e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED June 30, 2006
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of registrant as specified in its charter)
     
TEXAS   52-1862813
     
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification Number)
or organization)    
777 Main Street, Suite 2100, Fort Worth, Texas 76102
 
(Address of principal executive offices)(Zip code)
Registrant’s telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days.
YES þ NO o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ      Accelerated filer o     Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
YES o NO þ
Number of shares outstanding of each of the registrant’s classes of preferred and common shares, as of August 1, 2006:
         
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share:
    14,200,000  
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share:
    3,400,000  
Common Shares, par value $0.01 per share:
    102,585,657  
 
 

 


 

CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
         
    Page  
PART I: FINANCIAL INFORMATION
       
 
       
Item 1. Financial Statements
       
 
       
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    62  
 
       
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    62  
 Certifications Pursuant to Section 302
 Certifications Pursuant to Section 906

 


Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
                 
    June 30,     December 31,  
    2006     2005  
ASSETS:
               
Investments in real estate:
               
Land
  $ 191,025     $ 183,228  
Land improvements, net of accumulated depreciation of $33,141 and $29,784 at June 30, 2006 and December 31, 2005, respectively
    73,962       70,494  
Buildings and improvements, net of accumulated depreciation of $493,122 and $456,628 at June 30, 2006 and December 31, 2005, respectively
    1,850,516       1,760,920  
Furniture, fixtures and equipment, net of accumulated depreciation of $36,847 and $34,129 at June 30, 2006 and December 31, 2005, respectively
    38,914       37,236  
Land held for investment or development
    688,008       574,527  
Properties held for disposition, net
    4,139       28,918  
 
           
Net investment in real estate
  $ 2,846,564     $ 2,655,323  
 
               
Cash and cash equivalents
  $ 81,222     $ 86,228  
Restricted cash and cash equivalents
    71,018       84,699  
Defeasance investments
    115,318       274,134  
Accounts receivable, net
    49,373       56,356  
Deferred rent receivable
    63,789       70,074  
Investments in unconsolidated companies
    397,191       393,535  
Notes receivable, net
    248,034       219,016  
Income tax asset-current
    11,516       8,291  
Other assets, net
    287,716       294,206  
 
           
Total assets
  $ 4,171,741     $ 4,141,862  
 
           
 
               
LIABILITIES:
               
Borrowings under Credit Facility
  $ 310,000     $ 234,000  
Notes payable
    2,007,535       1,948,152  
Junior subordinated notes
    77,321       77,321  
Accounts payable, accrued expenses and other liabilities
    463,440       471,920  
Deferred tax liability
    1,093       1,093  
 
           
Total liabilities
  $ 2,859,389     $ 2,732,486  
 
           
 
               
COMMITMENTS AND CONTINGENCIES:
               
 
               
MINORITY INTERESTS:
               
Operating partnership, 11,428,673 and 11,416,173 units, at June 30, 2006 and December 31, 2005, respectively
  $ 105,531     $ 113,819  
Consolidated real estate partnerships
    54,619       53,562  
 
           
Total minority interests
  $ 160,150     $ 167,381  
 
           
 
               
SHAREHOLDERS’ EQUITY:
               
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
               
Series A Convertible Cumulative Preferred Shares, liquidation preference of $25.00 per share, 14,200,000 shares issued and outstanding at June 30, 2006 and December 31, 2005
  $ 319,166     $ 319,166  
Series B Cumulative Redeemable Preferred Shares, liquidation preference of $25.00 per share, 3,400,000 shares issued and outstanding at June 30, 2006 and December 31, 2005
    81,923       81,923  
Common shares, $0.01 par value, authorized 250,000,000 shares, 126,855,000 and 126,562,980 shares issued at June 30, 2006 and December 31, 2005, respectively
    1,269       1,266  
Additional paid-in capital
    2,276,224       2,271,888  
Deferred compensation on restricted shares
          (1,182 )
Accumulated deficit
    (1,066,392 )     (972,319 )
Accumulated other comprehensive income
    144       1,385  
 
           
 
  $ 1,612,334     $ 1,702,127  
 
           
 
               
Less – shares held in treasury, at cost, 25,120,917 common shares at June 30, 2006 and December 31, 2005
    (460,132 )     (460,132 )
 
           
Total shareholders’ equity
  $ 1,152,202     $ 1,241,995  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 4,171,741     $ 4,141,862  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
(unaudited)
                                 
    For the three months     For the six months  
    ended June 30,     ended June 30,  
    2006     2005     2006     2005  
REVENUE:
                               
Office Property
  $ 110,407     $ 92,651     $ 210,073     $ 181,566  
Resort Residential Development Property
    53,716       85,838       152,855       140,313  
Resort/Hotel Property
    30,941       29,925       70,739       69,759  
 
                       
Total Property revenue
  $ 195,064     $ 208,414     $ 433,667     $ 391,638  
 
                       
EXPENSE:
                               
Office Property real estate taxes
  $ 10,716     $ 9,843     $ 20,282     $ 19,911  
Office Property operating expenses
    39,588       37,523       81,142       73,872  
Resort Residential Development Property expense
    49,683       73,611       141,380       122,447  
Resort/Hotel Property expense
    23,815       23,723       53,272       55,458  
 
                       
Total Property expense
  $ 123,802     $ 144,700     $ 296,076     $ 271,688  
 
                       
 
                               
Income from Property Operations
  $ 71,262     $ 63,714     $ 137,591     $ 119,950  
 
                       
 
                               
OTHER INCOME (EXPENSE):
                               
Income from sale of investment in unconsolidated company
  $ 4,297     $     $ 4,297     $  
Income from investment land sales
          4,963             8,424  
Gain on joint venture of properties
          1,008             1,540  
Gain on property sales
    298       180       298       180  
Interest and other income
    9,291       7,906       25,179       13,210  
Corporate general and administrative
    (11,812 )     (11,063 )     (26,638 )     (21,392 )
Interest expense
    (32,644 )     (36,078 )     (66,054 )     (69,358 )
Amortization of deferred financing costs
    (1,843 )     (2,116 )     (3,613 )     (4,045 )
Extinguishment of debt
          (240 )           (1,667 )
Depreciation and amortization
    (37,191 )     (40,977 )     (73,635 )     (75,004 )
Other expenses
    (1,845 )     (8 )     (3,778 )     (676 )
Equity in net income (loss) of unconsolidated companies:
                               
Office Properties
    2,691       3,355       4,868       6,685  
Resort Residential Development Properties
    (597 )     71       (124 )     192  
Resort/Hotel Properties
    (1,216 )     (645 )     (2,086 )     760  
Temperature-Controlled Logistics Properties
    (2,278 )     (1,211 )     (2,600 )     (2,342 )
Other
    410       4,571       525       10,761  
 
                       
 
                               
Total other income (expense)
  $ (72,439 )   $ (70,284 )   $ (143,361 )   $ (132,732 )
 
                       
 
                               
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES
  $ (1,177 )   $ (6,570 )   $ (5,770 )   $ (12,782 )
 
Minority interests
    (1,066 )     (1,011 )     (568 )     (492 )
Income tax benefit
    5,429       329       4,325       1,545  
 
                       
 
                               
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  $ 3,186     $ (7,252 )   $ (2,013 )   $ (11,729 )
Income from discontinued operations, net of minority interests
    113       1,710       135       3,397  
(Loss) gain on sale of real estate from discontinued operations, net of minority interests
    (8 )           88       1,503  
 
                       
 
                               
NET INCOME (LOSS)
  $ 3,291     $ (5,542 )   $ (1,790 )   $ (6,829 )
Series A Preferred Share distributions
    (5,991 )     (5,991 )     (11,981 )     (11,981 )
Series B Preferred Share distributions
    (2,019 )     (2,019 )     (4,038 )     (4,038 )
 
                       
 
                               
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
  $ (4,719 )   $ (13,552 )   $ (17,809 )   $ (22,848 )
 
                       
 
                               
BASIC EARNINGS PER SHARE DATA:
                               
Loss available to common shareholders before discontinued operations
  $ (0.05 )   $ (0.16 )   $ (0.18 )   $ (0.28 )
Income from discontinued operations, net of minority interests
          0.02             0.03  
(Loss) gain on sale of real estate from discontinued operations, net of minority interests
                      0.02  
 
                       
 
                               
Net loss available to common shareholders – basic
  $ (0.05 )   $ (0.14 )   $ (0.18 )   $ (0.23 )
 
                       
DILUTED EARNINGS PER SHARE DATA:
                               
Loss available to common shareholders before discontinued operations
  $ (0.05 )   $ (0.16 )   $ (0.18 )   $ (0.28 )
Income from discontinued operations, net of minority interests
          0.02             0.03  
(Loss) gain on sale of real estate from discontinued operations, net of minority interests
                      0.02  
 
                       
 
                               
Net loss available to common shareholders – diluted
  $ (0.05 )   $ (0.14 )   $ (0.18 )   $ (0.23 )
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
(unaudited)
                                                                                                         
                                                                            Deferred             Accumulated        
    Series A     Series B                                     Additional     Compensation             Other        
    Preferred Shares     Preferred Shares     Treasury Shares     Common Shares     Paid-in     on Restricted     Accumulated     Comprehensive        
    Shares     Net Value     Shares     Net Value     Shares     Net Value     Shares     Par Value     Capital     Shares     (Deficit)     Income     Total  
SHAREHOLDERS’ EQUITY, December 31, 2005
    14,200,000     $ 319,166       3,400,000     $ 81,923       25,120,917     $ (460,132 )     126,562,980     $ 1,266     $ 2,271,888     $ (1,182 )   $ (972,319 )   $ 1,385     $ 1,241,995  
 
                                                                                                       
Exercise of Common Share Options
                                        188,820       2       3,185                         3,187  
 
                                                                                                       
Accretion of Discount on Employee Stock Option Notes
                                                    (126 )                       (126 )
 
                                                                                                       
Issuance of Shares in Exchange for Operating Partnership Units
                                        103,200       1       1,803                         1,804  
 
                                                                                                       
Amortization of Stock Options
                                                    131                         131  
 
                                                                                                       
Reclassification of Deferred Compensation on Restricted Shares
                                                    (1,182 )     1,182                    
 
                                                                                                       
Amortization of Restricted Shares
                                                    525                         525  
 
                                                                                                       
Dividends Paid
                                                                (76,264 )           (76,264 )
 
                                                                                                       
Net Loss Available to Common Shareholders
                                                                (17,809 )           (17,809 )
 
                                                                                                       
Change in Unrealized Net Gain on Marketable Securities
                                                                      (785 )     (785 )
 
                                                                                                       
Change in Unrealized Net Gain on Cash Flow Hedges
                                                                      (456 )     (456 )
 
                                                                                                       
 
                                                                             
SHAREHOLDERS’ EQUITY, June 30, 2006
    14,200,000     $ 319,166       3,400,000     $ 81,923       25,120,917     $ (460,132 )     126,855,000     $ 1,269     $ 2,276,224     $     $ (1,066,392 )   $ 144     $ 1,152,202  
 
                                                                             
The accompanying notes are an integral part of these consolidated financial statements.

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CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
                 
    For the six months ended June 30,  
    2006     2005  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (1,790 )   $ (6,829 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    77,311       81,545  
Extinguishment of debt
          1,777  
Resort Residential Development cost of sales
    80,953       66,616  
Resort Residential Development capital expenditures
    (198,561 )     (141,014 )
Income from investment land sales
          (8,424 )
Gain on joint venture of properties
          (1,540 )
Gain on property sales
    (403 )     (1,947 )
Income from sale of investment in unconsolidated company
    (4,297 )      
Minority interests
    610       1,353  
Non-cash compensation
    8,546       2,971  
Amortization of debt premiums
    (1,192 )     (1,232 )
Equity in earnings from unconsolidated companies
    (583 )     (16,056 )
Ownership portion of management fees from unconsolidated investments
    4,335       3,052  
Distributions received from unconsolidated companies
    3,746       10,366  
Change in assets and liabilities, net of acquisitions and dispositions:
               
Restricted cash and cash equivalents
    11,713       25,042  
Accounts receivable and notes receivable
    (13,536 )     3,302  
Deferred rent receivable
    6,286       (8,303 )
Income tax asset — current and deferred, net
    (3,224 )     (1,981 )
Other assets
    (2,239 )     (9,249 )
Accounts payable, accrued expenses and other liabilities
    (11,058 )     3,339  
 
           
Net cash (used in) provided by operating activities
  $ (43,383 )   $ 2,788  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from property sales
  $ 24,335     $ 48,602  
Proceeds from sale of investment in unconsolidated company and related property sales
    5,595        
Proceeds from joint venture partners
          147,543  
Acquisition of investment properties
    (30,675 )     (186,901 )
Development of investment properties
    (72,518 )     (5,278 )
Property improvements – Office Properties
    (5,084 )     (4,671 )
Property improvements – Resort/Hotel Properties
    (11,416 )     (3,601 )
Tenant improvement and leasing costs – Office Properties
    (33,972 )     (31,930 )
Resort Residential Development Properties investments
    (8,803 )     (10,891 )
Decrease (increase) in restricted cash and cash equivalents
    4,970       (584 )
Purchases of defeasance investments
          (115,710 )
Proceeds from defeasance investment maturities and other securities
    167,455       15,430  
Return of investment in unconsolidated companies
    15,643       18,051  
Investment in unconsolidated companies
    (16,413 )     (11,698 )
Increase in notes receivable
    (8,422 )     (62,349 )
 
           
Net cash provided by (used in) investing activities
  $ 30,695     $ (203,987 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Debt financing costs
  $ (2,133 )   $ (8,007 )
Borrowings under Credit Facility
    190,000       507,300  
Payments under Credit Facility
    (114,000 )     (472,800 )
Notes payable proceeds
    153,125       290,800  
Notes payable payments
    (171,087 )     (129,280 )
Junior subordinated notes
          51,547  
Resort Residential Development Properties notes payable borrowings
    125,278       115,387  
Resort Residential Development Properties notes payable payments
    (70,349 )     (58,972 )
Capital distributions to joint venture partners
    (8,172 )     (5,095 )
Capital contributions from joint venture partners
    8,434       893  
Proceeds from exercise of share and unit options
    4,989       5,239  
Reissuance of Treasury Shares
          16  
Series A Preferred Share distributions
    (11,981 )     (11,981 )
Series B Preferred Share distributions
    (4,038 )     (4,038 )
Dividends and unitholder distributions
    (92,384 )     (87,960 )
 
           
Net cash provided by financing activities
  $ 7,682     $ 193,049  
 
           
 
               
DECREASE IN CASH AND CASH EQUIVALENTS
  $ (5,006 )   $ (8,150 )
 
               
CASH AND CASH EQUIVALENTS, Beginning of period
    86,228       92,291  
 
           
 
               
CASH AND CASH EQUIVALENTS, End of period
  $ 81,222     $ 84,141  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.   ORGANIZATION AND BASIS OF PRESENTATION
     References to “we,” “us” or “our” refer to Crescent Real Estate Equities Company and, unless the context otherwise requires, Crescent Real Estate Equities Limited Partnership, which we refer to as our Operating Partnership, and our other direct and indirect subsidiaries. We conduct our business and operations through the Operating Partnership, our other subsidiaries and our joint ventures. References to “Crescent” refer to Crescent Real Estate Equities Company. The sole general partner of the Operating Partnership is Crescent Real Estate Equities, Ltd., a wholly-owned subsidiary of Crescent Real Estate Equities Company, which we refer to as the General Partner.
     We operate as a real estate investment trust, or REIT, for federal income tax purposes and provide management, leasing and development services for some of our properties.
     The following table shows our consolidated subsidiaries that owned or had an interest in real estate assets and the real estate assets that each subsidiary owned or had an interest in as of June 30, 2006.
     
Operating Partnership
  Wholly-owned assets – The Avallon IV, Dupont Centre and Financial Plaza, included in our Office Segment.
 
   
 
  Non wholly-owned assets, consolidated – 301 Congress Avenue (50% interest), included in our Office Segment. Fairmont Sonoma Mission Inn (80.1% interest), included in our Resort/Hotel Segment.
 
   
 
  Non wholly-owned assets, unconsolidated – Bank One Center (50% interest), 2211 Michelson Office Development – Irvine (40% interest), Three Westlake Park (20% interest), Four Westlake Park (20% interest), Miami Center (40% interest), One BriarLake Plaza (30% interest), Five Post Oak Park (30% interest), Houston Center (23.85% interest in three office properties and the Houston Center Shops), The Crescent Atrium (23.85% interest), The Crescent Office Towers (23.85% interest), Trammell Crow Center(1) (23.85% interest), Post Oak Central (23.85% interest in three Office Properties), Fountain Place (23.85% interest), Fulbright Tower (23.85% interest) and One Buckhead Plaza (35% interest), included in our Office Segment. AmeriCold Realty Trust (31.7% interest in 85 properties), included in our Temperature-Controlled Logistics Segment. Canyon Ranch Tucson and Canyon Ranch Lenox (48% interest), included in our Resort/Hotel Segment.
 
   
Crescent Real Estate Funding One, L.P. (Funding One)
  Wholly-owned assets – Carter Burgess Plaza, 125 E. John Carpenter Freeway, The Aberdeen, Regency Plaza One and The Citadel, included in our Office Segment.
 
   
Hughes Center Entities(2)
  Wholly-owned assets – Hughes Center Properties (eight office properties each in a separate limited liability company), 3883 Hughes Parkway (Office Development), included in our Office Segment.
 
   
Crescent Real Estate Funding III, IV and V, L.P. (Funding III, IV and V)(3)
  Non wholly-owned assets, consolidated – Greenway Plaza Office Properties (ten Office Properties, 99.9% interest), included in our Office Segment. Renaissance Houston Hotel (99.9% interest), included in our Resort/Hotel Segment.
 
   
Crescent Real Estate Funding VIII, L.P. (Funding VIII)
  Wholly-owned assets – The Addison, Austin Centre, The Avallon I, II, III and V, Exchange Building, 816 Congress, Greenway I & IA (two office properties), Greenway II, Johns Manville Plaza, One Live Oak, Palisades Central I, Palisades Central II, Stemmons Place, 3333 Lee Parkway, 44 Cook and 55 Madison, included in our Office Segment. Omni Austin Hotel and Ventana Inn & Spa, included in our Resort/Hotel Segment.
 
   
Crescent Real Estate Funding XII, L.P. (Funding XII)
  Wholly-owned assets – Briargate Office and Research Center, MacArthur Center I & II and Stanford Corporate Center, included in our Office Segment. Park Hyatt Beaver Creek Resort & Spa, included in our Resort/Hotel Segment.
 
   
Crescent 707 17th Street, LLC
  Wholly-owned assets – 707 17th Street, included in our Office Segment and the Denver Marriott City Center, included in our Resort/Hotel Segment.
 
   
Crescent Peakview Tower, LLC
  Wholly-owned asset – Peakview Tower, included in our Office Segment.
 
   
Crescent Alhambra, LLC
  Wholly-owned asset – The Alhambra (two Office Properties), included in our Office Segment.
 
   
Crescent Datran Center, LLC
  Wholly-owned asset – Datran Center (two Office Properties), included in our Office Segment.
 
   
Crescent Spectrum Center, L.P. (through Funding VIII)
  Non wholly-owned asset, consolidated – Spectrum Center (99.9% interest), included in our Office Segment.
 
   
Crescent-JMIR Paseo Del Mar, LLC
  Non wholly-owned asset, consolidated – Paseo Del Mar Office Development (80% interest), included in our Office Segment.
 
   
C-C Parkway Austin, L.P.
  Non wholly-owned asset, consolidated – Parkway at Oakhill Office Development (90% interest), included in our Office Segment.
 
   
Crescent Colonnade, LLC
  Wholly-owned asset – The BAC-Colonnade Building, included in our Office Segment.
 
   
Mira Vista Development Corp. (MVDC)
  Non wholly-owned asset, consolidated – Mira Vista (98% interest), included in our Resort Residential Development Segment.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     
Jefferson Station, L.P.(4)
  Non wholly-owned asset, consolidated – JPI (50% interest), included in our Resort Residential Development Segment.
 
   
Crescent Plaza Residential, L.P.
  Wholly-owned asset – the Residences at the Ritz-Carlton Development, included in our Resort Residential Development Segment.
 
   
Crescent Tower Residential, L.P.
  Wholly-owned asset – the Tower Residences and Regency Row at the Ritz-Carlton Development, included in our Resort Residential Development Segment.
 
   
Crescent Plaza Hotel Owner, L.P.
  Wholly-owned asset – the Ritz-Carlton Hotel Development, included in our Resort/Hotel Segment.
 
   
Houston Area Development Corp. (HADC)
  Non wholly-owned assets, consolidated – Falcon Point (98% interest) and Spring Lakes (98% interest), included in our Resort Residential Development Segment.
 
   
Desert Mountain Development
Corporation (DMDC)
  Non wholly-owned assets, consolidated – Desert Mountain (93% interest), included in our Resort Residential Development Segment.
 
   
Crescent Resort Development Inc.
(CRDI)(4)
  Wholly-owned asset – The Residences at Park Hyatt Beaver Creek, included in our Resort Residential Development Segment.
 
   
 
  Non wholly-owned assets, consolidated – Brownstones (64% interest), Creekside Townhomes at Riverfront Park (64% interest), Delgany (64% interest), One Riverfront (64% interest), Beaver Creek Landing (64% interest), Eagle Ranch (76% interest), Gray’s Crossing (71% interest), Hummingbird (64% interest), Main Street Vacation Club (30% interest), Northstar Highlands (57% interest), Northstar Village (57% interest), Old Greenwood (71% interest), Riverbend (68% interest), Village Walk (58% interest), Tahoe Mountain Club (71% interest) and Ritz-Carlton Highlands (71% interest), included in our Resort Residential Development Segment.
 
   
 
  Non wholly-owned assets, unconsolidated – Blue River Land Company, L.L.C. – Three Peaks (33.2% interest), EW Deer Valley, L.L.C. (35.7% interest) and East West Resort Development XIV, L.P., L.L.L.P. (26.8%), included in our Resort Residential Development Segment.
 
(1)   We own 23.85% of the economic interest in Trammell Crow Center through our ownership of a 23.85% interest in the joint venture that holds fee simple title to the Office Property (subject to a ground lease and a leasehold estate regarding the building) and two mortgage notes encumbering the leasehold interests in the land and the building.
 
(2)   In addition, we own nine retail parcels located in Hughes Center.
 
(3)   Funding III owns nine of the ten office properties in the Greenway Plaza office portfolio and the Renaissance Houston Hotel; Funding IV owns the central heated and chilled water plant building located at Greenway Plaza; and Funding V owns 9 Greenway, the remaining office property in the Greenway Plaza office portfolio.
 
(4)   We receive a preferred return on our invested capital before profits are allocated to the partners based on ownership percentage.
     See Note 8, “Investments in Unconsolidated Companies,” for a table that lists our ownership in significant unconsolidated joint ventures and investments as of June 30, 2006.
     See Note 9, “Notes Payable and Borrowings Under Credit Facility,” for a list of certain other subsidiaries, all of which are consolidated in our financial statements and were formed primarily for the purpose of obtaining secured debt or joint venture financing.
Segments
     Our assets and operations consisted of four investment segments at June 30, 2006, as follows:
    Office Segment;
 
    Resort Residential Development Segment;
 
    Resort/Hotel Segment; and
 
    Temperature-Controlled Logistics Segment.
     Within these segments, we owned in whole or in part the following operating real estate assets, which we refer to as the Properties, as of June 30, 2006:
    Office Segment consisted of 74 office properties, which we refer to as the Office Properties, located in 27 metropolitan submarkets in eight states, with an aggregate of approximately 30.1 million net rentable square feet. Fifty-four of the Office Properties are wholly-owned and 20 are owned through joint ventures, one of which is consolidated and 19 of which are unconsolidated.
 
    Resort Residential Development Segment consisted of our ownership of common stock representing interests of 98% to 100% in four Resort Residential Development Corporations and three limited partnerships. These Resort Residential Development Corporations, through partnership arrangements, owned in whole or in part 26 upscale resort residential development properties, which we refer to as the Resort Residential Development Properties.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Resort/Hotel Segment consisted of five luxury and destination fitness resorts and spas with a total of 949 rooms/guest nights and three upscale business-class hotel properties with a total of 1,376 rooms, which we refer to as the Resort/Hotel Properties. Five of the Resort/Hotel Properties are wholly-owned, one is owned through a joint venture that is consolidated and two are owned through joint ventures that are unconsolidated.
 
    Temperature-Controlled Logistics Segment consisted of our 31.7% interest in AmeriCold Realty Trust, or AmeriCold, a REIT. As of June 30, 2006, AmeriCold operated 101 facilities, of which 85 were wholly-owned, one was partially-owned and fifteen were managed for outside owners. The 86 owned and partially-owned facilities, which we refer to as the Temperature-Controlled Logistics Properties, had an aggregate of approximately 440.4 million cubic feet (17.4 million square feet) of warehouse space. AmeriCold also owned one quarry and the related land.
     See Note 3, “Segment Reporting,” for a table showing selected financial information for each of these investment segments for the six months ended June 30, 2006 and 2005, and total assets, consolidated property level financing, consolidated other liabilities and minority interests for each of these investment segments at June 30, 2006 and December 31, 2005.
Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.
     The consolidated balance sheet at December 31, 2005, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
     You should read these consolidated financial statements in conjunction with the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption of New Accounting Standards
     SFAS No. 123R. In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123R (Revised 2004), Share-Based Payment. The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. We were required to apply SFAS No. 123R beginning January 1, 2006. The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Effective January 1, 2003, we adopted the fair value expense recognition provisions of SFAS No. 123 on a prospective basis. We adopted SFAS No. 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Additionally, our prior interim periods and fiscal years do not reflect any restated amounts due to the adoption of SFAS No. 123R. We estimate an additional $1.4 million and $0.2 million of expense will be recorded in 2006 and 2007, respectively, for stock and unit options due to the adoption of SFAS No. 123R.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     EITF 04-5. At its June 2005 meeting, the Emerging Issues Task Force, or EITF, reached a consensus regarding Issue No. 04-5 (EITF 04-5), Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-5 was effective immediately for all newly-formed limited partnerships and for existing limited partnership agreements that are modified. The guidance is effective for existing limited-partnership agreements that are not modified no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The guidance provides a framework for addressing the question of when a general partner, as defined in EITF 04-5, should consolidate a limited partnership. The EITF has concluded that the general partner of a limited partnership should consolidate a limited partnership unless (1) the limited partners possess substantive kick-out rights as defined in paragraph B20 of FIN 46(R), Consolidation of Variable Interest Entities, or (2) the limited partners possess substantive participating rights similar to the rights described in Issue 96-16, Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders have Certain Approval or Veto Rights. The FASB has amended Statement of Position 78-9, Accounting for Investments in Real Estate Ventures, and EITF 96-16, to conform and align with the guidelines set forth in EITF 04-5. There was no impact to our financial condition or results of operations from the adoption of EITF 04-5.
     EITF 06-3. At its June 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-3 (EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross versus Net Presentation). EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and certain excise taxes. The consensus indicates that gross vs. net income statement classification of those taxes within its scope is an accounting policy decision. In addition, for taxes within its scope, the consensus requires the following disclosures: the accounting policy elected for these taxes and the amounts of the taxes reflected gross (as revenue) in the income statement on an interim and annual basis. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF 06-3.
     FASB Interpretation 48. On July 13, 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We are currently evaluating the impact, if any, to our financial condition and results of operations from the adoption of FIN 48.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant Accounting Policies
     Earnings Per Share. SFAS No. 128, Earnings Per Share, specifies the computation, presentation and disclosure requirements for earnings per share, or EPS.
     Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, where such exercise or conversion would result in a lower EPS amount. We present both basic and diluted earnings per share.
     The following tables present the reconciliation for the three and six months ended June 30, 2006 and 2005, of basic and diluted earnings per share from “Income (loss) before discontinued operations” to “Net loss available to common shareholders.” The tables also include weighted average shares on a basic and diluted basis.
                                                 
    For the three months ended June 30,
            2006                     2005        
            Wtd.     Per             Wtd.     Per  
    Income     Avg.     Share     (Loss)     Avg.     Share  
(in thousands, except per share amounts)   (Loss)     Shares     Amount     Income     Shares     Amount  
Basic/Diluted EPS -
                                               
 
                                               
Income (loss) before discontinued operations
  $ 3,186       101,632             $ (7,252 )     99,676          
Series A Preferred Share distributions
    (5,991 )                     (5,991 )                
Series B Preferred Share distributions
    (2,019 )                     (2,019 )                
         
Loss available to common shareholders before discontinued operations
  $ (4,824 )     101,632     $ (0.05 )   $ (15,262 )     99,676     $ (0.16 )
 
                                               
Income from discontinued operations, net of minority interests
    113                     1,710               0.02  
Loss on sale of real estate from discontinued operations, net of minority interests
    (8 )                                  
         
Net loss available to common shareholders
  $ (4,719 )     101,632     $ (0.05 )   $ (13,552 )     99,676     $ (0.14 )
                 
                                                 
    For the six months ended June 30,
            2006                     2005        
            Wtd.     Per             Wtd.     Per  
    (Loss)     Avg.     Share     (Loss)     Avg.     Share  
(in thousands, except per share amounts)   Income     Shares     Amount     Income     Shares     Amount  
Basic/Diluted EPS -
                                               
 
                                               
Loss before discontinued operations
  $ (2,013 )     101,555             $ (11,729 )     99,594          
Series A Preferred Share distributions
    (11,981 )                     (11,981 )                
Series B Preferred Share distributions
    (4,038 )                     (4,038 )                
         
Loss available to common shareholders before discontinued operations
  $ (18,032 )     101,555     $ (0.18 )   $ (27,748 )     99,594     $ (0.28 )
 
                                               
Income from discontinued operations, net of minority interests
    135                     3,397               0.03  
Gain on sale of real estate from discontinued operations, net of minority interests
    88                     1,503               0.02  
         
Net loss available to common shareholders
  $ (17,809 )     101,555     $ (0.18 )   $ (22,848 )     99,594     $ (0.23 )
                 
     The effect of the conversion of the Series A Convertible Cumulative Preferred Shares, stock options, restricted stock and the exchange of Operating Partnership units are not included in the computation of diluted EPS for the three and six months ended June 30, 2006 and 2005, since the effect of the conversions are not dilutive.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Disclosure to Statements of Cash Flows
                 
    For the six months ended  
    June 30,  
(in thousands)   2006     2005  
Supplemental disclosures of cash flow information:
               
 
               
Cash paid for interest
  $ (79,537 )   $ (80,253 )
 
           
 
               
Cash received (paid) for income taxes
  $ 1,101     $ (472 )
 
           
 
               
Interest capitalized – Office
  $ 2,291     $  
Interest capitalized – Resort Residential Development
    9,101       8,910  
Interest capitalized – Resort/Hotel
    1,022       269  
 
           
Total interest capitalized
  $ 12,414     $ 9,179  
 
           
 
               
Supplemental disclosures of non cash activities:
               
 
               
Assumption of debt in conjunction with acquisition of Office Property
  $ 23,605     $  
 
               
Joint venture of Office Properties’ debt
  $     $ 155,000  
3. SEGMENT REPORTING
     For purposes of segment reporting as defined in SFAS No. 131, we have four major investment segments based on property type: the Office Segment; the Resort Residential Development Segment; the Resort/Hotel Segment and the Temperature-Controlled Logistics Segment. Management utilizes this segment structure for making operating decisions and assessing performance.
     We use funds from operations, or FFO, as the measure of segment profit or loss. FFO, as used in this document, is based on the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, and means:
    Net Income (Loss) – determined in accordance with GAAP;
 
    excluding gains (losses) from sales of depreciable operating property;
 
    excluding extraordinary items (as defined by GAAP);
 
    plus depreciation and amortization of real estate assets; and
 
    after adjustments for unconsolidated partnerships and joint ventures.
     We calculate FFO available to common shareholders – diluted in the same manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available to Common Shareholders and we include the effect of Operating Partnership unitholder minority interests.
     NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We consider FFO available to common shareholders – diluted and FFO appropriate measures of performance for an equity REIT and for its investment segments. However, FFO available to common shareholders – diluted and FFO should not be considered as alternatives to net income determined in accordance with GAAP as an indication of our operating performance.
     Our measures of FFO available to common shareholders – diluted and FFO may not be comparable to similarly titled measures of other REITs if those REITs apply the definition of FFO in a different manner than we apply it.

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     CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Selected financial information related to each segment for the three and six months ended June 30, 2006 and 2005, and total assets, consolidated property level financing, consolidated other liabilities, and minority interests for each of the segments at June 30, 2006 and 2005, are presented in the following tables:
     Selected Financial Information:
                                                 
    For the three months ended June 30, 2006
            Resort             Temperature-              
            Residential             Controlled              
    Office     Development     Resort/Hotel     Logistics     Corporate        
(in thousands)   Segment(1)     Segment     Segment     Segment     and Other(2)     Total  
Total Property revenue
  $ 110,407     $ 53,716     $ 30,941     $     $     $ 195,064  
Total Property expense
    50,304       49,683       23,815                   123,802  
 
                                   
 
                                               
Income from Property Operations
  $ 60,103     $ 4,033     $ 7,126     $     $     $ 71,262  
 
                                               
Total other income (expense)
    (20,062 )     (5,021 )     (5,563 )     (2,279 )     (39,514 )     (72,439 )
Minority interests and income taxes
    (884 )     4,794       1,045             (592 )     4,363  
Discontinued operations –income and gain on sale of real estate, net of minority interests
    45                         60       105  
 
                                   
 
                                               
Net income (loss)
  $ 39,202     $ 3,806     $ 2,608     $ (2,279 )   $ (40,046 )   $ 3,291  
 
                                   
 
                                               
Depreciation and amortization of real estate assets
  $ 25,976     $ 2,534     $ 4,004     $     $     $ 32,514  
Gain on property sales
    (4,248 )     (159 )                       (4,407 )
Adjustments for investment in unconsolidated companies
    4,871       (2,908 )     1,172       4,269             7,404  
Unitholder minority interest
                            603       603  
Series A Preferred share distributions
                            (5,991 )     (5,991 )
Series B Preferred share distributions
                            (2,019 )     (2,019 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
  $ 26,599     $ (533 )   $ 5,176     $ 4,269     $ (7,407 )   $ 28,104  
 
                                   
Funds from operations available to common shareholders–diluted
  $ 65,801     $ 3,273     $ 7,784     $ 1,990     $ (47,453 )   $ 31,395  
 
                                   
See footnotes following the table.
     Selected Financial Information:
                                                 
    For the three months ended June 30, 2005
            Resort             Temperature-              
            Residential             Controlled              
    Office     Development     Resort/Hotel     Logistics     Corporate        
(in thousands)   Segment(1)     Segment     Segment     Segment     and Other(2)     Total  
Total Property revenue
  $ 92,651     $ 85,838     $ 29,925     $     $     $ 208,414  
Total Property expense
    47,366       73,611       23,723                   144,700  
 
                                   
 
                                               
Income from Property Operations
  $ 45,285     $ 12,227     $ 6,202     $     $     $ 63,714  
 
                                               
Total other income (expense)
    (23,008 )     (4,511 )     (8,560 )     (1,211 )     (32,994 )     (70,284 )
Minority interests and income taxes
    (1,304 )     (87 )     1,271             (562 )     (682 )
Discontinued operations, net of minority interests
    1,930                         (220 )     1,710  
 
                                   
 
                                               
Net income (loss)
  $ 22,903     $ 7,629     $ (1,087 )   $ (1,211 )   $ (33,776 )   $ (5,542 )
 
                                   
 
                                               
Depreciation and amortization of real estate assets
  $ 27,654     $ 2,480     $ 7,905     $     $     $ 38,039  
Gain on property sales
    (1,008 )           (180 )                 (1,188 )
Adjustments for investment in unconsolidated companies
    4,956       947       999       4,554             11,456  
Unitholder minority interest
                            (973 )     (973 )
Series A Preferred share distributions
                            (5,991 )     (5,991 )
Series B Preferred share distributions
                            (2,019 )     (2,019 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
    31,602       3,427       8,724       4,554       (8,983 )     39,324  
 
                                   
Funds from operations available to common shareholders – diluted
  $ 54,505     $ 11,056     $ 7,637     $ 3,343     $ (42,759 )   $ 33,782  
 
                                   
See footnotes following the table.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Selected Financial Information:
                                                 
    For the six months ended June 30, 2006
            Resort             Temperature-              
            Residential             Controlled              
    Office     Development     Resort/Hotel     Logistics     Corporate        
(in thousands)   Segment(1)     Segment     Segment     Segment     and Other(2)     Total  
Total Property revenue
  $ 210,073     $ 152,855     $ 70,739     $     $     $ 433,667  
Total Property expense
    101,424       141,380       53,272                   296,076  
 
                                   
 
                                               
Income from Property Operations
  $ 108,649     $ 11,475     $ 17,467     $     $     $ 137,591  
 
                                               
Total other income (expense)
    (44,346 )     (9,118 )     (10,914 )     (2,601 )     (76,382 )     (143,361 )
Minority interests and income taxes
    (1,241 )     3,149       1,413             436       3,757  
Discontinued operations –income and gain on sale of real estate, net of minority interests
    103                         120       223  
 
                                   
 
                                               
Net income (loss)
  $ 63,165     $ 5,506     $ 7,966     $ (2,601 )   $ (75,826 )   $ (1,790 )
 
                                   
 
                                               
Depreciation and amortization of real estate assets
  $ 51,437     $ 4,961     $ 8,155     $     $     $ 64,553  
Gain on property sales
    (4,361 )     (159 )                       (4,520 )
Adjustments for investment in unconsolidated companies
    10,255       (6,000 )     2,293       7,779             14,327  
Unitholder minority interest
                            (339 )     (339 )
Series A Preferred share distributions
                            (11,981 )     (11,981 )
Series B Preferred share distributions
                            (4,038 )     (4,038 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
  $ 57,331     $ (1,198 )   $ 10,448     $ 7,779     $ (16,358 )   $ 58,002  
 
                                   
Funds from operations available to common shareholders–diluted
  $ 120,496     $ 4,308     $ 18,414     $ 5,178     $ (92,184 )   $ 56,212  
 
                                   
See footnotes following the table.
     Selected Financial Information:
                                                 
    For the six months ended June 30, 2005
            Resort             Temperature-              
            Residential             Controlled              
    Office     Development     Resort/Hotel     Logistics     Corporate        
(in thousands)   Segment(1)     Segment     Segment     Segment     and Other(2)     Total  
Total Property revenue
  $ 181,566     $ 140,313     $ 69,759     $     $     $ 391,638  
Total Property expense
    93,783       122,447       55,458                   271,688  
 
                                   
Income from Property Operations
  $ 87,783     $ 17,866     $ 14,301     $     $     $ 119,950  
 
Total other income (expense)
    (43,714 )     (8,212 )     (11,170 )     (2,342 )     (67,294 )     (132,732 )
Minority interests and income taxes
    (2,038 )     2,041       2,772             (1,722 )     1,053  
Discontinued operations –income and gain on sale of real estate, net of minority interests
    5,600                         (700 )     4,900  
 
                                   
 
Net income (loss)
  $ 47,631     $ 11,695     $ 5,903     $ (2,342 )   $ (69,716 )   $ (6,829 )
 
                                   
 
Depreciation and amortization of real estate assets
  $ 52,528     $ 4,716     $ 11,549     $     $     $ 68,793  
Gain on property sales
    (3,308 )           (180 )           (289 )     (3,777 )
Adjustments for investment in unconsolidated companies
    10,079       (448 )     1,809       9,199             20,639  
Unitholder minority interest
                            (1,200 )     (1,200 )
Series A Preferred share distributions
                            (11,981 )     (11,981 )
Series B Preferred share distributions
                            (4,038 )     (4,038 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
  $ 59,299     $ 4,268     $ 13,178     $ 9,199     $ (17,508 )   $ 68,436  
 
                                   
Funds from operations available to common shareholders–diluted
  $ 106,930     $ 15,963     $ 19,081     $ 6,857     $ (87,224 )   $ 61,607  
 
                                   
See footnotes following the table.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                 
            Resort           Temperature-        
            Residential           Controlled   Corporate    
    Office   Development   Resort/Hotel   Logistics   and    
(in millions)   Segment   Segment   Segment   Segment   Other   Total
Total Assets by Segment:(3)
                                               
Balance at June 30, 2006(4)
  $ 2,081     $ 1,088     $ 354   $ 159     $ 490  (5)   $ 4,172  
Balance at December 31, 2005(4)
    2,024       969       338       162       649  (5)     4,142  
Consolidated Property Level Financing:
                                               
Balance at June 30, 2006
    (903 )     (198 )     (119 )           (1,175 )(6)     (2,395 )
Balance at December 31, 2005
    (851 )     (143 )     (59 )           (1,206 )(6)     (2,259 )
Consolidated Other Liabilities:
                                               
Balance at June 30, 2006
    (103 )     (293 )     (29 )     (1 )     (39 )     (465 )
Balance at December 31, 2005
    (117 )     (287 )     (28 )           (41 )     (473 )
Minority Interests:
                                               
Balance at June 30, 2006
    (17 )     (32 )     (6 )           (105 )     (160 )
Balance at December 31, 2005
    (15 )     (32 )     (6 )           (114 )     (167 )
 
(1)   The property revenue includes lease termination fees (net of the write-off of deferred rent receivables) of approximately $16.3 million and $2.1 million for the three months ended June 30, 2006 and 2005, respectively and $25.4 million and $2.0 million for the six months ended June 30, 2006 and 2005, respectively. The 2006 lease termination fees are primarily due to the El Paso lease termination and related re-leasing.
 
(2)   For purposes of this Note, Corporate and Other includes the total of: income from investment land sales, net, interest and other income, corporate general and administrative expense, interest expense, extinguishment of debt, other expenses and equity in net income of unconsolidated companies-other.
 
(3)   Total assets by segment are inclusive of investments in unconsolidated companies.
 
(4)   Non-income producing land held for investment or development of $88.0 million and $84.4 million at June 30, 2006 and December 31, 2005, respectively, by segment is as follows: Office $27.9 million and $24.3 million, Resort Residential Development $9.6 million and $9.6 million, Resort/Hotel $7.3 million and $7.3 million and Corporate $43.2 million and $43.2 million, respectively.
 
(5)   Includes mezzanine investments and defeasance investments.
 
(6)   Inclusive of Corporate bonds, credit facility, Junior Subordinated Notes, the Morgan Stanley and Goldman Sachs repurchase facilities, the Funding I defeased debt, the Funding II defeased debt and Nomura Funding VI defeased debt.
4. ACQUISITIONS
     During the six months ended June 30, 2006, we completed the following acquisition:
             
(in millions)
          Purchase
Date   Property   Location   Price
             
January 23, 2006   Financial Plaza – Class A Office Property   Phoenix, Arizona   $55.0 (1)
 
(1)   The acquisition was funded by the assumption of a $23.6 million loan from Allstate, a new $15.9 million loan from Allstate and a draw on our credit facility. This property is wholly-owned.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
     In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of the assets sold or held for sale have been presented as “Income from discontinued operations, net of minority interests,” and gain or loss on the assets sold or held for sale have been presented as “Gain on sale of real estate from discontinued operations, net of minority interests” in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005. Minority interests for wholly-owned properties represent unitholders’ share of related income, gains and losses. The carrying value of the assets held for sale has been reflected as “Properties held for disposition, net” in the accompanying Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005.
Assets Sold
     On February 17, 2006, we completed the sale of the Waterside Commons Office Property located in the Las Colinas submarket in Dallas, Texas. The sale generated proceeds, net of selling costs, of approximately $24.8 million. We previously recorded an impairment charge of approximately $1.0 million during the year ended December 31, 2005. The proceeds from the sale were used primarily to pay down our credit facility.
Summary of Assets Held for Sale
     The following table indicates the major classes of assets of the Properties held for sale.
                 
(in thousands)   June 30, 2006     December 31, 2005  
Land
  $     $ 3,650  
Buildings and improvements
    4,122       31,639  
Accumulated depreciation
    (43 )     (7,465 )
Other assets, net
    60       1,094  
 
           
Net investment in real estate
  $ 4,139     $ 28,918  
 
           
     The following tables present income and gain on sale for the six months ended June 30, 2006 and 2005, for properties included in discontinued operations.
                 
    For the six months ended  
    June 30,  
(in thousands)   2006     2005  
Total revenues
  $ 601     $ 11,856  
Operating and other expenses
    (377 )     (5,316 )
Depreciation and amortization
    (63 )     (2,547 )
Unitholder minority interests
    (26 )     (596 )
 
           
Income from discontinued operations, net of minority interests
  $ 135     $ 3,397  
 
           
                 
    For the six months ended  
    June 30,  
(in thousands)   2006     2005  
Realized gain on sale of properties
  $ 105     $ 1,767  
Unitholder minority interests
    (17 )     (264 )
 
           
Gain on sale of real estate from discontinued operations, net of minority interests
  $ 88     $ 1,503  
 
           

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. JOINT VENTURES
Office
Parkway at Oakhill
     On March 31, 2006, we entered into a joint venture arrangement, C-C Parkway Austin, L.P. (Parkway), with Champion Partners. The joint venture has committed to co-develop a 144,000 square-foot, two-building office complex in Austin, Texas. The venture is structured such that we own a 90% interest and Champion Partners owns the remaining 10% interest. In connection with the joint venture, Parkway entered into a maximum $18.3 million construction loan with JPMorgan Chase Bank. Our equity commitment to the joint venture was $8.2 million, of which $4.9 million has been funded as of June 30, 2006. The development, which is currently underway, is scheduled for delivery in 2007. Upon completion, we will manage the property on behalf of the joint venture. We consolidate Parkway in accordance with Interpretation No. 46R, Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51, or FIN 46R, as it was determined to be a VIE of which we are the primary beneficiary.
Chase Tower
     On June 20, 2006, we completed the sale of Chase Tower on behalf of Austin PT BK One Tower Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs, of approximately $68.8 million and a net gain of approximately $10.1 million. Our net gain was approximately $4.3 million, inclusive of the recognition of the deferred gain from the joint venture of the property in 2001. Our share of the proceeds was approximately $5.6 million, which was used to pay down the credit facility.
Resort Residential Development
Riverfront Village
     On March 21, 2006, CRDI entered into a joint venture arrangement, East West Resort Development XIV, L.P., L.L.L.P. (Riverfront Village), with affiliates of Crow Holdings and our development partner. The joint venture was formed to co-develop a hotel and condominiums in Avon, Colorado. The development, which is currently underway, is scheduled for delivery in 2008. We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital. Our equity commitment to the joint venture is $23.7 million, of which $10.6 million was funded as of June 30, 2006. We determined that Riverfront Village is a VIE under FIN 46R of which we are not the primary beneficiary; therefore we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of our capital investment. We account for our interest in Riverfront Village under the equity method.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MEZZANINE INVESTMENTS
     The following table presents our mezzanine loans entered into during the six months ended June 30, 2006. These loans are reflected in the “Notes receivable, net” line item in the Consolidated Financial Statements. Mezzanine loans are loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction. These loans may be in the form of a junior participating interest in the senior debt or in the form of loans to the direct or indirect parent of the property owner secured by pledges of ownership interests in entities that directly or indirectly control the real property or subordinated loans secured by second mortgage liens on the property.
                     
                Interest    
(in millions)   Outstanding   Underlying   Maturity   Rate at June   Fixed/
Date   Loan Amount   Real Estate Asset   Date   30, 2006   Variable
January 20, 2006   $15.0 (1)  
Florida Hotel Portfolio Investment
  2009   13.20%   Variable
April 12, 2006     20.0 (2)  
California Ski Resort
  2009     9.70%   Variable
May 8, 2006     28.8 (3)  
New York City Residential
  2007   18.03%   Variable
 
(1)   The loan bears interest at LIBOR plus 800 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.
 
(2)   The loan bears interest at LIBOR plus 450 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.
 
(3)   The loan bears interest at LIBOR plus 1,283 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.
     In February 2006, we received approximately $56.4 million of proceeds for the repayment of two of our mezzanine investments, which included $6.2 million of prepayment fees.
     At June 30, 2006, we had approximately $186.2 million of mezzanine investments outstanding which mature in 2006 through 2010 and had a weighted average interest rate of 13.33%.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENTS IN UNCONSOLIDATED COMPANIES
     The following is a summary of our ownership in significant unconsolidated joint ventures and investments as of June 30, 2006.
             
        Our Ownership
        as of
Entity   Classification   June 30, 2006
Main Street Partners, L.P.
  Office (Bank One Center-Dallas)     50.0 % (1)
Crescent Irvine, LLC
  Office (2211 Michelson Office Development – Irvine)     40.0 % (2)
Crescent Miami Center, LLC
  Office (Miami Center – Miami)     40.0 % (3) (4)
Crescent One Buckhead Plaza, L.P.
  Office (One Buckhead Plaza – Atlanta)     35.0 % (5) (4)
Crescent POC Investors, L.P.
  Office (Post Oak Central – Houston)     23.9 % (6) (4)
Crescent HC Investors, L.P.
  Office (Houston Center – Houston)     23.9 % (6) (4)
Crescent TC Investors, L.P.
  Office (The Crescent – Dallas)     23.9 % (6) (4)
Crescent Ross Avenue Mortgage Investors, L.P.
  Office (Trammell Crow Center, Mortgage – Dallas)     23.9 % (7) (4)
Crescent Ross Avenue Realty Investors, L.P.
  Office (Trammell Crow Center, Ground Lessor – Dallas)     23.9 % (7) (4)
Crescent Fountain Place, L.P.
  Office (Fountain Place – Dallas)     23.9 % (7) (4)
Crescent Five Post Oak Park L.P.
  Office (Five Post Oak Park – Houston)     30.0 % (8) (4)
Crescent One BriarLake Plaza, L.P.
  Office (One BriarLake Plaza – Houston)     30.0 % (9) (4)
Crescent 1301 McKinney, L.P.
  Office (Fulbright Tower – Houston)     23.9 % (10) (4)
Houston PT Three Westlake Office Limited Partnership
  Office (Three Westlake Park – Houston)     20.0 % (11) (4)
Houston PT Four Westlake Office Limited Partnership
  Office (Four Westlake Park – Houston)     20.0 % (11) (4)
AmeriCold Realty Trust
  Temperature-Controlled Logistics     31.7 % (12)
CR Operating, LLC
  Resort/Hotel     48.0 % (13)
CR Spa, LLC
  Resort/Hotel     48.0 % (13)
East West Resort Development XIV, L.P., L.L.L.P.
  Resort Residential Development     26.8 % (14)
Blue River Land Company, L.L.C.
  Resort Residential Development     33.2 % (15)
EW Deer Valley, L.L.C.
  Resort Residential Development     35.7 % (16)
SunTx Fulcrum Fund, L.P. (SunTx)
  Other     26.8 % (17)
Redtail Capital Partners, L.P. (Redtail)
  Other     25.0 % (18) (4)
Fresh Choice, LLC
  Other     40.0 % (19)
G2 Opportunity Fund, L.P. (G2)
  Other     12.5 % (20)
 
(1)   The remaining 50% interest is owned by Trizec Properties, Inc.
 
(2)   The remaining 60% interest is owned by an affiliate of Hines.
 
(3)   The remaining 60% interest is owned by an affiliate of a fund managed by JP Morgan Investment Management, Inc., or JPM.
 
(4)   We have negotiated performance based incentives, which we refer to as promoted interests, which allow for additional equity to be earned if return targets are exceeded.
 
(5)   The remaining 65% interest is owned by Metzler US Real Estate Fund, L.P.
 
(6)   Each limited partnership is owned by Crescent Big Tex I, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of General Electric, or GE.
 
(7)   Each limited partnership is owned by Crescent Big Tex II, L.P., which is owned 76.1% by a fund advised by JPM.
 
(8)   The remaining 70% interest is owned by an affiliate of GE.
 
(9)   The remaining 70% interest is owned by affiliates of JPM.
 
(10)   The partnership is owned by Crescent Big Tex III, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.
 
(11)   The remaining 80% interest is owned by an affiliate of GE.
 
(12)   Of the remaining 68.3% interest, 47.6% is owned by Vornado Realty, L.P. and 20.7% is owned by The Yucaipa Companies.
 
(13)   The remaining 52% interest is owned by the founders of Canyon Ranch. CR Spa, LLC operates three resort spas which offer guest programs and services and sells Canyon Ranch branded skin care products exclusively at the destination health resorts and the resort spas. CR Operating, LLC operates and manages the two Canyon Ranch destination health resorts, Tucson and Lenox, and collaborates with select real estate developers in developing residential lifestyle communities.
 
(14)   We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital. The remaining 73.2% interest is owned by parties unrelated to us. East West Resort Development XIV, L.P., L.L.L.P. was formed to co-develop a hotel and condominiums in Avon, Colorado.
 
(15)   The remaining 66.8% interest is owned by parties unrelated to us. Blue River Land Company, L.L.C. was formed to acquire, develop and sell certain real estate property in Summit County, Colorado.
 
(16)   The remaining 64.3% interest is owned by parties unrelated to us. EW Deer Valley, L.L.C. was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, L.L.C. was formed to acquire, develop and sell certain real estate property at Deer Valley Ski Resort next to Park City, Utah.
 
(17)   Of the remaining 73.2%, approximately 42.3% is owned by SunTx Capital Partners, L.P. and the remaining 30.9% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.1% is through an unconsolidated investment in SunTx Capital Partners, L.P., the general partner of SunTx. SunTx Fulcrum Fund, L.P.’s objective is to invest in a portfolio of entities that offer the potential for substantial capital appreciation.
 
(18)   The remaining 75% interest is owned by Capstead Mortgage Corporation. Redtail was formed to invest up to $100.0 million in equity in select mezzanine loans on commercial real estate over a two-year period.
 
(19)   The remaining 60% interest is owned by Cedarlane Natural Foods, Inc. Fresh Choice is a restaurant owner, operator and developer.
 
(20)   G2 was formed for the purpose of investing in commercial mortgage backed securities and other commercial real estate investments. The remaining 87.5% interest is owned by Goff-Moore Strategic Partners, L.P., or GMSPLP, and by parties unrelated to us. G2 is managed and controlled by an entity that is owned equally by GMSPLP and GMAC Commercial Mortgage Corporation, or GMACCM. The ownership structure of GMSPLP consists of an approximately 92% limited partnership interest owned directly and indirectly by Richard E. Rainwater, Chairman of our Board of Trust Managers, of which approximately 6% is owned by Darla Moore, who is married to Mr. Rainwater. Approximately 6% general partner interest is owned by John C. Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer. The remaining approximately 2% general partnership interest is owned by unrelated parties.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary Financial Information
     We report our share of income and losses based on our ownership interest in our respective equity investments, adjusted for any preference payments. The unconsolidated entities that are included under the headings on the following tables are summarized below.
     Balance Sheets as of June 30, 2006:
    Office – This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;
 
    Temperature-Controlled Logistics – This includes AmeriCold Realty Trust;
 
    Resort/Hotel – This includes CR Operating, LLC and CR Spa, LLC;
 
    Resort Residential Development – This includes East West Resort Development XIV, L.P., L.L.L.P., Blue River Land Company, L.L.C., and EW Deer Valley, L.L.C.; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail, Fresh Choice, LLC and G2.
     Balance Sheets as of December 31, 2005:
    Office – This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;
 
    Temperature-Controlled Logistics – This includes AmeriCold Realty Trust;
 
    Resort/Hotel – This includes CR Operating, LLC and CR Spa, LLC;
 
    Resort Residential Development – This includes Blue River Land Company, L.L.C. and EW Deer Valley, L.L.C.; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail, Fresh Choice, LLC and G2.
     Summary Statements of Operations for the six months ended June 30, 2006:
    Office – This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;
 
    Temperature-Controlled Logistics – This includes AmeriCold Realty Trust;
 
    Resort/Hotel – This includes CR Operating, LLC and CR Spa, LLC;
 
    Resort Residential Development – This includes East West Resort Development XIV, L.P., L.L.L.P., Blue River Land Company, L.L.C., and EW Deer Valley, L.L.C.; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail, Fresh Choice, LLC and G2.
     Summary Statements of Operations for the six months ended June 30, 2005:
    Office – This includes Crescent Big Tex I, L.P., Crescent Big Tex II, L.P., Main Street Partners, L.P., Crescent Irvine, LLC, Houston PT Three Westlake Office Limited Partnership, Houston PT Four Westlake Office Limited Partnership, Austin PT BK One Tower Office Limited Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center, LLC, Crescent Five Post Oak Park L.P., Crescent One BriarLake Plaza, L.P., Crescent Big Tex III, L.P. and Crescent One Buckhead Plaza, L.P.;
 
    Temperature-Controlled Logistics – This includes AmeriCold Realty Trust;
 
    Resort/Hotel – This includes CR Operating, LLC and CR Spa, LLC;
 
    Resort Residential Development – This includes Blue River Land Company, L.L.C. and EW Deer Valley, L.L.C.; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., and G2.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets:
                                                 
    As of June 30, 2006  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics     Resort/Hotel     Development     Other     Total  
Real estate, net
  $ 1,902,303     $ 1,104,501     $ 110,855     $ 23,677                  
Cash
    58,883       11,231       43,131       1,172                  
Restricted cash
    29,452       60,283                              
Other assets
    275,422       151,985       12,680       18,755                  
 
                                       
Total assets
  $ 2,266,060     $ 1,328,000     $ 166,666     $ 43,604                  
 
                                       
 
                                               
Notes payable
  $ 1,221,102     $ 752,017     $ 95,000     $ 3,500                  
Other liabilities
    178,967       89,191       24,822       2,326                  
Preferred membership units
                106,556                        
Equity
    865,991       486,792       (59,712 )     37,778                  
 
                                       
Total liabilities and equity
  $ 2,266,060     $ 1,328,000     $ 166,666     $ 43,604                  
 
                                       
 
                                               
Our share of unconsolidated debt
  $ 346,561     $ 238,537     $ 45,600     $ 1,467     $ 13,514     $ 645,679  
 
                                   
 
                                               
Our investments in unconsolidated companies
  $ 175,631     $ 158,797     $ 4,544     $ 14,617     $ 43,602     $ 397,191  
 
                                   
Balance Sheets:
                                                 
    As of December 31, 2005  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics     Resort/Hotel     Development     Other     Total  
Real estate, net
  $ 1,944,942     $ 1,122,155     $ 108,943     $ 11,789                  
Cash
    71,361       25,418       52,100       97                  
Restricted cash
    36,121       61,367       217                        
Other assets
    279,437       163,925       12,258       3,425                  
 
                                       
Total assets
  $ 2,331,861     $ 1,372,865     $ 173,518     $ 15,311                  
 
                                       
 
                                               
Notes payable
  $ 1,244,499     $ 765,640     $ 95,000     $                  
Other liabilities
    196,101       109,161       28,523       100                  
Preferred membership units
                104,231                        
Equity
    891,261       498,064       (54,236 )     15,211                  
 
                                       
Total liabilities and equity
  $ 2,331,861     $ 1,372,865     $ 173,518     $ 15,311                  
 
                                       
 
                                               
Our share of unconsolidated debt
  $ 348,663     $ 242,708     $ 45,600     $     $ 9,942     $ 646,913  
 
                                   
 
                                               
Our investments in unconsolidated companies
  $ 178,440     $ 162,439     $ 6,200     $ 6,113     $ 40,343     $ 393,535  
 
                                   

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary Statements of Operations:
                                                 
    For the six months ended June 30, 2006  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics(1)     Resort/Hotel     Development     Other     Total  
Total revenues
  $ 171,465     $ 382,897     $ 74,473     $ 5,155                  
Operating expense
    85,884       318,471       64,351       8,642                  
 
                                       
Net Operating Income
  $ 85,581     $ 64,426     $ 10,122     $ (3,487 )                
 
                                               
Interest expense
  $ 34,476     $ 32,714     $ 2,980     $                  
Depreciation and amortization
    43,037       34,990       5,734                        
Preferred dividends
                6,189                        
Taxes and other (income) expense
    (1,158 )     (971 )     686       (355 )                
 
                                       
Total expenses
  $ 76,355     $ 66,733     $ 15,589     $ (355 )                
 
                                       
 
                                               
Gain on sale of assets
    10,014       2,107                              
 
                                               
Net income (loss)
  $ 19,240     $ (200 )   $ (5,467 )   $ (3,132 )                
 
                                       
 
                                               
Our equity in net income (loss) of unconsolidated companies
  $ 4,868     $ (2,600 )   $ (2,086 )   $ (124 )   $ 525     $ 583  
 
                                   
 
(1)   In connection with the dissolution of Vornado Crescent Portland Partnership, we agreed to pay Vornado Realty, L.P. an annual management fee of $4.5 million, payable only out of dividends or sale proceeds on the shares of AmeriCold that we own. Our share of equity in net income (loss) for Temperature-Controlled Logistics includes management fees payable to Vornado Realty, L.P. totaling $2.3 million for the six months ended June 30, 2006.
Summary Statements of Operations:
                                                 
    For the six months ended June 30, 2005  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics(1)     Resort/Hotel     Development     Other     Total  
Total revenues
  $ 166,253     $ 360,117     $ 68,122     $ 5,694                  
Operating expense
    79,174       293,745       54,706       6,351                  
 
                                       
Net Operating Income
  $ 87,079     $ 66,372     $ 13,416     $ (657 )                
 
                                               
Interest expense
  $ 32,494     $ 26,640     $ 2,612     $                  
Depreciation and amortization
    37,736       37,377       4,908                        
Preferred dividends
                5,897                        
Taxes and other (income) expense
    (168 )     1,136       379       (51 )                
 
                                       
Total expenses
  $ 70,062     $ 65,153     $ 13,796     $ (51 )                
 
                                       
 
                                               
Net income (loss)
  $ 17,017     $ 1,219     $ (380 )   $ (606 )                
 
                                       
 
                                               
Our equity in net income (loss) of unconsolidated companies
  $ 6,685     $ (2,342 )   $ 760     $ 192     $ 10,761     $ 16,056  
 
                                   
 
(1)   In connection with the dissolution of Vornado Crescent Portland Partnership, we agreed to pay Vornado Realty, L.P. an annual management fee of $4.5 million, payable only out of dividends or sale proceeds on the shares of AmeriCold that we own. Our share of equity in net income (loss) for Temperature-Controlled Logistics includes management fees payable to Vornado Realty, L.P. totaling $2.3 million for the six months ended June 30, 2005.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unconsolidated Debt Analysis
     The following table shows, as of June 30, 2006, information about our share of unconsolidated fixed and variable rate debt and does not take into account any extension options, hedge arrangements or the entities’ anticipated pay-off dates.
                                 
        Balance     Our Share of              
    Our   Outstanding at     Balance at     Interest Rate at        
Description   Ownership   June 30, 2006     June 30, 2006     June 30, 2006   Maturity Date   Fixed/Variable (1)
        (in thousands)     (in thousands)              
Temperature-Controlled Logistics Segment:
                               
AmeriCold Realty Trust
  31.72%                            
Goldman Sachs(2)
      $ 460,831     $ 146,176     6.89%   5/11/2023   Fixed
Citigroup and Bank of America(3)
        243,124       77,119     5.80%   6/9/2007   Variable
Other
        48,062       15,242     3.48% to 13.63%   7/15/2006 to 4/1/2017   Fixed
 
                           
 
      $ 752,017     $ 238,537              
 
                           
Office Segment:
                               
Crescent HC Investors, L.P.
  23.85%     269,705       64,325     5.03%   11/7/2011   Fixed
Crescent TC Investors, L.P.
  23.85%     214,770       51,223     5.00%   11/1/2011   Fixed
Main Street Partners, L.P. (4) (5)
  50.00%     105,712       52,856     8.00%   12/1/2006   Variable
Crescent Fountain Place, L.P.
  23.85%     105,932       25,265     4.95%   12/1/2011   Fixed
Crescent POC Investors, L.P.
  23.85%     97,504       23,255     4.98%   12/1/2011   Fixed
Crescent One Buckhead Plaza, L.P.
  35.00%     85,000       29,750     5.47%   4/8/2015   Fixed
Crescent Miami Center, LLC
  40.00%     81,000       32,400     5.04%   9/25/2007   Fixed
Crescent 1301 McKinney, L.P. (6)(7)
  23.85%     73,350       17,494     6.43%   1/9/2008   Variable
Crescent One BriarLake Plaza, L.P.
  30.00%     50,000       15,000     5.40%   11/1/2010   Fixed
Houston PT Four Westlake Office Limited Partnership(8)
  20.00%     46,288       9,258     7.13%   8/1/2006   Fixed
Crescent Five Post Oak Park, L.P.
  30.00%     44,019       13,206     4.82%   1/1/2008   Fixed
Houston PT Three Westlake Office Limited Partnership
  20.00%     33,000       6,600     5.61%   9/1/2007   Fixed
Crescent Irvine, LLC(9)
  40.00%     14,822       5,929     8.07%   3/7/2009   Variable
 
                           
 
      $ 1,221,102     $ 346,561              
 
                           
Resort/Hotel Segment:
                               
CR Resort, LLC
  48.00%   $ 95,000     $ 45,600     5.94%   2/1/2015   Fixed
 
                           
 
                               
Resort Residential Development Segment:
                               
East West Resort Development XIV, L.P., L.L.L.P.(10)
  41.90%   $ 3,500     $ 1,467     5.00%   4/28/2008   Fixed
 
                           
 
                               
Other Segment:
                               
Redtail Capital Partners One, LLC(11)
  25.00%   $ 37,868     $ 9,467     7.00%   8/9/2008   Variable
Fresh Choice, LLC
  40.00%                            
GE Capital Franchise Finance Corporation(12)
        4,673       1,869     9.94%   1/1/2011   Variable
Various Loans and Capital Leases
        5,445       2,178     0.00% to 12.00%   10/1/2006 to 12/31/2029   Fixed
 
                           
 
      $ 47,986     $ 13,514              
 
                           
 
                               
Total Unconsolidated Debt
      $ 2,119,605     $ 645,679              
 
                           
Fixed Rate/Weighted Average
                      5.94%   8.9 years    
Variable Rate/Weighted Average
                      6.77%   1.0 years    
 
                               
Total Weighted Average
                      6.15%   6.9 years    
 
                               
 
(1)   All unconsolidated debt is secured.
 
(2)   AmeriCold Realty Trust expects to repay the notes on the Optional Prepayment Date of April 11, 2008.
 
(3)   The loan is a $400.0 million, one-year, interest-only financing that is collateralized by 21of its owned and six of its leased temperature-controlled warehouses. The loan bears interest at LIBOR plus 60 basis points and increases to LIBOR plus 110 basis points when the remaining balance is drawn.
 
(4)   Senior Note — Note A: $78.1 million at variable interest rate, LIBOR plus 189 basis points, $4.6 million at variable interest rate, LIBOR plus 250 basis points with a LIBOR floor of 2.50%. Note B: $23.0 million at variable interest rate, LIBOR plus 650 basis points with a LIBOR floor of 2.50%. In connection with this loan, we entered into an interest-rate cap agreement with a maximum LIBOR of 4.52% on all notes. All notes are amortized based on a 25-year schedule.
 
(5)   We and our JV partner each obtained a separate letter of credit to guarantee the repayment of up to $4.3 million each of principal of the Main Street Partners, L.P. loan.
 
(6)   This loan has two one-year extension options.
 
(7)   In January 2006, Crescent 1301 McKinney, L.P. purchased a one-year 7.0% interest rate cap on 1 month LIBOR with a notional amount of $73.4 million. Crescent 1301 McKinney, L.P. will be required to purchase a new cap in January 2007 that limits the interest rate to 1.0:1.0 debt service coverage. The loan bears interest at LIBOR plus 123 basis points.
 
(8)   In July 2006, Houston PT Four Westlake Office Limited Partnership extended the maturity of this loan to November 1, 2006.
 
(9)   This loan has one two-year extension option. The loan bears interest at LIBOR plus 275 basis points. In May 2006, Crescent Irvine, LLC, entered into an interest rate swap agreement struck at 5.34%.
 
(10)   We are allocated 26.8% of profits after we receive a preferred return on our invested capital.
 
(11)   This loan has one one-year extension option. Redtail Capital Partners One, LLC is owned 100% by Redtail Capital Partners, L.P. The loans supporting this facility are subject to daily valuations by Morgan Stanley and we are subject to a margin call if the overall leverage exceeds certain thresholds. The loan bears interest as follows: $25.4 million at LIBOR plus 185 basis points and $12.5 million at LIBOR plus 170 basis points.
 
(12)   We guarantee $1.0 million of this loan. The loan bears interest at LIBOR plus 470 basis points.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
     The significant terms of our primary debt financing arrangements existing as of June 30, 2006, are shown below:
                                 
                Balance         Interest    
                Outstanding         Rate at    
    Secured   Maximum     at June 30,         June 30,    
Description   Asset   Borrowings     2006     Interest Rate   2006   Maturity Date
Secured Fixed Rate Debt:
                               
AEGON Partnership Note
  Greenway Plaza   $ 245,544     $ 245,544         7.53%   July 2009
Prudential Note
  707 17th Street/Denver Marriott     70,000       70,000         5.22   June 2010
JP Morgan Chase III
  Datran Center     65,000       65,000         4.88   October 2015
Bank of America Note I (1)
  Fairmont Sonoma Mission Inn     55,000       55,000         5.40   February 2011
Morgan Stanley I
  The Alhambra     50,000       50,000         5.06   October 2011
Allstate Life Note
  Financial Plaza     39,228       39,228         5.47   October 2010
Bank of America Note II
  The BAC – Colonnade Building     37,676       37,676         5.53   May 2013
Metropolitan Life Note VII
  Dupont Centre     35,500       35,500         4.31   May 2011
Column Financial
  Peakview Tower     33,000       33,000         5.59   April 2015
Mass Mutual Note (2)
  3800 Hughes     32,905       32,905         7.75   August 2006
Northwestern Life Note
  301 Congress     26,000       26,000         4.94   November 2008
JP Morgan Chase II
  3773 Hughes     24,755       24,755         4.98   September 2011
Allstate Note (2)
  3993 Hughes     24,406       24,406         6.65   September 2010
Metropolitan Life Note VI (2)
  3960 Hughes     22,547       22,547         7.71   October 2009
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     37,949       37,949         2,90 to 13.75   July 2007 to Sept. 2011
 
                               
Secured Fixed Rate Defeased Debt (3):
                               
LaSalle Note I
  Funding I Defeasance     100,876       100,876         7.83   August 2007
Nomura Funding VI Note
  Funding VI Defeasance     7,330       7,330         10.07   July 2010
 
                         
Subtotal/Weighted Average
      $ 907,716     $ 907,716         6.38%    
 
                         
 
                               
Unsecured Fixed Rate Debt:
                               
The 2009 Notes (4) (5)
      $ 375,000     $ 375,000         9.25%   April 2009
The 2007 Notes (4)
        250,000       250,000         7.50   September 2007
 
                         
Subtotal/Weighted Average
      $ 625,000     $ 625,000         8.55%    
 
                         
 
                               
Secured Variable Rate Debt:
                               
KeyBank Construction Loan (6)
  Ritz-Carlton Dallas Construction   $ 175,000     $ 46,538     LIBOR + 225 bps   7.57%   July 2008
GACC Note (6) (7)
  Funding One Assets     165,000       165,000     LIBOR + 147 bps   6.67   June 2007
JPMorgan Chase
  Northstar Big Horn Construction     112,180       50,439     Prime – 50 bps   7.75   October 2007
Morgan Stanley II (8)
  Mezzanine Investments     100,000       38,280     LIBOR + 150 to 230 bps   7.07   March 2009
Goldman Sachs(8)
  Mezzanine Investments     100,000       10,000     LIBOR + 140 bps   6.77   May 2009
First Bank of Vail
  Village Walk Construction     62,457       9,260     Prime – 50 bps   7.75   February 2008
Guaranty Bank (9)(10)
  Paseo Del Mar Construction     53,100       26,784     LIBOR + 175 bps   6.86   September 2008
Societe Generale (9)
  3883 Hughes Construction     52,250       7,070     LIBOR + 180 bps   7.12   September 2008
Bank of America III (9)(10)
  Jefferson Station Apartments Construction     41,009       34,178     LIBOR + 200 bps   7.28   November 2007
US Bank(11)
  Beaver Creek Landing Construction     33,400       2,580     Prime – 115 bps   7.10   February 2008
National Bank of Arizona
  DMDC Assets     30,000       9,040     Prime + 50 bps   8.75   October 2007
California Bank & Trust(12)
  One Riverfront Construction     24,350       228     Prime + 12.5 bps   8.38   March 2008
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     129,971       75,422     LIBOR + 125 to 450 bps or Prime - 75 to 100 bps   6.44 to 9.25   July 2006 to Dec. 2012
 
                         
Subtotal/Weighted Average
      $ 1,078,717     $ 474,819            7.56%    
 
                         
 
                               
Unsecured Variable Rate Debt:
                               
Credit Facility (13)
      $ 387,633     $ 310,000     LIBOR + 160 bps      6.75%   February 2008
Junior Subordinated Notes (14)
        51,547       51,547     LIBOR + 200 bps   7.15   June 2035
Junior Subordinated Notes (14)
        25,774       25,774     LIBOR + 200 bps   7.15   July 2035
 
                         
Subtotal/Weighted Average
      $ 464,954     $ 387,321            6.83%    
 
                         
 
                               
Total/Weighted Average
      $ 3,076,387     $ 2,394,856            7.25% (15)  
 
                         
 
                               
Average remaining term
                          3.6 years    

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)   Obtaining this loan was a reconsideration event under FIN 46R. We determined that the entity that operates Fairmont Sonoma Mission Inn is a VIE of which we are the primary beneficiary. This entity was previously consolidated under other GAAP; therefore there is no impact to our Consolidated Financial Statements.
 
(2)   We assumed these loans in connection with the Hughes Center acquisitions. The following table lists the unamortized premium associated with the assumption of above market interest rate debt which is included in the balance outstanding at June 30, 2006, the effective interest rate of the debt including the premium and the outstanding principal balance at maturity:
(dollars in thousands)
                         
    Unamortized     Effective     Balance at  
Loan   Premium     Rate     Maturity  
Mass Mutual Note
  $ 117       3.47 %   $ 32,692  
Allstate Note
    1,067       5.19 %     20,771  
Metropolitan Life Note VI
    1,302       5.68 %     19,239  
Northwestern Life Note II
    325       3.80 %     8,663  
 
                   
Total
  $ 2,811             $ 81,365  
 
                   
 
    The premium was recorded as an increase in the carrying amount of the underlying debt and is being amortized using the effective interest rate method as a reduction of interest expense through maturity of the underlying debt. In July 2006, we extended the maturity of the Mass Mutual loan to January 2007.
 
(3)   We have purchased U.S. Treasuries and government sponsored agency securities, or defeasance investments, to substitute as collateral for these loans. The cash flow from the defeasance investments matches the debt service payments for each loan.
 
(4)   To incur any additional debt, the indenture requires us to meet thresholds for a number of customary financial and other covenants including maximum leverage ratios, minimum debt service coverage ratios, maximum secured debt as a percentage of total undepreciated assets, and ongoing maintenance of unencumbered assets. Additionally, as long as the 2009 Notes are not rated investment grade, there are restrictions on our ability to make certain payments, including distributions to shareholders and investments.
 
(5)   At our option, these notes can be called beginning in April 2006 for 104.6%, in April 2007 for 102.3% and beginning in April 2008 and thereafter for par.
 
(6)   This loan has three one-year extension options.
 
(7)   This note consists of a $110.0 million senior loan at LIBOR plus 108 basis points, a $40.0 million first mezzanine loan at LIBOR plus 225 basis points and a $15.0 million second mezzanine loan at LIBOR plus 225 basis points.
 
(8)   This loan has one one-year extension option. The loans supporting this facility are subject to daily valuations by Morgan Stanley and Goldman Sachs, respectively, and we are subject to a margin call if the overall leverage of the facility exceeds certain thresholds.
 
(9)   This loan has two one-year extension options.
 
(10)   Our partner provides a full guarantee of this loan.
 
(11)   This loan has one six-month extension option.
 
(12)   This loan has one one-year extension option.
 
(13)   Availability under the line of credit is subject to certain covenants including limitations on total leverage, fixed charge ratio, debt service coverage ratio, minimum tangible net worth, and a specific mix of office and hotel assets and average occupancy of Office Properties. At June 30, 2006, the maximum borrowing capacity under the credit facility was $387.6 million. The outstanding balance excludes letters of credit issued under our credit facility of $13.8 million which reduces our maximum borrowing capacity. The spread to LIBOR on this loan decreases to 150 basis points if we reduce leverage below 45% and it increases to 175 basis points if we exceed 55% leverage.
 
(14)   In 2005, we completed private offerings of $75.0 million of trust preferred securities through our trust subsidiaries. The securities are callable at no premium after June and July 2010.
 
(15)   The overall weighted average interest rate does not include the effect of our cash flow hedge agreements. Including the effect of these agreements, the overall weighted average interest rate would have been 7.12%.
     The following table shows information about our consolidated fixed and variable rate debt and does not take into account any extension options, hedging arrangements or our anticipated payoff dates.
                             
                    Weighted      
            Percentage     Average     Weighted Average
(in thousands)   Balance     of Debt (1)     Rate     Maturity
Fixed Rate Debt
  $ 1,532,716       64 %     7.27 %   3.3 years
Variable Rate Debt
    862,140       36       7.22     4.1 years
 
                   
Total Debt
  $ 2,394,856       100 %     7.25 % (2)   3.6 years
 
                   
 
(1)   Balance excludes hedges. The percentages for fixed rate debt and variable rate debt, including the $276.5 million of hedged variable rate debt, are 76% and 24%, respectively.
 
(2)   Including the effect of hedge arrangements, the overall weighted average interest rate would have been 7.12%.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Listed below are the aggregate principal payments by year required as of June 30, 2006, under our indebtedness. Scheduled principal installments and amounts due at maturity are included.
                                 
    Secured     Defeased     Unsecured        
(in thousands)   Debt     Debt     Debt     Total (1)  
2006
  $ 42,318     $ 981     $     $ 43,299  
2007
    319,375       100,279       250,000       669,654  
2008
    178,703       289       310,000       488,992  
2009
    282,305       320       375,000       657,625  
2010
    133,853       6,337             140,190  
Thereafter
    317,775             77,321       395,096  
 
                       
 
  $ 1,274,329     $ 108,206     $ 1,012,321     $ 2,394,856  
 
                       
 
(1)   Based on contractual maturity and does not include extension options on Bank of America Loan III, Societe Generale Loan, Guaranty Bank Loan, KeyBank Construction Loan, California Bank & Trust Loan, US Bank Loan, Morgan Stanley II loan, GACC Note or Goldman Sachs Loan.
     We are generally obligated by our debt agreements to comply with financial covenants, affirmative covenants and negative covenants, or some combination of these types of covenants. Failure to comply with covenants generally will result in an event of default under that debt instrument. Any uncured or unwaived events of default under our loans can trigger an increase in interest rates, an acceleration of payment on the loan in default, and for our secured debt, foreclosure on the property securing the debt. In addition, a default by us or any of our subsidiaries with respect to any indebtedness in excess of $5.0 million generally will result in a default under the Credit Facility, the 2007 Notes, 2009 Notes, the KeyBank Construction Loan, Morgan Stanley II Loan, Goldman Sachs Loan and the Societe Generale Construction Loan after the notice and cure periods for the other indebtedness have passed. As of June 30, 2006, no event of default had occurred, and we were in compliance with all covenants related to our outstanding debt. Our debt facilities generally prohibit loan pre-payment for an initial period, allow pre-payment with a penalty during a following specified period and allow pre-payment without penalty after the expiration of that period. During the six months ended June 30, 2006, there were no circumstances that required prepayment penalties or increased collateral related to our existing debt.
     In addition to the subsidiaries listed in Note 1, “Organization and Basis of Presentation,” certain other of our subsidiaries were formed primarily for the purpose of obtaining secured and unsecured debt or joint venture financings. These entities, all of which are consolidated and are grouped based on the Properties to which they relate, are: Funding One Properties (CREF One Parent, L.P., CREF One Parent GP, LLC, CREF One Holdings, L.P., CRE Management One, LLC); Funding III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VIII Properties (CRE Management VIII, LLC); Funding XII Properties (CREF XII Parent GP, LLC, CREF XII Parent, L.P., CREF XII Holding GP, LLC, CREF XII Holdings, L.P., CRE Management XII, LLC); Spectrum Center (Spectrum Mortgage Associates, L.P., CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management, LLC); The BAC-Colonnade Building (CEI Colonnade Holdings, LLC); Crescent BT I Investor, L.P. (CBT I Management Corp.), Crescent Finance Company, Crescent Real Estate Capital MS, L.P. and Crescent Real Estate Capital GS, L.P.
Warehouse Facilities
     On March 24, 2006, we entered into a Master Repurchase Agreement with Morgan Stanley Bank. Pursuant to the agreement, up to 70% of the value of the mezzanine loans that we make can be financed up to a maximum principal amount of $100.0 million. The investments can be financed through March 2008, after which four equal payments are due quarterly. The loan has a provision for a one-year extension which is subject to Morgan Stanley’s approval. The interest rate and advance percentage associated with each draw is dependent on the loan-to-value ratio at the underlying property(ies) and the purchase rate as specified in the Master Repurchase Agreement. The loan bears interest ranging from LIBOR plus 140 basis points to 230 basis points and is secured by the note receivable associated with each advance. At June 30, 2006, approximately $38.3 million with a weighted average interest rate of 7.07% was outstanding under this agreement.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     On May 5, 2006, we entered into a Master Repurchase Agreement with Goldman Sachs Mortgage Company. Pursuant to the agreement, up to 80% of the value of the loans that we make can be financed up to a maximum principal amount of $100.0 million. The investments can be financed through May 2009, at which full payment is due. The financing and payment can be extended one year subject to Goldman Sachs’ approval. If extended, payments will be made in twelve monthly installments during the extension period. The interest rate and advance percentage associated with each draw is dependent on the loan-to-value ratio at the underlying property(ies) and the purchase rate as specified in the Master Repurchase Agreement. The loan bears interest ranging from LIBOR plus 110 basis points to 250 basis points and is secured by the note receivable associated with each advance. At June 30, 2006, approximately $10.0 million with an interest rate of 6.77% was outstanding under this agreement.
Derivative Instruments and Hedging Activities
     We use derivative financial instruments to convert a portion of our variable rate debt to fixed rate debt and to manage the fixed to variable rate debt ratio. As of June 30, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which converted $276.5 million of our variable rate debt to fixed rate debt. During the first quarter of 2006, two interest rate swaps with a combined notional amount of $200.0 million expired. In April 2006, we entered into an interest rate swap struck at 5.20% to hedge 75% of our anticipated draws on our Ritz-Carlton construction loan.
10. MARKETABLE SECURITIES
     The following tables present the cost, fair value and unrealized gains and losses as of June 30, 2006, and December 31, 2005, and the realized gains and change in Accumulated Other Comprehensive Income, or OCI, for the six months ended June 30, 2006 and 2005, for our marketable securities.
                                                 
    As of June 30, 2006     As of December 31, 2005  
(in thousands)           Fair     Unrealized             Fair     Unrealized  
Type of Security   Cost     Value     Gain/(Loss)     Cost     Value     Gain/(Loss)  
Held to maturity (1)
  $ 115,318     $ 113,308     $ (2,010 )   $ 274,134     $ 271,659     $ (2,475 )
Trading (2)
    643       675       N/A       690       728       N/A  
Available for sale (3)
    13,496       13,279       (217 )     20,284       20,852       568  
 
                                   
Total
  $ 129,457     $ 127,262     $ (2,227 )   $ 295,108     $ 293,239     $ (1,907 )
 
                                   
                                 
    For the six months ended     For the six months ended  
    June 30, 2006     June 30, 2005  
(in thousands)   Realized     Change     Realized     Change  
Type of Security   Gain     In OCI     Gain     In OCI  
Held to maturity (1)
  $     $ N/A     $     $ N/A  
Trading (2)
    6       N/A       37       N/A  
Available for sale (3)
    114       (785           (109
 
                       
Total
  $ 120     $ (785   $ 37     $ (109
 
                       
 
(1)   Held to maturity securities are carried at amortized cost, included in “Defeasance investments” in the accompanying Consolidated Balance Sheets and consist of U.S. Treasury and government sponsored agency securities purchased for the sole purpose of funding debt service payments on LaSalle Note I, LaSalle Note II and the Nomura Funding VI note. In March 2006, LaSalle Note II was paid off with the proceeds from maturities of defeasance investment securities.
 
(2)   Trading securities primarily consist of marketable securities purchased in connection with our dividend incentive unit program. These securities are included in “Other assets, net” in the accompanying Consolidated Balance Sheets and are marked to market value on a monthly basis with the change in fair value recognized in earnings.
 
(3)   Available for sale securities consist of marketable securities that we intend to hold for an indefinite period of time. At June 30, 2006, these securities consist of $11.6 million of bonds and $1.7 million of preferred stock which are included in “Other assets, net” in the accompanying Consolidated Balance Sheets and are marked to market value on a monthly basis with the corresponding unrealized gain or loss recorded in OCI.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
Guarantee Commitments
     The FASB issued Interpretation 45, Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), requiring a guarantor to disclose its guarantees. For our guarantees on indebtedness, no triggering events or conditions are anticipated to occur that would require payment under the guarantees and management believes the assets associated with the loans that are guaranteed are sufficient to cover the maximum potential amount of future payments and therefore, would not require us to provide additional collateral to support the guarantees. We recorded a liability for the Fresh Choice guarantee in an amount not significant to our operations. We have not recorded a liability associated with the other guarantees as they were entered into prior to the adoption of FIN 45. Our guarantees in place as of June 30, 2006, are listed in the table below.
                 
    Guaranteed     Maximum  
    Amount     Guaranteed  
(in thousands)   Outstanding at     Amount at  
Debtor   June 30, 2006     June 30, 2006  
CRDI – Eagle Ranch Metropolitan District – Letter of Credit (1)
  $ 7,845     $ 7,845  
Main Street Partners, L.P. – Letter of Credit (2) (3)
    4,250       4,250  
Fresh Choice, LLC(4)
    1,000       1,000  
 
           
Total Guarantees
  $ 13,095     $ 13,095  
 
           
 
(1)   We provide a $7.8 million letter of credit to support the payment of interest and principal of the Eagle Ranch Metropolitan District Revenue Development Bonds.
 
(2)   See Note 8, “Investments in Unconsolidated Companies,” for a description of the terms of this debt.
 
(3)   We and our joint venture partner each obtained separate letters of credit to guarantee the repayment of up to $4.3 million each of the Main Street Partners, L.P. loan.
 
(4)   We provide a guarantee of up to $1.0 million to GE Capital Franchise Financing Corporation as part of Fresh Choice’s bankruptcy reorganization.
Other Commitments
     In July 2005, we purchased comprehensive insurance that covers us, contractors and other parties involved in the construction of the Ritz-Carlton hotel and condominium project in Dallas, Texas. Our insurance carrier, which will pay the associated claims as they occur under this program and will be reimbursed by us within our deductibles, requires us to provide a $1.7 million letter of credit supporting payment of claims. We believe there is a remote likelihood that payment will be required under the letter of credit.
12. MINORITY INTERESTS
     Minority interests in the Operating Partnership represent the proportionate share of the equity in the Operating Partnership of limited partners other than Crescent. The ownership share of limited partners other than Crescent is evidenced by Operating Partnership units. Of the total outstanding amount of Operating Partnership units, 1,292,500 vested restricted units (2,585,000 common share equivalents) are subject to redemption for cash as part of the 2004 and 2005 Unit Plans. The Operating Partnership pays a regular quarterly distribution to the holders of Operating Partnership units.
     Each Operating Partnership unit generally may be exchanged for either two common shares of Crescent or, at the election of Crescent, cash equal to the fair market value of two common shares at the time of the exchange. When a unitholder exchanges a unit, Crescent’s percentage interest in the Operating Partnership increases. During the six months ended June 30, 2006, there were 51,600 units exchanged for 103,200 common shares of Crescent.
     Minority interests in real estate partnerships represent joint venture or preferred equity partners’ proportionate share of the equity in certain consolidated real estate partnerships. Income in the real estate partnerships is allocated to minority interests based on weighted average percentage ownership during the year.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The following table summarizes minority interests as of June 30, 2006 and December 31, 2005:
                 
    June 30,     December 31,  
(in thousands)   2006     2005  
Limited partners in the Operating Partnership
  $ 55,415     $ 85,338  
Limited partners in the Operating Partnership – Units subject to redemption
    47,978       28,481  
Limited partners in the Operating Partnership – Unvested units subject to redemption
    2,138        
Development joint venture partners – Resort Residential Development Segment
    31,702       32,228  
Joint venture partners – Office Segment
    17,166       15,354  
Joint venture partners – Resort/Hotel Segment
    5,653       5,853  
Other
    98       127  
 
           
 
  $ 160,150     $ 167,381  
 
           
     The following table summarizes the minority interests’ share of net income (loss) before discontinued operations for the six months ended June 30, 2006 and 2005:
                 
    June 30,     June 30,  
(in thousands)   2006     2005  
Limited partners in the Operating Partnership
  $ (382 )   $ (2,060 )
Development joint venture partners – Resort Residential Development Segment
    1,842       2,596  
Joint venture partners – Office Segment
    (525 )     434  
Joint venture partners – Resort/Hotel Segment
    (338 )     (627 )
Other
    (29 )     149  
 
           
 
  $ 568     $ 492  
 
           
13. SHAREHOLDERS’ EQUITY
Distributions
     The following table summarizes the distributions paid or declared to common shareholders, unitholders and preferred shareholders during the six months ended June 30, 2006.
                                         
(dollars in thousands, except per share amounts)                            
    Per Share                           Annual
    Dividend/           Record   Payment   Dividend/
Security   Distribution   Total Amount   Date   Date   Distribution
Common Shares/Units (1)
  $ 0.375     $ 46,851 (2)(3)     1/31/06       2/15/06     $ 1.50  
Common Shares/Units (1)
    0.375       45,532 (2)     4/28/06       5/15/06       1.50  
Series A Preferred Shares
    0.422       5,991       1/31/06       2/15/06       1.6875  
Series A Preferred Shares
    0.422       5,991       4/28/06       5/15/06       1.6875  
Series B Preferred Shares
    0.594       2,019       1/31/06       2/15/06       2.3750  
Series B Preferred Shares
    0.594       2,019       4/28/06       5/15/06       2.3750  
 
(1)   Represents one-half the amount of the distribution per unit because each unit is exchangeable for two common shares.
 
(2)   Does not include dividends on unvested restricted units, which will be paid in arrears upon vesting.
 
(3)   Includes dividends paid on March 17, 2006, for restricted units that vested March 10, 2006.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK AND UNIT BASED COMPENSATION
Stock and Unit Option Plans
     Effective January 1, 2006, we adopted SFAS No. 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all options outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Effective January 1, 2003, we adopted the fair value expense recognition provisions of SFAS No. 123 on a prospective basis as permitted by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which requires that the fair value of stock options at the date of grant be amortized ratably into expense over the appropriate vesting period. The compensation expense recognized for stock and unit options for the six months ended June 30, 2006, was approximately $0.8 million, of which $0.7 million relates to additional expense recognized as a result of the adoption of SFAS No. 123R. For the six months ended June 30, 2005, compensation expense recognized for stock and unit options was approximately $0.1 million.
     The weighted average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $1.83 and $1.05 respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, was $1.2 million and $0.5 million, respectively. The fair value of each option is estimated at the date of grant using the Black-Scholes option-pricing model based on the expected weighted average assumptions in the following table. We estimated the expected term of options granted during the quarter by adding the vesting term plus the contractual term divided by two. We estimated stock price volatility using historical volatility data. The risk-free rate for the periods within the contractual life is based on the U.S. Treasury yield curve in effect at the time of grant.
                 
    For the six months ended
    June 30,
    2006   2005
     
Expected term
  6.5 years   10 years
Risk-free rate
    4.6 %     4.2 %
Expected dividends
    7.4 %     8.9 %
Expected volatility
    22.2 %     24.9 %
     As of June 30, 2006, there was approximately $1.6 million of total unrecognized compensation cost related to nonvested stock and unit options. That cost is expected to be recognized over a weighted average period of 1.4 years.
     With respect to our stock options which were granted prior to 2003 and prior to the adoption of SFAS No. 123, we accounted for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, and related Interpretations. Had compensation cost been determined based on the fair value at the grant dates for awards under the plans consistent with SFAS No. 123R, our net loss and loss per share would have been:
                 
    For the three months     For the six months  
    ended June 30,     ended June 30,  
(in thousands, except per share amounts)   2005     2005  
Net loss available to common shareholders, as reported
  $ (13,552 )   $ (22,848 )
Add: Stock-based employee compensation expense included in reported net loss
    1,718       3,081  
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interest
    (2,115 )     (3,869 )
 
           
Pro forma net loss available to common shareholders
  $ (13,949 )   $ (23,636 )
 
           
Loss per share:
               
Basic and diluted – as reported
  $ (0.14 )   $ (0.23 )
Basic and diluted – pro forma
  $ (0.14 )   $ (0.24 )

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Crescent has two stock incentive plans, the 1995 Stock Incentive Plan and the 1994 Stock Incentive Plan. The 1995 Plan and the 1994 Plan expired on June 11, 2005, and March 31, 2004, respectively. The Operating Partnership has two unit incentive plans, the 1995 Unit Incentive Plan and the 1996 Unit Incentive Plan. The 1995 Unit Plan expired on June 30, 2005, and the 1996 Unit Plan expired on July 16, 2006. The Operating Partnership has also granted unit options under the Operating Partnership agreement. These plans are collectively referred to as The Plans. Under The Plans, options were granted at a price not less than the market value of the shares on the date of grant, generally vest over five years of continuous service and expire ten years from the date of grant. We have a policy of issuing new shares to satisfy share option exercises.
     On February 19, 2002, John Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer, was granted the right to earn 300,000 restricted shares under the 1995 Plan. These shares vest at 100,000 shares per year on February 19, 2005, February 19, 2006, and February 19, 2007. Compensation expense is being recognized on a straight-line basis. For each of the six months ended June 30, 2006 and 2005, approximately $0.5 million was recorded as compensation expense related to this grant.
     A summary of the status of The Plans as of June 30, 2006, and changes during the six months then ended is presented in the table below.
(in thousands, except per share amounts)
                                 
    Shares             Wtd. Avg.        
    Underlying     Wtd. Avg.     Years        
    Stock and     Exercise     Remaining     Aggregate  
    Unit     Price Per     Contractual     Intrinsic  
    Options     Share     Term     Value  
Outstanding at January 1, 2006
    12,363     $ 18                  
Granted
    35       20                  
Exercised
    (292 )     17                  
Forfeited
    (2 )     18                  
Canceled
                           
 
                       
Outstanding at June 30, 2006
    12,104     $ 18       4.6     $ 13,361  
 
                       
 
                               
Exercisable at June 30, 2006
    10,364     $ 19       4.3     $ 11,430  
 
                       
2004 and 2005 Unit Plans
     The 2004 Unit Plan provides for the issuance by the Operating Partnership of up to 1,802,500 restricted units (3,605,000 common share equivalents) to our officers. Restricted units granted under the 2004 Unit Plan vest in 20% increments when the average closing price of Crescent common shares on the New York Stock Exchange for the immediately preceding 40 trading days equals or exceeds $19.00, $20.00, $21.00, $22.50 and $24.00. The 2005 Unit Plan provides for the issuance by the Operating Partnership of up to 1,275,000 restricted Units (2,550,000 common share equivalents). Restricted units granted under the 2005 Unit Plan vest in 20% increments when the average closing price of Crescent Common Shares on the New York Stock Exchange for the immediately preceding 40 trading days equals or exceeds $21.00, $22.50, $24.00, $25.50 and $27.00. Any restricted unit that is not vested on or prior to June 30, 2010, will be forfeited. Each vested restricted unit will be exchangeable, beginning on the second anniversary of the date of grant, for cash equal to the value of two Crescent common shares based on the closing price of the common shares on the date of exchange, and subject to a six-month hold period following vesting, unless, prior to the date of the exchange, Crescent requests and obtains shareholder approval authorizing it, at its discretion, to deliver instead two common shares in exchange for each such restricted unit. Regular quarterly distributions accrue on unvested restricted units and are payable upon vesting of the restricted units.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     We obtained a third-party valuation to determine the fair value of the restricted units issued under the Plans. The third-party used a lattice-based valuation model which incorporated a range of assumptions for inputs including the expected weighted average assumptions in the following table.
                 
    For the six months ended
    June 30,
    2006   2005
     
Expected term
    1.5 to 5.2 years       1.5 to 5.5 years  
Risk-free rate
    3.8%       3.8%  
Expected dividends
    9.0%       9.0%  
Expected volatility
    23%       23%  
     The weighted average grant-date fair value of the restricted units granted during the six months ended June 30, 2006 and 2005, was $7.31 and $6.16, respectively, which is being amortized on a straight-line basis over the related service period, except for when performance targets are achieved. For the six months ended June 30, 2006 and 2005, approximately $7.3 million and $2.5 million was recorded as compensation costs related to the Unit Plans, respectively, of which approximately $0.7 million and $0.2 million was capitalized, respectively.
     A summary of the status of nonvested restricted units (shown in common share equivalents) is presented below:
(share amounts in thousands)
                 
            Weighted-
    Shares   Average
    Underlying   Grant-Date
Nonvested Units   Units   Fair Value
 
Nonvested at January 1, 2006
    4,294     $ 6.54  
Granted
    25       7.31  
Vested
    (1,148 )     6.66  
Forfeited
           
 
               
Nonvested at June 30, 2006
    3,171     $ 6.49  
 
               
     As of June 30, 2006, there was approximately $18.1 million of total unrecognized compensation cost related to nonvested units. That cost is expected to be recognized over a weighted average period of 2.6 years.
     On March 10, 2006, the 40-day average closing price of Crescent’s common shares reached the third performance target under the 2004 Unit Plan and first performance target under the 2005 Unit Plan. Upon achieving these targets 574,000 units (1,148,000 common share equivalents) vested. Of this amount, 331,750 units (663,500 common share equivalents) may be exchanged for cash beginning on December 1, 2006, and 239,750 units (479,500 common share equivalents) in 2007 and 2,500 units (5,000 common share equivalents) in 2008 unless, prior to the date of exchange, Crescent obtains shareholder approval authorizing it, in its discretion, to deliver instead two common shares for each such restricted unit. The total grant-date fair value of units vested during the six months ended June 30, 2006, was $7.6 million.
15. INCOME TAXES
     Deferred income taxes reflect the net tax effect of temporary differences between the financial reporting carrying amounts of assets and liabilities of the taxable consolidated entities and the income tax basis. For the six months ended June 30, 2006, the taxable consolidated entities were comprised of our taxable REIT subsidiaries.
     We intend to maintain our qualification as a REIT under Section 856 of the U.S. Internal Revenue Code of 1986, as amended (the Code). As a REIT, we generally will not be subject to federal corporate income taxes as long as we satisfy certain technical requirements of the Code, including the requirement to distribute 90% of our REIT taxable income to our shareholders. Accordingly, we do not believe that we will be liable for current income taxes on our REIT taxable income at the federal level or in most of the states in which we operate. We consolidate certain taxable REIT subsidiaries, which are subject to federal and state income tax. For the six months ended June 30, 2006 and 2005, our income tax benefit from continuing operations was $4.3 million and $1.5 million, respectively. Our $4.3 million income tax benefit at June 30, 2006, consists primarily of $5.0 million for the Resort Residential Development Segment, which includes $1.7 million related to an IRS audit settlement of a charitable contribution deduction, and $1.1 million for the Resort/Hotel Segment, partially offset by $1.8 million tax expense for the Office Segment.
     At June 30, 2006, we had a net current tax asset of $11.5 million and a net deferred tax liability of $1.1 million. SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The change in the valuation allowance was not significant for the six months ended June 30, 2006.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS
Loans to Employees and Trust Managers of the Company for Exercise of Stock Options and Unit Options
     As of June 30, 2006, we had approximately $37.9 million in loan balances outstanding reflected in the “Additional paid-in capital” line item in the Consolidated Balance Sheets, inclusive of current interest accrued of approximately $0.2 million, to certain of our employees and trust managers on a recourse basis under stock and unit incentive plans pursuant to an agreement approved by our Board of Trust Managers and its Executive Compensation Committee. The employees and the trust managers used the loan proceeds to acquire common shares of Crescent pursuant to the exercise of vested stock and unit options. The loans bear interest at 2.52% per year, payable quarterly, mature on July 28, 2012, and may be repaid in full or in part at any time without premium or penalty. Mr. Goff had a loan representing $26.4 million of the $37.9 million total outstanding loans at June 30, 2006. No conditions exist at June 30, 2006 which would cause any of the loans to be in default.
17. SUBSEQUENT EVENTS
     On July 31, 2006, we entered into a $50.0 million loan with KeyBank secured by excess cash flow distributions from Funding III, IV and V (Greenway Plaza). The loan bears interest at LIBOR plus 200 basis points with an interest-only term until maturity in January 2007. The loan also has an accordion option based on market availability to expand the facility to $75.0 million. The proceeds were used to pay down the credit facility.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         
    35  
 
       
    36  
 
       
    37  
 
       
    41  
 
       
    48  
 
       
    53  
 
       
    55  
 
       
    57  
 
       
    58  
 
       

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Forward-Looking Statements
          You should read this section in conjunction with the consolidated interim financial statements and the accompanying notes in Item 1, “Financial Statements,” of this document and the more detailed information contained in our Form 10-K for the year ended December 31, 2005. In management’s opinion, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of the unaudited interim financial statements are included. Capitalized terms used but not otherwise defined in this section have the meanings given to them in the notes to the consolidated financial statements in Item 1, “Financial Statements.”
          This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as “believe,” “expect,” “anticipate,” “will” and “may.”
          Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those described in the forward-looking statements.
          The following factors might cause such a difference:
  §   Our ability, at our office properties to timely lease unoccupied square footage and timely re-lease occupied square footage upon expiration or termination on favorable terms, which continue to be adversely affected by existing real estate conditions (including the vacancy levels in particular markets, decreased rental rates and competition from other properties) and may also be adversely affected by general economic downturns;
 
  §   Adverse changes in the financial condition of existing office tenants and the ability of these office tenants to pay rent;
 
  §   Lack of control and limited flexibility in dealing with our jointly-owned investments;
 
  §   Our ability to reinvest available funds at anticipated returns and consummate anticipated office acquisitions on favorable terms and within anticipated time frames;
 
  §   The ability of El Paso Energy to satisfy its obligations to pay rent and termination fees in accordance with the terms of its agreement with us;
 
  §   The concentration of a significant percentage of our office assets in Texas;
 
  §   The ability to develop, sell and deliver resort residential units and lots within anticipated time frames and within anticipated profit margins;
 
  §   Deterioration in the market or in the economy generally and increases in construction costs associated with development of residential land or luxury residences, including single-family homes, town homes and condominiums;
 
  §   Financing risks, such as our ability to generate revenue sufficient to service and repay existing or additional debt, increases in debt service associated with increased debt and with variable-rate debt, our ability to meet financial and other covenants, liquidity risks related to the use of warehouse facilities governed by repurchase agreements to fund certain of our mezzanine investments and our ability to consummate financings and refinancings on favorable terms and within any applicable time frames;
 
  §   Deterioration in our resort/business-class hotel markets or in the economy generally and increase in construction costs associated with the development of resort/hotel properties;
 
  §   The inherent risk of mezzanine investments, which are structurally or contractually subordinated to senior debt, may become unsecured as a result of foreclosure by a senior lender on its collateral, and are riskier than conventional mortgage loans;
 
  §   The existence of complex regulations relating to our status as a REIT, the effect of future changes in REIT requirements as a result of new legislation and the adverse consequences of the failure to qualify as a REIT; and
 
  §   Other risks detailed from time to time in our filings with the SEC.
          Given these uncertainties, readers are cautioned not to place undue reliance on such statements. We are not obligated to update these forward-looking statements to reflect any future events or circumstances.

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Overview
          We are a REIT with assets and operations divided into four investment segments: Office, Resort Residential Development, Resort/Hotel and Temperature-Controlled Logistics. Our strategy has two key elements.
          First, we seek to capitalize on our award-winning office management platform. We intend to accomplish this by investing in premier office properties in select markets that offer attractive returns on invested capital. Our strategy is to align ourselves with institutional partners and become a significant manager of institutional capital. We believe this partnering makes us more competitive in acquiring new properties, and it enhances our return on equity by 300 to 600 basis points when compared to the returns we receive as a 100% owner. Where possible, we strive to negotiate performance-based incentives that allow for additional equity to be earned if return targets are exceeded. We were able to realize this increased return on equity from our promoted interest earned on the sale of Five Houston Center in December 2005.
          Consistent with this strategy, we continually evaluate our existing portfolio for potential joint-venture opportunities. We currently hold 48% of our office portfolio in joint ventures, and we will continue to joint venture more assets in our portfolio, which will enable us to further increase our return on equity as well as gain access to equity for reinvestment.
          We also seek to selectively develop new office properties where we see the opportunity for attractive returns. We started construction in the third quarter of 2005 on a new 239,000 square-foot office building as an addition to the Hughes Center complex in Las Vegas, Nevada. We are co-developing with Hines a 265,000 square-foot office building in Irvine, California, and we are developing, with JMI Realty, a 233,000 square-foot, three-building office complex in San Diego, California. We recently entered into a joint venture with Champion Partners to develop a 144,000 square-foot, two-building office complex in Austin, Texas.
          Second, we invest in real estate businesses that offer returns equal to or superior to what we are able to achieve in our office investments. We develop and sell residential properties in resort locations primarily through Harry Frampton and his East West Partners development team with the most significant project in terms of future cash flow being our investment in Tahoe Mountain Resorts in California. This development encompasses more than 2,500 total lots and units, of which 385 have been sold, 60 are currently in inventory and over 2,120 are scheduled for development over the next 14 years, and is expected to generate in excess of $4.6 billion in sales. We expect our investment in Tahoe to be a long-term source of earnings and cash flow growth as new projects are designed and developed. We view our resort residential developments as a business and believe that, beyond the net present value of existing projects, there is value in our strategic relationships with the development teams and our collective ability to identify and develop new projects. Additionally, we provide mezzanine financing to other office, resort, residential and hotel investors where we see attractive returns relative to owning the equity. We have approximately $186.2 million of mezzanine financing investments, of which approximately $107.4 million relates to Office Properties, outstanding at June 30, 2006.
          In 2005, we also completed the recapitalization of our Canyon Ranch investment. We believe Canyon Ranch is well positioned for significant growth, with a large portion of this growth over the near term coming from the addition of several Canyon Ranch Living communities. The focal point of these communities is a large, comprehensive wellness facility. Canyon Ranch will partner with developers on these projects and earn fees for the licensing of the brand name, design and technical services, and the ongoing management of the facilities. Canyon Ranch currently has one such development under construction in Miami Beach, has finalized an agreement that will pave the way for the development of a Canyon Ranch Living community in Bethesda, Maryland and Chicago, Illinois, and others are under consideration or in negotiation.

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Recent Developments
Office Segment
Joint Ventures
Parkway at Oakhill
          On March 31, 2006, we entered into a joint venture arrangement, C-C Parkway Austin, L.P. (Parkway), with Champion Partners. The joint venture has committed to co-develop a 144,000 square-foot, two-building office complex in Austin, Texas. The venture is structured such that we own a 90% interest and Champion Partners owns the remaining 10% interest. In connection with the joint venture, Parkway entered into a maximum $18.3 million construction loan with JPMorgan Chase Bank. Our equity commitment to the joint venture was $8.2 million, of which $4.9 million has been funded as of June 30, 2006. The development, which is currently underway, is scheduled for delivery in 2007. Upon completion, we will manage the property on behalf of the joint venture.
Chase Tower
          On June 20, 2006, we completed the sale of Chase Tower on behalf of Austin PT BK One Tower Office Limited Partnership, the joint venture which was owned 80% by an affiliate of GE and 20% by us. The sale generated proceeds to the joint venture, net of selling costs, of approximately $68.8 million and a net gain of approximately $10.1 million. Our net gain was approximately $4.3 million, inclusive of the recognition of the deferred gain from the joint venture of the property in 2001. Our share of the proceeds was approximately $5.6 million, which was used to pay down the credit facility.
Asset Purchase
                 
(in millions)           Purchase
Date   Property   Location   Price
January 23, 2006  
Financial Plaza – Class A Office Property
  Phoenix, Arizona   $ 55.0 (1)
 
(1)   The acquisition was funded by the assumption of a $23.6 million loan from Allstate, a new $15.9 million loan from Allstate and a draw on our credit facility. This property is wholly-owned.
Asset Sale
                 
(in millions)            
Date   Property   Location   Proceeds
February 17, 2006  
Waterside Commons – Class A Office Property
  Dallas, Texas   $ 24.8 (1)
 
(1)   We previously recorded an impairment charge of approximately $1.0 million during the year ended December 31, 2005. The proceeds from the sale were used primarily to pay down the credit facility.
Significant Tenant Lease Termination
          In June 2005, we entered into an agreement with our largest office tenant, El Paso Energy Services Company and certain of its subsidiaries, which will terminate El Paso’s leases relating to a total of 888,000 square feet at Greenway Plaza in Houston, Texas, effective December 31, 2007. Under the agreement, El Paso is required to pay us $65.0 million in termination fees in periodic installments through December 31, 2007, and $62.0 million in rent according to the original lease terms from July 1, 2005 through December 31, 2007. In December 2005, we collected the first installment of the lease termination fee in the amount of $10.0 million. For the six months ended June 30, 2006, we recognized $25.3 million in net termination fees, which includes accelerated termination fees and contractual full-service rents resulting from the re-lease of approximately 304,000 square feet. As of June 30, 2006, El Paso was current on all rent obligations. In June 2006, we collected the second installment of the lease termination fee in the amount of $12.5 million.

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Resort Residential Development
Riverfront Village
          On March 21, 2006, CRDI entered into a joint venture arrangement, East West Resort Development XIV, L.P., L.L.L.P. (Riverfront Village), with affiliates of Crow Holdings and our development partner. The joint venture was formed to co-develop a hotel and condominiums in Avon, Colorado. The development, which is currently underway, is scheduled for delivery in 2008. We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital. Our equity commitment to the joint venture is $23.7 million, of which $10.6 million was funded as of June 30, 2006.
Resort/Hotel
Park Hyatt Beaver Creek
          During the quarter ended June 30, 2006, 85 rooms were taken out of service at the Park Hyatt Beaver Creek in Avon, Colorado. The area occupied by 55 of these rooms is being converted into approximately 15 fractional units for sale in our Resort Residential Development Segment. The remaining space will be used to expand the Allegria Spa. In addition, the Resort is adding air conditioning and upgrading the common areas. The renovations are expected to be completed in December 2006.
Other Segment
Mezzanine Investments
          The following table presents mezzanine loans entered into in 2006. These loans are reflected in the “Notes receivable, net” line item in the consolidated financial statements. Mezzanine loans are loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction. These loans may be in the form of a junior participating interest in the senior debt or in the form of loans to the direct or indirect parent of the property owner secured by pledges of ownership interests in entities that directly or indirectly control the real property or subordinated loans secured by second mortgage liens on the property.
                             
                    Interest    
    Outstanding           Rate at    
(in millions)   Loan   Underlying   Maturity   June 30,   Fixed/
Date   Amount   Real Estate Asset   Date   2006   Variable
January 20, 2006   $ 15.0(1)    
Florida Hotel Portfolio Investment
  2009     13.20 %   Variable
April 12, 2006   $ 20.0(2)    
California Ski Resort
  2009     9.70 %   Variable
May 8, 2006     28.8(3)    
New York City Residential
  2007     18.03 %   Variable
 
(1)   The loan bears interest at LIBOR plus 800 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.
 
(2)   The loan bears interest at LIBOR plus 450 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options.
 
(3)   The loan bears interest at LIBOR plus 1,283 basis points with an interest-only term until maturity, subject to the right of the borrower to extend the loan pursuant to two one-year extension options. We determined that the entity to which the loan was funded is a VIE under FIN 46R of which we are not the primary beneficiary; therefore, we do not consolidate the entity. Our maximum exposure to loss is limited to the amount of the loan.
          In February 2006, we received approximately $56.4 million of proceeds for the repayment of two of our mezzanine investments, which included $6.2 million of prepayment fees.
          At June 30, 2006, we had approximately $186.2 million of mezzanine investments outstanding which mature in 2006 through 2010 and had a weighted average interest rate of 13.33%.

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2006 Operating Performance
Office Segment
          The following table shows the performance factors on stabilized properties, excluding properties held for sale, used by management to assess the operating performance of the Office Segment:
                 
    2006   2005
Economic Occupancy (1) (at June 30 and December 31)
    88.2 %     89.5 %
Leased Occupancy (2) (at June 30 and December 31)
    91.1 %     91.8 %
In-Place Weighted Average Full-Service Rental Rate (3) (at June 30 and December 31)
  $ 22.91     $ 22.74  
Tenant Improvement and Leasing Costs per Sq. Ft. per year (three months ended June 30)
  $ 3.41     $ 3.47  
Tenant Improvement and Leasing Costs per Sq. Ft. per year (six months ended June 30)
  $ 3.57     $ 3.52  
Average Lease Term (4) (three months ended June 30)
  6.7  yrs   6.5  yrs
Average Lease Term (4) (six months ended June 30)
  6.1  yrs   6.1  yrs
Same-Store NOI (5) (Decline) (three months ended June 30)
    (0.9 )%     (2.8 )%
Same-Store NOI (5) (Decline) (six months ended June 30)
    (2.3 )%     (1.2 )%
Same-Store Average Occupancy (three months ended June 30)
    88.4 %     87.0 %
Same-Store Average Occupancy (six months ended June 30)
    88.5 %     87.4 %
 
(1)   Economic occupancy reflects the occupancy of all tenants paying rent.
 
(2)   Leased occupancy reflects the amount of contractually obligated space, whether or not commencement has occurred.
 
(3)   Calculated based on base rent payable at June 30, 2006, giving effect to free rent and scheduled rent increases and including adjustments for expenses payable by or reimbursable from tenants. The weighted average full-service rental rate for the El Paso lease reflects weighted average full-service rental rate over the shortened term and excludes the impact of the net lease termination fee being recognized ratably to income through December 31, 2007.
 
(4)   Reflects leases executed during the period.
 
(5)   Same-store NOI (net operating income) represents office property net income excluding depreciation, amortization, interest expense and non-recurring items such as lease termination fees for Office Properties owned for the entirety of the comparable periods.
          For the remainder of 2006, we expect continued improvement in the economy. This allows us to remain cautiously optimistic about economic occupancy gains in 2006. We expect that the 2006 ending economic occupancy for our portfolio will increase to approximately 90% — 91%.
Resort Residential Development Segment
          The following tables show the performance factors used by management to assess the operating performance of the Resort Residential Development Segment. Information is provided for the CRDI Resort Residential Development Properties and the Desert Mountain Resort Residential Development Properties, which represent our significant investments in this segment as of June 30, 2006.
CRDI
                 
    For the three months ended June 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    41       94  
Resort Residential Unit Sales:
               
Townhome Sales
    1        
Condominium Sales
    4       51  
Equivalent Timeshare Sales
    4.96       3.69  
Average Sales Price per Resort Residential Lot
  $ 160     $ 74  
Average Sales Price per Resort Residential Unit
  $ 1,780     $ 741  
                 
    For the six months ended June 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    70       217  
Resort Residential Unit Sales:
               
Townhome Sales
    3        
Condominium Sales
    34       55  
Equivalent Timeshare Sales
    6.62       6.46  
Average Sales Price per Resort Residential Lot
  $ 166     $ 62  
Average Sales Price per Resort Residential Unit
  $ 1,874     $ 889  

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          CRDI, which invests primarily in mountain residential real estate in Colorado and California and residential real estate in downtown Denver, Colorado, is highly dependent upon the national economy and customer demand. For 2006, management expects that unit and lot sales will decrease due to the number of units and lots completed and available for sale as compared to 2005, but the average sales price will increase at CRDI due to product mix, with approximately 64% closed or pre-sold as of July, 17, 2006.
Desert Mountain
                 
    For the three months ended June 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    2       22  
Average Sales Price per Lot (1)
  $ 2,117     $ 1,014  
Resort Residential Unit Sales
    1        
Average Sales Price per Unit (1)
  $ 1,397        
 
(1)   Includes equity golf membership
                 
    For the six months ended June 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    3       31  
Average Sales Price per Lot (1)
  $ 1,936     $ 1,039  
Resort Residential Unit Sales
    2        
Average Sales Price per Unit (1)
  $ 1,592        
 
(1)   Includes equity golf membership
          Desert Mountain is in the latter stages of development and management anticipates minor additions to its decreasing available inventory. Total lot and unit sales are expected to be higher in 2006 compared to 2005 as a result of approximately 10 lots and 33 units forecasted in 2006.
Resort/Hotel Segment
          The following table shows the performance factors used by management to assess the operating performance of our Resort/Hotel Properties.
                                                                 
    For the three months ended June 30,
                    Average   Average   Revenue Per
    Same-Store NOI(1)   Occupancy   Daily   Available
    % Change   Rate   Rate   Room/Guest Night
    2006   2005   2006   2005   2006   2005   2006   2005
Luxury Resorts and Spas
    12 %     2,416 %(2)     62 %     57 %   $ 314     $ 278     $ 194     $ 159  
Upscale Business Class Hotels
    13 %     53 %     74 %     76 %   $ 140     $ 123     $ 103     $ 94  
                                                                 
    For the six months ended June 30,
                    Average   Average   Revenue Per
    Same-Store NOI(1)   Occupancy   Daily   Available
    % Change   Rate   Rate   Room/Guest Night
    2006   2005   2006   2005   2006   2005   2006   2005
Luxury Resorts and Spas
    17 %     75 %     66 %     60 %   $ 367     $ 337     $ 241     $ 203  
Upscale Business Class Hotels
    24 %     42 %     75 %     74 %   $ 137     $ 122     $ 103     $ 90  
 
(1)   Same-Store NOI (net operating income) represents net income excluding depreciation and amortization, interest expense and rent expense for Resort/Hotel Properties owned for the entirety of the comparable periods.
 
(2)   Increase is primarily attributable to the 2004 renovations at the Fairmont Sonoma Mission Inn and the Ventana Inn, which had 97 and 13 rooms out of service, respectively, for the three months ended June 30, 2004.
          We anticipate a 10% to 12% increase in revenue per available room in 2006 at the Resort/Hotel Properties, driven by the continued healthy expansion and growth of the economy and travel industry.

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Results of Operations
          The following table shows the variance in dollars for certain of our operating data between the three and six months ended June 30, 2006 and 2005.
                 
    Total variance in     Total variance in  
    dollars between     dollars between  
    the three months ended     the six months ended  
(in millions)   June 30, 2006 and 2005     June 30, 2006 and 2005  
REVENUE:
               
Office Property
  $ 17.7     $ 28.5  
Resort Residential Development Property
    (32.1 )     12.5  
Resort/Hotel Property
    1.0       1.0  
 
           
Total Property revenue
  $ (13.4 )   $ 42.0  
 
           
 
               
EXPENSE:
               
Office Property real estate taxes
  $ 0.9     $ 0.4  
Office Property operating expenses
    2.0       7.3  
Resort Residential Development Property expense
    (23.9 )     18.9  
Resort/Hotel Property expense
    0.1       (2.2 )
 
           
Total Property expense
  $ (20.9 )   $ 24.4  
 
           
 
               
Income from Property Operations
  $ 7.5     $ 17.6  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Income from sale of investment unconsolidated company
  $ 4.3     $ 4.3  
Income from investment land sales
    (5.0 )     (8.4 )
Gain on joint venture of properties
    (1.0 )     (1.5 )
Gain on property sales
    0.1       0.1  
Interest and other income
    1.4       11.9  
Corporate general and administrative
    (0.7 )     (5.2 )
Interest expense
    3.4       3.3  
Amortization of deferred financing costs
    0.3       0.4  
Extinguishment of debt
    0.2       1.7  
Depreciation and amortization
    3.8       1.4  
Other expenses
    (1.8 )     (3.1 )
Equity in net income (loss) of unconsolidated companies:
               
Office Properties
    (0.7 )     (1.8 )
Resort Residential Development Properties
    (0.7 )     (0.3 )
Resort/Hotel Properties
    (0.6 )     (2.9 )
Temperature-Controlled Logistics Properties
    (1.0 )     (0.3 )
Other
    (4.1 )     (10.2 )
 
           
Total other income (expense)
  $ (2.1 )   $ (10.6 )
 
           
 
               
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND
               
INCOME TAXES
  $ 5.4     $ 7.0  
 
               
Minority interests
    (0.1 )     (0.1 )
Income tax benefit
    5.1       2.8  
 
           
 
               
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  $ 10.4     $ 9.7  
 
               
Income from discontinued operations, net of minority interests
    (1.6 )     (3.3 )
(Loss) gain on sale of real estate from discontinued operations, net of minority interests
          (1.4 )
 
           
 
               
NET INCOME (LOSS)
  $ 8.8     $ 5.0  
 
               
Series A Preferred Share distributions
           
Series B Preferred Share distributions
           
 
           
 
               
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
  $ 8.8     $ 5.0  
 
           

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Comparison of the three months ended June 30, 2006 to the three months ended June 30, 2005.
Property Revenues
          Total property revenues decreased $13.4 million, or 6.4%, to $195.0 million for the three months ended June 30, 2006, as compared to $208.4 million for the three months ended June 30, 2005. The primary components of the decrease in total property revenues are discussed below.
    Office Property revenues increased $17.7 million, or 19.1%, to $110.4 million, primarily due to:
  §   an increase of $14.2 million in net lease termination fees (from $2.1 million to $16.3 million) primarily due to the El Paso lease termination and related re-leasing;
 
  §   an increase of $2.8 million from the 51 consolidated Office Properties (excluding 2005 and 2006 acquisitions and dispositions and properties considered unstabilized at December 31, 2004) that we owned or had an interest in, primarily due to a 1.8 percentage point increase in average occupancy (from 85.8% to 87.6%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses and increased telecom and parking revenue; partially offset by a decline in full service weighted average rental rates;
 
  §   an increase of $2.3 million from the acquisition of Financial Plaza in January 2006 and increased occupancy at One Live Oak, the Exchange Building and Peakview Tower;
 
  §   an increase of $0.9 million due to the settlement of litigation pertaining to leases and license agreements in various Office Properties; and
 
  §   an increase of $0.4 million resulting from third party management and leasing services and related direct expense reimbursements due to the joint venture of One Buckhead Plaza in June 2005; partially offset by
 
  §   a decrease of $2.9 million due to the joint venture of One Buckhead Plaza in June 2005.
    Resort Residential Development Property revenues decreased $32.1 million, or 37.4%, to $53.7 million, primarily due to:
  §   a decrease of $22.6 million in CRDI revenues related to product mix in lots and units available for sale in 2005 versus 2006, primarily at Delgany and Creekside Phase II in Denver, Colorado, and Horizon Pass in Bachelor Gulch, Colorado, which had sales in the three months ended June 30, 2005, but reduced or no sales in the same period in 2006; partially offset by Northstar Village in Lake Tahoe, California, which had sales in the three months ended June 30, 2006, but reduced sales in the same period in 2005; and
 
  §   a decrease of $10.3 million at DMDC primarily related to:
  §   a decrease of $17.4 million in lot sales revenue due to a decrease in lots sold (from 22 to 2); partially offset by an increase in the average price per lot (from $1.0 million to $2.1 million); partially offset by
 
  §   an increase of $6.7 million in deferred membership revenue.
    Resort/Hotel Property revenues increased $1.0 million, or 3.3%, to $30.9 million, primarily attributable to:
  §   an increase of $1.6 million in room revenue at the Luxury Resort and Spa Properties primarily at the Fairmont Sonoma Mission Inn which experienced a 17% increase in revenue per available room (from $226 to $265) resulting from an increase of 6% in average daily rate (from $305 to $322) and an 8 percentage point increase in occupancy (from 74% to 82%); partially offset by
 
  §   a decrease of $1.1 million in revenue at the Park Hyatt Beaver Creek related to a 14% decrease in revenue per available room (from $64 to $55) resulting from an decrease of 1% in average daily rate (from $159 to $158) and a 5 percentage point decrease in occupancy (from 40% to 35%). During the quarter ended June 30, 2006, 85 rooms were taken out of service. The area occupied by 55 of these rooms is being converted into approximately 15 fractional units and the remaining space will be used to expand the spa.

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Property Expenses
          Total property expenses decreased $20.9 million, or 14.4%, to $123.8 million for the three months ended June 30, 2006, as compared to $144.7 million for the three months ended June 30, 2005. The primary components of the decrease in total property expenses are discussed below.
    Office Property expenses increased $2.9 million, or 6.1%, to $50.3 million, primarily due to:
  §   an increase of $1.9 million in operating expenses of the 51 consolidated Office Properties (excluding 2005 and 2006 acquisitions and dispositions and properties considered unstabilized at December 31, 2004) that we owned or had an interest in primarily due to increased property taxes, utilities and cleaning expenses;
 
  §   an increase of $0.9 million from the acquisition of Financial Plaza in January 2006;
 
  §   an increase of $0.7 million related to increased payroll and benefit costs; partially offset by a decline in legal fees; and
 
  §   an increase of $0.6 million related to the cost of providing third-party management and leasing services due to the joint venture of One Buckhead Plaza in June 2005; partially offset by
 
  §   a decrease of $1.0 million due to the joint venture of One Buckhead Plaza in June 2005.
    Resort Residential Development Property expenses decreased $23.9 million, or 32.5%, to $49.7 million, primarily due to:
  §   a decrease of $15.8 million at CRDI primarily related to a decrease of $17.2 million in cost of sales from a decrease in sales and product mix of lots and units available for sale in 2005 versus 2006 at Delgany and Creekside II in Denver, Colorado, and Horizon Pass in Bachelor Gulch, Colorado, which had sales in the three months ended June 30, 2005, but reduced or no sales in the same period in 2006; partially offset by Northstar Village in Lake Tahoe, California, which had increased sales in the three months ended June 30, 2006, compared to the same period 2005; and
 
  §   a decrease of $10.6 million at DMDC primarily related to a decrease of $11.6 million in cost of sales due to decreased lot sales; partially offset by
 
  §   an increase of $1.4 million due to marketing expenses related to the Ritz-Carlton Tower Residences and Regency Row additions to The Residences at the Ritz-Carlton in Dallas, Texas.
    Resort/Hotel Property expenses increased $0.1 million, or 0.4%, to $23.8 million, primarily due to:
  §   an increase of $0.9 million in operating expenses at the Luxury Resort and Spa Properties primarily at Sonoma Mission Inn related to the increase in occupancy; partially offset by
 
  §   a decrease of $0.4 million at the Park Hyatt Beaver Creek related to the decrease in occupancy. During the quarter ended June 30, 2006, 85 rooms were taken out of service. The area occupied by 55 of these rooms is being converted into approximately 15 fractional units and the remaining space will be used to expand the spa.
Other Income/Expense
          Total other income and expenses increased $2.1 million, or 3.0%, to $72.4 million for the three months ended June 30, 2006, compared to $70.3 million for three months ended June 30, 2005. The primary components of the increase in total other income and expenses are discussed below.

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Other Income
          Other income decreased $7.3 million, or 36.1%, to $12.9 million for the three months ended June 30, 2006, as compared to $20.2 million for the three months ended June 30, 2005. The primary components of the decrease in other income are discussed below.
    Equity in net income of unconsolidated companies decreased $7.1 million to a $1.0 million loss, primarily due to:
  §   a decrease of $4.1 million in Other equity in net income primarily attributable to a decrease of income from the SunTx investment; and
 
  §   a decrease of $1.0 million in Temperature-Controlled Logistics equity in net income primarily attributable to the write-off of unamortized debt financing costs associated with the pay off of the Morgan Stanley debt in June 2006.
    Income from sale of investment in unconsolidated company increased $4.3 million due to the sale of the Chase Tower Office Property in 2006.
 
    Interest and other income increased $1.4 million to $9.3 million primarily due to $3.4 million increase related to interest from mezzanine loans attributable to an increase of $90.1 million in the weighted average mezzanine loan balance (from $81.9 to $172.0); partially offset by $1.7 million decrease in other income from legal settlement proceeds received in connection with certain deed transfer taxes in 2005.
 
    Income from investment land sales decreased $5.0 million due to the gain on the sale of one parcel of undeveloped investment land in Houston, Texas in 2005.
Other Expenses
          Other expenses decreased $5.2 million, or 5.7%, to $85.3 million for the three months ended June 30, 2006, compared to $90.5 million for the three months ended June 30, 2005. The primary components of the decrease in other expenses are discussed below.
    Depreciation and amortization costs decreased $3.8 million, or 9.3%, to $37.2 million due to a $3.9 million decrease in Resort/Hotel Property depreciation expense, primarily related to the reclassification of the Denver City Marriot Hotel Property from held for sale to held and used in 2005 and the related impact of recording additional depreciation expense.
 
    Interest expense decreased $3.4 million, or 9.4%, to $32.6 million due to a decrease of $16 million in the weighted average debt balance (from $2.307 billion to $2.291 billion) and an increase of $2.3 million in capitalized interest (from $4.7 million to $7.0 million), partially offset by a 0.1 percentage point increase in the hedged weighted average interest rate (from 6.9% to 7.0%).
 
    Corporate general and administrative costs increased $0.7 million, or 6.3%, to $11.8 million due primarily to an increase payroll and benefit costs.
Income Tax Benefit
          The $5.1 million increase in the income tax benefit for the three months ended June 30, 2006, compared to the three months ended June 30, 2005, is primarily due to:
    $3.7 million decrease in tax expense on the Resort Residential Development Properties primarily attributable to CRDI, related to a $1.7 million deduction associated with a charitable contribution and an increase in taxable losses in 2006 compared to 2005; and
 
    $1.6 million decrease in tax expense related to the 2005 unrealized gains associated with the SunTx investment.
Discontinued Operations
          Income from discontinued operations on assets sold and held for sale decreased $1.6 million to $0.1 million due to a decrease of $1.6 million, net of minority interest, attributable to the reduction of net income associated with properties held for sale in 2006 compared to 2005.

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Comparison of the six months ended June 30, 2006 to the six months ended June 30, 2005.
Property Revenues
          Total property revenues increased $42.0 million, or 10.7%, to $433.7 million for the six months ended June 30, 2006, as compared to $391.7 million for the six months ended June 30, 2005. The primary components of the increase in total property revenues are discussed below.
    Office Property revenues increased $28.5 million, or 15.7%, to $210.1 million, primarily due to:
  §   an increase of $23.4 million in net lease termination fees (from $2.0 million to $25.4 million) primarily due to the El Paso lease termination and related re-leasing;
 
  §   an increase of $4.7 million from the acquisition of Financial Plaza in January 2006 and increased occupancy at One Live Oak, the Exchange Building and Peakview Tower;
 
  §   an increase of $4.1 million from the 51 consolidated Office Properties (excluding 2005 and 2006 acquisitions and dispositions and properties considered unstabilized at December 31, 2004) that we owned or had an interest in, primarily due to a 1.4 percentage point increase in average occupancy (from 86.3% to 87.7%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses and increased telecommunications and parking revenue; partially offset by a decline in full service weighted average rental rates;
 
  §   an increase of $0.9 million due to the settlement of litigation pertaining to leases and license agreements in various Office Properties; and
 
  §   an increase of $0.7 million resulting from third party management and leasing services and related direct expense reimbursements due to the joint venture of One Buckhead Plaza in June 2005; partially offset by
 
  §   a decrease of $5.3 million due to the joint ventures of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.
    Resort Residential Development Property revenues increased $12.5 million, or 8.9%, to $152.9 million, primarily due to:
  §   an increase of $26.0 million in CRDI revenues related to product mix in lots and units available for sale in 2006 versus 2005, primarily at Northstar Village, Gray’s Crossing and Old Greenwood, all in Lake Tahoe, California, and Hummingbird Lodge in Bachelor Gulch, Colorado, which had sales in the six months June 30, 2006, but reduced or no sales in the same period in 2005; partially offset by Creekside Phase II and Delgany, both in Denver, Colorado, the Horizon Pass project in Bachelor Gulch, Colorado, and the Eagle Ranch project in Eagle, Colorado, which had sales in the six months ended June 30, 2005, but reduced or no sales in the same period in 2006; partially offset by
 
  §   a decrease of $12.8 million at DMDC primarily related to a decrease of $24.5 million in lot sales revenue due to a decrease in lots sold (from 31 to 3); partially offset by an increase of $9.3 million in deferred membership revenue and an increase of $3.2 million in unit sales revenue due to the sale of two units in 2006.
    Resort/Hotel Property revenues increased $1.0 million, or 1.4%, to $70.7 million, primarily attributable to:
  §   an increase of $3.5 million in room revenue at the Luxury Resort and Spa Properties, primarily at the Fairmont Sonoma Mission Inn which experienced a 24% increase in revenue per available room (from $170 to $211) resulting from an increase of 4% in average daily rate (from $275 to $286) and a 12 percentage point increase in occupancy (from 62% to 74%); and
 
  §   an increase of $1.7 million in room revenue at the Business Class Hotel Properties primarily related to a 14% increase in revenue per available room (from $90 to $103) resulting from a 12% increase in average daily rate (from $122 to $137) and a 1 percentage point increase in occupancy (from 74% to 75%); partially offset by
 
  §   a decrease of $4.6 million due to the contribution of the Canyon Ranch® Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment.

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Property Expenses
          Total property expenses increased $24.4 million, or 9.0%, to $296.1 million for the six months ended June 30, 2006, as compared to $271.7 million for the six months ended June 30, 2005. The primary components of the increase in total property expenses are discussed below.
    Office Property expenses increased $7.7 million, or 8.2%, to $101.4 million, primarily due to:
  §   an increase of $4.4 million in operating expenses of the 51 consolidated Office Properties (excluding 2004 and 2005 acquisitions and dispositions and properties considered unstabilized at December 31, 2004) that we owned or had an interest in primarily due to increased property taxes, administrative expenses, utilities, cleaning and general building and insurance expense;
 
  §   an increase of $1.9 million from the acquisition of the Exchange Building in February 2005 and Financial Plaza in January 2006;
 
  §   an increase of $1.5 million due to increased payroll and benefit costs and internal audit costs partially offset by a decline in legal fees; and
 
  §   an increase of $1.4 million in lease termination expense related to the termination of a tenant retail lease at Hughes Center; and
 
  §   an increase of $1.3 million related to the cost of providing third-party management services due to the joint venture of One Buckhead Plaza in June 2005; partially offset by
 
  §   a decrease of $2.4 million due to the joint venture of Fulbright Tower in February 2005 and the joint venture of One Buckhead Plaza in June 2005.
    Resort Residential Development Property expenses increased $18.9 million, or 15.4%, to $141.4 million, primarily due to:
  §   an increase of $29.3 million in CRDI cost of sales related to product mix in lots and units available for sale in 2006 versus 2005, primarily at Northstar Village, Gray’s Crossing and Old Greenwood, all in Lake Tahoe, California, and Hummingbird Lodge in Bachelor Gulch, Colorado, which had sales in the six months ended June 30, 2006, but reduced or no sales in the same period in 2005; partially offset by Creekside Phase II and Delgany, both in Denver, Colorado, Horizon Pass in Bachelor Gulch, Colorado, and the Eagle Ranch project in Eagle, Colorado, which had sales in the six months ended June 30, 2005, but reduced or no sales in the same period 2006; and
 
  §   an increase of $1.4 million primarily due to marketing expenses related to the Ritz-Carlton Tower Residences and Regency Row additions to The Residences at the Ritz-Carlton in Dallas, Texas; partially offset by
 
  §   a decrease of $14.4 million at DMDC primarily related to a decrease of $16.4 million in cost of sales attributable to decreased lot sales.
    Resort/Hotel Property expenses decreased $2.2 million, or 4.0%, to $53.3 million, primarily due to:
  §   a decrease of $4.1 million due to the contribution, in January 2005, of the Canyon Ranch Properties to a newly formed entity, CR Operating, LLC, in which we have a 48% member interest that is accounted for as an unconsolidated investment; partially offset by
 
  §   an increase of $1.9 million in operating expenses at the Luxury Resort and Spa Properties, primarily at Sonoma Mission Inn, related to an increase in occupancy.
Other Income/Expense
          Total other income and expenses increased $10.6 million, or 8.0%, to $143.3 million for the six months ended June 30, 2006, compared to $132.7 million for six months ended June 30, 2005. The primary components of the increase in total other income and expenses are discussed below.

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Other Income
          Other income decreased $9.1 million, or 23.0%, to $30.4 million for the six months ended June 30, 2006, as compared to $39.5 million for the six months ended June 30, 2005. The primary components of the decrease in other income are discussed below.
    Equity in net income of unconsolidated companies decreased $15.5 million to $0.6 million primarily due to:
  §   a decrease of $10.2 million in Other equity in net income primarily attributable to a decrease of income from the G2 and SunTx investments;
 
  §   a decrease of $2.8 million in Resort/Hotel equity in net income primarily attributable to Canyon Ranch Living Miami license fees of $3.0 million, of which our portion was $1.4 million; recognized at CR Operating, LLC in the first quarter 2005; and
 
  §   a decrease of $1.8 million in Office equity in net income due to a $0.8 million decline at Bank One Center (primarily due to increased bad debt and interest expense), $0.3 million decrease related to the disposition of 5 Houston Center in December 2005, a 0.9 percentage point decline in occupancy (from 90.3% to 89.4%) and a decline in weighted average rental rates at unconsolidated joint venture properties; partially offset by the joint venture of One Buckhead Plaza in June 2005.
    Income from investment land sales decreased $8.4 million due to the gain on the sale of two parcels of undeveloped investment land in Houston, Texas in 2005.
 
    Gain on joint venture of properties decreased $1.5 million due to the gain from the joint venture of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.
 
    Interest and other income increased $11.9 million to $25.2 million primarily due to $13.5 million increase related to interest from mezzanine loans attributable to an increase of $106.8 million in the weighted average mezzanine loan balance (from $57.4 million to $164.2 million) and includes approximately $6.2 million in prepayment fees on two mezzanine loans that were paid off in first quarter 2006; partially offset by $1.7 million decrease in other income from legal settlement proceeds received in connection with certain deed transfer taxes in 2005.
 
    Income from sale of investment in unconsolidated company increased $4.3 million due to the sale of the Chase Tower in 2006.
Other Expenses
          Other expenses increased $1.5 million, or 0.9%, to $173.7 million for the six months ended June 30, 2006, compared to $172.2 million for the six months ended June 30, 2005. The primary components of the increase in other expenses are discussed below.
    Corporate general and administrative costs increased $5.2 million, or 24.3%, to $26.6 million due primarily to an increase in compensation expense associated with restricted units granted under our long-term incentive compensation plans in December 2004 and May 2005, increased stock and unit option expense from the adoption of SFAS No. 123R and increased payroll and benefit costs.
 
    Depreciation and amortization costs decreased $1.4 million, or 1.9%, to $73.6 million due to:
  §   $3.4 million decrease in Resort/Hotel Property depreciation expense, primarily related to the reclassification of the Denver City Marriot Hotel Property from held for disposition to held and used in 2005 and the related impact of recording additional depreciation expense; partially offset by
 
  §   $1.6 million increase in Office Property depreciation and amortization expense primarily attributable to leasehold and building improvements.
    Interest expense decreased $3.3 million, or 4.8%, to $66.1 million due to an increase of $3.2 million in capitalized interest (from $9.2 million to $12.4 million) and a 0.03 percentage point decrease in the hedged weighted average interest rate (from 7.02% to 6.99%); partially offset by an increase of $44 million in the weighted average debt balance (from $2.243 billion to $2.287 billion).

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Income Tax Benefit
     The $2.8 million increase in the income tax benefit for the six months ended June 30, 2006, compared to the six months ended June 30, 2005, is primarily due to a $3.6 million decrease in tax expense related to 2005 income from the G2 investment and 2005 unrealized gains associated with the SunTx investment.
Discontinued Operations
      Income from discontinued operations on assets sold and held for sale decreased $4.7 million to $0.2 million due to:
 
    a decrease of $3.3 million, net of minority interest, due to the reduction of net income associated with properties held for sale in 2006 compared to 2005; and
 
    a decrease of $1.4 million, net of minority interest, primarily due to the $1.5 million gain on the sale of Albuquerque Plaza in February 2005.
Liquidity and Capital Resources
Overview
          Our primary sources of liquidity are cash flow from operations, our credit facility, and proceeds from asset sales and joint ventures. Our short-term liquidity requirements through June 30, 2007, consist primarily of our normal operating expenses, principal and interest payments on our debt, distributions to our shareholders and capital expenditures. Our long-term liquidity requirements are substantially similar to our short-term liquidity requirements, other than the level of debt obligations maturing after June 30, 2007.
Short-Term Liquidity
          We believe that cash flow from operations will be sufficient to cover our normal operating expenses, interest payments on our debt, distributions on our preferred shares, non-revenue enhancing capital expenditures and revenue enhancing capital expenditures (including property improvements, tenant improvements and leasing commissions) in 2006 and 2007. The cash flow from our Resort Residential Development Segment is cyclical in nature and primarily realized in the last quarter of each year. We expect to meet temporary shortfalls in operating cash flow caused by this cyclicality through working capital draws under our credit facility. As of June 30, 2006, we had up to $63.9 million of borrowing capacity available under our credit facility. However, if our Board of Trustees continues to declare distributions on our common shares at current levels, our cash flow from operations, after payments discussed above, is not expected to fully cover such distributions on our common shares in 2006 and 2007. We intend to use proceeds from asset sales and joint ventures, additional leverage on assets, and borrowings under our credit facility to cover this shortfall.
          In addition, through June 30, 2007, we expect to make capital expenditures that are not in the ordinary course of operations of our business of approximately $289.9 million, primarily relating to new developments of investment property. We anticipate funding these short-term liquidity requirements primarily through construction loans and borrowings under our credit facility or additional debt facilities. As of June 30, 2006, we also had maturing debt obligations of $233.8 million through June 30, 2007, made up primarily of the maturity of the GACC Note, which has three one-year extension options, and the Mass Mutual Note which we intend to refinance with a new fixed rate loan. In addition, $23.4 million of these maturing debt obligations relate to the Resort Residential Development Segment and will be repaid with the sales of the corresponding land or units or will be refinanced or with additional debt facilities. The remaining maturities consist primarily of normal principal amortization and will be met with cash flow from operations.
Long-Term Liquidity
          Our long-term liquidity requirements as of June 30, 2006, consist primarily of $2.2 billion of debt maturing after June 30, 2007. We also have $357.3 million of expected long-term capital expenditures relating to capital investments that are not in the ordinary course of operations of our business. We anticipate meeting these obligations primarily through refinancing maturing debt with long-term secured and unsecured debt, construction loans and through other debt and equity financing alternatives, as well as cash proceeds from asset sales and joint ventures.
          We anticipate that long-term liquidity requirements will also include amounts required for future unidentified property acquisitions, mezzanine investments and capital expenditures. Property acquisitions and capital expenditures are expected to be funded with available cash flow from operations, borrowings under our credit facility, construction and permanent secured financing, other debt and equity financing alternatives, as well as cash proceeds from asset sales and joint ventures. Mezzanine investments are expected to be funded with borrowings under our credit facility and through the use of our warehouse facilities governed by repurchase agreements.

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Cash Flows
          Our cash flow from operations is primarily attributable to the operations of our Office, Resort Residential Development and Resort/Hotel Properties. The level of our cash flow depends on multiple factors, including rental rates and occupancy rates at our Office Properties, sales of lots and units at our Resort Residential Development Properties and room rates and occupancy rates at our Resort/Hotel Properties. Our net cash provided by operating activities is also affected by the level of our operating and other expenses, as well as Resort Residential capital expenditures for existing projects.
          During the six months ended June 30, 2006, our cash flow from operations was insufficient to fully cover the distributions on our common shares. We funded this shortfall primarily with a combination of proceeds from asset sales and proceeds from investment land sales and borrowings under our credit facility.
         
    For the six months  
(in millions)   ended June 30, 2006  
Cash used in Operating Activities
  $ (43.4 )
Cash provided by Investing Activities
    30.7  
Cash provided by Financing Activities
    7.7  
 
     
Decrease in Cash and Cash Equivalents
  $ (5.0 )
Cash and Cash Equivalents, Beginning of Period
    86.2  
 
     
Cash and Cash Equivalents, End of Period
  $ 81.2  
 
     
Operating Activities
          Our cash used in operating activities of $43.4 million is attributable to Property operations.
Investing Activities
          Our cash provided by investing activities of $30.7 million is primarily attributable to:
    $167.5 million proceeds from defeasance investment maturities and other securities, primarily due to the maturity of the securities securing the LaSalle Note II which was repaid in March 2006;
 
    $24.3 million proceeds from property sales due to the sale of Waterside Commons Office Property in February 2006;
 
    $15.6 million return of investment in unconsolidated companies, primarily due to the distributions received from Riverfront Village, AmeriCold Realty Trust and Redtail Capital Partners, L.P.;
 
    $5.6 million proceeds from sale of investment in unconsolidated company due to the sale of our interests in the Chase Tower office property; and
 
    $5.0 million decrease in restricted cash.
The cash provided by investing activities is partially offset by:
    $72.5 million for the development of investment properties, due to the development of the JPI Multi-Family Investments luxury apartments, Paseo del Mar office development, Ritz-Carlton Hotel development and 3883 Hughes Parkway office development;
 
    $34.0 million for non-revenue enhancing tenant improvement and leasing costs for Office Properties;
 
    $30.7 million for the acquisition of investment properties, primarily due to the acquisition of the Financial Plaza Office Property in January 2006;
 
    $16.5 million of property improvements for Office and Resort/Hotel Properties;
 
    $16.4 million additional investment in unconsolidated companies, primarily related to our investment in Riverfront Village and Redtail Capital Partners, L.P.;
 
    $8.8 million for development of amenities at the Resort Residential Development Properties; and
 
    $8.4 million increase in notes receivable, primarily due to $63.8 million for three new mezzanine loans, partially offset by the repayment of approximately $50.2 million for two mezzanine loans.

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Financing Activities
          Our cash provided by financing activities of $7.7 million is primarily attributable to:
    $190.0 million proceeds from borrowings under our credit facility;
 
    $153.1 million proceeds from other borrowings, primarily due to the Bank of America loan secured by the Fairmont Sonoma Mission Inn, the Morgan Stanley and Goldman Sachs repurchase agreements secured by mezzanine loans and construction draws on our Office developments and the Ritz-Carlton hotel development;
 
    $125.3 million proceeds from borrowings for construction costs at the Resort Residential Development Properties;
 
    $8.4 million proceeds from capital contributions from our joint venture partners; and
 
    $5.0 million proceeds from the exercise of share and unit options.
The cash provided by financing activities is partially offset by:
    $171.1 million payments under other borrowings, primarily due to the pay off of the LaSalle Note II funded by proceeds from the maturity of defeasance investments;
 
    $114.0 million payments under our credit facility;
 
    $92.4 million distributions to common shareholders and unitholders;
 
    $70.3 million Resort Residential Development Property note payments;
 
    $16.0 million distributions to preferred shareholders;
 
    $8.2 million capital distributions to joint venture partners; and
 
    $2.1 million debt financing costs, primarily due to Bank of America loan secured by the Fairmont Sonoma Mission Inn and the Goldman Sachs and Morgan Stanley repurchase agreements secured by mezzanine loans.
Liquidity Requirements
Debt Financing Summary
          The following table shows summary information about our debt, including our pro rata share of unconsolidated debt, as of June 30, 2006. Listed below are the aggregate required principal payments by year as of June 30, 2006, excluding any extension options. Scheduled principal installments and amounts due at maturity are included.
                                                 
                                    Share of        
    Secured     Defeased     Unsecured     Consolidated     Unconsolidated        
(in thousands)   Debt     Debt     Debt     Debt     Debt     Total  
2006
  $ 42,318     $ 981     $     $ 43,299     $ 65,656     $ 108,955  
2007
    319,375       100,279       250,000       669,654       126,699       796,353  
2008
    178,703       289       310,000 (1)     488,992       49,014       538,006  
2009
    282,305       320       375,000       657,625       13,368       670,993  
2010
    133,853       6,337             140,190       23,788       163,978  
Thereafter
    317,775             77,321       395,096       367,154       762,250  
 
                                   
 
  $ 1,274,329     $ 108,206     $ 1,012,321     $ 2,394,856     $ 645,679     $ 3,040,535  
 
                                   
 
(1)   Borrowings under the credit facility.

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Significant Capital Expenditures
          As of June 30, 2006, we had unfunded capital expenditures of approximately $647.2 million relating to capital investments that are not in the ordinary course of operations of our business segments. The table below specifies our requirements for capital expenditures not factoring in project level financing, the amounts funded as of June 30, 2006, and amounts remaining to be funded (future funding classified between short-term and long-term capital requirements):
                                         
                            Capital Expenditures  
    Total     Amount     Amount     Short-Term     Long-Term  
    Project     Spent as of     Remaining     (Next 12     (12+  
(in millions) Project   Cost (1)     June 30, 2006     To Spend     Months) (2)     Months) (2)  
Consolidated:
                                       
Office Segment
                                       
3883 Hughes Center (3)
  $ 72.1     $ 31.4     $ 40.7     $ 36.1     $ 4.6  
Paseo del Mar (4)
    65.4       48.5       16.9       15.0       1.9  
Parkway at Oakhill(5)
    24.6       5.4       19.2       11.1       8.1  
 
                                       
Resort Residential Development Segment
                                       
Ritz-Carlton Highlands (6)
    292.9       8.7       284.2       55.1       229.1  
Tahoe Mountain Club (7)
    94.4       76.7       17.7       17.7        
JPI Multi-family Investments Luxury Apartments (8)
    54.3       47.5       6.8       6.8        
The Ritz-Carlton – Phase I(9)
    202.7       88.6       114.1       98.1       16.0  
The Ritz-Carlton – Phase II(10)
    138.8       9.8       129.0       31.4       97.6  
 
                                       
Resort/Hotel Segment
                                       
Park Hyatt Beaver Creek(11)
    25.8       7.2       18.6       18.6        
 
                             
 
                                       
Total
  $ 971.0     $ 323.8     $ 647.2     $ 289.9     $ 357.3  
 
                             
 
(1)   All amounts are approximate.
 
(2)   Reflects our estimate of the breakdown between short-term and long-term capital expenditures.
 
(3)   We have committed to a first phase office development of 239,000 square feet on land that we own within the Hughes Center complex. We expect to complete the building in the first quarter of 2007. We closed a $52.3 million construction loan in the third quarter of 2005.
 
(4)   In September 2005, we entered into a joint venture agreement with JMI Realty. The joint venture has committed to develop a 233,000 square-foot, three-building office complex in the Del Mar Heights submarket of San Diego, California. We have a $53.1 million construction loan from Guaranty Bank for the construction of this project. The loan is fully guaranteed by an affiliate of our partner. Amounts in the table represent our portion (80%) of total project costs. The development is scheduled for delivery in the third quarter of 2006.
 
(5)   In March 2006, we entered into a joint venture agreement with Champion Partners. The joint venture has committed to develop a 144,000 square-foot, two-building office complex in Austin, Texas. The joint venture has a $18.3 million construction loan from JP Morgan Chase Bank to fund construction of this project. Amounts in the table represent our portion (90%) of total project costs. The development is scheduled for delivery in 2008.
 
(6)   We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop a 173 room luxury hotel in Lake Tahoe, California. The new luxury property will also include the Ritz-Carlton Residences. Construction on the development is anticipated for delivery in the fourth quarter 2009.
 
(7)   As of June 30, 2006, we had invested $76.7 million in Tahoe Mountain Club, which includes the acquisition of land and development of golf courses and club amenities. Table includes the development planned for 2006 only. We anticipate collecting membership deposits which will be utilized to fund a portion of the development costs.
 
(8)   In October 2004, we entered into an agreement with JPI Multi-Family Investments, L.P. to develop a multi-family apartment project in Dedham, Massachusetts. We have a construction loan with a maximum borrowing of $41.0 million, which our partner guarantees to fund construction.
 
(9)   We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop the first Ritz-Carlton hotel and condominium project in Dallas, Texas. The development plans include a Ritz-Carlton with approximately 217 hotel rooms and 70 residences. Construction on the development is anticipated for delivery in the third quarter of 2007. We have a $175.0 million construction line of credit from KeyBank for the construction of this project.
 
(10)   We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop an additional approximately 96 Ritz-Carlton residences and approximately 4 penthouses adjacent to the Phase I development. Construction on the development is anticipated for delivery in the fourth quarter of 2008.
 
(11)   In April 2006, we began renovations at the Park Hyatt Beaver Creek in Avon, Colorado, which consist of the addition of air conditioning, upgrades to the common areas and taking 30 rooms out of service to expand the Allegria Spa. The renovations are expected to be completed in December 2006.

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Units Subject to Redemption
          Restricted units granted under the 2004 and 2005 Unit Plans vest in 20% increments when the average closing price of Crescent common shares for the preceding 40 trading days achieves certain targets. Each vested restricted unit will be exchangeable, beginning on the second anniversary of the date of grant, for cash equal to the value of two Crescent common shares based on the closing price of the common shares on the date of exchange, and subject to a six-month hold period following vesting, unless, prior to the date of the exchange, Crescent requests and obtains shareholder approval authorizing it, at its discretion, to deliver instead two common shares in exchange for each such restricted unit. Regular quarterly distributions accrue on unvested restricted units and are payable upon vesting of the restricted units.
          The following table presents the amount of restricted unit grants, vested restricted units and the redemption amount by year.
                                                 
                    Vested Unit              
(dollars in                   Redemption Value     Redeemable in        
thousands)   Granted(1)     Vested(1)   at June 30, 2006(2)     2006     2007     2008  
2004 Plan
    3,568,500       2,147,500     $ 39,858     $ 37,204     $ 2,654     $  
2005 Plan
    2,187,500       437,500       8,120             8,027       93  
 
                                   
 
    5,756,000       2,585,000     $ 47,978     $ 37,204     $ 10,681     $ 93  
 
                                   
 
(1)   Amounts listed in common share equivalents and are net of forfeitures.
 
(2)   Vested units may be exchanged for cash unless, prior to the date of exchange, Crescent obtains shareholder approval authorizing it, in its discretion, to deliver instead two common shares for each such restricted unit.
Off-Balance Sheet Arrangements — Guarantee Commitments
          Our guarantees in place as of June 30, 2006, are listed in the table below. For the guarantees on indebtedness, no triggering events or conditions are anticipated to occur that would require payment under the guarantees and management believes the assets associated with the loans that are guaranteed are sufficient to cover the maximum potential amount of future payments and therefore, would not require us to provide additional collateral to support the guarantees.
                 
    Guaranteed     Maximum  
    Amount     Guaranteed  
    Outstanding at     Amount at  
(in thousands)   June 30, 2006     June 30, 2006  
Debtor
               
CRDI – Eagle Ranch Metropolitan District – Letter of Credit (1)
  $ 7,845     $ 7,845  
Main Street Partners, L.P. – Letter of Credit (2) (3)
    4,250       4,250  
Fresh Choice, LLC(4)
    1,000       1,000  
 
           
Total Guarantees
  $ 13,095     $ 13,095  
 
           
 
(1)   We provide a $7.8 million letter of credit to support the payment of interest and principal of the Eagle Ranch Metropolitan District Revenue Development Bonds.
 
(2)   See Note 8, “Investments in Unconsolidated Companies,” for a description of the terms of this debt.
 
(3)   We and our joint venture partner each obtained separate letters of credit to guarantee the repayment of up to $4.3 million each of the Main Street Partners, L.P. loan.
 
(4)   We provide a guarantee of up to $1.0 million to GE Capital Franchise Financing Corporation as part of Fresh Choice’s bankruptcy reorganization.
Other Commitments
          In July 2005, we purchased comprehensive insurance that covers us, contractors and other parties involved in the construction of the Ritz-Carlton hotel and condominium project in Dallas, Texas. Our insurance carrier, which will pay the associated claims as they occur under this program and will be reimbursed by us within our deductibles, requires us to provide a $1.7 million letter of credit supporting payment of claims. We believe there is a remote likelihood that payment will be required under the letter of credit.

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Debt Financing
          The significant terms of our primary debt financing arrangements existing as of June 30, 2006, are shown below:
                                 
                Balance     Interest      
                Outstanding     Rate at      
    Secured   Maximum     at June 30,     June 30,      
Description(1)   Asset   Borrowings     2006     2006     Maturity Date
Secured Fixed Rate Debt:
                               
AEGON Partnership Note
  Greenway Plaza   $ 245,544     $ 245,544       7.53 %   July 2009
Prudential Note
  707 17th Street/Denver Marriott     70,000       70,000       5.22     June 2010
JP Morgan Chase III
  Datran Center     65,000       65,000       4.88     October 2015
Bank of America Note I
  Fairmont Sonoma Mission Inn     55,000       55,000       5.40     February 2011
Morgan Stanley I
  The Alhambra     50,000       50,000       5.06     October 2011
Allstate Life Note
  Financial Plaza     39,228       39,228       5.47     October 2010
Bank of America Note II
  The BAC – Colonnade Building     37,676       37,676       5.53     May 2013
Metropolitan Life Note VII
  Dupont Centre     35,500       35,500       4.31     May 2011
Column Financial
  Peakview Tower     33,000       33,000       5.59     April 2015
Mass Mutual Note (2)
  3800 Hughes     32,905       32,905       7.75     August 2006
Northwestern Life Note
  301 Congress     26,000       26,000       4.94     November 2008
JP Morgan Chase II
  3773 Hughes     24,755       24,755       4.98     September 2011
Allstate Note (2)
  3993 Hughes     24,406       24,406       6.65     September 2010
Metropolitan Life Note VI (2)
  3960 Hughes     22,547       22,547       7.71     October 2009
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     37,949       37,949       2.90 to 13.75     July 2007 to Sept. 2011
Secured Fixed Rate Defeased Debt (3):
                               
LaSalle Note I
  Funding I Defeasance     100,876       100,876       7.83     August 2007
Nomura Funding VI Note
  Funding VI Defeasance     7,330       7,330       10.07     July 2010
 
                         
Subtotal/Weighted Average
      $ 907,716     $ 907,716       6.38 %    
 
                         
Unsecured Fixed Rate Debt:
                               
The 2009 Notes
      $ 375,000     $ 375,000       9.25 %   April 2009
The 2007 Notes
        250,000       250,000       7.50     September 2007
 
                         
Subtotal/Weighted Average
      $ 625,000     $ 625,000       8.55 %    
 
                         
Secured Variable Rate Debt:
                               
KeyBank Construction Loan (4)
  Ritz-Carlton Dallas Construction   $ 175,000     $ 46,538       7.57 %   July 2008
GACC Note (4)
  Funding One Assets     165,000       165,000       6.67     June 2007
JPMorgan Chase
  Northstar Big Horn Construction     112,180       50,439       7.75     October 2007
Morgan Stanley II (5)(6)
  Mezzanine Investments     100,000       38,280       7.07     March 2009
Goldman Sachs(6)(7)
  Mezzanine Investments     100,000       10,000       6.77     May 2009
First Bank of Vail
  Village Walk Construction     62,457       9,260       7.75     February 2008
Guaranty Bank (8)(9)
  Paseo Del Mar Construction     53,100       26,784       6.86     September 2008
Societe Generale (8)
  3883 Hughes Construction     52,250       7,070       7.12     September 2008
Bank of America III (8)(9)
  Jefferson Station Apartments Construction     41,009       34,178       7.28     November 2007
US Bank(10)
  Beaver Creek Landing Construction     33,400       2,580       7.10     February 2008
National Bank of Arizona
        30,000       9,040       8.75     October 2007
California Bank & Trust(11)
  One Riverfront Construction     24,350       228       8.38     March 2008
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     129,971       75,422       6.44 to 9.25     July 2006 to Dec. 2012
 
                         
Subtotal/Weighted Average
      $ 1,078,717     $ 474,819       7.56 %    
 
                         
Unsecured Variable Rate Debt:
                               
Credit Facility (12)
      $ 387,633     $ 310,000       6.75 %   February 2008
Junior Subordinated Notes
        51,547       51,547       7.15     June 2035
Junior Subordinated Notes
        25,774       25,774       7.15     July 2035
 
                         
Subtotal/Weighted Average
      $ 464,954     $ 387,321       6.83 %    
 
                         
 
                               
Total/Weighted Average
      $ 3,076,387     $ 2,394,856       7.25 %(13)    
 
                         
 
                               
Average remaining term
                      3.6 years    
 
(1)   For more information regarding the terms of our debt financing arrangements and the method of calculation of the interest rate for our variable rate debt, see Note 9, “Notes Payable and Borrowings under the Credit Facility,” included in Item 1, “Financial Statements.”
 
(2)   Includes a portion of total premiums of $3.4 million reflecting market value of debt acquired with the purchase of Hughes Center portfolio. In July 2006, we extended the maturity of the Mass Mutual loan to January 2007.
 
(3)   We purchased U.S. Treasuries and government sponsored agency securities, or defeasance investments, to substitute as collateral for these loans. The cash flow from defeasance investments (principal and interest) matches the total debt service payment of the loans.
 
(4)   This loan has three one-year extension options.
 
(5)   The investments can be financed through March 2008, after which four equal payments are due quarterly. The loan has a provision for a one-year extension which is subject to Morgan Stanley’s approval.
 
(6)   The loans supporting these facilities are subject to daily valuations by Morgan Stanley and Goldman Sachs, respectively. We are subject to a margin call if the overall leverage of the facility exceeds certain thresholds.
 
(7)   The loan has a provision for a one-year extension which is subject to Goldman Sachs’ approval.
 
(8)   This loan has two one-year extension options.
 
(9)   Our partner provides a full guarantee of this loan.
 
(10)   This loan has one six-month extension option.
 
(11)   This loan has one one-year extension option.
 
(12)   The Credit Facility has a maximum potential capacity of $400.0 million. The $310.0 million outstanding at June 30, 2006, excludes letters of credit issued under the facility of $13.8 million. We are also subject to financial covenants, which include minimum debt service ratios, maximum leverage ratios and, in the case of the Operating Partnership, a minimum tangible net worth limitation and a fixed charge coverage ratio.
 
(13)   The overall weighted average interest rate does not include the effect of our cash flow hedge agreements. Including the effect of these agreements, the overall weighted average interest rate would have been 7.12%.

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          We are generally obligated by our debt agreements to comply with financial covenants, affirmative covenants and negative covenants, or some combination of these types of covenants. The financial covenants to which we are subject include, among others, leverage ratios, debt service coverage ratios and limitations on total indebtedness. The affirmative covenants to which we are subject under our debt agreements include, among others, provisions requiring us to comply with all laws relating to operation of any Properties securing the debt, maintenance of those Properties in good repair and working order, and maintaining adequate insurance and providing timely financial information. The negative covenants under our debt agreements generally restrict our ability to transfer or pledge assets or incur additional debt at a subsidiary level, limit our ability to engage in transactions with affiliates and place conditions on our or our subsidiaries’ ability to make distributions.
          Failure to comply with covenants generally will result in an event of default under that debt instrument. Any uncured or unwaived events of default under our loans can trigger an increase in interest rates, an acceleration of payment on the loan in default, and for our secured debt, foreclosure on the property securing the debt, and could cause the credit facility to become unavailable to us. In addition, an event of default by us or any of our subsidiaries with respect to any indebtedness in excess of $5.0 million generally will result in an event of default under the Credit Facility, the 2007 Notes, 2009 Notes and the KeyBank Construction Loan, Morgan Stanley II Loan, Goldman Sachs Loan and Societe Generale Construction Loan, after the notice and cure periods for the other indebtedness have passed. As a result, any uncured or unwaived event of default could have an adverse effect on our business, financial condition, or liquidity.
          Our secured debt facilities generally prohibit loan prepayment for an initial period, allow prepayment with a penalty during a following specified period and allow prepayment without penalty after the expiration of that period. During the six months ended June 30, 2006, there were no circumstances that required prepayment penalties or increased collateral related to our existing debt.
Warehouse Facilities
          We finance certain of our mezzanine loans through the use of warehouse facilities governed by repurchase agreements. A repurchase agreement is a financing under which we pledge one or more of our mezzanine investments as collateral to secure a loan with the repurchase agreement counterparty (i.e. lender). The amount borrowed under a repurchase agreement is limited to a specified percentage, generally not more than 80%, of the estimated market value of the pledged collateral. Repurchase agreements take the form of a sale of the pledged collateral to a lender at an agreed upon price in return for such lender’s simultaneous agreement to resell the same securities back to the borrower at a future date (i.e. the maturity of the borrowing), with periodic interest payments during the term of the sale. The cost of borrowings under repurchase agreements generally corresponds to LIBOR plus a margin. Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the lender maintains custody of such collateral. At the maturity of a repurchase agreement, we are required to repay the loan, which may be due in installments over a one-year period, and receive back our pledged collateral from the lender or, at the sole discretion of the lender, we may renew such agreement. Under repurchase agreements, a lender may require us to pledge additional assets to such lender (i.e. a margin call) in the event that the lender determines the estimated fair value of our existing pledged collateral has declined below a specified percentage. Our pledged collateral fluctuates in value due to, among other things, market changes in interest rates and matters affecting the real estate underlying certain pledged collateral.
          In order to reduce our exposure to counterparty-related risk, our goal is to enter into repurchase agreements with multiple financial institutions, all of whom have investment-grade long-term debt ratings. As of June 30, 2006, we had outstanding repurchase obligations under two repurchase agreements totaling $48.3 million with a weighted average borrowing rate of 7.01%.

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Debt Financing
          On July 31, 2006, we entered into a $50.0 million loan with KeyBank secured by excess cash flow distributions from Funding III, IV and V (Greenway Plaza). The loan bears interest at LIBOR plus 200 basis points with an interest-only term until maturity in January 2007. The loan also has an accordion option based on market availability to expand the facility to $75.0 million. The proceeds were used to pay down the credit facility.
Unconsolidated Debt Arrangements
          As of June 30, 2006, the total debt of the unconsolidated joint ventures and investments in which we have ownership interests was $2.1 billion, of which our share was $645.7 million. We guaranteed $5.3 million of this debt as of June 30, 2006. Additional information relating to our unconsolidated debt financing arrangements is contained in Note 8, “Investments in Unconsolidated Companies,” of Item 1, “Financial Statements.”
Derivative Instruments and Hedging Activities
     We use derivative financial instruments to convert a portion of our variable rate debt to fixed rate debt and to manage the fixed to variable rate debt ratio. As of June 30, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which converted $276.5 million of our variable rate debt to fixed rate debt. During the first quarter 2006, two interest rate swaps with a combined notional amount of $200.0 million expired. In April 2006, we entered into an interest rate swap struck at 5.20% to hedge 75% of our anticipated draws on our Ritz-Carlton construction loan.

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Unconsolidated Investments
     The following is a summary of our ownership in significant unconsolidated joint ventures and investments as of June 30, 2006.
             
        Our Ownership
        as of
Entity   Classification   June 30, 2006
Main Street Partners, L.P.
  Office (Bank One Center-Dallas)     50.0 %(1)
Crescent Irvine, LLC
  Office (2211 Michelson Office Development – Irvine)     40.0 %(2)
Crescent Miami Center, LLC
  Office (Miami Center – Miami)     40.0 %(3) (4)
Crescent One Buckhead Plaza, L.P.
  Office (One Buckhead Plaza – Atlanta)     35.0 %(5) (4)
Crescent POC Investors, L.P.
  Office (Post Oak Central – Houston)     23.9 %(6) (4)
Crescent HC Investors, L.P.
  Office (Houston Center – Houston)     23.9 %(6) (4)
Crescent TC Investors, L.P.
  Office (The Crescent – Dallas)     23.9 %(6) (4)
Crescent Ross Avenue Mortgage Investors, L.P.
  Office (Trammell Crow Center, Mortgage – Dallas)     23.9 %(7) (4)
Crescent Ross Avenue Realty Investors, L.P.
  Office (Trammell Crow Center, Ground Lessor – Dallas)     23.9 %(7) (4)
Crescent Fountain Place, L.P.
  Office (Fountain Place – Dallas)     23.9 %(7) (4)
Crescent Five Post Oak Park L.P.
  Office (Five Post Oak Park – Houston)     30.0 %(8) (4)
Crescent One BriarLake Plaza, L.P.
  Office (One BriarLake Plaza – Houston)     30.0 %(9) (4)
Crescent 1301 McKinney, L.P.
  Office (Fulbright Tower – Houston)     23.9 %(10) (4)
Houston PT Three Westlake Office Limited Partnership
  Office (Three Westlake Park – Houston)     20.0 %(11) (4)
Houston PT Four Westlake Office Limited Partnership
  Office (Four Westlake Park – Houston)     20.0 %(11) (4)
AmeriCold Realty Trust
  Temperature-Controlled Logistics     31.7 %(12)
CR Operating, LLC
  Resort/Hotel     48.0 %(13)
CR Spa, LLC
  Resort/Hotel     48.0 %(13)
East West Resort Development XIV, L.P., L.L.L.P.
  Resort Residential Development     26.8 %(14)
Blue River Land Company, L.L.C.
  Resort Residential Development     33.2 %(15)
EW Deer Valley, L.L.C.
  Resort Residential Development     35.7 %(16)
SunTx Fulcrum Fund, L.P. (SunTx)
  Other     26.8 %(17)
Redtail Capital Partners, L.P. (Redtail)
  Other     25.0 %(18) (4)
Fresh Choice, LLC
  Other     40.0 %(19)
G2 Opportunity Fund, L.P. (G2)
  Other     12.5 %(20)
 
(1)   The remaining 50% interest is owned by Trizec Properties, Inc.
 
(2)   The remaining 60% interest is owned by an affiliate of Hines.
 
(3)   The remaining 60% interest is owned by an affiliate of a fund managed by JPM.
 
(4)   We have negotiated performance based incentives, which we refer to as promoted interests, which allow for additional equity to be earned if return targets are exceeded.
 
(5)   The remaining 65% interest is owned by Metzler US Real Estate Fund, L.P.
 
(6)   Each limited partnership is owned by Crescent Big Tex I, L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.
 
(7)   Each limited partnership is owned by Crescent Big Tex II, L.P., which is owned 76.1% by a fund advised by JPM.
 
(8)   The remaining 70% interest is owned by an affiliate of GE.
 
(9)   The remaining 70% interest is owned by affiliates of JPM.
 
(10)   The partnership is owned by Crescent Big Tex III L.P., which is owned 60% by a fund advised by JPM and 16.1% by affiliates of GE.
 
(11)   The remaining 80% interest is owned by an affiliate of GE.
 
(12)   Of the remaining 68.3% interest, 47.6% is owned by Vornado Realty, L.P. and 20.7% is owned by The Yucaipa Companies.
 
(13)   The remaining 52% interest is owned by the founders of Canyon Ranch. CR Spa, LLC operates three resort spas which offer guest programs and services and sells Canyon Ranch branded skin care products exclusively at the destination health resorts and the resort spas. CR Operating, LLC operates and manages the two Canyon Ranch destination health resorts, Tucson and Lenox, and collaborates with select real estate developers in developing residential lifestyle communities.
 
(14)   We provided 41.9% of the initial capitalization and the venture is structured such that we own a 26.8% interest after we receive a preferred return on our invested capital. The remaining 73.2% interest is owned by parties unrelated to us. East West Resort Development XIV, L.P., L.L.L.P. was formed to co-develop a hotel and condominiums in Avon, Colorado.
 
(15)   The remaining 66.8% interest is owned by parties unrelated to us. Blue River Land Company, L.L.C. was formed to acquire, develop and sell certain real estate property in Summit County, Colorado.
 
(16)   The remaining 64.3% interest is owned by parties unrelated to us. EW Deer Valley, L.L.C. was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, L.L.C. was formed to acquire, develop and sell certain real estate property at Deer Valley Ski Resort next to Park City, Utah.
 
(17)   Of the remaining 73.2%, approximately 42.3% is owned by SunTx Capital Partners, L.P. and the remaining 30.9% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.1% is through an unconsolidated investment in SunTx Capital Partners, L.P., the general partner of SunTx. SunTx Fulcrum Fund, L.P.’s objective is to invest in a portfolio of entities that offer the potential for substantial capital appreciation.
 
(18)   The remaining 75% interest is owned by Capstead Mortgage Corporation. Redtail was formed to invest up to $100.0 million in equity in select mezzanine loans on commercial real estate over a two-year period.
 
(19)   The remaining 60% interest is owned by Cedarlane Natural Foods, Inc. Fresh Choice is a restaurant owner, operator and developer.
 
(20)   G2 was formed for the purpose of investing in commercial mortgage backed securities and other commercial real estate investments. The remaining 87.5% interest is owned by Goff-Moore Strategic Partners, L.P., or GMSPLP, and by parties unrelated to us. G2 is managed and controlled by an entity that is owned equally by GMSPLP and GMAC Commercial Mortgage Corporation, or GMACCM. The ownership structure of GMSPLP consists of an approximately 92% limited partnership interest owned directly and indirectly by Richard E. Rainwater, Chairman of our Board of Trust Managers, of which approximately 6% is owned by Darla Moore, who is married to Mr. Rainwater. Approximately 6% general partner interest is owned by John C. Goff, Vice-Chairman of our Board of Trust Managers and our Chief Executive Officer. The remaining approximately 2% general partnership interest is owned by unrelated parties.

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Significant Accounting Policies
Critical Accounting Policies
          A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2005, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to these policies during 2006.
Adoption of New Accounting Standards
          SFAS No. 123R. In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123R (Revised 2004), Share-Based Payment. The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. We were required to apply SFAS No. 123R beginning January 1, 2006. The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Effective January 1, 2003, we adopted the fair value expense recognition provisions of SFAS No. 123 on a prospective basis. We adopted SFAS No. 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006, for which the requisite service has not yet been rendered. Additionally, our prior interim periods and fiscal years do not reflect any restated amounts due to the adoption of SFAS No. 123R. We estimate an additional $1.4 million and $0.2 million of expense will be recorded in 2006 and 2007, respectively, for stock and unit options due to the adoption of SFAS No. 123R.
          EITF 04-5. At its June 2005 meeting, the Emerging Issues Task Force, or EITF, reached a consensus regarding Issue No. 04-5 (EITF 04-5), Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-5 was effective immediately for all newly-formed limited partnerships and for existing limited partnership agreements that are modified. The guidance is effective for existing limited-partnership agreements that are not modified no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The guidance provides a framework for addressing the question of when a general partner, as defined in EITF 04-5, should consolidate a limited partnership. The EITF has concluded that the general partner of a limited partnership should consolidate a limited partnership unless (1) the limited partners possess substantive kick-out rights as defined in paragraph B20 of FIN 46(R), Consolidation of Variable Interest Entities, or (2) the limited partners possess substantive participating rights similar to the rights described in Issue 96-16, Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders have Certain Approval or Veto Rights. The FASB has amended Statement of Position 78-9, Accounting for Investments in Real Estate Ventures, and EITF 96-16, to conform and align with the guidelines set forth in EITF 04-5. There was no impact to our financial condition or results of operations from the adoption of EITF 04-5.
          EITF 06-3. At its June 2006 meeting, the EITF ratified the consensus regarding Issue No. 06-3 (EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross versus Net Presentation). EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and certain excise taxes. The consensus indicates that gross vs. net income statement classification of those taxes within its scope is an accounting policy decision. In addition, for taxes within its scope, the consensus requires the following disclosures: the accounting policy elected for these taxes and the amounts of the taxes reflected gross (as revenue) in the income statement on an interim and annual basis. We do not believe there will be an impact to our financial condition or results of operations from the adoption of EITF 06-3.

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          FASB Interpretation 48. On July 13, 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. We are currently evaluating the impact, if any, to our financial condition and results of operations from the adoption of FIN 48.
Funds from Operations
FFO, as used in this document, means:
    Net Income (Loss) - determined in accordance with GAAP;
 
    excluding gains (or losses) from sales of depreciable operating property;
 
    excluding extraordinary items (as defined by GAAP);
 
    plus depreciation and amortization of real estate assets; and
 
    after adjustments for unconsolidated partnerships and joint ventures.
          We calculate FFO available to common shareholders – diluted in the same manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available to Common Shareholders and we include the effect of operating partnership unitholder minority interests.
          The National Association of Real Estate Investment Trusts, or NAREIT, developed FFO as a relative measure of performance and liquidity of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We consider FFO available to common shareholders – diluted and FFO appropriate measures of performance for an equity REIT and for its investment segments. However, FFO available to common shareholders - diluted and FFO should not be considered an alternative to net income determined in accordance with GAAP as an indication of our operating performance.
          Accordingly, we believe that to facilitate a clear understanding of our consolidated historical operating results, FFO available to common shareholders - diluted should be considered in conjunction with our net income and cash flows reported in the consolidated financial statements and notes to the financial statements. However, our measure of FFO available to common shareholders – diluted may not be comparable to similarly titled measures of other REITs because these REITs may apply the definition of FFO in a different manner than we apply it.

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Consolidated Statements of Funds from Operations
                                 
    For the three months ended     For the six months ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Net income (loss)
  $ 3,291     $ (5,542 )   $ (1,790 )   $ (6,829 )
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders - diluted:
                               
Depreciation and amortization of real estate assets
    32,514       38,039       64,553       68,793  
Gain on property sales
    (4,407 )     (1,188 )     (4,520 )     (3,777 )
Adjustment for investments in unconsolidated companies:
                               
Office Properties
    4,871       4,956       10,255       10,079  
Resort Residential Development Properties
    (2,908 )     947       (6,000 )     (448 )
Resort/Hotel Properties
    1,172       999       2,293       1,809  
Temperature-Controlled Logistics Properties
    4,269       4,554       7,779       9,199  
Unitholder minority interest
    603       (973 )     (339 )     (1,200 )
Series A Preferred Share distributions
    (5,991 )     (5,991 )     (11,981 )     (11,981 )
Series B Preferred Share distributions
    (2,019 )     (2,019 )     (4,038 )     (4,038 )
 
                       
 
                               
Funds from operations available to common shareholders – diluted(1) (2)
  $ 31,395     $ 33,782     $ 56,212     $ 61,607  
 
                       
 
                               
Investment Segments:
                               
Office Properties
  $ 65,801     $ 54,505     $ 120,496     $ 106,930  
Resort Residential Development Properties
    3,273       11,056       4,308       15,963  
Resort/Hotel Properties
    7,784       7,637       18,414       19,081  
Temperature-Controlled Logistics Properties
    1,990       3,343       5,178       6,857  
Other:
                               
Corporate general and administrative
    (11,812 )     (11,063 )     (26,638 )     (21,392 )
Interest expense
    (32,644 )     (36,078 )     (66,054 )     (69,358 )
Series A Preferred Share distributions
    (5,991 )     (5,991 )     (11,981 )     (11,981 )
Series B Preferred Share distributions
    (2,019 )     (2,019 )     (4,038 )     (4,038 )
Income from mezzanine loans and other loans
    5,768       2,148       16,736       3,087  
Other(3)
    (755 )     10,244       (209 )     16,458  
 
                       
Funds from operations available to common shareholders - diluted(1) (2)
  $ 31,395     $ 33,782     $ 56,212     $ 61,607  
 
                       
 
                               
Basic weighted average shares outstanding
    101,632       99,676       101,555       99,594  
Diluted weighted average shares and units outstanding(4)
    122,187       117,485       122,100       117,338  
 
(1)   To calculate basic funds from operations available to common shareholders, deduct unitholder minority interest.
 
(2)   In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO available to common shareholders — as adjusted, which includes adjustments to exclude extinguishment of debt and impairment charges related to real estate assets and include the impact of gain on sale of developed properties and promoted interests. We provide this additional information because management utilizes it, in addition to FFO available to common shareholders – diluted, in making operating decisions and assessing performance, and because we believe that it also is useful to investors in assessing our operating performance.
                                 
    For the three months ended June 30,     For the six months ended June 30,  
(dollars in thousands)   2006     2005     2006     2005  
FFO available to common shareholders – diluted – NAREIT
  $ 31,395     $ 33,782     $ 56,212     $ 61,607  
Debt extinguishment charges related to the sale of real estate assets
          (668 )           388  
 
                       
FFO available to common shareholders – diluted – as adjusted
  $ 31,395     $ 33,114     $ 56,212     $ 61,995  
 
                       
 
(3)   Includes income from investment land sales, interest and other income, extinguishment of debt, income/loss from other unconsolidated companies, other expenses, depreciation and amortization of non-real estate assets, and amortization of deferred financing costs.
 
(4)   See calculations for the amounts presented in the reconciliation following this table.

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     The following schedule reconciles our basic weighted average shares to the diluted weighted average shares/units presented above (units are presented in share equivalents):
                                 
    For the three months ended     For the six months ended  
    June 30,     June 30,  
(in thousands)   2006     2005     2006     2005  
Basic weighted average shares:
    101,632       99,676       101,555       99,594  
Add: Weighted average units
    19,687       17,448       19,255       17,489  
Restricted shares and share and unit options
    868       361       1,290       255  
 
                           
 
                       
Diluted weighted average shares and units
    122,187       117,485       122,100       117,338  
 
                       
Item 3. Quantitative and Qualitative Disclosures About Market Risk
          No material changes in our market risk occurred from December 31, 2005 through June 30, 2006. Information regarding our market risk at June 30, 2006, is contained in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
          Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, or the Exchange Act, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. These controls and procedures are based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. Rules adopted by the SEC require that we present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
          Internal Control Over Financial Reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, using their cumulative knowledge, experience and judgment as appropriate, and effected by our employees, including management and our Board of Trust Managers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This process includes policies and procedures that:
  pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of our assets in reasonable detail;
 
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with the authorization procedures we have established; and
 
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of any of our assets in circumstances that could have a material adverse effect on our financial statements.
          Limitations on the Effectiveness of Controls. Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. In designing and evaluating our control system, management recognizes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any that may affect our operations have been detected.
          These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that our design will succeed in achieving its stated goals under all potential future conditions. Over time, our current controls may become inadequate because of changes in conditions that cannot be anticipated at the present time, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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          Scope of the Evaluation. The evaluations by our Chief Executive Officer and our Chief Financial Officer of our disclosure controls and procedures and our internal control over financial reporting included a review of procedures and our internal audit, as well as discussions with our Disclosure Committee, independent public accountants and others in our organization, as appropriate. In conducting the evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The evaluation of our disclosure controls and procedures and our internal control over financial reporting is done on a quarterly basis, so that the conclusions concerning the effectiveness of such controls can be reported in our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. Our internal control over financial reporting is also assessed on an ongoing basis by personnel in our accounting department and by our independent auditors in connection with their audit and review activities.
          The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and our internal control over financial reporting and to make modifications as necessary. Our intent in this regard is that the disclosure controls and procedures and internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal control over financial reporting. This information is important both for the evaluation generally and because the Section 302 certifications require that our Chief Executive Officer and our Chief Financial Officer disclose that information to the Audit Committee of our Board of Trust Managers and our independent auditors and also require us to report on related matters in this section of the Annual Report on Form 10-K. In the Public Company Accounting Oversight Board’s Auditing Standard No. 2, a “significant deficiency” is a “control deficiency,” or a combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected.
          Periodic Evaluation and Conclusion of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that such controls and procedures were effective as of the end of the period covered by this report.
          Changes in Internal Control Over Financial Reporting. We made no changes to our internal controls over financial reporting during the three months ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
Item 1A. Risk Factors
          A summary of our risk factors is included in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. There have been no significant changes to these risk factors during the quarter ended June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
          The annual meeting of our shareholders was held on May 8, 2006.
          Two proposals were submitted to a vote of shareholders as follows:
  (1)   The shareholders approved the election of the following individuals as our Trust Managers:
                 
Name   For   Withheld
Richard E. Rainwater
    87,768,563       2,292,174  
Anthony M. Frank
    87,593,446       2,467,291  
William F. Quinn
    87,863,113       2,197,624  
          The terms of office of the following Trust Managers continued after the meeting:
John C. Goff
Dennis H. Alberts
Robert W. Stallings
Paul E. Rowsey, III
Terry N. Worrell
  (2)   The shareholders approved, with 89,865,739 affirmative votes, 102,145 negative votes and 85,452 abst