摩根士丹利 (MS) 2002 Q3 法說會逐字稿

Good morning.

My name is Jay [INAUDIBLE], and I will be your conference facilitator today.

I would like to welcome everyone to the Crescent Real Estate third quarter 2002 earnings release conference call with our hosts, Mr. John Goff and Ms. Keira Moody.

All lines have been put on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

And questions will be taken in the order they are received.

If you would like to withdraw your question, you may do so by pressing the pound key.

In order to insure that all participants will be allowed to present their questions, we ask that each participant limit themselves to one question and one follow-up question before reentering the queue.

As a reminder, if you are on a speakerphone, please pick up your handset before presenting your question.

I would now like to turn the call over to our host, Ms. Keira Moody, Vice President of Investor Relations for Crescent Real Estate, Inc.

Thank you.

Ms. Moody, you may begin your conference.

Good morning, everyone, and welcome to our third quarter earnings call.

We appreciate your joining us on such a busy morning with the other calls.

I think there were seven at my last count.

In the room we have John Goff, CEO, Denny Alberts, President and COO, Jane Mody, EVP Capital Markets and Jerry Crenshaw, CFO.

We are hosting a live webcast, and we hope you'll had a chance to pull up the presentation investor supplement on our website.

I want to remind you that certain statements made in this call this morning may be considered forward-looking statements within the meaning of the federal securities laws.

Although we believe they are based upon a reasonable assumption, Crescent's future operations and actual performance may differ materially from those indicated in any forward-looking statements.

Additional information that could cause actual results to differ materially from these statements are detailed in the earnings release issued this morning, and from time to time in Crescent's S.E.C. reports.

I'll go ahead and turn the call over to John Goff.

Thank you, and good morning, everyone.

If you're following on our website, you can turn to slide 6, which is where I will start.

No question this is a very tough operating environment.

If we look at our principal economic gauges, specifically in our major markets, Dallas, Houston, Austin and Denver, it tells a pretty sobering story of a tough national economy.

The unemployment rate in these four principal markets on average improved over the second quarter of 2002, but slightly, about 50 basis points on average.

Job growth was worse in the third quarter compared to the second quarter with negative to slightly positive job growth market by market.

On an occupancy basis, on average occupancy dropped about 2% versus the national drop of about 3.2% quarter to quarter.

The market rate dropped 3% on average in our four major markets, which is about the same as the nation.

Sublease space leveled off in both Dallas and Denver.

It was up slightly in Houston and Austin.

Construction was leveled to down, still very low when you compare it to the inventory in these markets, which is a very good -- good sign.

Absorption was still negative with a few slightly positive absorption numbers here and there, but for the most part negative across the board.

However, in spite of all of those, I'd say, you know, generally negative points, there are signs of stabilization.

We're not seeing the downward momentum that we saw before, or we have been seeing over the last few quarters.

But certainly it's too early to spot a true recovery.

In addition, in spite of these negative factors we were able to maintain level occupancy quarter to quarter in our portfolio.

My gut tells me that we're going to be in for continued sideways to hopefully some spotty improvement as we see the national economy improve, but I think it's going to be a very slow process and will continue through 2003 and into 2004.

Slide 7, if you look at the traditional office demand model, which everyone, I think, follows, which is really simple, is that if you have national economic growth or regional economic growth that's gonna create jobs and jobs create office demand.

It's a really simple model, but issues exist in that model today which are somewhat unique.

Even though we're having anemic growth on a national level, it seems to be consumer driven, it's housing driven, it's consumer credit driven.

Its's not driven by corporate investment.

Capital expenditures just are not happening on a corporate basis.

Companies are not hiring.

They're focused on investments because they're having a heck of a time increasing their revenues.

I do feel that this is going to create an opportunity in our markets to benefit as jobs change location in the country as companies move to cheaper sites looking to cut their expenses.

And this is substantiated by the relocation interest and activity that we're seeing in Dallas which, according to the Chamber of Commerce in Dallas, is at a 10-year high.

And I'm not saying that is being exhibited yet fully in actual activity of relocation, but the level of activity they're seeing in interest in Dallas is at a 10-year high, and they say it's up 40% over 2001.

Slide 8, our strategy in this environment is to maintain the course.

We stay focused on our customers, providing good value for our customers, really focusing on providing terrific service because these relationships are important.

As we always say, it's much less expensive to retain an existing customer than to try to attract a new one.

Our renewals this year are at 1.6 million square feet of renewals and expansions on a year-to-date basis to our existing customer base, which represents a 62% retention rate.

Credit quality remains very good in our portfolio.

We have a $2.5 million reserve to take care of issues, which is 100% or better than 100% of our watch list.

It more than covers all receivables over 30 days.

Our bad debt expense is running right in line where where it was in 2001 and continues to remain on a very, I think, low level relative to the amount of revenues.

Expense management is a big focus for us.

Just by way of example, we've saved on a year-to-date basis energy costs of $15 million as a result of various energy management initiatives and large contracts that we entered into last year.

Financial flexibility is critical.

And we continue to focus on our balance sheet and improving our flexibility.

You know, it's interesting to look at the value arbitrage that continues to exist, in fact has even gotten greater.

In terms of looking at the public valuation of office assets versus the private valuation.

We have now sold and joint ventured approximately $1.6 billion of assets for a $150 million gain.

And this dates back to the point in time we initiated our strategic plan back in '99.

We continue to be net sellers in this environment.

We've sold $272 million of assets this year.

And it's interesting, if you try to extrapolate this, the value differential is enormous.

And it's something we're gonna continue to try to capture through further select sales and further joint ventures.

And joint ventures is clearly our preferred route to go.

The public value implied by our stock price versus the private value implied by recent sales activity as I said, is quite large.

If you look at kinds of the low end of our net asset value range of $22, that implies about a $132 square foot value to the office assets.

The average sales price per square foot price on our joint ventures and our office sales, which I would argue is relatively low because typically those assets, with the exception of the joint ventures, are not the same quality as what we have in our portfolio.

In other words, we've sold lesser quality assets and retained higher quality assets.

But that average price is $141 for this year.

With the stock at 15, that implies, if you start at that $131 with the 22 NAV, that implies a $100 per square foot value for office assets, versus what we're selling and JVing at 141.

You take that over the 28 million feet that we own, and that's over $1 billion of untapped value that we obviously from a strategic standpoint want to figure out how to capture.

We continue to try to enhance our liquidity.

We have $200 million of readily accessible capacity today.

We have had over $500 million of securities sold this year, both in unsecured debt as well as preferred equity.

We have retired our GMAC preferred partnership units which originally were 280 million, started the year at 218 million, and those were retired in August of this year.

Our portfolio quality I think continues to be very high, and we continue to improve it by culling both B assets as well as B markets.

We're out of what I would call the B markets, markets that we didn't feel had a lot of upside last year, and we continue to look for assets that are tough to lease and try to dispose of those.

We feel very good about the quality going forward and I feel very good about the markets going forward.

We continue to look at acquisition opportunities.

We are very tough in our underwriting in this environment.

We have been successful on one asset, which I'll cover in just a moment.

We have been unsuccessful on numerous assets.

And I think its's because we're pretty rigorous in the way with underwrite assets.

We're not going to sacrifice returns just simply to grow the portfolio.

Our preferred approach is to joint venture on these acquisitions, and we will do so where it makes sense.

We have a number of key partners that we're working with on joint ventures, and we like this because for the obvious reasons it enables us to leverage our capital and expertise and it does enhance the returns.

And we've become a much more efficient buyer of assets.

Slide 9, if you look at recent transactions, as I mentioned, we acquired the Johns Manville Plaza in August.

It was a $91 million acquisition of a 675,000 square foot building in downtown Denver.

It complements the MCI tower.

It's actually part of the same development.

So, we now control that entire development.

The initial going in cap rate is 9.3%.

That grows relatively quickly to well north of 10%.

On the joint venture front, we have executed two new joint ventures, one in August, which was 3 West Lake Park.

That was with GE Asset Management, acquiring an 80% interest for net proceeds of $47 million, representing a gain of over 17 million.

We joint ventured Miami Center in September with J. P. Morgan Asset Management, acquiring a 60% interest, representing $111 million in net proceeds and a net gain of over 5 million.

We also joint ventured our Sonoma Mission Inn and Spa with Fairmont, which provided additional capital to further improve that asset as well as giving us some additional liquidity.

And also, joint ventured the Ritz Carlton Palm Beach in October.

If you look at joint ventures in summary, we've now established seven joint ventures over the last 18 months for 570 million in told value.

We've generated $286 million of cash.

And I think most importantly we've increased our return on equity by an average of 200 to 400 basis points going into the transaction.

And that should increase as we are able to capture the value of the promotes that we negotiated in each of these transactions.

We really like this strategy because it leverages our infrastructure.

We're able to receive value for our management and leasing capabilities.

We're able to increase our return on equity.

We're able to increase our growth rate.

And we establish relationships with capital partners that we can do other things with, like acquiring new assets.

Slide 10, looking at our financial results, we met the consensus estimate for the quarter of 43 cents per share in FFO, which represented $50 million.

On a year-to-date basis our FFO is 167.3 million, or $1.42 per share.

Our guidance for 2002 remains the same, which is $2.00 to $2.10 per share in FFO.

I want to emphasize that we have several critical initiatives to meet that range, both in terms of lease termination fees, land sales, et cetera.

Nothing which is not typical for the fourth quarter for us -- the fourth quarter is always a big quarter for us and there are always a lot of initiatives like this that we need to achieve to hit estimates.

But this is not a typical economic environment that we're operating in, so I simply in caveating that reaffirmation, but we as it stands today feel good about hitting that range.

Initiating our range and guidance for 2003, we're going out with 1.80 to $2.05 per share in FFO.

This is at the low end of the range of $1.80, we're assuming further deterioration in the economy.

At the higher end of the range we're assuming no recovery, no material acquisitions.

And in this environment it's really tough to estimate going forward because it's just -- because of all the uncertainties in the environment and the potential war with Iraq, et cetera.

We're trying not to be too conservative.

We're trying to be realistic.

But our range as it stands today is $1.80 to $2.05 in FFO.

And as we go forward and complete our budgets here and work through the fourth quarter, we will certainly give you further guidance on that front.

Let me briefly address dividend coverage.

This is a hot topic across many REITs today.

We recognize that our coverage is tight at the moment.

When you look at -- when you look at the coverage on a CAV to pay out -- on a payout ratio basis.

But we do feel this is a temporary phenomena, that we have plenty of flexibility to address.

If you look at further deterioration in the portfolio, if you were to assume that and the resulting low end of our range of $1.80 in FFO for 2003, and you use an estimate of 50 cents per share for recurring capital expenses, you do get to a shortfall.

However, it's relatively modest compared to the size and scope of this company, and it's more than offset by the return of capital from our residential development business, which we estimate at 55 cents per share in 2003.

One other point I'd like to make is as a result of changing auditors from Arthur Andersen to Ernst & Young recently, we had to go back and reaudit our prior three years of financial statements.

This process was just completed.

We filed a 10K-A as a result of that, representing the new opinion that was issued by Ernst & Young.

We went through that with flying colors.

There were no changes or adjustments.

And I think this speaks to the quality and the integrity of our financial reporting systems.

We certainly feel with the stock where it is that it represents an extremely attractive value.

And you may have noticed that on October 16th of this year we announced that Richard Rainwater had exchanged a little over 3 million shares of his 4.15 million common shares back to partnerships, partnership units.

So, he converted 3.05 million shares to 1.525 partnership units.

This allows Richard and the company more flexibility to acquire shares going forward without Richard exceeding the 9.5% ownership limitation that's stipulated in our charter.

In addition, there will be a form 4 filed in the very near future, probably in the next -- probably this week where Richard is transferring approximately 500,000 shares or equivalent units to his wife.

This will have no change in the beneficial ownership of Richard and his family.

I will now turn over the call to Denny to cover our operating results.

Thank you, John.

John asked me to take a few minutes to bring you up to date on our third quarter business operation.

Basically office was slightly ahead of plan.

Resort and residential were on plan or slightly below.

I will give you in a few minutes some specific business segment guidance for the rest of the year and really try to give you a little more color on 2003, particularly in office.

If you'll turn to slide 11, we'll begin with the office segment.

As most of you know, our business strategy is focused on our core business, which is owning and managing high quality A and AA office buildings.

Our overall strategic plan over time is to grow the office portfolio from 70 to 80 to 85%.

As of 9/30 this year, our office portfolio was about 70% of our FFO, it was office.

And we were at 90.7% leased.

This compares to approximately 90.4% as of June and 90.5 percent as of March 31.

So, relatively flat over the last -- last three quarters.

I would say it seems like for us this year from a leasing standpoint we tend to take one step forward and one step back and one step forward and one step back in this market, particularly in Dallas, although we did have a -- I think a very good third quarter leasing.

And we've -- we have signed a couple of very nice leases already in the fourth quarter.

I'll cover that more in just a minute.

Like most office companies, our leasing is down on a year-over-year basis, a little over 300 basis points, which has impacted our same store NOI growth.

Our office FFO was $88 million in the third quarter.

This compares to $80.5 million in the second quarter and 80.6 million in the first quarter.

The third quarter we had higher than expected lease termination fees.

We had lower operating expenses and other income that was higher than the first and the second quarter.

We do, however, expect the fourth quarter to return to about $80 million, which would give us for the year approximately $329 million in office FFO.

In our last call I gave you guidance in the 320 to 329 million dollar range.

So, we expect to come in after tying into that range.

This level of FFO would give us an unleveraged return on invested capital for the office segment in excess of 11%.

As we explained on our last call, a large part of our year-over-year occupancy decline was caused by one specific lease, which was the ARCO lease of 400,000 feet, which expired in January.

This is in the CBD area of Denver.

We have been successful in backfilling now on a signed or in negotiation basis about 300,000 square feet of that space.

So, we feel pretty good.

We're seeing some good activity now in downtown Denver.

The ARCO lease was at $17, and the leases that we're signing right now are in the low 20s. 125,000 square feet of this space was converting MCI from a sublease to a direct lease.

Our rent is current with MCI through October.

Obviously we'll have to wait and see how much space they'll confirm in bankruptcy, and we think that is likely to occur late summer or early fall of next year.

But certainly we are recording rent only on a cash basis with MCI.

Overall the credit quality of the portfolio has held up well, and it's fairly consistent with last year.

We are, as John said, more than 100% reserved on our watch list.

And year to date we've charged off $1.9 million, or about .38 of 1% of our revenues.

This is almost exactly the same level that we charged off last year, which was about .4 on 500 million in revenues.

And I think -- I think the quality of our customer base is exemplary and a strong reason why we've been able to maintain, I think, a very comfortable level of charge offs has been selling off the assets and improving the overall quality of the portfolio.

As you can see on slide 11, our third quarter same store NOI growth was down 2.6%.

I think this is pretty consistent with a number of the other office REITs.

Our lower same store NOI growth was driven by the decline in year-over-year occupancy.

As I said earlier, in the third quarter we actually had a good quarter leasing.

We leased 1.4 million square feet.

However, we did record a 13% decline in net effective rent for the leases that we renewed.

Year to date it's a 3% decline.

The third quarter decline was primarily a result of two leases and not an overall trend in the portfolio.

In the third quarter we had a lease, the Caltex lease, which is in the 125 Carpenter building in Las Polinas -- expired.

It was a 250,000 foot lease.

The rate was $29 a foot.

This rent has been above market for a long time.

We have always anticipated this rolldown, and it is now here and affecting our quarterly numbers.

We just signed three very important leases to backfill that space totaling 150,000 feet.

The leases were signed on a full-service basis at $20 per foot, which is really quite a good rate in Las Polinas.

It's about $3.00 higher than the markets and some of our competitors.

Also, in Houston we had at 2 Houston Center a major lease that was renewed and some new leases signed, totaling about 230,000 feet.

The rent rolled down on this particular space from $25.50 to $21.75.

Again, we did expect this.

This was not exactly prime space in our buildings.

And as we have mentioned in the past, we've been able to hold our rents on the better space.

This happened to be some space that we wanted to move, so we took this 21.75 rent, it was actually to Shell, a very good credit, so we were pleased to go ahead and make this deal.

If you take the Las Polinas out of the totals and you take the 2 Houston Center lease out of the totals, our quarter over quarter net effective rent would have been flat.

So, these two leases did have a big impact in the third quarter.

As all of you know, and as John said, we're really focusing on relationships and customer service and effectively operating our business.

As many of you know, we were recognized last year by BOMA and TEL as one of the top five real estate companies in the United States for customer service.

The 2002 customer surveys have now been completed, and I'm happy to say our scores went up this year.

So, I'm very proud of our team.

We think that this on-site customer service is critical for customer retention.

As John said, the best customer that you can have is the one you've got.

And so, the name of the game in the office business is retention.

Our retention rate is 62%.

And we will continue to focus in this area.

In the fourth quarter we've got approximately 1.7 million square feet expiring.

Of that amount approximately 66% has been signed.

Or is in active negotiation.

And based on the leases that we've executed, the renewal rate is flat in the fourth quarter.

In 2003 we've got approximately 3.6 million square feet expiring.

And of that amount we have 68% now either signed or in active final negotiations.

I will say in Houston this figure is 83%.

We're very pleased with that.

And based on the leases that we've already signed for 2003, rents are up 6%.

So, we think that's a positive trend.

No doubt, as John said, 2003 is going to be a choppy year with the uncertainty in the economy and world affairs.

Business leaders continue to be slow making the decision to expand their space.

So, we are planning fairly conservatively for 2003.

I would see our occupancy for 2003 on an average to average basis being roughly flat.

However, near term I think the occupancy may drop somewhat, and it will be a result of really two large leases rolling in Dallas.

We've got 130,000 feet expiring at the Crescent.

This is KPMG space, which will expire in November.

The KPMG rate was $23 full service.

We have signed recently a renewal in the Crescent.

Not this space, but another renewal for 65,000 feet at $32.

So, we feel like the in place rent that we will be rolling from is -- is replaceable.

And actually, it should go up.

The second large expiration that we have is 150,000 feet of Nortel space located in Richardson.

This expires in January.

And again, this rent is reasonable.

It's $13.90.

But we have two pretty good-sized spaces that are going to take down the overall occupancy in Dallas for us for a period of time in the fourth quarter.

Let's turn to slide 12.

We continue to focus on our four key markets, Houston, Dallas, Austin and Denver.

Let's start with Houston.

Our portfolio was 92% leased at the end of September.

Again, this is exactly the same as we had last quarter, compared to 87% for the overall market.

As I said on the last call, the leasing velocity in Houston was picking up.

It's continued to do that.

Our rollover for 2003, as I said, is in, I think, excellent shape with 83% of that rollover already addressed.

Our 5 Houston Center project opened in November.

We had an excellent turnout to celebrate that.

We are about 90% committed.

We're 88% leased right now.

We are moving customers into the space.

We've got about 34% of our customers in.

It will be about 60% by the end of the year, and the rest will be moved in by the first quarter.

As many of you know, a lot of discussion about the Enron building.

The Enron building has now gone under contract, as you probably have heard, to a gentleman from New York for $102.5 million.

We were actively looking at that building, and we were in New York for the bid.

But as John said, our underwriting standards have been, I think, appropriate.

And this rice was a little rich for us.

So, we will not be involved in that transaction.

I think this transaction will cause a lot of space to come back on the market in a multi-tenant format.

So, I think we're going to continue to see pressure on downtown occupancies.

But I certainly am glad that our 2003 renewal position is in the shape it's in in Houston.

I think -- I think we're in excellent shape there.

Turn to slide 13.

The Dallas market continues to remain very competitive.

However, we are starting to see the sublet space starting to level off.

It's been that way now for the last couple of quarters.

It's actually down just a little bit.

I think the 2003 rental decline is about over.

We're looking for maybe an additional 3 to 5% in Dallas next year.

Rental concession packages have been up in Dallas, as all of you would expect.

They're up for us about $2.00 in total year-over-year.

But that's exactly what we budgeted.

And you know, quite frankly we thought at one point in time they may go up above that.

But they're up about $2.00 for us.

As of 9/30 we're 90% leased in Dallas compared to 82% for the overall class A market.

We are not as well positioned in Dallas as we are in Houston with respect to 2003 expirations.

In Dallas we're 58% addressed compared to, as I said, 83% in Houston.

I think 58% is okay.

But because of the KPMG and the Nortel space, as I said, we should expect Dallas -- our Dallas occupancy rates to go down somewhat in the first quarter.

The good news for Dallas remains that it is a capital constraint market.

There's only 700,000 feet of class A space under construction, which is not a lot given the inventory.

Turn to slide 14.

I wanted to take a quick look at the Dallas CBD market.

You hear a lot about the Dallas CBD being 26% vacant.

That is true.

But there is a real difference between AA, A, B and C space in the CBD.

AA space is 91% leased.

Then you see from the chart a big dropoff in A, B and C space.

A space is 80%, B space is 68%, and C space is only 52% leased.

And some of that space, and actually quite a bid of it, is really obsolete.

All of Crescent's 5.4 million square feet is AA, and we're 91% leased.

So, I think we're well positioned in that particular market.

John's already covered really the office joint venture acquisition disposition program that we had in the third quarter, which was quite active.

I would like to say that I think Ken Michelski and the investment team did an excellent job executing this plan.

I think the results were excellent.

And it was a busy third quarter.

Turn to slide 15.

Take a look at the resort business for just a second.

For the third quarter our resort same store occupancies were up 2%.

Our same store ADR was flat.

And our same store rev par was up.

But the same store NOI was down 13%.

So, the logical question is why and what happened?

The answer to that question is primarily Sonoma Mission Inn.

First off, we continue not to be able to generate the weekday traffic that we would like.

But specifically what caused Sonoma's operating numbers to decline in the third quarter was our food and beverage business, as well as the spa business.

They were well below expectations.

So, even though people were coming there, they were not spending the money for the F & B and for the spa treatment.

And so, as a result of this, Sonoma's net operating income ended up being about 30% below last year.

We, as John mentioned, have now entered into a joint venture and a new management contract with Fairmont.

We've been working on this for several months.

It is closed.

They are now operating Sonoma as the Fairmont Sonoma Mission Inn.

I think it was the right decision for us to bring in a leading resort operator.

They've got a very strong national marketing capability.

I think they're excellent at selling cross-services.

And so, we're real excited about this partnership, and we're -- we're excited about seeing what they'll be able to do for us in 2003.

Their early expectations are good, and so, we'll wait to see those results.

But for 2003 -- or 2002, excuse me, I think our consolidated resort FFO will be in the 32 to 39 million dollar range, which is with the guidance we gave you earlier.

Let's turn to slide 16 and take a look at residential.

The Woodlands lot sales were down in the third quarter compared to third quarter of 2001.

We think that the Woodlands will come in about 1,350 to 1, 450 in lot sales for this year.

This is down from their original budget of 1550 to 1800.

Slower demand for some of the larger lots has caused it to drop.

For the Woodlands to meet their 2002 budget, they'll need to realize certain commercial land sales, which has been very brisk and active.

Several of those are scheduled to close in the fourth quarter.

Desert Mountain had a slow third quarter, reporting only six lot sales.

For Desert Mountain to meet their 2002 FFO budget they'll need to have a good fourth quarter.

At Desert Mountain we just opened [INAUDIBLE] Clubhouse.

We had a series of celebrations and member parties, guest parties, prospect parties at this clubhouse over the last month.

We had actually over 1800 people attend these receptions.

And the early word here, it's generating a lot of activity.

The indicators for the fourth quarter with respect to sales are positive now.

The pipeline is beginning to build.

But as all of you know, Desert Mountain is a very fourth quarter-oriented business.

So, we're going to have to wait and see how that comes out.

Turn to slide 17, which is Harry Frampton's business, Crescent Resort Development.

Harry's had a good year.

His year to date vertical condo sales have reached 235 units.

This compares to 31units last year.

Likewise, their lot sales year to date have been 189 lots compared to 108 last year.

Not bad given the economy.

Harry does have one project that construction has been delayed.

And this is primarily because several of their customers have change orders.

They've changed the interiors of their units, which has delayed actually the closings.

These units are sold, but it looks like maybe 20 of the units may be shifted from the fourth quarter to the first quarter of '03.

It's a timing issue.

So, we'll have to wait and see what happens there.

There's about $2 million of FFO attached to those 20 units.

So, we'll see how that shakes out in the fourth quarter.

So, for 2002 we see consolidated residential FFO probably in the 55 to 60 million dollar range.

So, in summary, 2002 range is really based on executing several key operating initiatives.

As John said, the area that we have probably the least visibility on right now is residential because it is such a fourth quarter business.

But the early signs are positive.

John?

At this point in time we'll open it up for questions.

At this time I would like to remind everyone in order to ask a question please press the star, then the number 1 on your telephone keypad.

If your question has already been asked and answered, you may withdraw your question by pressing the pound key.

If you are on a speakerphone, please pick up your handset before presenting your question.

Please hold for your first question.

Your first question comes from Lee Steller, at Bank of America Security.

Good morning.

It's Alexa Hughes.

I had just one question on --- I was wondering if you could provide some color on your temperature-controlled business.

Sure.

Jerry, do you want to take it, or do you want me to take it?

Sure.

Let me just -- I'll make a quick comment here.

The cold storage business was, as we said, basically flat year to year in terms of EBITDA.

To be a little more specific, on a same store basis, we look at it typically excluding G & A, and it was up about 385,000 this year versus last year.

If you look at it including G & A because of overhead cuts that they've been able to institute, they were up about 1.4 million year-over-year.

Their occupancy is actually up to 77.5% from 75.5% year to year.

Okay, and I guess taking this the next step, any thoughts on pursuing a sale, et cetera?

Well, obviously lots of thoughts.

But I think the right action right now is to continue to let the team run the business and continue to improve the operating model there.

I still feel very confident in their ability to do that.

And we just simply need to give them the room and time to go execute.

You know, this is a tough economic environment not only for the real estate business, but also for a business like this.

And I think given the uncertainties and in the economy, they're doing a pretty darn good job.

And I'm frankly not dissatisfied with the result.

I'd certainly like to see more improvement, and I think we will over time.

Is there -- is there a specific strategic plan in place that you have confidence in, or is it just that you've seen an increase in some of the trends, you know, trend in occupancy increasing, et cetera, that's causing you to wait?

No, there's a very specific strategic plan, just like we have in each of our businesses.

There's a very specific plan that we've all agreed upon, all the partners agreed upon, and it's being executed.

And is there any specific guidance that you can provide on timing, on expected timing of the completion of the strategic plan?

No.

No, I don't think there's any additional color I can give you as to, you know, any potential target out there.

You know, the CEO had a lot of operating issues to get his arms around first, and he has done that.

He's changed the team up, he's changed the organizational structure up, he's wrung out overhead costs out of the business.

And now its's just a matter of execution.

And again, I feel very confident in his ability to execute.

Okay.

Switching gears to earnings for 2003, I was just hoping to get a little more detail on the range.

I think that you mentioned that at the low end it assumed further deterioration in the economy.

What does that mean?

How many basis points of deterioration in occupancy or same-store growth, et cetera?

You know, on an occupancy, Alexa, we're assuming 87% to on the high ends 91%.

We should ends up the year for 2002 on an average occupancy of 89 to 90%.

On a same store we're assuming on the low ends 4% to 5% down, to on the high end 2% up.

And as we work through the budget, we'll be able to give further guidance and clarification to our range.

But we are in the midst of kinds of the budgeting process and the budgeting cycle.

And we would like to see kind of what transpires over the next 60 to 75 days.

Okay.

And just to clarify, you mentioned that the high end assumes no recovery, no acquisitions.

But it looks like your projecting occupancy at the high end to increase about 100 to 200 basis points and same growth to be up.

Yeah.

Okay.

I just wanted to make sure that that was accurate.

Yeah, I would say flat to slightly up, that's correct.

Okay.

Thank you.

Your next question comes from Larry Raymond, CSFB.

Hi.

Thanks for the good work in trying to put the company back to track.

If I could follow up on Alexis' last question in getting some detail on the estimate range for next year, you provided a nice detail on segment basis expectations of FFO for '02.

Could you provide that same detail for '03, as well?

I know you've done so in the past.

Yeah, and we definitely will on the year-ends call, Larry.

As we're looking into the businesses, we really want to see what's going to transpire over the next 60 days for fourth quarter.

You know, we're giving some clarification on our range on the office, but we would like to basically see what transpires on the residential side as well as on the temperature control logistics side.

Okay.

One other quick question, then I'll yield the floor.

Your lease termination fee revenue, you alluded to that.

I know John mentioned that there should be some incremental revenue in the fourth quarter.

Could you provide some direction, what that calendar year amount could be, and what you might expect lease termination revenue to be next year?

Year to date right now we're at $4.7 million.

We're looking at fourth quarter could be anywhere from 3 to 7 million dollars.

Okay.

So, that would put us at 10 to 12.

I think historically we have been 5 to 10 on average.

Great.

Thanks.

Sure.

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