92,951,000
447,778,000
450,279,000
501,379,000
81,741,000
ASSETS:
Investments in Real Estate:
Land
Land improvements, net of accumulated depreciation
Building and improvements, net of accumulated depreciation
Furniture, fixtures and equipment, net of accumulated depreciatio
Land held for investment or development
Properties held for disposition, net
Less - accumulated depreciation
Net Investment in Real Estate
Cash and cash equivalents
Restricted cash and cash equivalents
Defeasance investments
Accounts receivable, net
Deferred rent receivable
Investments in unconsolidated companies
Notes receivable, net
Income tax asset - current and deferred
Other assets, net
Total Assets
-
62,597,000
64,694,000
122,085,000
52,519,000
(507,520,000)
(555,491,000)
(637,904,000)
-
-
-
3,588,054,000
3,126,110,000
2,779,923,000
3,104,585,000
3,155,263,000
2,740,725,000
72,926,000
38,966,000
36,285,000
78,444,000
78,052,000
92,291,000
87,939,000
94,568,000
115,531,000
105,786,000
217,329,000
93,739,000
-
-
-
-
9,620,000
175,853,000
37,204,000
42,200,000
28,654,000
42,046,000
40,480,000
60,004,000
74,271,000
82,775,000
66,362,000
59,869,000
62,582,000
58,271,000
812,494,000
845,317,000
838,317,000
562,643,000
443,974,000
362,643,000
131,542,000
141,407,000
132,065,000
115,494,000
78,453,000
102,173,000
-
-
-
39,709,000
17,506,000
13,839,000
146,131,000
4,950,561,000
171,975,000
4,543,318,000
145,012,000
4,142,149,000
179,823,000
4,288,399,000
215,263,000
4,318,522,000
338,226,000
4,037,764,000
LIABILITIES:
Borrowings under Credit Facility
Notes payable
Accounts payable, accrued expenses and other liabilities
Current income tax payable
Total Liabilities
510,000,000
553,452,000
283,000,000
164,000,000
239,000,000
142,500,000
2,088,929,000
1,718,443,000
1,931,094,000
2,218,910,000
2,319,699,000
2,009,755,000
170,984,000
202,591,000
220,068,000
375,902,000
374,195,000
422,348,000
2,769,913,000
2,474,486,000
2,434,162,000
2,758,812,000
7,995,000
2,940,889,000
2,574,603,000
99,226,000
100,586,000
69,910,000
130,802,000
108,706,000
113,572,000
-
-
-
43,972,000
47,123,000
49,339,000
24,648,000
123,874,000
236,919,000
337,505,000
232,137,000
302,047,000
174,774,000
155,829,000
162,911,000
200,000,000
200,000,000
200,000,000
MINORITY INTERESTS:
Operating partnership
Consolidated real estate partnerships
Investment in joint ventures
Total Minority Interests
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100 mill shares:
Series A Convertible Cumulative Preferred Shares
Series B Cumulative Preferred Shares
Common shares, $0.01 par value, authorized 250 mill shares
Additional paid-in capital
Deferred compensation on restricted shares
Accumulated deficit
Accumulated other comprehensive income
Less - shares held in treasury, at cost
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
-
-
-
248,160,000
248,160,000
319,166,000
-
-
-
81,923,000
81,923,000
81,923,000
1,208,000
1,211,000
1,227,000
1,236,000
1,237,000
1,245,000
2,229,680,000
2,221,531,000
2,234,360,000
2,243,419,000
2,245,683,000
2,246,335,000
(41,000)
-
-
(5,253,000)
(4,102,000)
(2,233,000)
(386,532,000)
(402,337,000)
(638,435,000)
(728,060,000)
(877,120,000)
(885,016,000)
12,459,000
(6,734,000)
(31,484,000)
(27,252,000)
(13,829,000)
(1,022,000)
2,056,774,000
2,013,671,000
1,765,668,000
1,814,173,000
1,681,952,000
1,760,398,000
-
(282,344,000)
(359,728,000)
(459,360,000)
(460,148,000)
(460,148,000)
2,056,774,000
1,731,327,000
1,405,940,000
1,354,813,000
1,221,804,000
1,300,250,000
4,950,561,000
4,543,318,000
4,142,149,000
4,288,399,000
4,318,522,000
4,037,764,000
66
Appendix J: Forecasted Balance Sheet
67
Dec. 2005
Dec. 2006
Dec. 2007
Dec. 2008
Dec. 2009
Dec. 2010
Dec. 2011
Dec. 2012
Dec. 2013
232,987,058
256,783,330
275,280,149
289,699,585
292,043,923
320,611,921
342,441,411
359,129,401
360,851,254
59,233,998
63,143,442
65,542,893
66,853,750
65,382,968
69,698,244
72,346,777
73,793,713
72,170,251
1,892,723,679
2,017,643,442
2,094,313,893
2,136,200,170
2,089,203,767
2,227,091,215
2,311,720,681
2,357,955,095
2,306,080,083
ASSETS:
Investments in Real Estate:
Land
Land improvements, net of accumulated depreciation
Building and improvements, net of accumulated depreciation
Furniture, fixtures and equipment, net of accumulated depreciation
Land held for investment or development
Properties held for disposition, net
Net Investment in Real Estate
Cash and cash equivalents
Restricted cash and cash equivalents
Defeasance investments
Accounts receivable, net
Deferred rent receivable
Investments in unconsolidated companies
Notes receivable, net
Other assets, net
Total Assets
51,336,131
54,724,316
56,803,840
57,939,917
56,665,239
60,405,145
62,700,540
63,954,551
62,547,551
434,382,651
463,051,906
480,647,879
490,260,836
479,475,098
511,120,454
530,543,031
541,153,892
529,248,506
59,233,998
63,143,442
65,542,893
66,853,750
65,382,968
69,698,244
72,346,777
73,793,713
72,170,251
2,729,897,516
2,918,489,877
3,038,131,545
3,107,808,009
3,048,153,962
3,258,625,223
3,392,099,218
3,469,780,364
3,403,067,896
78,978,664
84,191,256
87,390,523
89,138,334
87,177,290
92,930,992
96,462,369
98,391,617
96,227,001
102,672,263
109,448,632
113,607,680
115,879,834
113,330,478
120,810,289
125,401,080
127,909,102
125,095,102
157,957,328
155,753,823
148,563,890
138,164,417
122,048,207
116,163,740
106,108,606
93,472,036
76,981,601
65,947,184
63,143,442
65,542,893
66,853,750
65,382,968
46,465,496
48,231,185
49,195,808
48,113,501
59,233,998
63,143,442
65,542,893
66,853,750
65,382,968
69,698,244
72,346,777
73,793,713
72,170,251
355,403,987
387,279,776
410,735,460
427,864,002
427,168,723
464,654,958
491,958,084
511,636,407
510,003,106
102,672,263
109,448,632
113,607,680
115,879,834
113,330,478
120,810,289
125,401,080
127,909,102
125,095,102
296,169,989
318,663,903
326,403,605
328,474,760
316,889,451
356,390,353
365,110,068
367,492,689
354,596,499
3,948,933,192
4,209,562,783
4,369,526,168
4,456,916,692
4,358,864,525
4,646,549,583
4,823,118,467
4,919,580,837
4,811,350,058
LIABILITIES:
Borrowings under Credit Facility
Notes payable
Accounts payable, accrued expenses and other liabilities
Total Liabilities
193,326,935
206,086,513
213,917,800
218,196,156
213,395,841
227,479,966
236,124,205
240,846,689
235,548,062
1,966,945,655
2,096,764,069
2,176,441,103
2,219,969,925
2,171,130,587
2,314,425,206
2,402,373,363
2,450,420,831
2,396,511,572
334,268,507
356,330,229
369,870,777
377,268,193
368,968,293
393,320,200
408,266,367
416,431,695
407,270,197
2,494,541,097
2,659,180,810
2,760,229,681
2,815,434,274
2,753,494,720
2,935,225,372
3,046,763,936
3,107,699,215
3,039,329,832
128,488,414
136,968,649
142,173,458
145,016,927
141,826,554
151,187,107
156,932,217
160,070,861
156,549,303
56,835,021
60,586,132
62,888,405
64,146,173
62,734,958
66,875,465
69,416,733
70,805,067
69,247,356
2,250,892
2,399,451
2,490,630
2,540,443
2,484,553
2,648,533
2,749,178
2,804,161
2,742,470
187,574,327
199,954,232
207,552,493
211,703,543
207,046,065
220,711,105
229,098,127
233,680,090
228,539,128
311,003,762
331,530,010
344,128,151
351,010,714
343,288,478
365,945,518
379,851,447
387,448,476
378,924,610
80,442,928
85,752,162
89,010,744
90,790,959
88,793,557
94,653,932
98,250,782
100,215,797
98,011,050
1,266,818
1,350,428
1,401,744
1,429,779
1,398,324
1,490,613
1,547,256
1,578,202
1,543,481
2,158,404,113
2,300,858,785
2,388,291,418
2,436,057,247
2,382,463,987
2,539,706,610
2,636,215,462
2,688,939,771
2,629,783,096
MINORITY INTERESTS:
Operating partnership
Consolidated real estate partnerships
Investment in joint ventures
Total Minority Interests
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100 mill shares:
Series A Convertible Cumulative Preferred Shares
Series B Cumulative Preferred Shares
Common shares, $0.01 par value, authorized 250 mill shares
Additional paid-in capital
Deferred compensation on restricted shares
Accumulated deficit
Accumulated other comprehensive income
Less - shares held in treasury, at cost
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
(3,800,453)
(4,051,283)
(4,205,232)
(4,289,337)
(4,194,971)
(4,471,839)
(4,641,769)
(4,734,605)
(4,630,443)
(817,477,506)
(871,431,021)
(904,545,400)
(922,636,308)
(902,338,309)
(961,892,637)
(998,444,558)
(958,413,449)
(996,008,353)
(11,401,360)
(12,153,850)
(12,615,696)
(12,868,010)
(12,584,914)
(13,415,518)
(13,925,308)
(14,203,814)
(13,891,330)
1,718,438,302
1,831,855,230
1,901,465,729
1,939,495,044
1,896,826,153
2,022,016,679
2,098,853,312
2,140,830,379
2,093,732,110
(451,620,534)
(481,427,490)
(499,721,734)
(509,716,169)
(498,502,413)
(531,403,572)
(551,596,908)
(562,628,846)
(550,251,012)
1,266,817,768
1,350,427,741
1,401,743,995
1,429,778,875
1,398,323,739
1,490,613,106
1,547,256,404
1,578,201,532
1,543,481,099
3,948,933,192
4,209,562,783
4,369,526,168
4,456,916,692
4,358,864,525
4,646,549,583
4,823,118,467
4,919,580,837
4,811,350,058
68
Appendix K: Five-Year Historical Cash Flows
69
Dec. 1999
Dec. 2000
Dec. 2001
Dec. 2002
Dec. 2003
Dec. 2004
$10,959,000
$248,122,000
($4,659,000)
$87,708,000
$26,022,000
$172,936,000
$141,940,000
$120,573,000
$2,384,000
($7,808,000)
-
$133,336,000
$9,349,000
$51,002,000
($6,878,000)
($3,763,000)
$135,484,000
$25,332,000
($20,458,000)
$21,429,000
($476,000)
-
$139,484,000
$160,057,000
($91,046,000)
$4,123,000
($10,397,000)
$20,927,000
$13,216,000
($22,591,000)
($18,166,000)
$19,654,000
$1,956,000
($23,328,000)
$408,000
$115,000
($39,778,000)
$6,609,000
$155,237,000
$107,163,000
($130,692,000)
$25,052,000
($10,287,000)
$19,178,000
$8,624,000
($13,038,000)
($100,000)
$6,439,000
$1,093,000
($11,190,000)
$1,246,000
($5,760,000)
($10,427,000)
$4,053,000
$176,686,000
$161,853,000
($205,714,000)
$2,978,000
($1,052,000)
$5,152,000
$4,094,000
($18,879,000)
($265,772,000)
$37,211,000
$1,737,000
($6,262,000)
$1,833,000
$245,000
$2,266,000
$280,000
$25,404,000
$30,857,000
$336,060,000
$1,589,000
$2,308,000
($19,672,000)
$275,715,000
$3,392,000
$10,392,000
($22,301,000)
$212,813,000
$25,510,000
$34,418,000
$4,975,000
($17,925,000)
$280,303,000
$10,313,000
$11,000,000
$3,500,000
($430,000)
$127,951,000
$4,833,000
$113,000
$1,822,000
($21,657,000)
$95,684,000
($500,000)
($27,781,000)
($20,254,000)
($22,021,000)
$627,775,000
($41,938,000)
($26,559,000)
$200,389,000
$129,651,000
$107,940,000
($23,723,000)
($46,427,000)
($58,462,000)
($205,811,000)
($68,461,000)
$428,306,000
($51,810,000)
$209,994,000
$38,226,000
$121,422,000
$164,067,000
($120,206,000)
($2,477,000)
($17,241,000)
($16,745,000)
($49,175,000)
$55,181,000
$11,574,000
$43,155,000
$178,667,000
($44,732,000)
($6,613,000)
($18,023,000)
($13,574,000)
($77,279,000)
($36,484,000)
$334,000
$174,881,000
$3,229,000
$1,028,913,000
($381,672,000)
($4,142,000)
($14,297,000)
($27,739,000)
($92,876,000)
$629,253,000
($167,615,000) ($737,981,000) ($425,488,000) ($293,325,000)
($91,859,000)
($710,698,000)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adj. to Reconcile Net Inc. to Net Cash From Op Activities:
Depreciation and amortization
Residential Development cost of sales
Residential Development capital expenditures
Impairment charges related to real estate
Gain on real estate from discontinued operations
Discontinued operations
Impairment charges related to real estate assets
Income from investment land sales, net
Gain on joint venture of properties, net
Minority interests
Non-cash compensation
Office Properties
Ownership portion of Office Properties Fee
Resort/Hotel Properties
Residential Development Properties
Other
Distributions received from unconsolidated companies:
Office Properties
Residential Development Properties
Temperature-Controlled Logistics Properties
Income tax -current and deferred, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation
Proceeds from property sales
Proceeds from sale of investment
Proceeds from joint venture partner
Acquisition of investment properties
Development of investment properties
Property improvements - Office Properties
Property improvements - Resort/Hotel Properties
Tenant improvement and leasing costs - Office Properties
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities
INCREASE (DEC.) IN CASH AND CASH EQUIVALENTS
($37,366,000)
($33,960,000)
($2,681,000)
$42,159,000
($392,000)
$14,239,000
CASH AND CASH EQUIVALENTS,
Beginning of period
$110,292,000
$72,926,000
$38,966,000
$36,285,000
$78,444,000
$78,052,000
$38,966,000
$36,285,000
$78,444,000
$78,052,000
$92,291,000
End of period
$72,926,000
70
Appendix L: Forecasted Cash Flows
Dec. 2005
Dec. 2006
Dec. 2007
Dec. 2008
Dec. 2009
Dec. 2010
Dec. 2011
Dec. 2012
Dec. 2013
(1,983,806)
64,564,256
98,950,508
115,459,438
59,243,819
149,995,461
198,465,640
222,322,821
146,030,261
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adj. to Reconcile Net Inc. to Net Cash From Op Activities:
Depreciation and amortization
Residential Development cost of sales
Residential Development capital expenditures
Impairment charges related to real estate
Gain on real estate from discontinued operations
Discontinued operations
Impairment charges related to real estate assets
Income from investment land sales, net
Gain on joint venture of properties, net
Minority interests
Non-cash compensation
Office Properties
Ownership portion of Office Properties Fee
Resort/Hotel Properties
Residential Development Properties
Other
Distributions received from unconsolidated companies:
Office Properties
Residential Development Properties
Temperature-Controlled Logistics Properties
Income tax -current and deferred, net
Net cash provided by operating activities
133,577,020
127,964,540
(148,169,468)
6,734,976
(4,826,733)
10,214,713
5,836,979
(13,357,702)
(17,959,935)
15,041,446
1,234,746
(6,734,976)
1,122,496
(2,244,992)
(7,857,472)
1,122,496
151,699,377
163,257,425
174,685,444
148,809,865
155,094,554
165,951,172
(202,265,836) (228,560,395) (279,496,711)
7,223,780
8,162,871
8,734,272
(14,447,560)
(7,020,069)
(7,511,474)
8,668,536
14,856,426
15,896,375
7,512,731
8,489,386
9,083,643
(17,192,596)
(19,427,634)
(20,787,568)
(23,116,096)
(26,121,188)
(27,949,671)
19,359,730
21,876,495
23,407,850
1,795,832
1,921,540
(10,113,292)
(9,795,445)
(10,481,127)
1,444,756
1,632,574
1,746,854
(6,501,402)
(3,265,148)
(3,493,709)
(11,558,048)
(11,428,020)
(12,227,981)
1,444,756
(17,958,317)
1,746,854
155,470,046
147,696,543
(205,220,460)
7,773,502
(6,685,212)
14,147,774
8,084,442
(18,500,935)
(24,875,207)
20,832,986
1,710,171
(9,328,203)
1,554,700
(3,109,401)
(10,882,903)
1,554,700
179,101,493
184,394,937
192,490,324
149,251,244
157,410,312
168,429,034
(278,602,322) (314,820,624) (336,858,067)
9,950,083
11,243,594
12,030,645
(8,557,071)
(9,669,491)
(10,346,355)
18,109,151
20,463,341
21,895,774
10,348,086
11,693,337
12,511,871
(23,681,197)
(26,759,753)
(28,632,936)
(31,840,265)
(35,979,500)
(45,716,452)
26,666,222
30,132,831
32,242,129
2,189,018
2,473,591
2,646,742
(11,940,100)
(13,492,312)
(14,436,774)
1,990,017
2,248,719
2,406,129
(3,980,033)
(4,497,437)
(4,812,258)
(13,930,116)
(15,741,031)
(16,842,903)
1,990,017
2,248,719
2,406,129
171,316,388
154,184,750
(256,974,583)
10,707,274
(9,208,256)
19,487,239
11,135,565
(25,483,313)
(34,263,278)
28,695,495
2,355,600
(12,848,729)
2,141,455
(4,282,910)
(14,990,184)
2,141,455
8,306,470
8,418,720
3,142,989
(7,071,725)
112,249,597
10,691,194
10,835,670
4,045,317
(9,101,963)
144,475,597
11,504,783
11,660,253
4,353,161
(9,794,613)
155,470,046
14,726,123
14,925,124
5,572,046
(12,537,104)
199,001,658
15,846,766
16,060,911
5,996,074
(13,491,166)
214,145,486
12,081,049
12,244,307
4,571,208
(16,325,742)
163,257,425
12,926,723
13,101,408
4,891,192
(11,005,183)
174,685,444
16,640,519
16,865,391
6,296,412
(14,166,928)
224,871,874
17,805,355
18,045,968
6,737,161
(15,158,613)
240,612,905
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation
Proceeds from property sales
Proceeds from sale of investment
Proceeds from joint venture partner
Acquisition of investment properties
Development of investment properties
Property improvements - Office Properties
Property improvements - Resort/Hotel Properties
Tenant improvement and leasing costs - Office Properties
Net cash provided by (used in) investing activities
10,889,342
60,989,148
64,476,665
69,645,953
15,625,336
68,113,439
70,505,450
72,654,131
16,152,850
43,557,367
243,956,592
257,906,660
278,583,810
62,501,344
272,453,758
282,021,800
290,616,524
64,611,399
21,778,683
121,978,296
128,953,330
139,291,905
31,250,672
136,226,879
141,010,900
145,308,262
32,305,699
32,668,025
182,967,444
193,429,995
208,937,858
46,876,008
204,340,318
211,516,350
217,962,393
48,458,549
(109,667,500) (164,069,375) (175,035,219) (207,611,023) (164,095,779) (177,702,849) (181,111,218) (182,630,217) (176,385,016)
(9,238,750)
(5,617,688)
(6,402,859)
(6,350,324)
(6,902,405)
(6,318,319)
(6,493,477)
(6,516,131)
(6,557,583)
(23,997,000)
(18,389,500)
(18,676,625)
(18,840,031)
(19,975,789)
(18,970,486) (107,658,000) (19,225,510)
(19,321,880)
(19,352,667)
(19,352,667)
(20,004,583)
(21,612,229)
(20,080,536)
(20,262,504)
(20,489,963)
(20,611,308)
(20,361,078)
(67,785,000)
(71,778,750)
(77,429,688)
(77,467,359)
(73,615,199)
(75,072,749)
(75,896,249)
(75,512,889)
(75,024,272)
($121,147,500) $330,683,500 $347,217,675 $364,578,559 ($128,416,350) $382,807,487 $313,405,594 $422,045,254 ($136,121,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities
(75,574,000)
(451,870,200) (460,907,604) (470,125,756)
(149,528,271)
(537,118,837) (498,901,213) (608,879,238)
(219,056,822)
INCREASE (DEC.) IN CASH AND CASH EQUIVALENTS
(84,471,903)
23,288,897
49,567,496
69,138,247
(122,474,575)
44,690,308
39,376,255
53,778,922
(141,032,668)
CASH AND CASH EQUIVALENTS,
Beginning of period
92,291,000
7,819,097
31,107,994
80,675,490
149,813,737
27,339,161
72,029,470
111,405,724
165,184,646
7,819,097
31,107,994
80,675,490
149,813,737
27,339,161
72,029,470
111,405,724
165,184,646
24,151,978
End of period
71
Appendix M: Historical Pro Forma Income Statement
-2-
1999
2000
2001
2002
2003
2004
85.2%
9.1%
5.7%
100.0%
87.4%
10.4%
2.2%
100.0%
92.6%
7.4%
100.0%
53.7%
20.3%
26.0%
100.0%
52.2%
23.8%
24.0%
100.0%
49.5%
18.7%
31.8%
100.0%
13.7%
28.1%
35.7%
64.3%
13.9%
27.4%
36.1%
63.9%
13.8%
29.3%
39.9%
60.1%
13.5%
30.8%
77.8%
91.6%
63.4%
36.6%
13.2%
34.4%
81.0%
88.6%
65.3%
34.7%
12.5%
35.9%
84.9%
87.3%
67.6%
32.4%
100.0%
100.0%
83.8%
16.2%
100.0%
0.4%
16.7%
82.9%
100.0%
42.0%
33.8%
24.2%
100.0%
82.0%
12.4%
0.1%
5.5%
100.0%
6.2%
87.8%
5.9%
100.0%
3.0%
35.3%
1.9%
24.2%
2.8%
29.8%
3.1%
75.5%
-7.6%
6.5%
54.9%
2.6%
33.5%
2.5%
53.3%
32.8%
0.7%
5.0%
39.2%
2.0%
2.3%
25.4%
5.4%
20.0%
74.8%
-7.4%
0.2%
7.0%
47.2%
2.7%
36.5%
3.5%
3.0%
37.9%
4.1%
8.6%
44.5%
2.8%
40.6%
2.2%
1.2%
40.7%
5.0%
8.8%
40.2%
3.0%
9.7%
37.2%
0.9%
0.2%
44.9%
18.4%
7.7%
62.8%
22.0%
7.5%
100.0%
2.9%
-0.3%
1.5%
1.5%
-1.9%
-0.1%
-0.6%
-1.0%
4.2%
70.6%
9.8%
15.4%
100.0%
68.3%
-7.4%
36.3%
-0.6%
35.8%
-1.9%
-0.4%
0.0%
33.4%
12.0%
80.1%
2.2%
5.8%
100.0%
1.4%
-3.1%
-2.3%
1.5%
-0.7%
-1.9%
-2.9%
43.8%
-0.2%
74.3%
-5.5%
-12.3%
100.0%
25.8%
-2.2%
0.4%
7.7%
1.3%
-0.4%
1.0%
-0.9%
8.7%
-2.3%
-0.7%
6.6%
42.3%
23.2%
42.1%
8.8%
-16.4%
100.0%
21.9%
-0.7%
-2.8%
4.1%
0.2%
-2.6%
1.1%
2.7%
-2.5%
-1.1%
-0.03%
65.1%
-2.5%
-23.5%
63.9%
-2.9%
100.0%
19.3%
-3.8%
1.3%
16.9%
1.0%
-0.3%
0.1%
17.7%
-3.3%
-1.1%
14.4%
Revenues:
Office Property
Resort/Hotel Property
Residential Development Property
Behavioral healthcare properties
Total Property Revenue
Operating Expenses:
Office Property real estate taxes
Office Property operating expenses
Resort/Hotel Property expense
Residential Development Property expense
Total Property expense
Income from Property Operations
Other Income:
Income from sale of investment in unconsolidated company, net
Income from investment land sales, net
Gain on joint venture of properties, net
Gain on property sales, net
Interest and other income
Total Other Income
Other Expenses
Loss on property sales, net
Corporate general and administrative
Interest expense
Amortization of deferred financing costs
Extinguishment of debt
Depreciation and amortization
Settlement of merger dispute
Impairments related to real estate assets
Impairments related to COPI
Impairments related to the behavioral healthcare
Carrying value in excess of market value of asset held for sale
Other expenses
Total Other Expenses
Net Operating Income (loss)
Equity in Net Income (loss) of Unconsolidated Companies:
Office Properties
Resort/Hotel Properties
Residential Development Properties
Temperature-Controlled Logistics Properties
Other
Total Equity in Net Income of Unconsolidated Companies
INCOME from Continuing Ops. before Minority Interests & Inc. Taxes
Minority interests
Income tax (provision) benefit
INCOME (loss) Before Disc. Ops. & Cum. Effect of a Change in Acct.
Income from discontinued operations, net of minority interests
Impairment charges from R/E assets from disc. ops, net of minority interests
Gain on real estate from discontinued operations, net of minority interests
Extraordinary item - extinguishment of debt
Cumulative effect of a change in accounting principle
NET INCOME (loss)
Series A Preferred Share distributions
Series B Preferred Share distributions
Share repurchase agreement return
Forward share purchase agreement return
NET INCOME (loss) Available to common shareholders
-3-
Appendix N: Forecasted Pro Forma Income Statement
4
2005
2006 2007 2008
2009
2010 2011 2012
2013
Revenues:
Office Property
Resort/Hotel Property
Residential Development Property
Total Property Revenue
% of Total Prop
Revenue
50.0%
20.0%
30.0%
Revenue Growth -11.0%
50.0%
23.0%
27.0%
33.0%
50.0%
23.0%
27.0%
19.0%
50.0%
23.0%
27.0%
10.0%
50.0%
23.0%
27.0%
-11.0%
50.0%
23.0%
27.0%
33.0%
50.0%
23.0%
27.0%
19.0%
50.0%
23.0%
27.0%
10.0%
50.0%
23.0%
27.0%
-11.0%
13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
28.5% 28.5% 28.5% 28.5% 28.5% 28.5%
78.0% 78.0% 78.0% 78.0% 78.0% 78.0%
85.0% 85.0% 85.0% 85.0% 85.0% 85.0%
Sum of Segment's Expense
Property Revenue less Property Expenses
13.5%
28.5%
78.0%
85.0%
Operating Expenses:
Office Property real estate taxes
Office Property operating expenses
Resort/Hotel Property expense
Residential Development Property expense
Total Property expense
Income from Property Operations
Other Income:
Total Other Income
% of each
Segments
Revenues
Income Growth on
Past Years Avr.
13.5%
28.5%
78.0%
85.0%
13.5%
28.5%
78.0%
85.0%
6.0%
5.8%
5.5%
5.3%
5.0%
4.8%
4.5%
4.3%
4.0%
Other Expenses
Corporate general and administrative
Interest expense
Amortization of deferred financing costs
Depreciation and amortization
Impairments related to real estate assets
Other expenses
Total Other Expenses
Net Operating Income (loss)
% of Total
Other Expenses
Expense Growth
Equity in Net Income (loss) of Unconsolidated Companies:
Office Properties
% of Total
Resort/Hotel Properties
Net Income of
Residential Development Properties
Unconsolidated
Temperature-Controlled Logistics Properties
Companies
Other
Total Equity in Net Income of Unconsolidated Companies
Growth Rate
INCOME from Continuing Ops. before Minority Interests & Inc. Taxes
Minority interests
% of Inc from Ops
NET INCOME (loss)
Series A Preferred Share distributions
Preffered
Series B Preferred Share distributions
Growth
NET INCOME (loss) Available to common shareholders
5
7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0%
2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%
32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%
1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2%
4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Income from Prop Operation plus Other Income less Other Expenses
36.8% 36.8% 36.8% 36.8% 36.8% 36.8% 36.8% 36.8% 36.8%
21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3%
35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
5.0% 4.8% 4.5% 4.3% 4.0% 3.8% 3.5% 3.3% 3.0%
Net Op Income plus Equity in Net Income of Unconsolidated Co.
20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Sum of Income from Continuing Ops, Minority Int, & Tax
1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Net Income less Preferred Distributions
Appendix O: Pro Forma Balance Sheet
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
8.1%
71.3%
1.4%
1.9%
72.5%
1.5%
1.8%
0.8%
1.5%
16.4%
2.7%
3.0%
100.0%
6.1%
69.6%
1.3%
2.6%
1.4%
68.8%
0.9%
2.1%
0.9%
1.8%
18.6%
3.1%
3.8%
100.0%
6.0%
70.9%
1.7%
2.2%
1.6%
67.1%
0.9%
2.8%
0.7%
1.6%
20.2%
3.2%
3.5%
100.0%
5.2%
1.3%
51.4%
1.2%
10.4%
2.8%
72.4%
1.8%
2.5%
1.0%
1.4%
13.1%
2.7%
4.2%
100.0%
5.6%
2.4%
52.2%
1.2%
10.4%
1.2%
73.1%
1.8%
5.0%
0.2%
0.9%
1.4%
10.3%
1.8%
5.0%
100.0%
5.2%
1.7%
45.5%
1.1%
12.4%
2.0%
67.9%
2.3%
2.3%
4.4%
1.5%
1.4%
9.0%
2.5%
8.4%
100.0%
5.9%
1.5%
47.9%
1.3%
11.0%
1.5%
69.1%
2.0%
2.6%
4.0%
1.7%
1.5%
9.0%
2.6%
7.5%
-2.2%
6.1%
1.5%
47.9%
1.3%
11.0%
1.5%
69.3%
2.0%
2.6%
3.7%
1.5%
1.5%
9.2%
2.6%
7.6%
6.6%
6.3%
1.5%
47.9%
1.3%
11.0%
1.5%
69.5%
2.0%
2.6%
3.4%
1.5%
1.5%
9.4%
2.6%
7.5%
3.8%
6.5%
6.7%
6.9%
1.5%
1.5%
1.5%
47.9% 47.9% 47.9%
1.3%
1.3%
1.3%
11.0% 11.0% 11.0%
1.5%
1.5%
1.5%
69.7% 69.9% 70.1%
2.0%
2.0%
2.0%
2.6%
2.6%
2.6%
3.1%
2.8%
2.5%
1.5%
1.5%
1.0%
1.5%
1.5%
1.5%
9.6%
9.8% 10.0%
2.6%
2.6%
2.6%
7.4%
7.3%
7.7%
2.0%
-2.2%
6.6%
Total Asset Growth Rate
7.1%
1.5%
47.9%
1.3%
11.0%
1.5%
70.3%
2.0%
2.6%
2.2%
1.0%
1.5%
10.2%
2.6%
7.6%
3.8%
7.3%
1.5%
47.9%
1.3%
11.0%
1.5%
70.5%
2.0%
2.6%
1.9%
1.0%
1.5%
10.4%
2.6%
7.5%
2.0%
7.5%
1.5%
47.9%
1.3%
11.0%
1.5%
70.7%
2.0%
2.6%
1.6%
1.0%
1.5%
10.6%
2.6%
7.4%
-2.2%
18.4%
75.4%
6.2%
56.0%
22.4%
69.4%
8.2%
54.5%
11.6%
79.3%
9.0%
58.8%
5.9%
80.4%
13.6%
64.3%
8.1%
78.9%
12.7%
68.1%
5.5%
78.1%
16.4%
63.8%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
7.8%
78.9%
13.4%
63.2%
80.1%
19.9%
2.5%
29.8%
70.2%
7.4%
23.1%
76.9%
7.3%
74.8%
25.2%
4.1%
69.8%
30.2%
3.6%
69.7%
30.3%
4.0%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
68.5%
30.3%
1.2%
4.8%
0.1%
108.4%
-18.8%
0.6%
100.0%
41.5%
0.1%
128.3%
-23.2%
-0.4%
116.3%
-16.3%
38.1%
0.1%
158.9%
-45.4%
-2.2%
125.6%
-25.6%
33.9%
18.3%
6.0%
0.1%
165.6%
-0.4%
-53.7%
-2.0%
133.9%
-33.9%
31.6%
20.3%
6.7%
0.1%
183.8%
-0.3%
-71.8%
-1.1%
137.7%
-37.7%
28.3%
24.5%
6.3%
0.1%
172.8%
-0.2%
-68.1%
-0.1%
135.4%
-35.4%
32.2%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
24.6%
6.4%
0.1%
170.4%
-0.3%
-64.5%
-0.9%
135.7%
-35.7%
32.1%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
ASSETS:
Investments in Real Estate:
Land
Land improvements, net of accumulated depreciation
Building and improvements, net of accumulated depreciation
Furniture, fixtures and equipment, net of accumulated depreciation
Land held for investment or development
Properties held for disposition, net
Net Investment in Real Estate
Cash and cash equivalents
Restricted cash and cash equivalents
Defeasance investments
Accounts receivable, net
Deferred rent receivable
Investments in unconsolidated companies
Notes receivable, net
Other assets, net
Total Assets
LIABILITIES:
Borrowings under Credit Facility
Notes payable
Accounts payable, accrued expenses and other liabilities
Total Liabilities
MINORITY INTERESTS:
Operating partnership
Consolidated real estate partnerships
Investment in joint ventures
Total Minority Interests
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Cumulative Preferred Shares
Series B Cumulative Preferred Shares
Common shares, $0.01 par value, authorized 250,000,000 shares
Additional paid-in capital
Deferred compensation on restricted shares
Accumulated deficit
Accumulated other comprehensive income
Less - shares held in treasury, at cost
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
6
Sources:
•
Ford Epic Research Software
•
www.crescent.com
•
www.edgarscan.pwcglobal.com
•
http://finance.yahoo.com
•
www.wsj.com
•
www.morningstar.com
•
www.nareit.org
¾ National Association of Real Estate Investment Trusts
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