Crescent Real Estate Equities Company
December 13, 2002
Re: Conditions for Use of Non-GAAP Financial Measures (File No. S7-43-02)
Dear Mr. Katz:
Crescent Real Estate Equities Company appreciates this opportunity to respond to the Securities and Exchange Commission regarding the proposals and questions set forth in Release No. 33-8145 and No. 34-46788 (the "Releases") relating to use of non-GAAP financial information. Crescent Real Estate Equities is a real estate investment trust that has been subject to the Commission's periodic reporting requirements since its initial public offering in May 1994.
We support the Commission's efforts to reform the use of non-GAAP financial measures by public companies and agree with the need to improve the transparency and quality of public disclosures, including pro forma financial information. Crescent Real Estate also supports the Commission's proposal that any non-GAAP financial measure be reconciled with the comparable GAAP measure, which must be presented with equal or greater prominence than that used for the comparable non-GAAP measure. We are concerned, however, that the proposed prohibition on the use of non-GAAP per share information in corporate earnings releases could be counterproductive to the interests of investors.
We use a non-GAAP measure, Funds From Operations (FFO), as a basis for making operating decisions and as the measure of profit or loss for our segment information, both in reporting to our chief operating decision maker and in assessing the resource needs and performance of a segment. Crescent Real Estate also uses FFO as an important supplemental indicator of our company's operating profitability. Additionally, investors have advised us that they consider these non-GAAP per-share measures, including Funds From Operations and Net Asset Value, to be important supplemental indicators of a real estate company's operating profitability and financial condition.
Reporting FFO, as well as other non-GAAP measures, on only an absolute basis and not on a per-share basis, would be inappropriate and potentially misleading since the issuance or repurchase of shares could affect the absolute measure. We therefore believe that reconciliation of non-GAAP per-share measures with comparable GAAP per-share measures would be more informative for investors than a prohibition on their use would be.
We recommend that the final rule allow per share reporting of non-GAAP measures and require that both the numerator (the non-GAAP measure) and the denominator (the applicable diluted number of shares) be reconciled to GAAP net income and to the number of diluted shares used to calculate GAAP net income per share, respectively. Crescent Real Estate has reconciled Funds From Operations to Net Income in its public disclosures since 1995, because we understand the importance of transparency and quality of public disclosures. This position agrees with the alternative suggested in "Questions regarding amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F" of the Releases.
Crescent Real Estate thanks the Commission for the opportunity to comment on this proposal. Please contact Jerry Crenshaw, Executive Vice President and Chief Financial Officer, at (817) 321-1492 if you have any questions regarding this letter.