UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

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
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			59
Item 4.		Controls and Procedures			59
PART II: OTHER INFORMATION
Item 1A.		Risk Factors			61
Item 6.		Exhibits			61
Certifications of CEO and CFO Pursuant to Section 302
Certifications of CEO and CFO Pursuant to Section 906

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.

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.

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.

5

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.

6

CRESCENT REAL ESTATE EQUITIES COMPANY

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.

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.

     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.

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.

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.

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

		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

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:

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