e10vq
Table of Contents

 
 
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 September 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
or organization)
  (I.R.S. Employer Identification Number)
     
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 November 2, 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:
    102,741,892  
 
 

 


 

CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
             
        Page
PART I: FINANCIAL INFORMATION        
 
           
Item 1.
  Financial Statements        
 
           
 
  Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005 (unaudited)     3  
 
           
 
  Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 (unaudited)     4  
 
           
 
  Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2006 (unaudited)     5  
 
           
 
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)     6  
 
           
 
  Notes to Consolidated Financial Statements     7  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     59  
 
           
  Controls and Procedures     59  
 
           
PART II: OTHER INFORMATION        
 
           
  Risk Factors     61  
 
           
  Exhibits     61  
 Certifications of CEO and CFO Pursuant to Section 302
 Certifications of CEO and CFO Pursuant to Section 906

 


Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
                 
    September 30,     December 31,  
    2006     2005  
ASSETS:
               
Investments in real estate:
               
Land
  $ 192,946     $ 183,228  
Land improvements, net of accumulated depreciation of $34,783 and $29,784 at September 30, 2006 and December 31, 2005, respectively
    75,402       70,494  
Buildings and improvements, net of accumulated depreciation of $512,353 and $456,628 at September 30, 2006 and December 31, 2005, respectively
    1,901,077       1,760,920  
Furniture, fixtures and equipment, net of accumulated depreciation of $38,229 and $34,129 at September 30, 2006 and December 31, 2005, respectively
    40,079       37,236  
Land held for investment or development
    789,549       574,527  
Properties held for disposition, net
    4,016       28,918  
 
           
Net investment in real estate
  $ 3,003,069     $ 2,655,323  
 
               
Cash and cash equivalents
  $ 77,231     $ 86,228  
Restricted cash and cash equivalents
    74,666       84,699  
Defeasance investments
    113,599       274,134  
Accounts receivable, net
    47,754       56,356  
Deferred rent receivable
    65,799       70,074  
Investments in unconsolidated companies
    388,217       393,535  
Notes receivable, net
    253,279       219,016  
Income tax asset-current and deferred
    13,994       8,291  
Other assets, net
    276,126       294,206  
 
           
Total assets
  $ 4,313,734     $ 4,141,862  
 
           
 
               
LIABILITIES:
               
Borrowings under Credit Facility
  $ 301,000     $ 234,000  
Notes payable
    2,138,572       1,948,152  
Junior subordinated notes
    77,321       77,321  
Accounts payable, accrued expenses and other liabilities
    508,633       471,920  
Deferred tax liability
          1,093  
 
           
Total liabilities
  $ 3,025,526     $ 2,732,486  
 
           
 
               
COMMITMENTS AND CONTINGENCIES:
               
 
               
MINORITY INTERESTS:
               
Operating partnership, 11,429,173 and 11,416,173 units, at September 30, 2006 and December 31, 2005, respectively
  $ 101,919     $ 113,819  
Consolidated real estate partnerships
    54,498       53,562  
 
           
Total minority interests
  $ 156,417     $ 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 September 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 September 30, 2006 and December 31, 2005
    81,923       81,923  
Common shares, $0.01 par value, authorized 250,000,000 shares, 127,858,021 and 126,562,980 shares issued and 102,737,104 and 101,442,063 shares outstanding at September 30, 2006 and December 31, 2005, respectively
    1,279       1,266  
Additional paid-in capital
    2,294,264       2,271,888  
Deferred compensation on restricted shares
          (1,182 )
Accumulated deficit
    (1,103,547 )     (972,319 )
Accumulated other comprehensive income (loss)
    (1,162 )     1,385  
 
           
 
  $ 1,591,923     $ 1,702,127  
 
               
Less — shares held in treasury, at cost, 25,120,917 common shares at September 30, 2006 and December 31, 2005
    (460,132 )     (460,132 )
 
           
Total shareholders’ equity
  $ 1,131,791     $ 1,241,995  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 4,313,734     $ 4,141,862  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
(unaudited)
                                 
    For the three months     For the nine months  
    ended September 30,     ended September 30,  
    2006     2005     2006     2005  
REVENUE:
                               
Office Property
  $ 103,115     $ 96,283     $ 313,188     $ 277,849  
Resort Residential Development Property
    67,662       78,401       220,517       218,714  
Resort/Hotel Property
    33,870       35,787       104,609       105,546  
 
                       
Total Property revenue
  $ 204,647     $ 210,471     $ 638,314     $ 602,109  
 
                       
EXPENSE:
                               
Office Property real estate taxes
  $ 10,443     $ 9,509     $ 30,725     $ 29,421  
Office Property operating expenses
    40,863       40,574       122,006       114,446  
Resort Residential Development Property expense
    63,725       68,706       205,105       191,154  
Resort/Hotel Property expense
    25,170       26,531       78,441       81,989  
 
                       
Total Property expense
  $ 140,201     $ 145,320     $ 436,277     $ 417,010  
 
                       
 
                               
Income from Property Operations
  $ 64,446     $ 65,151     $ 202,037     $ 185,099  
 
                       
 
                               
OTHER INCOME (EXPENSE):
                               
Income from sale of investment in unconsolidated company
  $ 24,249     $     $ 28,546     $  
Income from investment land sales
    228             228       8,424  
Gain (loss) on joint venture of properties
    (6 )     276       (6 )     1,816  
Gain (loss) on property sales
    (12 )     (39 )     286       141  
Interest and other income
    10,743       7,412       35,921       20,622  
Corporate general and administrative
    (10,937 )     (11,751 )     (37,575 )     (33,143 )
Interest expense
    (34,569 )     (34,076 )     (100,623 )     (103,434 )
Amortization of deferred financing costs
    (2,025 )     (2,139 )     (5,638 )     (6,183 )
Extinguishment of debt
          (361 )           (2,028 )
Depreciation and amortization
    (37,330 )     (36,937 )     (110,966 )     (111,943 )
Other expenses
    (5,047 )     (1,686 )     (8,825 )     (2,362 )
Equity in net income (loss) of unconsolidated companies:
                               
Office Properties
    2,340       3,202       7,208       9,888  
Resort Residential Development Properties
    (333 )     (839 )     (457 )     (647 )
Resort/Hotel Properties
    (1,424 )     (733 )     (3,510 )     28  
Temperature-Controlled Logistics Properties
    (1,832 )     77       (4,432 )     (2,266 )
Other
    491       210       1,016       10,971  
 
                       
 
                               
Total other income (expense)
  $ (55,464 )   $ (77,384 )   $ (198,827 )   $ (210,116 )
 
                       
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES
  $ 8,982     $ (12,233 )   $ 3,210     $ (25,017 )
Minority interests
    (3,001 )     641       (3,569 )     150  
Income tax benefit
    3,337       754       7,663       2,299  
 
                       
 
                               
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  $ 9,318     $ (10,838 )   $ 7,304     $ (22,568 )
Income from discontinued operations, net of minority interests
    61       811       195       4,208  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
    (105 )     (64 )     (105 )     (64 )
Gain on sale of real estate from discontinued operations, net of minority interests
    50       89,735       139       91,238  
 
                       
 
                               
NET INCOME
  $ 9,324     $ 79,644     $ 7,533     $ 72,814  
 
Series A Preferred Share distributions
    (5,991 )     (5,991 )     (17,972 )     (17,972 )
Series B Preferred Share distributions
    (2,019 )     (2,019 )     (6,056 )     (6,056 )
 
                       
 
                               
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
  $ 1,314     $ 71,634     $ (16,495 )   $ 48,786  
 
                       
 
                               
BASIC EARNINGS PER SHARE DATA:
                               
Income (loss) available to common shareholders before discontinued operations
  $ 0.01     $ (0.19 )   $ (0.16 )   $ (0.46 )
Income from discontinued operations, net of minority interests
          0.01             0.04  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
                       
Gain on sale of real estate from discontinued operations, net of minority interests
          0.89             0.91  
 
                       
 
                               
Net income (loss) available to common shareholders – basic
  $ 0.01     $ 0.71     $ (0.16 )   $ 0.49  
 
                       
DILUTED EARNINGS PER SHARE DATA:
                               
Income (loss) available to common shareholders before discontinued operations
  $ 0.01     $ (0.19 )   $ (0.16 )   $ (0.46 )
Income from discontinued operations, net of minority interests
          0.01             0.04  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
                       
Gain on sale of real estate from discontinued operations, net of minority interests
          0.89             0.91  
 
                       
 
                               
Net income (loss) available to common shareholders – diluted
  $ 0.01     $ 0.71     $ (0.16 )   $ 0.49  
 
                       
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
                                        375,455       4       6,616                         6,620  
 
                                                                                                       
Accretion of Discount on Employee Stock Option Notes
                                                    (190 )                       (190 )
 
                                                                                                       
Issuance of Shares in Exchange for Operating Partnership Units
                                        919,586       9       16,132                         16,141  
 
                                                                                                       
Amortization of Stock Options
                                                    212                         212  
 
                                                                                                       
Reclassification of Deferred Compensation on Restricted Shares
                                                    (1,182 )     1,182                    
 
                                                                                                       
Amortization of Restricted Shares
                                                    788                         788  
 
                                                                                                       
Dividends Paid
                                                                (114,733 )           (114,733 )
 
                                                                                                       
Net Loss Available to Common Shareholders
                                                                (16,495 )           (16,495 )
 
                                                                                                       
Change in Unrealized Net Gain on Marketable Securities
                                                                      (641 )     (641 )
 
                                                                                                       
Change in Unrealized Net Gain on Cash Flow Hedges
                                                                      (1,906 )     (1,906 )
 
                                                                             
 
                                                                                                       
SHAREHOLDERS’ EQUITY, September 30, 2006
    14,200,000     $ 319,166       3,400,000     $ 81,923       25,120,917     $ (460,132 )     127,858,021     $ 1,279     $ 2,294,264     $     $ (1,103,547 )   $ (1,162 )   $ 1,131,791  
 
                                                                             
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
                 
    For the nine months ended  
    September 30,  
    2006     2005  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
 
               
Net income
  $ 7,533     $ 72,814  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    116,667       121,605  
Extinguishment of debt
          2,138  
Resort Residential Development cost of sales
    114,702       112,459  
Resort Residential Development capital expenditures
    (342,172 )     (255,585 )
Impairment charges related to real estate assets from discontinued operations
    125       75  
Income from investment land sales
    (228 )     (8,424 )
(Gain) loss on joint venture of properties
    6       (1,816 )
(Gain) loss on property sales
    (451 )     (107,480 )
Income from sale of investment in unconsolidated company
    (28,546 )      
Minority interests
    3,613       16,682  
Non-cash compensation
    10,805       7,114  
Amortization of debt premiums
    (1,551 )     (1,845 )
Equity in loss (earnings) from unconsolidated companies
    175       (17,974 )
Ownership portion of management fees from unconsolidated investments
    5,533       5,283  
Distributions received from unconsolidated companies
    4,911       12,109  
Change in assets and liabilities, net of acquisitions and dispositions:
               
Restricted cash and cash equivalents
    4,121       27,927  
Accounts receivable and notes receivable
    (19,001 )     6,147  
Deferred rent receivable
    4,274       (16,987 )
Current and deferred income taxes
    (6,796 )     (2,932 )
Other assets
    (9,794 )     (18,455 )
Accounts payable, accrued expenses and other liabilities
    33,387       41,814  
 
           
Net cash used in operating activities
  $ (102,687 )   $ (5,331 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from property sales
  $ 24,335     $ 236,572  
Proceeds from sale of investment in unconsolidated company and related property sales
    34,313        
Proceeds from joint venture partners
          144,193  
Acquisition of investment properties
    (30,675 )     (186,901 )
Development of investment properties
    (107,623 )     (49,177 )
Property improvements — Office Properties
    (9,590 )     (8,080 )
Property improvements — Resort/Hotel Properties
    (19,785 )     (5,076 )
Tenant improvement and leasing costs — Office Properties
    (46,849 )     (50,719 )
Resort Residential Development Properties investments
    (18,927 )     (23,470 )
Decrease (increase) in restricted cash and cash equivalents
    8,913       (3,160 )
Purchases of defeasance investments
          (115,710 )
Proceeds from defeasance investment maturities and other securities
    172,845       20,430  
Return of investment in unconsolidated companies
    21,988       21,777  
Investment in unconsolidated companies
    (20,496 )     (14,131 )
Increase in notes receivable
    (5,770 )     (67,479 )
 
           
Net cash provided by (used in) investing activities
  $ 2,679     $ (100,931 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
 
               
Debt financing costs
  $ (3,785 )   $ (9,867 )
Borrowings under Credit Facility
    284,000       550,300  
Payments under Credit Facility
    (217,000 )     (519,800 )
Notes payable proceeds
    233,201       370,026  
Notes payable payments
    (174,082 )     (257,510 )
Junior subordinated notes proceeds
          77,321  
Resort Residential Development Properties notes payable borrowings
    205,517       179,870  
Resort Residential Development Properties notes payable payments
    (96,269 )     (85,253 )
Capital distributions to joint venture partners
    (9,532 )     (6,271 )
Capital contributions from joint venture partners
    8,446       7,104  
Proceeds from exercise of share and unit options
    22,778       21,304  
Reissuance of Treasury Shares
          16  
Series A Preferred Share distributions
    (17,972 )     (17,972 )
Series B Preferred Share distributions
    (6,056 )     (6,056 )
Dividends and unitholder distributions
    (138,235 )     (133,128 )
 
           
Net cash provided by financing activities
  $ 91,011     $ 170,084  
 
           
 
               
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
  $ (8,997 )   $ 63,822  
 
               
CASH AND CASH EQUIVALENTS, Beginning of period
    86,228       92,291  
 
           
 
               
CASH AND CASH EQUIVALENTS, End of period
  $ 77,231     $ 156,113  
 
           
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 September 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), 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 86 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.
  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.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     
Mira Vista Development Corp. (MVDC)
  Non wholly-owned asset, consolidated – Mira Vista (98% interest), included in our Resort Residential Development Segment.
 
   
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 asset, 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 (59% 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, LLC – Three Peaks (33.2% interest), EW Deer Valley, LLC (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 cash flows are allocated to the partners.
     See Note 8, “Investments in Unconsolidated Companies,” for a table that lists our ownership in significant unconsolidated joint ventures and investments as of September 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.
Segments
     Our assets and operations consisted of four investment segments at September 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 September 30, 2006:
    Office Segment consisted of 74 office properties, which we refer to as the Office Properties, located in 28 metropolitan submarkets in eight states, with an aggregate of approximately 29.8 million net rentable square feet. Fifty-four of the Office Properties are wholly-owned and 20 are owned through joint ventures, two of which are consolidated and 18 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 28 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 September 30, 2006, AmeriCold operated 102 facilities, of which 86 were wholly-owned, one was partially-owned and fifteen were managed for outside owners. The 87 owned and partially-owned facilities, which we refer to as the Temperature-Controlled Logistics Properties, had an aggregate of approximately 445.1 million cubic feet (17.7 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 nine months ended September 30, 2006 and 2005, and total assets, consolidated property level financing, consolidated other liabilities and minority interests for each of these investment segments at September 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 nine month period ended September 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 for the years ended December 31, 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 Interpretation No. 46(R), Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51, or FIN 46R 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 (EITF 96-16). 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. In July 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. The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the beginning balance of accumulated deficit on January 1, 2007.
     SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The new FASB rule defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, to our financial condition or results of operations from the adoption of SFAS No. 157.
     SAB No. 108. In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, Financial Statements – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108), which is effective for fiscal years ending after November 15, 2006. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements. We do not believe there will be an impact to our financial condition or results of operations from the adoption of SAB No. 108.

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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 nine months ended September 30, 2006 and 2005, of basic and diluted earnings per share from “Income (loss) before discontinued operations” to “Net income (loss) available to common shareholders.” The tables also include weighted average shares on a basic and diluted basis.
                                                 
    For the three months ended September 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 EPS —
                                               
 
                                               
Income (loss) before discontinued operations
  $ 9,318       102,449             $ (10,838 )     100,663          
Series A Preferred Share distributions
    (5,991 )                     (5,991 )                
Series B Preferred Share distributions
    (2,019 )                     (2,019 )                
         
 
                                               
Income (loss) available to common shareholders before discontinued operations
  $ 1,308       102,449     $ 0.01     $ (18,848 )     100,663     $ (0.19 )
 
Income from discontinued operations, net of minority interests
    61                     811               0.01  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
    (105 )                   (64 )              
Gain on sale of real estate from discontinued operations, net of minority interests
    50                     89,735               0.89  
         
Net income available to common shareholders
  $ 1,314       102,449     $ 0.01     $ 71,634       100,663     $ 0.71  
         
                                                 
    For the three months ended September 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  
Diluted EPS —
                                               
 
                                               
Income (loss) before discontinued operations
  $ 9,318       102,449             $ (10,838 )     100,663          
Series A Preferred Share distributions
    (5,991 )                     (5,991 )                
Series B Preferred Share distributions
    (2,019 )                     (2,019 )                
Effect of dilutive securities:
                                               
Share and unit options
            1,614                       (1)          
         
Income (loss) available to common shareholders before discontinued operations
  $ 1,308       104,063     $ 0.01     $ (18,848 )     100,663     $ (0.19 )
 
                                               
Income from discontinued operations, net of minority interests
    61                     811               0.01  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
    (105 )                   (64 )              
Gain on sale of real estate from discontinued operations, net of minority interests
    50                     89,735               0.89  
         
Net income available to common shareholders
  $ 1,314       104,063     $ 0.01     $ 71,634       100,663     $ 0.71  
         
 
(1)   Share and unit options are not included because the effect of their conversion would be antidilutive to loss available to common shareholders before discontinued operations.
                                                 
    For the nine months ended September 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 — (1)
                                               
 
                                               
Income (loss) before discontinued operations
  $ 7,304       101,856             $ (22,568 )     99,936          
Series A Preferred Share distributions
    (17,972 )                     (17,972 )                
Series B Preferred Share distributions
    (6,056 )                     (6,056 )                
         
Loss available to common shareholders before discontinued operations
  $ (16,724 )     101,856     $ (0.16 )   $ (46,596 )     99,936     $ (0.46 )
 
Income from discontinued operations, net of minority interests
    195                     4,208               0.04  
Impairment charges related to real estate assets from discontinued operations, net of minority interests
    (105 )                   (64 )              
Gain on sale of real estate from discontinued operations, net of minority interests
    139                     91,238               0.91  
         
Net (loss) income available to common shareholders
  $ (16,495 )     101,856     $ (0.16 )   $ 48,786       99,936     $ 0.49  
         
 
(1)   Share and unit options are not included because the effect of their conversion would be antidilutive to loss available to common shareholders before discontinued operations.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The effect of the conversion of the Series A Convertible Cumulative Preferred Shares and the exchange of Operating Partnership units are not included in the computation of diluted EPS for the three and nine months ended September 30, 2006 and 2005, since the effect of the conversions are not dilutive.
Supplemental Disclosure to Statements of Cash Flows
                 
    For the nine months ended  
    September 30,  
(in thousands)   2006     2005  
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ (118,385 )   $ (116,317 )
 
           
 
               
Cash received (paid) for income taxes
  $ 867     $ (633 )
 
           
 
               
Interest capitalized – Office
  $ 3,795     $ 173  
Interest capitalized – Resort Residential Development
    16,093       14,716  
Interest capitalized – Resort/Hotel
    2,008       523  
 
           
Total interest capitalized
  $ 21,896     $ 15,412  
 
           
 
               
Supplemental disclosures of non cash activities:
               
 
               
Assumption of debt in conjunction with acquisition of Office Property
  $ 23,605     $  
 
               
Joint venture of Office Properties’ debt
  $     $ 158,350  
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.
     Selected financial information related to each segment for the three and nine months ended September 30, 2006 and 2005, and total assets, consolidated property level financing, consolidated other liabilities, and minority interests for each of the segments at September 30, 2006 and 2005, are presented in the following tables:

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected Financial Information:
                                                 
    For the three months ended September 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
  $ 103,115     $ 67,662     $ 33,870     $     $     $ 204,647  
Total Property expense
    51,306       63,725       25,170                   140,201  
 
                                   
 
Income from Property Operations
  $ 51,809     $ 3,937     $ 8,700     $     $     $ 64,446  
 
Total other income (expense)
    (586 )     (5,023 )     (5,795 )     (1,831 )     (42,229 )     (55,464 )
Minority interests and income taxes
    (1,399 )     3,230       339             (1,834 )     336  
Discontinued operations – net of minority interests
    51                         (45 )     6  
 
 
                                   
Net income (loss)
  $ 49,875     $ 2,144     $ 3,244     $ (1,831 )   $ (44,108 )   $ 9,324  
 
                                   
 
Depreciation and amortization of real estate assets
  $ 25,937     $ 2,620     $ 4,017     $     $     $ 32,574  
(Gain) loss on property sales
    (9,558 )     6                         (9,552 )
Promoted interests related to the sale of investment in unconsolidated companies
    (14,742 )                               (14,742 )
Adjustments for investment in unconsolidated companies
    5,770       (3,276 )     1,204       4,212             7,910  
Unitholder minority interest
                            1,774       1,774  
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
  $ 7,407     $ (650 )   $ 5,221     $ 4,212     $ (6,236 )   $ 9,954  
 
                                   
Funds from operations available to common shareholders–diluted
  $ 57,282     $ 1,494     $ 8,465     $ 2,381     $ (50,344 )   $ 19,278  
 
                                   
See footnotes following the table.
Selected Financial Information:
                                                 
    For the three months ended September 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
  $ 96,283     $ 78,401     $ 35,787     $     $     $ 210,471  
Total Property expense
    50,083       68,706       26,531                   145,320  
 
 
                                   
Income from Property Operations
  $ 46,200     $ 9,695     $ 9,256     $     $     $ 65,151  
 
Total other income (expense)
    (23,697 )     (5,156 )     (5,317 )     76       (43,290 )     (77,384 )
Minority interests and income taxes
    (1,365 )     858       151             1,751       1,395  
Discontinued operations, net of minority interests
    106,535                         (16,053 )     90,482  
 
 
                                   
Net income (loss)
  $ 127,673     $ 5,397     $ 4,090     $ 76     $ (57,592 )   $ 79,644  
 
                                   
 
Depreciation and amortization of real estate assets
  $ 27,208     $ 2,238     $ 4,219     $     $     $ 33,665  
(Gain) loss on property sales
    (105,847 )           39                   (105,808 )
Adjustments for investment in unconsolidated companies
    5,548       (2,161 )     1,004       4,530             8,921  
Unitholder minority interest
                            14,049       14,049  
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
    (73,091 )     77       5,262       4,530       6,039       (57,183 )
 
                                   
Funds from operations available to common shareholders — diluted
  $ 54,582     $ 5,474     $ 9,352     $ 4,606     $ (51,553 )   $ 22,461  
 
                                   
See footnotes following the table.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected Financial Information:
                                                 
    For the nine months ended September 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
  $ 313,188     $ 220,517     $ 104,609     $     $     $ 638,314  
Total Property expense
    152,731       205,105       78,441                   436,277  
 
                                   
 
Income from Property Operations
  $ 160,457     $ 15,412     $ 26,168     $     $     $ 202,037  
 
Total other income (expense)
    (44,927 )     (14,141 )     (16,709 )     (4,432 )     (118,618 )     (198,827 )
Minority interests and income taxes
    (2,640 )     6,380       1,751             (1,397 )     4,094  
Discontinued operations — net of minority interests
    156                         73       229  
 
 
                                   
Net income (loss)
  $ 113,046     $ 7,651     $ 11,210     $ (4,432 )   $ (119,942 )   $ 7,533  
 
                                   
 
Depreciation and amortization of real estate assets
  $ 77,374     $ 7,580     $ 12,173     $     $     $ 97,127  
Gain on property sales
    (13,920 )     (153 )                       (14,073 )
Promoted interests related to the sale of investment in unconsolidated companies
    (14,742 )                             (14,742 )
Adjustments for investment in unconsolidated companies
    16,025       (9,276 )     3,497       11,991             22,237  
Unitholder minority interest
                            1,435       1,435  
Series A Preferred share distributions
                            (17,972 )     (17,972 )
Series B Preferred share distributions
                            (6,056 )     (6,056 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
  $ 64,737     $ (1,849 )   $ 15,670     $ 11,991     $ (22,593 )   $ 67,956  
 
                                   
Funds from operations available to common shareholders—diluted
  $ 177,783     $ 5,802     $ 26,880     $ 7,559     $ (142,535 )   $ 75,489  
 
                                   
See footnotes following the table.
Selected Financial Information:
                                                 
    For the nine months ended September 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
  $ 277,849     $ 218,714     $ 105,546     $     $     $ 602,109  
Total Property expense
    143,867       191,154       81,989                   417,010  
 
                                   
 
                                               
Income from Property Operations
  $ 133,982     $ 27,560     $ 23,557     $     $     $ 185,099  
 
                                               
Total other income (expense)
    (67,411 )     (13,367 )     (16,487 )     (2,266 )     (110,585 )     (210,116 )
Minority interests and income taxes
    (3,402 )     2,899       2,923             29       2,449  
Discontinued operations — net of minority interests
    112,135                         (16,753 )     95,382  
 
                                               
 
                                   
Net income (loss)
  $ 175,304     $ 17,092     $ 9,993     $ (2,266 )   $ (127,309 )   $ 72,814  
 
                                   
 
                                               
Depreciation and amortization of real estate assets
  $ 79,737     $ 6,954     $ 15,769     $     $     $ 102,460  
Gain on property sales
    (109,155 )           (141 )           (289 )     (109,585 )
Adjustments for investment in unconsolidated companies
    15,627       (2,609 )     2,813       13,729             29,560  
Unitholder minority interest
                            12,849       12,849  
Series A Preferred share distributions
                            (17,972 )     (17,972 )
Series B Preferred share distributions
                            (6,056 )     (6,056 )
 
                                   
Adjustments to reconcile net income (loss) to funds from operations available to common shareholders — diluted
  $ (13,791 )   $ 4,345     $ 18,441     $ 13,729     $ (11,468 )   $ 11,256  
 
                                   
Funds from operations available to common shareholders—diluted
  $ 161,513     $ 21,437     $ 28,434     $ 11,463     $ (138,777 )   $ 84,070  
 
                                   
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 September 30, 2006(4)
  $ 2,104     $ 1,200     $ 367     $ 155     $ 488 (5)   $ 4,314  
Balance at December 31, 2005(4)
    2,024       969       338       162       649 (5)     4,142  
Consolidated Property Level Financing:
                                               
Balance at September 30, 2006
    (972 )     (252 )     (128 )           (1,165 )(6)     (2,517 )
Balance at December 31, 2005
    (851 )     (143 )     (59 )           (1,206 )(6)     (2,259 )
Consolidated Other Liabilities:
                                               
Balance at September 30, 2006
    (116 )     (311 )     (32 )           (50 )     (509 )
Balance at December 31, 2005
    (117 )     (287 )     (28 )           (41 )     (473 )
Minority Interests:
                                               
Balance at September 30, 2006
    (17 )     (32 )     (5 )           (102 )     (156 )
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 $8.5 million and $4.9 million for the three months ended September 30, 2006 and 2005, respectively and $33.9 million and $7.0 million for the nine months ended September 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 $88.1 million and $84.4 million at September 30, 2006 and December 31, 2005, respectively, by segment is as follows: Office $28.0 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 and Nomura Funding VI defeased debt. Balance at December 31, 2005 also includes Funding II defeased debt.
4. ACQUISITIONS
          During the nine months ended September 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.
5. DISCONTINUED OPERATIONS
          In accordance with SFAS 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,” impairments on the assets sold or held for sale have been presented as “Impairment charges related to real estate assets 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 nine months ended September 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 September 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.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Assets Held for Sale
          The following table indicates the major classes of assets of the Properties held for sale.
                 
(in thousands)   September 30, 2006     December 31, 2005  
Land
  $     $ 3,650  
Buildings and improvements
    3,998       31,639  
Accumulated depreciation
    (43 )     (7,465 )
Other assets, net
    61       1,094  
 
           
Net investment in real estate
  $ 4,016     $ 28,918  
 
           
          The following tables present income, impairment charges and gain on sale for the nine months ended September 30, 2006 and 2005, for properties included in discontinued operations.
                 
    For the nine months ended  
    September 30,  
(in thousands)   2006     2005  
Total revenues
  $ 674     $ 16,841  
Operating and other expenses
    (379 )     (8,335 )
Depreciation and amortization
    (63 )     (3,555 )
Unitholder minority interests
    (37 )     (743 )
 
           
Income from discontinued operations, net of minority interests
  $ 195     $ 4,208  
 
           
                 
    For the nine months ended  
    September 30,  
(in thousands)   2006     2005  
Impairment charges related to real estate assets
  $ (125 )   $ (75 )
Unitholder minority interests
    20       11  
 
           
Impairment charges related to real estate assets from discontinued operations, net of minority interests
  $ (105 )   $ (64 )
 
           
                 
    For the nine months ended  
    September 30,  
(in thousands)   2006     2005  
Realized gain on sale of properties
  $ 165     $ 107,339  
Unitholder minority interests
    (26 )     (16,101 )
 
           
Gain on sale of real estate from discontinued operations, net of minority interests
  $ 139     $ 91,238  
 
           
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 144,380 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 $7.0 million has been funded as of September 30, 2006. The development, which is currently underway, is scheduled for delivery in the second quarter of 2007. Upon completion, we will manage the property on behalf of the joint venture. We consolidate Parkway in accordance with FIN 46R, as it was determined to be a variable interest entity, or VIE, of which we are the primary beneficiary. JPMorgan Chase Bank has no recourse to Crescent.
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.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Four Westlake Park
     On September 26, 2006, we completed the sale of Four Westlake Park on behalf of Houston PT Four Westlake 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 $121.3 million and a net gain of approximately $55.0 million. Our share of the net gain, including a promoted interest of approximately $14.7 million, was approximately $24.2 million. Our share of the proceeds was approximately $28.7 million, which was used to pay down our 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 and return of our capital. Our equity commitment to the joint venture is $23.7 million, of which $13.5 million was funded as of September 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.
7. MEZZANINE INVESTMENTS
     The following table presents our mezzanine loans entered into during the nine months ended September 30, 2006. These loans are reflected in the “Notes receivable, net” line item in the Consolidated Balance Sheets. 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.
                                         
    Outstanding                   Interest Rate at    
(in millions)   Loan   Underlying   Maturity   September 30,   Fixed/
Date   Amount   Real Estate Asset   Date   2006   Variable
January 20, 2006   $ 15.0 (1)   Florida Hotel Portfolio Investment     2009       13.33 %   Variable
April 12, 2006     20.0 (2)   California Ski Resort     2009       9.83 %   Variable
May 8, 2006     28.8 (3)   New York City Residential     2007       18.16 %   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 September 30, 2006, we had approximately $186.2 million of mezzanine investments outstanding which mature in 2007 through 2010 and had a weighted average interest rate of 13.47%.

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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 September 30, 2006.
                     
                 
        Our Ownership
as of
       
Entity   Classification   September 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)        
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, LLC
  Resort Residential Development     33.2 %(15)        
EW Deer Valley, LLC
  Resort Residential Development     35.7 %(16)        
SunTx Fulcrum Fund, L.P. (SunTx)
  Other     26.7 %(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 interest, 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 and their affiliates. 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% economic 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, LLC 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, LLC was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, LLC 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 73.3%, approximately 42.5% is owned by SunTx Capital Partners, L.P. and the remaining 30.8% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.3% 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 September 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, 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, LLC, and EW Deer Valley, LLC; 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, LLC and EW Deer Valley, LLC; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail, Fresh Choice, LLC and G2.
     Summary Statements of Operations for the nine months ended September 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, LLC, and EW Deer Valley, LLC; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail, Fresh Choice, LLC and G2.
     Summary Statements of Operations for the nine months ended September 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, LLC and EW Deer Valley, LLC; and
 
    Other – This includes SunTx, SunTx Capital Partners, L.P., Redtail and G2.

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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets:
                                                 
    As of September 30, 2006  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics     Resort/Hotel     Development     Other     Total  
Real estate, net
  $ 1,867,432     $ 1,101,474     $ 112,111     $ 31,584                  
Cash
    80,129       174,935       37,363       2,170                  
Restricted cash
    29,370       54,577       224                        
Other assets
    248,993       153,750       15,068       17,095                  
 
                                       
Total assets
  $ 2,225,924     $ 1,484,736     $ 164,766     $ 50,849                  
 
                                       
 
                                               
Notes payable
  $ 1,183,835     $ 918,942     $ 95,000     $ 3,500                  
Other liabilities
    200,389       90,716       29,081       6,414                  
Preferred membership units
                107,770                        
Equity
    841,700       475,078       (67,085 )     40,935                  
 
                                       
Total liabilities and equity
  $ 2,225,924     $ 1,484,736     $ 164,766     $ 50,849                  
 
                                       
 
                                               
Our share of unconsolidated debt
  $ 340,869     $ 291,488     $ 45,600     $ 1,467     $ 14,255     $ 693,679  
 
                                   
 
                                               
Our investments in unconsolidated companies
  $ 171,031     $ 155,047     $ 1,878     $ 16,695     $ 43,566     $ 388,217  
 
                                   
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 nine months ended September 30, 2006  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics(1)     Resort/Hotel     Development     Other     Total  
Total revenues
  $ 256,393     $ 574,226     $ 109,117     $ 6,409                  
Operating expense
    127,709       479,388       96,150       8,853                  
 
                                       
Net Operating Income
  $ 128,684     $ 94,838     $ 12,967     $ (2,444 )                
 
                                               
Interest expense
  $ 51,568     $ 46,758     $ 4,490     $                  
Depreciation and amortization
    72,660       53,641       8,875                        
Preferred dividends
                9,334                        
Taxes and other (income) expense
    (2,248 )     (1,551 )     434       (376 )                
 
                                       
Total expenses
  $ 121,980     $ 98,848     $ 23,133     $ (376 )                
 
                                       
 
                                               
Gain on sale of assets
    65,014       2,095                              
 
                                       
 
                                               
Net income (loss)
  $ 71,718     $ (1,915 )   $ (10,166 )   $ (2,068 )                
 
                                       
 
                                               
Our equity in net income (loss) of unconsolidated companies
  $ 7,208     $ (4,432 )   $ (3,510 )   $ (457 )   $ 1,016     $ (175 )
 
                                   
 
(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 $3.4 million for the nine months ended September 30, 2006.
Summary Statements of Operations:
                                                 
    For the nine months ended September 30, 2005  
            Temperature-             Resort              
            Controlled             Residential              
(in thousands)   Office     Logistics(1)     Resort/Hotel     Development     Other     Total  
Total revenues
  $ 254,824     $ 592,893     $ 103,258     $ 9,327                  
Operating expense
    121,186       489,360       83,924       7,588                  
 
                                       
Net Operating Income
  $ 133,638     $ 103,533     $ 19,334     $ 1,739                  
 
                                               
Interest expense
  $ 50,634     $ 41,761     $ 4,077     $                  
Depreciation and amortization
    59,429       55,651       7,647                        
Preferred dividends
                8,950                        
Taxes and other (income) expense
    (396 )     1,113       2,059       (36 )                
 
                                       
Total expenses
  $ 109,667     $ 98,525     $ 22,733     $ (36 )                
 
                                       
 
                                               
Net income (loss)
  $ 23,971     $ 5,008     $ (3,399 )   $ 1,775                  
 
                                       
 
                                               
Our equity in net income (loss) of unconsolidated companies
  $ 9,888     $ (2,266 )   $ 28     $ (647 )   $ 10,971     $ 17,974  
 
                                   
 
(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 $3.4 million for the nine months ended September 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 September 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                    
            Outstanding at     Balance at     Interest Rate at              
    Our     September 30,     September 30,     September 30,              
Description   Ownership     2006     2006     2006     Maturity Date     Fixed/Variable (1)  
            (in thousands)     (in thousands)                          
Temperature-Controlled Logistics Segment:
                                               
AmeriCold Realty Trust
    31.72 %                                        
Goldman Sachs(2)
          $ 457,226     $ 145,032       6.89 %     5/11/2023     Fixed
Citigroup/Bank of America(3)
            430,000       136,396       6.58 %     6/9/2007     Variable
Other
            31,716       10,060     3.48% to 13.63%   12/15/2006 to 4/1/2017   Fixed
 
                                           
 
          $ 918,942     $ 291,488                          
 
                                           
 
                                               
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 %     105,109       52,555       8.22 %     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       6.56 %     1/9/2008     Variable
Crescent One BriarLake Plaza, L.P.
    30.00 %     50,000       15,000       5.40 %     11/1/2010     Fixed
Crescent Five Post Oak Park, L.P.
    30.00 %     43,838       13,151       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(8)
    40.00 %     24,627       9,851       8.08 %     3/7/2009     Variable
 
                                           
 
          $ 1,183,835     $ 340,869                          
 
                                           
 
                                               
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.(9)
    41.90 %   $ 3,500     $ 1,467       5.00 %     4/28/2008     Fixed
 
                                           
 
                                               
Other Segment:
                                               
Redtail Capital Partners One, LLC(10)
    25.00 %   $ 41,330     $ 10,333       7.13 %     8/9/2008     Variable
Fresh Choice, LLC
    40.00 %                                        
GE Capital Franchise Finance Corporation(11)
            4,477       1,791       10.10 %     1/1/2011     Variable
Various Loans and Capital Leases
            5,328       2,131     0.00% to 12.00%   1/1/2007 to 12/31/2029   Fixed
 
                                           
 
          $ 51,135     $ 14,255                          
 
                                           
 
                                               
Total Unconsolidated Debt
          $ 2,252,412     $ 693,679                          
 
                                           
Fixed Rate/Weighted Average
                            5.86 %   8.9 years        
Variable Rate/Weighted Average
                            7.07 %   0.8 years        
 
                                           
Total Weighted Average
                            6.26 %   6.2 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 one-year, interest-only financing that is collateralized by 21 of its owned and six of its leased temperature-controlled warehouses. The loan bears interest at LIBOR plus 125 basis points.
 
(4)    Senior Note — Note A: $77.7 million at variable interest rate, LIBOR plus 189 basis points, $4.5 million at variable interest rate, LIBOR plus 250 basis points with a LIBOR floor of 2.50%. Note B: $22.9 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)    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%.
 
(9)     We provided 41.90% of the initial capitalization and the venture is structured such that we own 26.82% of profits after we receive a preferred return on our invested capital.
 
(10)    This loan has one one-year extension option. Redtail Capital Partners One, LLC is owned 100% by Redtail. 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: $28.8 million at LIBOR plus 185 basis points and $12.5 million at LIBOR plus 170 basis points.
 
(11)    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 September 30, 2006, are shown below:
                                     
                Balance         Interest      
                Outstanding at         Rate at      
    Secured   Maximum     September 30,         September 30,      
Description   Asset   Borrowings     2006     Interest Calculation   2006     Maturity Date
Secured Fixed Rate Debt:
                                   
AEGON Partnership Note
  Greenway Plaza   $ 243,932     $ 243,932           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     39,089       39,089           5.47     October 2010
Bank of America Note II
  The BAC – Colonnade Building     37,558       37,558           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
  3800 Hughes     32,498       32,498           7.75     January 2007
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     24,216       24,216           6.65     September 2010
Metropolitan Life Note VI (2)
  3960 Hughes     22,312       22,312           7.71     October 2009
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     38,603       38,603           2.90 to 13.75     July 2007 to
September 2011
 
                                   
Secured Fixed Rate Defeased Debt(3):
                                   
LaSalle Note I
  Funding I Defeasance     100,462       100,462           7.83     August 2007
Nomura Funding VI Note
  Funding VI Defeasance     7,270       7,270           10.07     July 2010
 
                             
Subtotal/Weighted Average
      $ 905,195     $ 905,195           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 I (6)
  Ritz-Carlton Dallas Construction   $ 175,000     $ 65,150     LIBOR + 225 bps     7.58 %   July 2008
GACC Note (6) (7)
  Funding One Assets     165,000       165,000     LIBOR + 147 bps     6.80     June 2007
JPMorgan Chase
  Northstar Big Horn Construction     113,992       64,939     Prime – 50 bps     7.75     October 2007
Morgan Stanley II (8)
  Mezzanine Investments     100,000       38,280     LIBOR + 150 to 230 bps     7.29     March 2009
Goldman Sachs(8)
  Mezzanine Investments     100,000       10,000     LIBOR + 140 bps     6.73     May 2009
KeyBank II
  Distributions from Funding III, IV & V     75,000       50,000     LIBOR + 200 bps     7.33     January 2007
First Bank of Vail
  Village Walk Construction     62,457       21,468     Prime – 50 bps     7.75     February 2008
Guaranty Bank (9)(10)
  Paseo Del Mar Construction     53,100       35,745     LIBOR + 175 bps or Prime + 50 bps     7.31     September 2008
Societe Generale I (9) (11)
  3883 Hughes Construction     52,250       19,116     LIBOR + 180 bps     7.26     September 2008
Bank of America III (9)(10)
  Jefferson Station Apts Construction     41,009       37,231     LIBOR + 200 bps     7.33     November 2007
US Bank II
  Northstar Trailside Construction     36,000       336     LIBOR + 250 bps     7.83     March 2008
US Bank I (12)
  Beaver Creek Landing Construction     33,400       9,813     Prime – 115 bps     7.07     February 2008
National Bank of Arizona
  DMDC Assets     30,000       15,156     Prime + 50 bps     8.75     October 2007
California Bank & Trust(13)
  One Riverfront Construction     24,350       7,182     Prime + 12.5 bps     8.38     March 2008
Societe Generale II
  Gray’s Crossing Construction     22,209       11,483     LIBOR + 250 bps     7.84     July 2007
Chase Bank
  Old Greenwood Construction     21,000       19,008     Prime     8.25     March 2007
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     72,689       38,470     LIBOR + 125 to 450 bps or
Prime – 75 to 100 bps
    6.58 to 9.25     February 2007 to
December 2012
 
                             
Subtotal/Weighted Average
      $ 1,177,456     $ 608,377           7.36 %    
 
                             
 
Unsecured Variable Rate Debt:
                                   
Credit Facility (14)
      $ 380,335     $ 301,000     LIBOR + 160 bps     6.93 %   February 2008
Junior Subordinated Notes (15)
        51,547       51,547     LIBOR + 200 bps     7.49     June 2035
Junior Subordinated Notes (15)
        25,774       25,774     LIBOR + 200 bps     7.49     July 2035
 
                                   
 
                             
Subtotal/Weighted Average
      $ 457,656     $ 378,321           7.04 %    
 
                             
 
                                   
Total/Weighted Average
      $ 3,165,307     $ 2,516,893           7.26 %(16)    
 
                             
 
Average remaining term
                          3.2 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 properties 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 September 30, 2006, the effective interest rate of the debt including the premium and the outstanding principal balance at maturity:
                         
(dollars in thousands)                    
    Unamortized             Balance at  
Loan   Premium     Effective Rate     Maturity  
Allstate Note
  $ 1,004       5.19 %   $ 20,771  
Metropolitan Life Note VI
    1,200       5.68 %     19,239  
Northwestern Life Note II
    248       3.80 %     8,663  
 
                   
Total
  $ 2,452             $ 48,673  
 
                   
    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.
 
(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)    The rate on this loan decreases to LIBOR plus 170 basis points when the following are met: 85% leased and 75% occupied.
 
(12)     This loan has one six-month extension option.
 
(13)   This loan has one one-year extension option.
 
(14)    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 September 30, 2006, the maximum borrowing capacity under the credit facility was $380.3 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.
 
(15)    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.
 
(16)    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 7.22%.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     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
  $ 1,530,195       61 %     7.27 %   3.0 years
Variable Rate Debt
    986,698       39       7.24     3.4 years
 
                       
Total Debt
  $ 2,516,893       100 %     7.26 %(2)   3.2 years
 
                       
 
(1)    Balance excludes hedges. The percentages for fixed rate debt and variable rate debt, including the $301.8 million of hedged variable rate debt, are 72.8% and 27.2%, respectively.
 
(2)    Including the effect of hedge arrangements, the overall weighted average interest rate would have been 7.22%.
     Listed below are the aggregate principal payments by year required as of September 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
  $ 3,098     $ 507     $     $ 3,605  
2007
    423,395       100,279       250,000       773,674  
2008
    244,909       289       301,000       546,198  
2009
    282,467       320       375,000       657,787  
2010
    134,051       6,337             140,388  
Thereafter
    317,920             77,321       395,241  
 
                         
 
                             
 
  $ 1,405,840     $ 107,732     $ 1,003,321     $ 2,516,893  
 
                       
 
(1)     Based on contractual maturity and does not include extension options on Bank of America III Loan, Societe Generale Loan, Guaranty Bank Loan, KeyBank I Construction Loan, California Bank & Trust Loan, US Bank I 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, KeyBank I Loan, Morgan Stanley II Loan, Goldman Sachs Loan, Societe Generale I Construction Loan and KeyBank II Loan after the notice and cure periods for the other indebtedness have passed. As of September 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 nine months ended September 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 Finance Company, Crescent Real Estate Capital MS, L.P. and Crescent Real Estate Capital GS, L.P.

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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2006, approximately $38.3 million with a weighted average interest rate of 7.29% was outstanding under this agreement.
     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 September 30, 2006, approximately $10.0 million with an interest rate of 6.73% was outstanding under this agreement.
10. INTEREST RATE SWAPS AND CAPS
     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 September 30, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which are accounted for in conformity with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FASB Statement No. 133 and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
     The following table shows information regarding the fair value of our interest rate swaps and caps designated as cash flow hedge agreements, which are included in the “Other assets, net” and “Accounts payable, accrued expenses and other liabilities” line items in the Consolidated Balance Sheets, and additional interest expense and unrealized gains (losses) recorded in Accumulated other comprehensive income, or OCI, for the nine months ended September 30, 2006.
                                             
                                Additional   Change in
    Notional   Maturity   Reference   Fair Market   (Reduction)   Unrealized Gains
Effective Date   Amount   Date   Rate   Value   Interest Expense   (Losses) in OCI
(in thousands)                                            
Interest rate swaps
                                           
2/15/03
  $ 100,000     2/15/06     3.26 %   $     $ (147 )   $ (138 )
2/15/03
    100,000     2/15/06     3.25 %           (148 )     (139 )
9/02/03
    200,000     9/01/06     3.72 %           (1,603 )     (1,264 )
1/17/05
    36,000     10/16/06     3.74 %     24       6 (1)     (181 )
4/25/06
    58,047     12/26/07     5.20 %     (90 )     (1)     (90 )
9/29/06
    200,000     9/4/07     5.20 %     (16 )     (1 )     (16 )
 
                                     
 
                                           
 
                      $ (82 )   $ (1,893 )   $ (1,828 )
Interest rate caps
                                           
1/07/05
    7,800     2/01/08     6.00 %     2             (4 )
 
                                           
 
                                     
 
                      $ (80 )   $ (1,893 )   $ (1,832 )
 
                                     
 
(1)   A portion of the interest on the debt that this swap is hedging is capitalized.
     In addition, three of our unconsolidated companies have interest rate caps and swaps designated as cash flow hedges of which our portion of change in unrealized gains reflected in OCI was $(0.1) million for the nine months ended September 30, 2006.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     We have designated our cash flow hedge agreements as cash flow hedges of LIBOR-based monthly interest payments on a designated pool of variable rate LIBOR indexed debt. The interest rate swaps have been and are expected to remain highly effective. Changes in the fair value of these highly effective hedging instruments are recorded in OCI. The effective portion that has been deferred in OCI will be recognized in earnings as interest expense when the hedged items impact earnings. If an interest rate swap falls outside 80%-125% effectiveness for a quarter, all changes in the fair value of the hedge for the quarter will be recognized in earnings during the current period. If it is determined based on prospective testing that it is no longer likely a hedge will be highly effective on a prospective basis, the hedge will no longer be designated as a cash flow hedge in conformity with SFAS No. 133, as amended.
11. MARKETABLE SECURITIES
     The following tables present the cost, fair value and unrealized gains and losses as of September 30, 2006, and December 31, 2005, and the realized gains and change in OCI for the nine months ended September 30, 2006 and 2005, for our marketable securities.
                                                 
    As of September 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)
  $ 117,956     $ 117,513     $ (443 )   $ 274,134     $ 271,659     $ (2,475 )
Trading(2)
    648       702       N/A       690       728       N/A  
Available for sale(3)
    9,916       9,843       (73 )     20,284       20,852       568  
 
                                   
Total
  $ 128,520     $ 128,058     $ (516 )   $ 295,108     $ 293,239     $ (1,907 )
 
                                   
                                 
    For the nine months ended     For the nine months ended  
    September 30, 2006     September 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)
    10       N/A       138       N/A  
Available for sale(3)
    123       (641 )     (19 )     (338 )
 
                       
Total
  $ 133     $ (641 )   $ 119     $ (338 )
 
                       
 
(1)    Held to maturity securities are carried at amortized cost and consist of $113.6 million of defeasance investments, included in “Defeasance investments” in the accompanying Consolidated Balance Sheets, which 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 and $4.4 million of bonds. 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 September 30, 2006, these securities consist of $8.6 million of bonds, all of which were sold in the fourth quarter 2006, and $1.3 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
12. COMMITMENTS AND CONTINGENCIES
Guarantee Commitments
     The FASB issued Interpretation No. 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 and U.S. Bank National Association guarantees 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 September 30, 2006, are listed in the table below.
                 
    Guaranteed     Maximum  
    Amount     Guaranteed  
    Outstanding at     Amount at  
    September 30,     September 30,  
(in thousands)   2006     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  
CRDI — U.S. Bank National Association (5)
    8,449       20,393  
 
           
Total Guarantees
  $ 21,544     $ 33,488  
 
           
 
(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.
 
(5)   We entered into a Payment and Completion Guaranty with U.S. Bank National Association for the repayment of bonds that were issued by the Northstar Community Housing Corporation to fund construction of an employee housing project. The initial guaranty of $20.4 million decreases to $5.1 million once construction is complete and certain conditions are met and decreases further and is eventually released as certain debt service coverage ratios are achieved.
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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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 nine months ended September 30, 2006, there were 459,793 units exchanged for 919,586 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.
     The following table summarizes minority interests as of September 30, 2006 and December 31, 2005:
                 
    September 30,     December 31,  
(in thousands)   2006     2005  
Limited partners in the Operating Partnership
  $ 41,763     $ 85,338  
Limited partners in the Operating Partnership — Units subject to redemption
    56,379       28,481  
Limited partners in the Operating Partnership — Unvested units subject to redemption
    3,777        
Development joint venture partners — Resort Residential Development Segment
    31,815       32,228  
Joint venture partners — Office Segment
    17,161       15,354  
Joint venture partners — Resort/Hotel Segment
    5,446       5,853  
Other
    76       127  
 
           
 
  $ 156,417     $ 167,381  
 
           
     The following table summarizes the minority interests’ share of net income (loss) before discontinued operations for the nine months ended September 30, 2006 and 2005:
                 
    September 30,     September 30,  
(in thousands)   2006     2005  
Limited partners in the Operating Partnership
  $ 1,391     $ (3,983 )
Development joint venture partners — Resort Residential Development Segment
    2,802       4,082  
Joint venture partners — Office Segment
    (524 )     168  
Joint venture partners — Resort/Hotel Segment
    (48 )     (546 )
Other
    (52 )     129  
 
           
 
  $ 3,569     $ (150 )
 
           

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDERS’ EQUITY
Distributions
     The following table summarizes the distributions paid or declared to common shareholders, unitholders and preferred shareholders during the nine months ended September 30, 2006.
(dollars in thousands, except per share amounts)
                                         
    Per Share                           Annual
    Dividend/   Total   Record   Payment   Dividend/
Security   Distribution   Amount   Date   Date   Distribution
Common Shares/Units(1)
  $ 0.375     $ 46,851 (2)     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  
Common Shares/Units(1)
    0.375       45,852 (2) (3)     7/31/06       8/15/06       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 A Preferred Shares
    0.422       5,991       7/31/06       8/15/06       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  
Series B Preferred Shares
    0.594       2,019       7/31/06       8/15/06       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.
15. 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 nine months ended September 30, 2006, was approximately $1.3 million, of which $1.1 million relates to additional expense recognized as a result of the adoption of SFAS No. 123R. For the nine months ended September 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 nine months ended September 30, 2006 and 2005 was $1.83 and $1.05 respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005, was $3.3 million and $2.3 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 nine months ended
    September 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 September 30, 2006, there was approximately $1.2 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 1.3 years.

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     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 nine months  
    ended September 30,     ended September 30,  
(in thousands, except per share amounts)   2005     2005  
Net income available to common shareholders, as reported
  $ 71,634     $ 48,786  
Add: Stock-based employee compensation expense included in reported net income
    4,294       7,375  
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interest
    (4,695 )     (8,591 )
 
           
Pro forma net income available to common shareholders
  $ 71,233     $ 47,570  
 
           
Income per share:
               
Basic and diluted — as reported
  $ 0.71     $ 0.49  
Basic and diluted — pro forma
  $ 0.71     $ 0.48  
     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 under shareholder approved plans.
     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 nine months ended September 30, 2006 and 2005, approximately $0.8 million was recorded as compensation expense related to this grant.
     A summary of the status of The Plans as of September 30, 2006, and changes during the nine months then ended is presented in the table below.
                                 
    Shares             Wtd. Avg.        
    Underlying     Wtd. Avg.     Years        
    Stock and     Exercise     Remaining     Aggregate  
    Unit     Price Per     Contractual     Intrinsic  
(in thousands, except per share amounts)   Options     Share     Term     Value  
Outstanding at January 1, 2006
    12,363     $ 18                  
Granted
    35       20                  
Exercised
    (1,296 )     18                  
Forfeited
    (8 )     15                  
Expired
    (8 )     18                  
 
                           
Outstanding at September 30, 2006
    11,086     $ 19       4.8     $ 42,316  
 
                       
 
                               
Exercisable at September 30, 2006
    9,363     $ 19       4.4     $ 34,977  
 
                       

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CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
     We obtained a third-party valuation to determine the fair value of the restricted units issued under the 2004 and 2005 Unit 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 nine months ended
    September 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
    23.0 %     23.1 %
     The weighted average grant-date fair value of the restricted units granted during the nine months ended September 30, 2006 and 2005, was $7.31 and $6.19, respectively, which is being amortized on a straight-line basis over the related service period, except for when performance targets are achieved. For the nine months ended September 30, 2006 and 2005, approximately $9.0 million and $6.4 million was recorded as compensation costs related to the 2004 and 2005 Unit Plans, respectively, of which approximately $0.8 million and $0.6 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 September 30, 2006
    3,171     $ 6.49  
     
     As of September 30, 2006, there was approximately $16.4 million of total unrecognized compensation cost related to nonvested units. That cost is expected to be recognized over a weighted average period of 2.4 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 nine months ended September 30, 2006 and 2005, was $7.6 million and $5.1 million, respectively.

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Table of Contents

CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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 nine months ended September 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 nine months ended September 30, 2006 and 2005, our income tax benefit from continuing operations was $7.7 million and $2.3 million, respectively. Our $7.7 million income tax benefit at September 30, 2006, consists primarily of $9.2 million for the Resort Residential Development Segment, which includes $1.7 million related to an IRS audit settlement of a charitable contribution deduction, and $1.7 million for the Resort/Hotel Segment, partially offset by $3.2 million tax expense for the Office Segment.
     At September 30, 2006, we had a net deferred tax asset of $14.0 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 nine months ended September 30, 2006.
17. RELATED PARTY TRANSACTIONS
Loans to Employees and Trust Managers of the Company for Exercise of Stock Options and Unit Options
     As of September 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 September 30, 2006. No conditions exist at September 30, 2006 which would cause any of the loans to be in default.

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Table of Contents

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  
 
       
    42  
 
       
    48  
 
       
    53  
 
       
    55  
 
       
    56  
 
       
    57  

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Table of Contents

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:
  §   The results of our review of our strategic alternatives;
 
  §   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 and dispositions 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 of our resort residential segment to develop, sell and deliver 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 and Four Westlake Park in September 2006.
          Consistent with this strategy, we continually evaluate our existing portfolio for potential joint-venture opportunities. We currently hold 47% 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. In August 2006, we completed, with JMI Realty, a 232,330 square-foot, three-building complex in San Diego, California. We are also developing a 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 267,000 square-foot office building in Irvine, California, and we are co-developing, with Champion Partners, a 144,380 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 399 have been sold, 72 are currently in inventory and over 2,110 are scheduled for development over the next 14 years, and is expected to generate in excess of $4.7 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. In addition, we sometimes serve as the primary developer, such as The Ritz-Carlton-Phases I and II. 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 September 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 Chicago, Illinois, and others are under consideration or in negotiation.
     During 2006, we have conducted an extensive review of our strategic alternatives, and in late August received an offer to purchase certain assets. Our Board of Trust Managers established a special committee of independent trust managers to assist in its consideration of the strategic alternatives and to respond to the offer that was received. The Special Committee hired an independent investment banker and counsel to assist with its review. The Special Committee has rejected the offer received, and we are continuing to review our strategic alternatives. We do not expect to make any further announcements or provide further updates regarding our strategic review until the review has been completed or an announcement is otherwise required by federal securities laws.

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Recent Developments
Office Segment
Joint Ventures
Four Westlake Park
          On September 26, 2006, we completed the sale of Four Westlake Park on behalf of Houston PT Four Westlake 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 $121.3 million and a net gain of approximately $55.0 million. Our share of the net gain, including a promoted interest of approximately $14.7 million, was approximately $24.2 million. Our share of the proceeds was approximately $28.7 million, which was used to pay down our credit facility.
Paseo Del Mar
          The development of Paseo Del Mar, 232,330 square foot, three-building office complex in the Del Mar Heights submarket of San Diego, California, was completed in August 2006. The property is owned by Crescent-JMIR Paseo Del Mar LLC, a consolidated joint venture between Crescent and JMI Realty, in which Crescent owns 80%. We will manage the property on a fee basis.
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.
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 144,380 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 $7.0 million has been funded as of September 30, 2006. The development, which is currently underway, is scheduled for delivery in the second quarter of 2007. Upon completion, we will manage the property on behalf of the joint venture.
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.

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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 and in June 2006, we collected the second installment of the lease termination fee in the amount of $12.5 million. For the nine months ended September 30, 2006, we recognized $33.6 million in net termination fees, which includes accelerated termination fees and contractual full-service rents resulting from the re-lease of approximately 420,000 square feet. As of September 30, 2006, El Paso was current on all rent obligations.
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 and return of our capital. Our equity commitment to the joint venture is $23.7 million, of which $13.5 million was funded as of September 30, 2006.
Resort/Hotel
Park Hyatt Beaver Creek
          In the second quarter of 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 spa expansion and resort upgrades are expected to be completed in December 2006.
Temperature-Controlled Logistics
          On August 31, 2006, AmeriCold entered into a definitive agreement to acquire from ConAgra Foods, Inc., four refrigerated warehouse facilities and the lease on a fifth facility, with an option to purchase. These five warehouses contain a total of 1.7 million square feet and 48.9 million cubic feet. The aggregate purchase price, including closing costs, is approximately $190.0 million, consisting of $152.0 million in cash to ConAgra Foods and $38.0 million representing the recording of a capital lease obligation for the fifth facility. On October 10, 2006, AmeriCold assumed the leasehold on the fifth facility and the related capital lease obligation. AmeriCold expects to complete the balance of this acquisition in the first quarter of 2007.

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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.
                                         
(in millions)   Outstanding   Underlying   Maturity   Interest Rate at   Fixed/
Date   Loan Amount   Real Estate Asset   Date   September 30, 2006   Variable
January 20, 2006
  $ 15.0(1)     Florida Hotel Portfolio Investment
    2009       13.33 %   Variable
April 12, 2006
  $ 20.0(2)     California Ski Resort
    2009       9.83 %   Variable
May 8, 2006
  $ 28.8(3)     New York City Residential
    2007       18.16 %   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.
          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 September 30, 2006, we had approximately $186.2 million of mezzanine investments outstanding which mature in 2007 through 2010 and had a weighted average interest rate of 13.47%.
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 September 30 and December 31)
    89.8 %     88.5 %
Leased Occupancy(2) (at September 30 and December 31)
    91.8 %     90.8 %
In-Place Weighted Average Full-Service Rental Rate(3) (at September 30 and December 31)
  $ 22.80     $ 22.48  
Tenant Improvement and Leasing Costs per Sq. Ft. per year (three months ended September 30)
  $ 3.12     $ 3.20  
Tenant Improvement and Leasing Costs per Sq. Ft. per year (nine months ended September 30)
  $ 3.40     $ 3.41  
Average Lease Term(4) (three months ended September 30)
  5.5 yrs   5.7 yrs
Average Lease Term(4) (nine months ended September 30)
  5.9 yrs   5.9 yrs
Same-Store NOI(5) (Decline) (three months ended September 30)
    (1.1 )%     (1.1 )%
Same-Store NOI(5) (Decline) (nine months ended September 30)
    (1.8 )%     (1.0 )%
Same-Store Average Occupancy (three months ended September 30)
    88.9 %     86.8 %
Same-Store Average Occupancy (nine months ended September 30)
    88.4 %     87.3 %
 
(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 September 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.

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          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 September 30, 2006.
CRDI
                 
    For the three months ended September 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    91       67  
Resort Residential Unit Sales:
               
Townhome Sales
    14       24  
Condominium Sales
    4       13  
Equivalent Timeshare Sales
    5.01       6.01  
Average Sales Price per Resort Residential Lot
  $ 57     $ 166  
Average Sales Price per Resort Residential Unit
  $ 1,632     $ 1,012  
                 
    For the nine months ended September 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    161       284  
Resort Residential Unit Sales:
               
Townhome Sales
    17       24  
Condominium Sales
    38       68  
Equivalent Timeshare Sales
    11.63       12.47  
Average Sales Price per Resort Residential Lot
  $ 104     $ 87  
Average Sales Price per Resort Residential Unit
  $ 1,790     $ 939  
          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.
Desert Mountain
                 
    For the three months ended September 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
          6  
Average Sales Price per Lot (1)
  $     $ 1,086  
Resort Residential Unit Sales
    1        
Average Sales Price per Unit (1)
  $ 1,537     $  
 
(1)   Includes equity golf membership
                 
    For the Nine months ended September 30,
(dollars in thousands)   2006   2005
Resort Residential Lot Sales
    3       37  
Average Sales Price per Lot (1)
  $ 1,936     $ 1,047  
Resort Residential Unit Sales
    3        
Average Sales Price per Unit (1)
  $ 1,573     $  
 
(1)   Includes equity golf membership
          Desert Mountain is in the latter stages of development and management anticipates minor additions to its decreasing available inventory.

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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 September 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(2)
    9 %     51 %     87 %     88 %   $ 395     $ 367     $ 344     $ 322  
Upscale Business Class Hotels
    18 %     23 %     72 %     74 %   $ 138     $ 122     $ 100     $ 91  
                                                                 
    For the nine months ended September 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(2)
    19 %     145 %     77 %     71 %   $ 350     $ 333     $ 270     $ 236  
Upscale Business Class Hotels
    22 %     36 %     74 %     74 %   $ 137     $ 122     $ 102     $ 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)   Excludes the Park Hyatt Beaver Creek Resort and Spa which had 85 rooms taken out of service in April 2006. The onsite construction and closure of the spa has impacted performance at the property. The floor space occupied by 55 of these rooms is to be converted into 15 fractional units for sale in our Resort Residential Development Segment. The remaining space will be used to expand the Allegria Spa.

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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 nine months ended September 30, 2006 and 2005.
                 
    Total variance in     Total variance in  
    dollars between     dollars between  
    the three months ended     the nine months ended  
    September 30, 2006     September 30, 2006  
(in millions)   and 2005     and 2005  
REVENUE:
               
Office Property
  $ 6.8     $ 35.3  
Resort Residential Development Property
    (10.7 )     1.8  
Resort/Hotel Property
    (1.9 )     (0.9 )
 
           
Total Property revenue
  $ (5.8 )   $ 36.2  
 
           
 
               
EXPENSE:
               
Office Property real estate taxes
  $ 0.9     $ 1.3  
Office Property operating expenses
    0.3       7.6  
Resort Residential Development Property expense
    (5.0 )     14.0  
Resort/Hotel Property expense
    (1.3 )     (3.6 )
 
           
Total Property expense
  $ (5.1 )   $ 19.3  
 
           
 
               
Income from Property Operations
  $ (0.7 )   $ 16.9  
 
           
 
OTHER INCOME (EXPENSE):
               
Income from sale of investment unconsolidated company
  $ 24.2     $ 28.5  
Income from investment land sales
    0.2       (8.2 )
Gain on joint venture of properties
    (0.2 )     (1.8 )
Gain on property sales
          0.1  
Interest and other income
    3.3       15.3  
Corporate general and administrative
    0.8       (4.4 )
Interest expense
    (0.5 )     2.8  
Amortization of deferred financing costs
    0.1       0.5  
Extinguishment of debt
    0.4       2.0  
Depreciation and amortization
    (0.4 )     1.0  
Other expenses
    (3.3 )     (6.4 )
Equity in net income (loss) of unconsolidated companies:
               
Office Properties
    (0.9 )     (2.7 )
Resort Residential Development Properties
    0.5       0.2  
Resort/Hotel Properties
    (0.7 )     (3.5 )
Temperature-Controlled Logistics Properties
    (1.9 )     (2.2 )
Other
    0.3       (10.0 )
 
           
Total other income (expense)
  $ 21.9     $ 11.2  
 
           
 
               
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND INCOME TAXES
  $ 21.2     $ 28.1  
 
               
Minority interests
    (3.6 )     (3.7 )
Income tax benefit
    2.6       5.4  
 
           
 
               
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  $ 20.2     $ 29.8  
 
               
Income from discontinued operations, net of minority interests
    (0.8 )     (4.0 )
Impairment charges related to real estate assets from discontinued operations, net of minority interests
           
(Loss) gain on sale of real estate from discontinued operations, net of minority interests
    (89.7 )     (91.1 )
 
           
 
               
NET INCOME
  $ (70.3 )   $ (65.3 )
 
               
Series A Preferred Share distributions
           
Series B Preferred Share distributions
           
 
           
 
               
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
  $ (70.3 )   $ (65.3 )
 
           

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Comparison of the three months ended September 30, 2006 to the three months ended September 30, 2005.
Property Revenues
          Total property revenues decreased $5.8 million, or 2.8%, to $204.6 million for the three months ended September 30, 2006, as compared to $210.4 million for the three months ended September 30, 2005. The primary components of the decrease in total property revenues are discussed below.
    Office Property revenues increased $6.8 million, or 7.1%, to $103.1 million, primarily due to:
  §   an increase of $3.6 million in net lease termination fees (from $4.9 million to $8.5 million) primarily due to the El Paso lease termination and related re-leasing;
 
  §   an increase of $2.4 million from the 51 consolidated Office Properties (excluding properties acquired, disposed, or stabilized during 2005 and 2006) that we owned or had an interest in, primarily due to a 2.4 percentage point increase in average occupancy (from 86.0% to 88.4%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses, increased parking revenue and increased billable electricity; partially offset by a decline in full service weighted average rental rates; and
 
  §   an increase of $2.2 million from the acquisition of Financial Plaza in January; partially offset by
 
  §   a decrease of $0.6 million due to the disposition of the 5 Houston Center office property in December 2005; and
 
  §   a decrease of $0.6 million in third party management and leasing services related to a decrease in lease commission revenue at the Three Westlake Park Office Property.
    Resort Residential Development Property revenues decreased $10.7 million, or 13.6%, to $67.7 million, primarily due to:
  §   a decrease of $10.6 million in CRDI revenues related to product mix in lots and units available for sale in 2005 versus 2006 at Creekside Townhomes, Creekside - Phase II and Brownstones — Phase I, all in Denver, Colorado, Horizon Pass in Bachelor Gulch, Colorado, and Eagle Ranch in Eagle, Colorado, which had sales in the three months ended September 30, 2005, but reduced or no sales in the same period in 2006; partially offset by Old Greenwood and Northstar Ironhorse in Lake Tahoe, California, which had sales in the three months ended September 30, 2006, but reduced or no sales in the same period in 2005; and
    Resort/Hotel Property revenues decreased $1.9 million, or 5.3%, to $33.9 million, primarily attributable to:
  §   a decrease of $3.2 million in revenue at the Park Hyatt Beaver Creek related to a decrease in occupancy due to construction activity on the property and the closure of the Allegria Spa for expansion; partially offset by
 
  §   an increase of $0.9 million in revenue at the remaining Luxury Resort and Spa Properties primarily at the Fairmont Sonoma Mission Inn which experienced an 8% increase in revenue per available room (from $276 to $297) resulting from an increase of 9% in average daily rate (from $316 to $343) with occupancy remaining flat.
Property Expenses
          Total property expenses decreased $5.1 million, or 3.5%, to $140.2 million for the three months ended September 30, 2006, as compared to $145.3 million for the three months ended September 30, 2005. The primary components of the decrease in total property expenses are discussed below.
    Office Property expenses increased $1.2 million, or 2.4%, to $51.3 million, primarily due to:
  §   an increase of $2.0 million in operating expenses of the 51 consolidated Office Properties (excluding properties acquired, disposed, or stabilized in 2005 and 2006) that we owned or had an interest in primarily due to increased property taxes, utilities, general building expenses and cleaning expenses; and
 
  §   an increase of $1.2 million from the acquisition of Financial Plaza in January 2006; partially offset by
 
  §   a decrease of $1.4 million related to decreased leasing costs and consulting and legal fees.

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    Resort Residential Development Property expenses decreased $5.0 million, or 7.3%, to $63.7 million, primarily due to:
  §   a decrease of $7.7 million at CRDI primarily related to a decrease in cost of sales from product mix of lots and units available for sale in 2005 versus 2006 at Creekside Townhomes, Creekside — Phase II and Brownstones — Phase I, all in Denver, Colorado, Horizon Pass in Bachelor Gulch, Colorado, and Eagle Ranch in Eagle, Colorado, which had sales in the three months ended September 30, 2005, but reduced or no sales in the same period in 2006; partially offset by Old Greenwood and Northstar Ironhorse in Lake Tahoe, California, which had increased sales in the three months ended September 30, 2006, compared to the same period 2005.
    Resort/Hotel Property expenses decreased $1.3 million, or 4.9%, to $25.2 million, primarily due to a decrease in occupancy at the Park Hyatt Beaver Creek due to construction activity on the property and the closure of the Allegria Spa for expansion.
Other Income/Expense
          Total other income and expenses decreased $21.9 million, or 28.3%, to $55.5 million for the three months ended September 30, 2006, compared to $77.4 million for three months ended September 30, 2005. The primary components of the decrease in total other income and expenses are discussed below.
Other Income
          Other income increased $24.8 million, or 258.3%, to $34.4 million for the three months ended September 30, 2006, as compared to $9.6 million for the three months ended September 30, 2005. The primary components of the increase in other income are discussed below.
    Income from sale of investment in unconsolidated company increased $24.2 million due to the sale of the Four Westlake Park Office Property in September 2006.
 
    Interest and other income increased $3.3 million to $10.7 million primarily due to $3.2 million increase related to interest from mezzanine loans attributable to an increase of $79.4 million in the weighted average mezzanine loan balance (from $106.8 to $186.2) and a 1.50 percentage point increase in the weighted average interest rate (from 11.97% to 13.47).
 
    Equity in net income of unconsolidated companies decreased $2.7 million to a $0.8 million loss, primarily due to a decrease of $1.9 million in Temperature-Controlled Logistics equity in net income primarily attributable to decreased income in the transportation segment due to service with FEMA in 2005 in the wake of Hurricane Katrina.
Other Expenses
          Other expenses increased $2.9 million, or 3.3%, to $89.9 million for the three months ended September 30, 2006, compared to $87.0 million for the three months ended September 30, 2005. The primary components of the increase in other expenses are discussed below.
    Other expenses increased $3.3 million, to $5.0 million due primarily to legal and advisory fees for certain contemplated strategic alternatives.
 
    Interest expense increased $0.5 million, or 1.5%, to $34.6 million due to an increase of $144 million in the weighted average debt balance (from $2.315 billion to $2.459 billion) and a .24 percentage point increase in the hedged weighted average interest rate (from 6.90% to 7.14%); partially offset by an increase of $3.6 million in capitalized interest (from $5.9 million to $9.5 million).
 
    Corporate general and administrative costs decreased $0.8 million, or 6.8%, to $10.9 million due primarily to a decrease in compensation expense associated with restricted units granted under our long-term incentive compensation plans in December 2004 and May 2005 as a result of reaching the first performance target in August 2005, which resulted in acceleration of compensation expense.

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Income Tax Benefit
          The $2.6 million increase in the income tax benefit for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, is primarily due to a $1.8 million decrease in tax expense on the Resort Residential Development Properties primarily attributable to a decrease in taxable income for DMDC.
Discontinued Operations
          Income from discontinued operations on assets sold and held for sale decreased $90.5 million due primarily to a decrease of $89.7 million, net of minority interest, attributable to the gain on sale of three properties in 2005.
Comparison of the nine months ended September 30, 2006 to the nine months ended September 30, 2005.
Property Revenues
          Total property revenues increased $36.2 million, or 6.0%, to $638.3 million for the nine months ended September 30, 2006, as compared to $602.1 million for the nine months ended September 30, 2005. The primary components of the increase in total property revenues are discussed below.
    Office Property revenues increased $35.3 million, or 12.7%, to $313.2 million, primarily due to:
  §   an increase of $26.9 million in net lease termination fees (from $7.0 million to $33.9 million) primarily due to the El Paso lease termination and related re-leasing;
 
  §   an increase of $6.9 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 $6.4 million from the 51 consolidated Office Properties (excluding properties acquired, disposed, or stabilized during 2005 and 2006) that we owned or had an interest in, primarily due to a 1.7 percentage point increase in average occupancy (from 86.2% to 87.9%), increased expense recovery revenue related to the increase in occupancy and increased recoverable expenses and increased parking revenue; partially offset by a decline in full service weighted average rental rates; and
 
  §   an increase of $0.9 million due to the settlement of litigation pertaining to leases and license agreements in various Office Properties; partially offset by
 
  §   a decrease of $6.3 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 $1.8 million, or 0.8%, to $220.5 million, primarily due to:
  §   an increase of $15.4 million in CRDI revenues related to product mix in lots and units available for sale in 2006 versus 2005, primarily at Northstar Ironhorse, Gray’s Crossing and Old Greenwood, all in Lake Tahoe, California, and Hummingbird Lodge in Bachelor Gulch, Colorado, which had sales in the nine months ended September 30, 2006, but reduced or no sales in the same period in 2005; partially offset by Creekside — Phase II, Creekside Townhomes, Delgany and Brownstones — Phase I, all in Denver, Colorado, the Horizon Pass project in Bachelor Gulch, Colorado, and Eagle Ranch in Colorado, which had sales in the nine months ended September 30, 2005, but reduced or no sales in the same period in 2006; partially offset by
 
  §   a decrease of $12.4 million at DMDC primarily related to a decrease in lot sales revenue due to a decrease in lots sold (from 37 to 3); partially offset by an increase of $4.7 million in unit sales revenue due to the sale of three units in 2006.
    Resort/Hotel Property revenues decreased $0.9 million, or 0.9%, to $104.6 million, primarily attributable to:
  §   a decrease of $4.6 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; and
 
  §   a decrease of $3.7 million in revenue at the Park Hyatt Beaver Creek related to a decrease in occupancy due to construction activity on the property and the closure of the Allegria Spa for expansion; partially offset by
 
  §   an increase of $4.8 million in revenue at the remaining Luxury Resort and Spa Properties, primarily at the Fairmont Sonoma Mission Inn which experienced a 17% increase in revenue per available room (from $206 to $240) resulting from an increase of 5% in average daily rate (from $292 to $307) and an 8 percentage point increase in occupancy (from 70% to 78%); and
 
  §   an increase of $2.5 million in room revenue at the Business Class Hotel Properties primarily related to a 13% increase in revenue per available room (from $90 to $102) resulting from a 12% increase in average daily rate (from $122 to $137) with occupancy remaining flat.

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Property Expenses
          Total property expenses increased $19.3 million, or 4.6%, to $436.3 million for the nine months ended September 30, 2006, as compared to $417.0 million for the nine months ended September 30, 2005. The primary components of the increase in total property expenses are discussed below.
    Office Property expenses increased $8.9 million, or 6.2%, to $152.7 million, primarily due to:
  §   an increase of $6.5 million in operating expenses of the 51 consolidated Office Properties (excluding properties acquired, disposed or stabilized during 2005 and 2006) that we owned or had an interest in primarily due to increased property taxes, utilities, general building expenses, cleaning expenses, insurance expense and non-recoverable administrative expenses;
 
  §   an increase of $3.2 million from the acquisition of Financial Plaza in January 2006 and the Exchange Building in February 2005;
 
  §   an increase of $1.4 million in lease termination expense related to the termination of a retail lease at Hughes Center; and
 
  §   an increase of $0.6 million related to the cost of providing third party management and leasing services primarily related to the joint venture of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005; partially offset by
 
  §   a decrease of $2.8 million related to the joint venture of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.
    Resort Residential Development Property expenses increased $14.0 million, or 7.3%, to $205.1 million, primarily due to:
  §   an increase of $23.3 million in CRDI cost of sales related to product mix in lots and units available for sale in 2006 versus 2005, primarily at Northstar Ironhorse, Gray’s Crossing and Old Greenwood, all in Lake Tahoe, California, and Hummingbird Lodge in Bachelor Gulch, Colorado, which had sales in the nine months ended September 30, 2006, but reduced or no sales in the same period in 2005; partially offset by Creekside Phase II, Creekside Townhomes, Delgany and Brownstones – Phase I, all in Denver, Colorado, Horizon Pass in Bachelor Gulch, Colorado, and Eagle Ranch in Colorado, which had sales in the nine months ended September 30, 2005, but reduced or no sales in the same period 2006; and
 
  §   an increase of $2.3 million primarily due to marketing expenses related to the Ritz-Carlton Tower Residences and Regency Row and to The Residences at the Ritz-Carlton in Dallas, Texas; partially offset by
 
  §   a decrease of $12.1 million at DMDC primarily related to a decrease in cost of sales attributable to decreased lot sales.
    Resort/Hotel Property expenses decreased $3.6 million, or 4.4%, to $78.4 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; and
 
  §   a decrease of $2.3 million at the Park Hyatt Beaver Creek related to a decrease in occupancy due to construction activity on the property and the closure of the Allegria Spa for expansion; partially offset by
 
  §   an increase of $3.0 million at the remaining Luxury Resort and Spa Properties, primarily at Sonoma Mission Inn, related to an 8 percentage point increase in occupancy (from 70% to 78%).
Other Income/Expense
          Total other income and expenses decreased $11.2 million, or 5.3%, to $198.8 million for the nine months ended September 30, 2006, compared to $210.0 million for nine months ended September 30, 2005. The primary components of the decrease in total other income and expenses are discussed below.
Other Income
          Other income increased $15.7 million, or 32.0%, to $64.8 million for the nine months ended September 30, 2006, as compared to $49.1 million for the nine months ended September 30, 2005. The primary components of the increase in other income are discussed below.
    Income from sale of investment in unconsolidated company increased $28.5 million due to the sale of the Four Westlake Park and Chase Tower Office Properties in 2006.
 
    Interest and other income increased $15.3 million to $35.9 million primarily due to $16.7 million increase from mezzanine loans attributable to an increase of $99.4 million in the weighted average mezzanine loan balance (from $74.0 million to $173.4 million) and includes approximately $6.2 million in prepayment fees on two mezzanine loans that were paid off in first quarter 2006 and a 1.09 percentage point increase in the weighted average interest rate (from 11.81% to 12.90%);

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    Equity in net income of unconsolidated companies decreased $18.2 million primarily due to:
  §   a decrease of $10.0 million in Other equity in net income primarily attributable to a decrease of income from the G2 and SunTx investments;
 
  §   a decrease of $3.5 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;
 
  §   a decrease of $2.7 million in Office equity in net income due to a $1.1 million decrease at Bank One Center, $0.7 million decrease at Houston Center, and the disposition of 5 Houston Center in December 2005; and
 
  §   a decrease of $2.2 million in Temperature-Controlled Logistics equity in net income primarily attributable to decreased income in the transportation segment due to services with FEMA in 2005 in the wake of Hurricane Katrina.
    Income from investment land sales decreased $8.2 million due primarily 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 $1.8 million due to the gain from the joint venture of Fulbright Tower in February 2005 and One Buckhead Plaza in June 2005.
Other Expenses
          Other expenses increased $4.5 million, or 1.7%, to $263.6 million for the nine months ended September 30, 2006, compared to $259.1 million for the nine months ended September 30, 2005. The primary components of the increase in other expenses are discussed below.
    Other expenses increased $6.4 million, to $8.8 million due primarily to legal and advisory fees for certain contemplated strategic alternatives.
 
    Corporate general and administrative costs increased $4.4 million, or 13.3%, to $37.6 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 due to nine months of expense in 2006 for the May 2005 unit plan and as a result of reaching the third performance target in March 2006, which resulted in acceleration of compensation expense, as well as increased stock and unit option expense from the adoption of SFAS No. 123R and increased payroll and benefit costs.
 
    Interest expense decreased $2.8 million, or 2.7%, to $100.6 million due to an increase of $6.9 million in capitalized interest (from $15.0 million to $21.9 million); partially offset by an increase of $80 million in the weighted average debt balance (from $2.265 billion to $2.345 billion) and a 0.06 percentage point increase in the hedged weighted average interest rate (from 6.98% to 7.04%);
 
    Extinguishment of debt decreased $2.0 million due to the write-off of deferred financing costs associated with the reduction of the Bank of America Funding XII Term Loan, the payoff of the old credit facility and the payoff of the Fleet Term Loan, all in 2005.
Income Tax Benefit
          The $5.4 million increase in the income tax benefit for the nine months ended September 30, 2006, compared to the nine months ended September 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 $95.1 million to $0.2 million due to:
    a decrease of $91.1 million, net of minority interest, due to the gain on the sale of four office properties in 2005; and
 
    a decrease of $4.0 million, net of minority interest, due to the reduction of net income associated with properties held for sale in 2006 compared to 2005.

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Liquidity and Capital Resources
Overview
          Our primary sources of liquidity are cash flow from operations, our credit facility, construction loans and proceeds from asset sales and joint ventures. Our short-term liquidity requirements through September 30, 2007, consist primarily of our normal operating expenses, recurring principal and interest payments on our debt, resort residential development capital expenditures, capital expenditures for operating properties, potential redemption of restricted units of our Operating Partnership and distributions to our shareholders. Our long-term liquidity requirements are substantially similar to our short-term liquidity requirements, other than the level of debt obligations maturing after September 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 and additional borrowings. As of September 30, 2006, we had up to $65.6 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 September 30, 2007, we expect to make capital expenditures that are not in the ordinary course of operations of our business of approximately $162.1 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 September 30, 2006, we also had maturing debt obligations of $670.5 million through September 30, 2007, made up primarily of the maturity of the 2007 Notes, the GACC Note (which has three one-year extension options), Funding I Defeasance (to be repaid from proceeds of defeasance investments) and the KeyBank II loan. The 2007 Notes will be repaid using proceeds from new bonds, asset sales or additional leverage on under-leveraged assets. We intend to refinance the KeyBank II loan. In addition, $53.3 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 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 September 30, 2006, consist primarily of $1.8 billion of debt maturing after September 30, 2007. We also have $14.3 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 and committed projects.
          During the nine months ended September 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 borrowings under our credit facility.
         
    For the nine months ended  
(in millions)   September 30, 2006  
Cash used in Operating Activities
  $ (102.7 )
Cash provided by Investing Activities
    2.7  
Cash provided by Financing Activities
    91.0  
 
     
Decrease in Cash and Cash Equivalents
  $ (9.0 )
Cash and Cash Equivalents, Beginning of Period
    86.2  
 
     
Cash and Cash Equivalents, End of Period
  $ 77.2  
 
     
Operating Activities
          Our cash used in operating activities of $102.7 million is attributable to Property operations.
Investing Activities
          Our cash provided by investing activities of $2.7 million is primarily attributable to:
    $172.8 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;
 
    $34.3 million proceeds from sale of investment in unconsolidated company due to the sale of our interests in the Four Westlake Park and Chase Tower office properties;
 
    $24.3 million proceeds from property sales due to the sale of Waterside Commons Office Property in February 2006;
 
    $22.0 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.; and
 
    $8.9 million decrease in restricted cash.
The cash provided by investing activities is partially offset by:
    $107.6 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;
 
    $46.8 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;
 
    $29.3 million of property improvements for Office and Resort/Hotel Properties;
 
    $20.5 million additional investment in unconsolidated companies, primarily related to our investment in Riverfront Village and Redtail Capital Partners, L.P.;
 
    $18.9 million for development of amenities at the Resort Residential Development Properties; and
 
    $5.8 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 $91.0 million is primarily attributable to:
    $233.2 million proceeds from other borrowings, primarily due to the Bank of America loan secured by the Fairmont Sonoma Mission Inn, the Key Bank loan secured by distributions from Funding III, IV & V, 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;
 
    $109.2 million net proceeds from borrowings for construction costs at the Resort Residential Development Properties;
 
    $67.0 million net proceeds from borrowings under our credit facility;
 
    $22.8 million proceeds from the exercise of share and unit options; and
 
    $8.5 million proceeds from capital contributions from our joint venture partners.
The cash provided by financing activities is partially offset by:
    $174.1 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;
 
    $138.2 million distributions to common shareholders and unitholders;
 
    $24.0 million distributions to preferred shareholders;
 
    $9.5 million capital distributions to joint venture partners; and
 
    $3.8 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 September 30, 2006. Listed below are the aggregate required principal payments by year as of September 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
  $ 3,098     $ 507     $     $ 3,605     $ 54,328     $ 57,933  
2007
    423,395       100,279       250,000       773,674       186,340       960,014  
2008
    244,909       289       301,000 (1)     546,198       48,405       594,603  
2009
    282,467       320       375,000       657,787       17,322       675,109  
2010
    134,051       6,337             140,388       23,823       164,211  
Thereafter
    317,920             77,321       395,241       363,461       758,702  
 
                                   
 
  $ 1,405,840     $ 107,732     $ 1,003,321     $ 2,516,893     $ 693,679     $ 3,210,572  
 
                                   
 
(1)   Borrowings under the credit facility.

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Significant Capital Expenditures
          As of September 30, 2006, we had unfunded capital expenditures of approximately $176.4 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 September 30, 2006, and amounts remaining to be funded (future funding classified between short-term and long-term capital requirements):
                                         
            Amount Spent             Capital Expenditures  
    Total     as of     Amount     Short-Term     Long-Term  
    Project     September 30,     Remaining To     (Next 12     (12+  
(in millions) Project   Cost (1)     2006     Spend     Months) (2)     Months) (2)  
Consolidated:
                                       
Office Segment
                                       
3883 Hughes Center (3)
  $ 73.0     $ 44.9     $ 28.1     $ 28.1     $  
Paseo del Mar (4)
    65.4       55.8       9.6       8.8       0.8  
Parkway at Oakhill(5)
    24.6       8.5       16.1       8.9       7.2  
 
                                       
Resort Residential Development Segment
                                       
Ritz-Carlton Highlands(6)
    369.7       17.7       (7)            
Tahoe Mountain Club(8)
    94.4       84.7       7.3       7.3        
JPI Multi-family Investments Luxury Apartments(9)
    54.3       50.5       3.8       3.8        
The Ritz-Carlton – Phase I(10)
    202.7       103.2       99.5       93.2       6.3  
The Ritz-Carlton – Phase II(11)
    126.5       12.8       (12)            
 
                                       
Resort/Hotel Segment
                                       
Park Hyatt Beaver Creek(13)
    26.0       14.0       12.0       12.0        
 
                             
 
                                       
Total
  $ 1,036.6     $ 392.1     $ 176.4     $ 162.1     $ 14.3  
 
                             
 
(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 232,330 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 office complex was completed in August 2006.
 
(5)   In March 2006, we entered into a joint venture agreement with Champion Partners. The joint venture has committed to develop a 144,380 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 to be completed in 2007.
 
(6)   We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop a 172 room luxury hotel in Lake Tahoe, California. The new luxury property will also include the Ritz-Carlton Residences.
 
(7)   The funding of future potential capital expenditures is dependent upon obtaining a certain level of unit pre-sales, construction financing and obtaining a joint venture partner for 60% of the equity.
 
(8)   As of September 30, 2006, we had invested $84.7 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.
 
(9)   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.
 
(10)   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 to be completed in the third quarter of 2007. We have a $175.0 million construction line of credit from KeyBank for the construction of this project.
 
(11)   We entered into agreements with Ritz-Carlton Hotel Company, L.L.C. for us to develop an additional 96 Ritz-Carlton residences and 4 townhomes adjacent to the Phase I development.
 
(12)   The funding of future potential capital expenditures is dependent upon obtaining a certain level of unit pre-sales and construction financing.
 
(13)   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 spa expansion and resort upgrades 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        
                    Redemption Value        
                    at September 30,     Redeemable in  
(dollars in thousands)   Granted(1)     Vested(1)     2006(2)     2006(3)     2007(4)     2008  
2004 Plan
    3,568,500       2,147,500     $ 46,837     $ 43,719     $ 3,118     $  
2005 Plan
    2,187,500       437,500       9,542             9,433       109  
 
                                   
 
    5,756,000       2,585,000     $ 56,379     $ 43,719     $ 12,551     $ 109  
 
                                   
 
(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.
 
(3)   Amount is redeemable beginning December 1, 2006.
 
(4)   Amount is redeemable primarily beginning May 16, 2007.
Off-Balance Sheet Arrangements — Guarantee Commitments
          Our guarantees in place as of September 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)   September 30,     September 30,  
Debtor   2006     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  
CRDI – U.S. Bank National Association(5)
    8,449       20,393  
 
           
Total Guarantees
  $ 21,544     $ 33,488  
 
           
 
(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.
 
(5)   We entered into a Payment and Completion Guaranty with U.S. Bank National Association for the repayment of bonds that were issued by the Northstar Community Housing Corporation to fund construction of an employee housing project. The initial guaranty of $20.4 million decreases to $5.1 million once construction is complete and certain conditions are met and decreases further and is eventually released as certain debt service coverage ratios are achieved.
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 September 30, 2006, are shown below:
                                 
                Balance            
                Outstanding at     Interest Rate at      
    Secured   Maximum     September 30,     September 30,      
Description(1)   Asset   Borrowings     2006     2006     Maturity Date
Secured Fixed Rate Debt:
                               
AEGON Partnership Note
  Greenway Plaza   $ 243,932     $ 243,932       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     39,089       39,089       5.47     October 2010
Bank of America Note II
  The BAC – Colonnade Building     37,558       37,558       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     32,498       32,498       7.75     January 2007
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     24,216       24,216       6.65     September 2010
Metropolitan Life Note VI (2)
  3960 Hughes     22,312       22,312       7.71     October 2009
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     38,603       38,603       2.90 to 13.75     July 2007 to Sept. 2011
Secured Fixed Rate Defeased Debt(3):
                               
LaSalle Note I
  Funding I Defeasance     100,462       100,462       7.83     August 2007
Nomura Funding VI Note
  Funding VI Defeasance     7,270       7,270       10.07     July 2010
 
                         
Subtotal/Weighted Average
      $ 905,195     $ 905,195       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 I (4)
  Ritz-Carlton Dallas Construction   $ 175,000     $ 65,150       7.58 %   July 2008
GACC Note (4)
  Funding One Assets     165,000       165,000       6.80     June 2007
JPMorgan Chase
  Northstar Big Horn Construction     113,992       64,939       7.75     October 2007
Morgan Stanley II (5)(6)
  Mezzanine Investments     100,000       38,280       7.29     March 2009
Goldman Sachs(6)(7)
  Mezzanine Investments     100,000       10,000       6.73     May 2009
KeyBank II
  Distributions from Funding III, IV and V     75,000       50,000       7.33     January 2007
First Bank of Vail
  Village Walk Construction     62,457       21,468       7.75     February 2008
Guaranty Bank (8)(9)
  Paseo Del Mar Construction     53,100       35,745       7.31     September 2008
Societe Generale I (8)
  3883 Hughes Construction     52,250       19,116       7.26     September 2008
Bank of America III (8)(9)
  Jefferson Station Apts Construction     41,009       37,231       7.33     November 2007
US Bank II
  Northstar Trailside Construction     36,000       336       7.83     March 2008
US Bank I (10)
  Beaver Creek Landing Construction     33,400       9,813       7.07     February 2008
National Bank of Arizona
  DMDC Assets     30,000       15,156       8.75     October 2007
California Bank & Trust(11)
  One Riverfront Construction     24,350       7,182       8.38     March 2008
Societe General II
  Gray’s Crossing Construction     22,209       11,483       7.84     July 2007
Chase Bank
  Old Greenwood Construction     21,000       19,008       8.25     March 2007
Construction, Acquisition and other obligations
  Various Office and Resort Residential Assets     72,689       38,470       6.58 to 9.25     February 2007 to December 2012
 
                         
Subtotal/Weighted Average
      $ 1,177,456     $ 608,377       7.36 %    
 
                         
 
Unsecured Variable Rate Debt:
                               
Credit Facility (12)
      $ 380,335     $ 301,000       6.93 %   February 2008
Junior Subordinated Notes
        51,547       51,547       7.49     June 2035
Junior Subordinated Notes
        25,774       25,774       7.49     July 2035
 
                         
Subtotal/Weighted Average
      $ 457,656     $ 378,321       7.04 %    
 
                         
 
                               
Total/Weighted Average
      $ 3,165,307     $ 2,516,893       7.26 %(13)    
 
                         
Average remaining term
                      3.2 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 $2.5 million reflecting market value of debt acquired with the purchase of Hughes Center portfolio.
 
(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 investments can be financed through May 2009. The financing and maturity can be extended one year 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 $380.3 million. The $301.0 million outstanding at September 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 7.22%.

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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, 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 the Credit Facility, the 2007 Notes, 2009 Notes, KeyBank I Loan, Morgan Stanley II Loan, Goldman Sachs Loan, Societe Generale I Construction Loan and KeyBank II 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.
          As of September 30, 2006, no event of default had occurred, and we were in compliance with all covenants related to our outstanding debt. 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 nine months ended September 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 September 30, 2006, we had outstanding repurchase obligations under two repurchase agreements totaling $48.3 million with a weighted average borrowing rate of 7.17%.
Unconsolidated Debt Arrangements
          As of September 30, 2006, the total debt of the unconsolidated joint ventures and investments in which we have ownership interests was $2.3 billion, of which our share was $693.7 million. We guaranteed $5.3 million of this debt as of September 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 September 30, 2006, we had interest rate swaps and interest rate caps designated as cash flow hedges, which converted $301.0 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. In September 2006, an interest rate swap with a notional amount of $200.0 million and an interest rate at 3.72% expired and we entered into a new interest rate swap agreement with Bank of America with a notional amount of $200.0 million with an interest rate at 5.20% and a September 4, 2007, maturity date.

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Unconsolidated Investments
          The following is a summary of our ownership in significant unconsolidated joint ventures and investments as of September 30, 2006.
             
        Our Ownership
        as of
Entity   Classification   September 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)
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, LLC
  Resort Residential Development     33.2 %(15)
EW Deer Valley, LLC
  Resort Residential Development     35.7 %(16)
SunTx Fulcrum Fund, L.P. (SunTx)
  Other     26.7 %(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 interest, 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 and their affiliates. 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% economic 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, LLC 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, LLC was formed to acquire, hold and dispose of its 3.3% ownership interest in Empire Mountain Village, L.L.C. Empire Mountain Village, LLC 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 73.3%, approximately 42.5% is owned by SunTx Capital Partners, L.P. and the remaining 30.8% is owned by a group of individuals unrelated to us. Of our limited partnership interest in SunTx, 6.3% 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 for the years ended December 31, 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