摩根士丹利 (MS) 2002 Q4 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Crescent Real Estate year end 2002 earnings release conference call with our host, Ms. Keira Moody as the leader.

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

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press the star key and the number one on your telephone keypad and the 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 ensure that all participants will be allowed to present their questions, we ask that all participants limit themselves to one question and one follow-up question before reentering the cue.

As a reminder, if you are on a speaker phone, 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.

Thank you, Ms. Moody.

You may begin.

Thank you.

Good morning everyone and welcome to our year-end earnings call.

I'm joined today by our Vice-Chairman and Chief Executive Officer, John Goff, President and Chief Operating Officer, Dennis Albert, and Executive Vice President Captial Markets, Jane Moody, and Executive Vice President and Chief Financial Officer, Jerry Crenshaw.

I hope you've had a chance to pull up our presentation on our website at crescent.com to follow along the call.

I need to remind you that certain statements we will make within this call are considered forward-looking statements.

Although we believe they are based upon reasonable assumptions, our future operations and actual performance may differ materially from those indicated in any forward-looking statements.

Additional information could cause actual results to differ materially from these statements in the press release issued this morning and in the SEC report.

I'll turn the call over to John Goff.

Good morning, everyone.

Thank you for joining our 4th quarter 2002 call.

We met expectations for the quarter and for the year.

If you are following along with the slides on our website, slide six shows that FFO results for the quarter were $70.8 million or $0.60 per share.

For 2002, FFO came in at $238.2 million or $2.02 per share.

Net income was $0.27 per share for the 4th quarter and $0.63 cents a share for the year.

While we're pleased to have met our expectations for the year, I have to emphasize that I wish expectations were much higher but this is a very, very tough economic environment that we are operating in.

We all know about that.

We all understand the reasons.

There is no question the economy will improve, but the timing of an improvement is very, very tough to predict.

We are data hounds here.

We look at a lot of information.

We hire outside firms to even help gather difficult-to-gather information and we monitor a lot of this data on an ongoing basis.

We are looking for clues, trends, positive, negative.

It does not matter.

We just want to try to understand what is going on and where things are headed to help us predict where our business is going to go going forward and to help make adjustments in managing the business going forward.

I want to share with you some of this big-picture data if I could, for a minute, that we're looking at as of year-end.

Unemployment in the nation ended the year at six percent, which is up slightly over year-end 2001, which was at 5.8 percent.

Dallas basically ended the year right in line with the national average at 6.1 percent.

Houston, Austin and Denver, three of our other major markets were, I would say, below to significantly below the national unemployment.

Which is good.

All but Denver showed improvement quarter four over quarter three.

Denver showed a slight increase in its unemployment rate in the 4th quarter.

Job growth, which is the key in this business, or maybe I should say job loss here over the last couple of years, is interesting when you drill down and look at it.

The nation lost 181,000 jobs in 2002.

Interestingly, 120,000 of those jobs were lost in the 4th quarter.

The annual trend actually looks positive, because if you measure that against the jobs loss in 2001, that was 1.4 million.

So the jobs lost in 2002, frankly, were not all that significant, although I would say it is a little concerning that the ones that were lost were primarily in the 4th quarter.

Contrary to the nation, we had job growth in all of our major markets except Denver, which had a slight loss.

Every market that we are involved with improved in quarter four over quarter three.

However, I will state that quarter four was not as strong as the 2nd quarter, which -- the 2nd quarter was pretty darn strong in the way of job growth.

Quarter three was very weak.

In fact, we had job loss.

So it is tough, when you look at this, to really say that we have a favorable trend going.

But if you just look at it from the very big picture and look at it on a national and regional level, it looks like things are slowly becoming more positive, but certainly not ramping up at any fast pace.

Absorption, the nation had negative absorption for two years running now.

All though it was nearly a push for 2002, the negative absorption was not that great, 96 million square feet, obviously very significant.

So I would say, looking at absorption on a broad scale, you know, it looks like we are trending to the positive.

But again, nothing that would, you know, ignite a lot of optimism here.

Dallas, Denver, and Houston all had negative absorption for 2002.

Austin was slightly positive.

2002 absorption contrasts negatively with 2001's statistics for each of these markets.

Drilling down to the data, I do not see any noteworthy trends occurring on a market by market basis.

However, if you look at the class A space, which is primarily our competition, the data is not quite as negative, reflecting positive trends in Denver, Houston, and in Austin.

As we all know, the health of the office market is conditioned on demand, job growth, obviously.

And supply or construction.

Just those two things, absorption and rental rates, which we all tend to talk about and quote constantly are simply the product of these two key drivers.

Looking ahead using Torto Weaton data who we contract with and get specific information, office employment in the nation is expected to grow 2.6 percent in 2003 and more than that in 2004.

Those are good numbers.

Our markets, according to Torto Weaton are expected to exceed those national growths for 2003 and 2004, frankly, substantially.

If you look at Dallas, it is showing their prediction of 6.1 percent -- I'm sorry, 3.6 percent and 4.3 percent, 2003/2004 respectively.

Austin is the high mark in our markets at 5.5 percent and six percent.

If you couple this projected job growth alongside what is very, very low construction in progress right now, it would cause you to believe that we're in for a healthy recovery in the office market in the latter part of 2003 and into 2004.

My own assessment of this Torto Weaton data is that it is probably reasonable.

I think that the data is well-constructed.

I do think that it is aggressive as to timing.

I would not say that 2003 would be as strong as what they're predicting but we are looking for some recovery in the latter part of the year.

In summary, the data appears to show that job growth is improving and predicted to improve at a faster pace later this year and into 2004.

I think we'll start to see, again, a positive impact in our portfolio at the end of the year and Denny will go into that a little more specifically.

Looking at rental rates, looking at the impact of downturn on rates in our markets, an average growth is again off of Torto Weaton data, reflects 7.9 percent decrease 2002 compared to 2001, compared to the nation which had a 9.8 percent decrease in rates from 2002 versus 2001.

As I've stated before, I feel that we've done a very good job of repositioning our portfolio and our balance sheet to weather the type of economic environment that we're currently in.

I think we're betting on the right markets today.

I think we're betting on the right properties within those markets.

In a recovering economy, I want to reemphasize, I know I sound like a broken record, I say this every time.

But in a recovering economy, I want to belong to those markets attractive to businesses, low cost of living, low cost of doing business, low taxes, good transportation systems, all the reasons that take us into Dallas, Houston, Austin, Denver.

And given the fact that there is such little construction currently going on in those markets, clearly it is the existing space that is going to absorb this future growth.

If you turn to slide seven, I want to summarize our 2002 accomplishments.

We continue to monetize the arbitrage existing between the stock price, which is obviously very low today, versus the value of our assets, if you look at the private market valuation.

We are doing that through both sales and through joint ventures.

On the office joint venture front, we joint ventured 1.8 million square feet during the year, for 158 million in net proceeds, and recognized a $22 million gain in doing so.

We'll continue to look for selected investments in office properties to joint venture going forward.

On the office and related land position dispositions, we disposed of 866,000 square feet for $152 million in net proceeds, including the land positions that are detailed out on slide seven, for a total of $54 million in net gains, which is obviously very healthy.

I think, you know, we had made some very good purchases along the way, which this represents.

Office acquisitions during the year total $156 million, including Johns Manville in Denver, we own 100 percent ourselves, and a park in Houston which we acquired along with our partner GE pension trust.

On the resort joint venture front, we executed two transactions, one at Sonoma with Fairmont, reflagging that property, and at the RITZ Carlton at Palm Beach with Westbrook Partners.

With respect to our balance sheet, we had a $375 million bond offering during the year and retired the 2002 bonds, we issued $150 million in preferred during the year, and we retired the General Motors Acceptance Corp. preferred partnership interest of $218 million outstanding out of the original total of $275 million.

Slide nine shows the return that Crescent had, which was honestly a paltry point three percent for the year.

When you compare that to the large cap office REIT average, it looks favorable.

That average was a negative 4.6 percent for the year.

Obviously compared to other indices, such as the Dow Jones, the S& P and NASDAQ, we compared favorably, factoring obviously the dividend for the year, compared to the Morgan Stanley read index and the other index, we compared unfavorably, primarily as a result of the favorable response in the retail REITs during the year driving up those indices.

Slide ten covers our 2003 guidance.

We are essentially reaffirming our previous guidance that we gave you before.

For FFO for the year of $214 million to $244 million as a range, which is $1.80 to $2.05 a share, for the 1st quarter as usual you will see the 1st quarter is always down relative to the year-end.

We are always weighted heavily to quarter four of the year, and we are projecting that to be $38 million to $42 million in FFO or $0.32 to $0.35 a share.

Details of this guidance are also supplied in the supplement on page 12.

And I would encourage you to go through that.

And you can call and ask questions if you like.

Denny?

Thank you, John.

John asked me to take a few minutes this morning to bring you up to date on our 4th quarter business.

Basically our office segment in the 4th quarter was slightly ahead of plan, and this was primarily because of lease terminations.

Our resort business was below plan and this was because of Sonoma.

I will talk about that in a minute.

Residential was ahead of 2001 for the quarter and for the year, but slightly below what we had hoped to have in the 4th quarter.

The -- the reason for that occuranceoccurrence was Harry Frampton, and I mentioned this on our last call, had some condominium closings that might occur in the 4th quarter or slide over into 2003 because of construction timing, and that did occur.

So that did slide into '03.

Those units are sold.

They will close.

So it is a timing issue.

I will also point out that we had a very good 4th quarter performance by Desert Mountain, and I will come back to that in minute.

If you will turn to slide 11, we will begin with our office segment.

As all of you know, our business strategy is focused on our core business, which is owning and managing A and double A office buildings.

Our goal in this particular segment is to deliver terrific customer service every day.

And I wanted to take a minute and report that we have just found out, I guess ten days ago, that we have won the Boma CELA award now for the second year in a row.

This award recognizes us as one of the top five real estate companies in the United States as it related to customer service.

And I'm very proud that our people won this award again for the second time.

They worked very hard.

If you'll notice, I've outlined some of the scores.

The scores actually have improved in 2002 over 2001.

Which we were pleased with.

I think this type of customer service is critical in the environment we're in today, to focus on customer retention, which we do.

You can see at the bottom of the page, renewal intention was 89 percent and I'm going to spend a few minutes when we get to the individual markets and talk about our renewal program for this year.

But I'm very proud of our office group.

I think we have a excellent office operating platform.

Turn to slide 12.

As of year end, our office portfolio produced 72 percent of our FFO, and as of year end we were 89.7 percent leased.

This compares to 90.7 percent leased in the 3rd quarter, 90.4 percent leased in the 2nd quarter and 90.5 percent leased in the 1st quarter.

We were 87.2 peracentpercent occupied at the end of the year.

We anticipated.

We anticipated a decline in the 4th quarter.

We talked about it on the last call.

And it really relates to some specific leases, and I want to comment on this.

The first lease was a moveoutmove out at Crescent, it was 135,000 foot lease by kpmg.

The rate on on this rate was $28 on the moveoutmove out.

We have now backfilled about half of this space at a rate in excess of $30.

So that will come on -- later on in 2003.

Secondly, we had a early termination by Aetna of 155,000 feet.

That was in Houston.

We collected a fee for this termination.

This lease has now been completely backfilled, and then some by Exxon at comparable rates.

They will actually be taking in total about 250,000 feet there in the Greenway complex.

They should occupy this space in March.

So it will not help our numbers a lot the 1st quarter, but it will them them for the remainder of the year.

Greenway with the Exxon lease has now gone to 95 percent of executed leases, the highest it has ever been.

Third lease I want to mention is with Caltext, they had a lease expiring in the 4th quarter in Los Palenas, which was at $28 a foot.

I mentioned it on the last call.

We are going to experience some rolldown on that lease and it will affect our same-store sales numbers as we release that space.

We have released some of that space now.

It has been released at a full service rate of about $20.

That is a major rolldown hurting our same store numbers, but the $20 is a favorable market rate and we are pleased with that performance.

Our office FFO for the 4th quarter was $85.8 million dollars, comparing to $88 million in the 3rd quarter. $80.5 million in the 2nd quarter, and $80.6 million in the 1st quarter.

We had expected our 4th quarter office FFO to be approximately $80 million, which was the same as the 1st quarter and the 2nd quarter.

Instead, we reported the $85.8 and it was primarily because of higher lease termination fees.

The $85 million dollar 4th quarter gave us a year FFO in our office segment of $334.9 million dollars.

This level of FFO gives us an unleveraged return on investment on invested capital for our office segment of approximately 11 percent, and we believe that the fair-market believe that the fair-market value of our office portfolio is approximately $1 billion dollars over our gross book value.

As you can see in slide 12 also, our 4th quarter and our year-to-date same store NOI growth was down over the last year, I've pointed out some of the reasons causing that on our wholly owned assets for the 4th quarter it was down 8.3 percent.

If you add back the assets that were -- that we own in joint venture to those that we own on a wholly owned basis, it was down 6.2 percent.

Those comparable figures for the year were -- on a wholly owned basis -- 3.4 percent.

If you include our joint ventures, it was two percent.

The lower same store results were driven primarily by occupancy, as most other office REITs have reported.

For the year, our acerage occupancy was down 360 basis point, which caused the decline in same-store sales.

Given the economy, and given the uncertainty that we see in the geopolitical arena, I think we did a good job of leasing in that we closed five million square feet this year.

We would like to have done more, but we did get five million.

The decline of net effective rent in 2002 as you can see at four percent was caused by a few specific leases, and that would be the Cal Tech's lease and we had one other lease in Houston that was pretty significant, that rolldown, causing that to be down four percent for the year.

In 2003, looking at our expiration schedule, we've got about 4.2 million square feet of gross space expiring; that would be about 2.9 million square feet of space that we have not already signed, resigned.

Of the 4.2 million square feet of gross space, about 70 percent of that space has been addressed; that would be either signed letter of intent outstanding or in final negotiation.

This is well ahead of where we were last year.

It is about ten points ahead of where we were last year.

So 2003 seems to be starting off pretty good.

That figure is 82 percent in Houston, which again is much higher than it was last year.

Based on the leases that we have already executed for 2003, our full -- full service rental rates are up about five percent, which is a positive sign.

No doubt, 2003 is going to be a challenging year for all office rents.

Near term, as I've been saying in the first part of 2003, our occupancies will decline because of some of these larger expirations that I -- that I highlighted.

KPMG, Cal Tech, Nortel, the Aetna lease, until we can get this space backfilled which is underway right now.

We do anticipate same-store NOI and average occupancies to decline somewhat for 2003.

We think they'll pick back up the second half, but still on a average to average basis, they should be -- should be slightly down.

On page 12 of our guidance, you'll see that the average occupancy that we're calling for 2003 to be in the 88 to 89 percent range, and same-store NOI down four to five percent.

Maybe just a -- a brief comment on credit quality, and then we'll go to the individual markets.

Credit quality has held up pretty well this year.

We are more than 100 percent reserved on our watch list.

And in 2002 we charged or expensed $2.9 million that was point 53 percent of our revenues.

For 2001 we took 4/10ths of 1 percent bad debt expense on revenues of $500 million, so I think those are reasonable levels.

And fairly consistent year over year.

I think one of the reasons that the credit quality held up well is we sold a number of our B assets in 2000 and it left us with higher quality customers in our buildings.

We should comment on a couple of customers, one, MCI; we have 125,000 square feet of space to MCI in Denver, 41,000 in Miami, 22,000 in Austin, and 24 thousand in Dallas.

It appears that we will retain about 100,000 feet in Denver.

They will probably give us one floor back there.

In Miami, it looks like we will retain all that space, that is a sub-station space.

A switching station.

So that is -- that is going to stay.

We're still waiting on final word in Austin and Dallas.

And we should know soon on that.

The rent is current.

Obviously, we're also watching the development at El Paso; as most of you know El Paso was downgraded by Moody's to CAA1, representing 4.1 percent of our revenues.

They are current on their rent at this time.

They are at Greenway Plaza in Houston.

And a lot of the space, most of the space, a good portion of the space, was a result of the coastal acquisition which is the gas pipeline business.

So we'll wait and see on that.

But they are current on their rent.

Let's turn to slide 13, and take a look at some of the individual markets.

In Houston, our portfolio was 91.4 percent leased.

This is just slightly below last quarter, and it is ahead of the market at 86.6 percent leased.

As I said on our last call, our leasing velocity has picked up in Houston, our rollover for 2003 is very well addressed at 82 percent.

Our five Houston center project that we opened in November last year is 90 percent committed.

We continue to move our customers into that space.

We're 63 percent occupied.

That is going up every day, as we finished out the tenant improvements and move customers in.

So that should move straight up to 90 percent.

The rates for this project are in the low 30s.

The Houston CBD market has become very competitive, as the Enron building has sold and has now come back on the marketplace.

The CBD market is likely to dip below 80 percent in occupancy.

So I'm pleased with where we are in that market.

I'm pleased that we're in such good shape with respect to renewal and retention in the downtown market at this time.

You may have seen a press release, oh, a few weeks ago, announcing the sale of a portion of what we call the super block lands in downtown Houston.

This is land that is directly across the street from the Convention Center, adjacent to the new arena, the arena hotel, bordered on one end by the new baseball stadium.

We sold this land to the city.

We were very excited to close this sale to the city for several reasons.

First off, we really considered this excess land to Crescent.

This land we did not see that we would be developing, or doing anything with for probably ten years, and still had 18 acres remaining.

So we felt like it was a proper strategic move to sell this to the city.

The city really wanted the land.

It fit in really well with the Convention Center expansion that they've got.

It will be a wonderful piece of property for them.

Next to the hotel, the arena and the ballpark.

So they were very anxious to get this.

And finally we sold the land, we got $33 million in cash from a non-income-producing asset, which we thought was very positive, we will reinvest the capital and it will be a premium for us.

Turn to slide 14.

The Dallas market.

The Dallas market remains very competitive.

We had, in the class A market we had negative absorption of about 3 million feet this last year.

We did see some sublet space starting to decline.

Those levels have started to decline now for three quarters in a row.

We are still going to see a weak rate environment, we think, in 2003 in Dallas, probably will see market declines in the three to five percent range.

With respect to rental concession -- five percent range.

With respect to tenant improvement and leasing commissions, they were up in 2002.

We think they will be up again in 2003, probably in the ten to 15 percent range.

As of year-end, we were 88.1 percent leased in Dallas.

This compares to 90 percent in the 3rd quarter.

We did continue to outperform the class A market, which was 80.6 percent.

As you would expect, we are not as well positioned in Dallas as we are in Houston, with respect to 2003 expirations.

We're 63 percent addressed right now in Dallas, compared to 82 percent in Houston.

I might mention just briefly, you know, Austin and Denver, before we complete Dallas, in Austin we're 96 percent addressed on our renewals in that market.

So we're comfortable where we are there.

In Denver we are 38 percent addressed.

And as John said, that is a weaker job market.

We are seeing a pretty good pipeline of activity on some of our downtown assets, and also in Cherry Creek.

We've got a couple of larger transactions that we're working on right now.

If you will notice in our supplement, most of the roll that we've got in -- in Denver is in the 4th quarter, and it is substantially in the Cherry Creek market, which tends to be one of the stronger markets we have.

So we'll be -- we will be working hard in that market.

Back on Dallas, just to finish up really quickly, the good news here in Dallas is that it is a capital constrained market.

There is only 300,000 square feet of class A space under construction.

Dallas issue is now job growth and absorption, it is not really new construction.

Turn to slide 15.

I want to take one minute to talk a little bit about Dallas CBD.

There is a lot of comment, and discussion about the vacancy level of 28 percent in the CBD.

That is correct.

But the reality there is the vacancy or occupancy, if you will, is very well segmented by double A, A B and C occupancies.

Double A space is 91 percent leased and then it drops off fairly dramatically as you can see, 77, 62, 51.

Crescent -- in crescent we have all double A space.

We were 89 percent in that marketplace.

We were 91 percent last quarter.

It dropped 2 percentage points, and that was primarily because of that one lease, the KPMG lease as they moved out of the crescent and rollback on that space.

Turn to slide 16.

For 2002, resorts, same store occupancy was basically flat at 69 percent.

Our same store ADR was down one percent, our same store REV par was down three percent.

However, the statement store NOI was down 20 percent for the year.

And same store NOI was down 54 percent for the 4th quarter.

You've got to ask why?

The answer, again, revolves primarily around Sonoma.

All year, Sonoma reported occupancy and ADR and REV par numbers that were below historical levels and also in the 4th quarter additionally, Sonoma's food and beverage business has been dramatically off what we expected it to be, same thing with the spa business, has run well below acceptable levels.

So it has really impacted the margin.

To solve this problem, what we did was we brought Fairmont in, as John said, in the 4th quarter, as a JV partner and our new operator.

We're encouraged by what we're seeing Fairmont begin to do.

I think they're going to help us.

Their advance bookings have increased for 2003.

Based on their marketing muscle, their marketing power.

If you look at the group business that they have brought in, the group advance bookings for 2003, we've got 21,000 advance bookings; this compares to 6,000 -- or 16,000 for all of 2002.

So they're giving us some nice increases for 2003.

And we are optimistic that they will be able to make a difference in Sonoma.

Also in the fourth quarter, at Sonoma, took a $750,000 what I call transition expense, reserve, to cover one time charges as we set up for Fairmont coming in to take over the assets, which affected margin.

We do expect to see some improvement in same-store sales in 2003.

But probably not in the 1st quarter.

As we look at the business in the 1st quarter, the resort business in the 1st quarter, the hospitality industry, as I'm sure all of you know, and you've heard on other calls is being affected by the economy and the geopolitical uncertainty.

So I would say -- I would say January and February are not positive for the resort business, but we think it will improve, particularly because of the advance bookings that we've seen for the rest of the year.

If you'll turn to slide 17, we had a pretty good 4th quarter in the residential businesses, as I said.

The Woodlands, lot sales were on plan in the 4th quarter, commercial sales were ahead of plan.

And for the year, Woodlands met its FFO goals of $25 million.

We were very pleased with their performance.

What we see going into 2003 at the Woodlands, the builder inventories are unusually low right now.

And so we are projecting lot sales to increase in 2003 to probably 1400 to 1550 lots.

Desert Mountain, Desert Mountain had a good 4th quarter.

We were very pleased.

We had 24 lot sales, which really exceeded our expectations.

In the 4th quarter, we opened the new clubhouse, which we have been working on for over a year.

We had receptions there.

We probably had 2,000 people attend.

A lot of excitement.

It -- it generated a lot of traffic.

And I think a very positive trend which is carrying over into the 1st quarter for Desert Mountain.

In 2002, we sold 78 lots.

In 2003, our guidance says 60 to 70 lots.

I think there is a chance we could see a upside surprise at Desert Mountain, and we are hoping for that.

Turn to slide 18, my last slide, just a quick comment on Harry Framton's business.

Harry had a great year, exceeding last year in residential condominium sales as well as lot sales, condo's totallingtotaling 257 units in 2002, compared to 120 units in 2001.

Pleased with that.

We actually, as I said earlier, thought we might have a few more units in 2002.

It looks like those are sliding to 2003.

Lot sales total 309 lots in 2002.

This compares to 181 lots in 2001.

So you've got to like that.

So Harry's business was up for the year.

As far as 2003 is concerned, condo sales will be down from the 257,000 level of 2002, and that is primarily because we just do not have that much inventory to sell right now.

We should have 60 to 70 units sold in 2003, and that will be -- that will be a good year.

So for 2003, we anticipate our consolidated residential FFO to be between 54 and 56 million, which is just a little better than last year, but by and large pretty consistent with what we saw this year.

John?

Well, at this time we'd like to open it up for questions.

Thank you, Mr. Goff.

I would like to remind everyone, in order to ask a question, please press the star key and the number one on your telephone keypad at this time.

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 told for your first question.

q-and-a.

Your first question is from David Copp, of RBC capital markets.

Here with Jay as well.

Could you talk a little about the impairment charge you took for COPI and what drove that?

You are talking about the impairment charge last year?

David?

I thought there was a 12.1 this quarter.

No?

No.

Okay.

And then could you just help reconcile where we were in terms of addressing your 2003 expirations?

It looks like I are about where you were as of the 3rd quarter, if I'm reading this correctly?

Actually, we're slightly ahead of where we were in the 3rd quarter.

Okay.

It looks like you have about 600,000 square foot more rolling now than the 3rd quarter.

Have we been doing some short term leases here?

We've got some month to month but basically it was a early termination.

Okay.

Great.

Thanks.

Your next question comes from Greg White of Morgan Stanley.

Good morning, guys.

Just a couple of things.

Can you -- what would the same-store number have been in you had included the termination fees?

For the quarter, it would have been 6.1 percent.

Negative 6.1.

Positive.

Positive 6.1.

It would have been negative point six percent for the year.

Okay.

Okay.

And then in the guidance that you guys have given for 2003, have you included any termination fees in there?

Approximately 4.5 million to 7.5.

Greg, that would be a moderate level relative to what we historically have had.

And that -- the guidance, when you said 4.5 to 7, I mean, that -- is there some stuff that you actually know is going to happen, and if that is the case, is there -- you know, can you give some comment in terms of the seasonality, is it first half, second half?

We've got some, Greg, that we've identified.

It's a little over $1 million.

Early in the year.

So that is all that is identified right now.

Okay.

And then and then you guys did not make any specific comments on the cold storage.

Can you talk a little bit about that?

I know that in the 3rd quarter you had some sort of pension funds trueup and we actually thought we were seeing, you know, kind of a bottoming out in some of the deterioration there.

It looks as though it has weakened in the 4th quarter.

Can you talk about what is going on there?

Yes, Greg.

This is John.

As you probably saw, EBIDAR for the business was down 3 percent for the year, 2002 versus 2001.

But if you look at the numbers relative to our budget, we were up about 3.2 percent.

We did $130 million of EBIDAR for the year, versus 126 for 2001.

So the business is actually trending positive relative to our expectations, which I think is probably more important looking at one year than the other.

Our expectations were they were repositioning the business, there were going to be severance costs and other insurance costs that we occur diluting the numbers a bit versus 2001.

If you look at the run rate of revenues, it was basically flat year to year.

If you look at occupancy, we're up slightly year over year, 79 percent in 2002 versus less than 78 percent in 2001.

Margins were impacted negatively, slightly, 20.9 percent compared to 20.1 percent as a result of these insurance costs, and severance costs.

If you look at our, you know, projections going forward, we're projecting EBIDAR to start growing back to, you know, the levels of 2001 and beyond.

So we feel good about how Alex has repositioned the business.

Wish it was earning more.

But in this economic environment, frankly, I felt, you know, like they pulled off a reasonable year.

Thank you.

Your next question comes from David Loeb of FBR.

Hi.

A couple of questions.

One is a follow-up on David Copp's question there was a $12.2 million charge, looks like it was listed as impairment and other charges related to real estate assets- what is that about?

That 12.2 relates to a 2.6 million impairment on the Ritz Carlton, Palm Beach.

Again, that is -- I think it is more of an accounting impairment, than anything at this point.

We believe on long term that we'll recoup the two-six. 9.6 relates to a impairment of our investment at Canyon Ranch at the Venetian in Las Vegas.

Okay.

And I wanted to ask about corporate G&A.

That jumped in the 3rd quarter essentially, jumping again in the 4th quarter.

Why?

And what's the outlook for next year?

The G&A in 3rd quarter included the $2 million charge for the Sarbanes-Oxley related to stock options.

That was reclassed to other expenses in 4th quarter.

For the year, we're up $3 million, and that related to a long term incentive accrual that we did not have in 2001.

I think expectations, going to 2003, we're looking at 26 to 27.

Total for the year?

Okay.

Yes.

Great, thank you.

Thank you.

Your next question comes from to -- Todd Boits of Cliffwood Partners.

Yes, good morning.

I was curious about, you had 16.7 million of gains on sale, and you only back out of 2.2 million of that.

So you are including 14 million?

You know, are those personal sales, or is that -- is that complying with FFO?

Todd, yes, it is complying with FFO and it is outparcel sales related to the land that Denny alluded to in his -- his talk.

Okay.

And then also on the impairment, I see you took a twelve-two impairment but then you added back four teen-eight.

That's correct.

Within the twelve-two also includes -- we had a impairment of our charter facilities of approximately two-and-a-half million that was included down in discontinued ops.

Okay.

And then also I had a question just in general, it sounds like you are having some success on leasing going forward.

Could you give us a sense about the cost of leasing?

It looks like, year over year, TIs and OCs are up significantly, can we he can expect that to continue or are we at a good run rate for TIs and OCs?

I'll answer that.

This last year, looking at 2002 compared to 2001, our cap ex for property was down.

If you look at TI and leasing commission willing for new leases, Twas actually down.

If you look at TI and leasing commissions for renewals, it was up.

So it tells what we're doing.

We're spending our dollars on existing customers to ensure they're happy, to ensure they stay.

And so we're fighting to retain those customers, which we think is the best dollar in the world you could spend.

So that is where the up has come.

I think -- I think in 2003 we're going to continue to see it go up.

I think in our portfolio it might be up 10 to 15 percent, but that should be the high water mark.

Thank you.

At this time I would like to give everyone a additional minute to press star and the number one on your telephone keypad for a question.

All right if there are.

I apologize, sir, you have a follow-up from David Coop.

Good morning, gentlemen, a follow-up, Jay here.

Could you give us guidance with what your asset assumptions are for 2003 included in your guidance?

Also could you -- Jerry mentioned earlier in the call, the $2 million charge for compliance of Sarbanes-Oxley, talk a little bit about your plans for the audit committee and adding a financial expert to -- independent financial expert to chair that over the coming 12 months, and what your timing is there?

Jay, as it related to land, as it relates to property sales, we have not reflected any property sales into our guidance in 2003.

As it related to Sarbanes-Oxley, we do have two independent directors that are on our audit committee, of which both are CPAs or former CPAs.

We are fortunate to have a lot of expertise within the board, you know That arena that appear to qualify, you know, under the guidelines, talking about Sarbanes-Oxley.

Let me give you a little additional color too, Jay, in terms of asset sales.

When you look at the company today the most frustrating thing that we see, or the most opportunistic thing that we see is the fact that there is this huge arbitrage between where the stock trades in the implied valuation of the assets, versus where we can sell or joint venture those assets in the private marketplace.

That difference is, you know, the stock is at 14.50, our NAV assessment is anywhere from $22 to upwards of $24, even in this current, you know, depressed environment.

We continue to reassess that NAV.

I do not think we've budgeted off of that number.

We've updated our assessment recently.

That is a big difference.

The issue is, you know, should we be more aggressive in terms of sales or joint ventures to capture that difference for the shareholder base, I think obviously that is a smart thing to do, particularly if we can take -- if the stock remains low, it will benefit the shareholders by buying stock for those who do not want to stay along for the ride.

That is something that we're highly focused on.

Just by way of illustration, not that this is -- should be used as a benchmark to value the rest of the portfolio, but if you look at the sales that occurred this last year, we sold what I would consider to be, you know, really B assets.

And those sales were done at extremely low current cap rates.

Now we sold buildings that were not that well occupied, you know, there were issues associated with them.

But, nevertheless, the cap rate on current FFO or NOI, I should say, was. six percent or less.

On average.

Why is that happening?

Well, what is happening is that the marketplace is valuing, the private marketplace is valuing unleased space at a pretty healthy clip in this market.

And so what it is telling you is that they are bullish on where these markets are headed, they are bullish on how the assets is going to perform.

The public marketplace is not in the same position, we are caught up in the economy, things will get worse, they're going to turn around and you know they may get worse before they turn around.

Ultimately it will turn around and this business will follow right alongside.

In the meantime, we're hustling to determine, and -- and to try to capture as much as that value for the shareholders as we can, because it is there, and it is ready for the taking.

I over-answered your question, but I just wanted to give you a little added color as to what our thinking is on that -- in that area.

Your next question comes from Terry Boston of Salomon Smith Barney.

Good morning.

I guess sort of as a follow-up on that, are there any spots in your portfolio or in the markets that you are operating in where you are seeing any opportunities to really make new investment, or is the private market at this point sort of priced you guys, you know, priced you guys out of any real acquisition opportunities?

Gary if you saw what we did for the year, is basically took the joint venture proceeds and redeployed that in new acquisitions, bought two new properties, relative to the capital base of this company.

We have not been very aggressive on the buying front because of the fact that the private marketplace is valuing these assets far greater than we are willing to.

We've gotten close on a number of other acquisitions, but not close enough.

We feel no reason here to stretch, to own something.

We're only going to own it if it is a market we know stone cold and we feel very bullish about where we can take the asset, which was the case at Five Post Oak and Johns Manville in Denver.

So, you know, I do not see that -- so, you know, I do not see that changing much over the near term.

I think that the market is still going to be pretty darn strong for sellers, and there's going to be a lot of buyers out there pinching funds or driving that activity 100 percent.

And, frankly, what they are doing, you know, I think still makes a lot of sense because I think they are get good current cash yields relative to what they can get, you know, elsewhere.

So I think it is, you know, the most attractive thing right now for us to do if -- to the extent we could, would be to buy more of what we already own.

You know, so the issue is how do we -- how do we get our hands on that capital to do that, without in any way, you know, jeopardizing the balance sheet, do it on a leverage neutral basis?

John, it is John Litt.

A question on El Paso, when you reaffirmed earnings, is that in your numbers or out of the numbers?

It is in our numbers.

Where the rents relative to market?

The rents are about $4.

Two to four.

Two to four above?

Yes.

Okay.

Do you see any other long term incentive comp. expenses that may come up during the year that would impact you in either way, than they did this year or, sorry, in 2002, or do you think that you've captured them all in your G&A forecast?

Well, in 2002, obviously we've captured everything.

What is there, is there.

In 2003, it will depend on whether or not we hit targets and, you know, we'll set pretty aggressive targets for ourselves.

Does your G&A forecasted numbers contemplate that at this point?

No, it does not.

Thank you.

Thank you.

Your next question is from John Roberts, with Rifle Nicholas.

Good morning.

First thing, are you building any lease termination fees into your estimates for next year?

4.5 to 7.5.

4.5 to 7.5 million.

Yes.

1st quarter is a little below consensus on your estimate.

Now, is that due to lower residential lot sales, mostly?

Yes.

That is a part of it.

Okay, that's it, thanks.

Your next question is from David Lobe with FBR.

I want to ask kind of generally about your comfort with the difficult dependency at the current level and specifically about -- dividend at the current level and specifically.

Your next question is from David LOBE with FBR.

I want to ask kind of generally about your comfort with the difficult dependency at the current level and specifically about -- dividend at the something that you've discussed in the past.

Where do you think that the number will be in 2003 and are there any other calls for that capital?

David, we think that the return of capital in 2003 is anywhere from seven to nine -- $75 to $95 million dollars.

As it related to -- we have not earmarked anything in particular for those dollars at this point.

In 2002 it was $57 million.

Am I right.

2002 was $57 million.

So of that 75 to 95, you do not need to reinvest that in order to continue to reason the cash flow off of the residential land?

Not off the existing business, no.

Okay.

And how about your comfort with the dividend generally?

I gather that is going to -- that 75 to 95 will make you a little more comfortable paying it.

Yes, we are comfortable with the dividend.

Okay.

Thanks.

Thank you.

Your next question comes from Steve Sakowa with Merrill Lynch.

Good morning.

I guess my dividend question was just asked.

John, I guess on the share buyback, it sounds like you are not forecasting any dispositions, therefore I assume you are not forecasting any share repurchases.

That's correct.

That's right.

It is just a tough thing to bake into a model, Steve.

You know, it is something that we're openly telling everyone that, you know, we're going to strive to figure out how to do it and to execute some sales.

It is just-you know, I do not think it is prudent in this economic environment to forecast those kinds of things.

Can you tell us, you know, what kind of assets you may have for currently or contemplating;

I mean, what kind of range could we look forward to.

Well, you know, the format that we think is the joint venture structure, being in partners.

And we've been spending a lot of time and energy courting existing pension funds as partners, and even additional pension funds and pension fund managers as partners, and we've got, you know, a really good base.

We've really revved up the team here to focus on that.

We have a big team of operations, you know, solely focused on those opportunities.

That is the format that we think because we get, you know Ebig value for our existing infrastructure as opposed to simply selling an asset outright, which we will do, depends on the market and the asset.

In a joint venture we get to retain part of the upset, get a promoted interest, typically.

We get a fee stream.

We get value for this infrastructure that is, you know, now an award winning infrastructure and that gets a lot of notice in the pension funds community.

You know, we are the kind of partner that they are seeking to put some capital with.

That is a really good business.

Because the return on equity is dramatically higher than if we were to own the building outright.

But to the extent that there are demands out there for the buildings, the joint ventures take a long time, if you are implying that you are trading at six percent of NAV, you cannot capture that.

Time of execution does not differ that much and surprisingly price does not differ that much.

Last question, I wanted to circle back on, I guess, the disposition of the land in Houston, and I realize that may have been a very large outparcel but, you know, it seems to me that from a characterization standpoint I'm not sure that that's all that different than selling a non-core office building, anticipate just trying to understand the thought process behind including that but maybe not including some of the other gains on building dispositions into FFO.

Well, let me take a stab at that and, Jerry, you can add to it.

I mean, first of all, this is part of our business, it is consistent with the way we've always treated these types of sales.

When you are in the office business, you are typically, by virtue of being a large owner in a marketplace, going to have investment outside of pure office that all relate to that office in the -- and the efforts and energy expended in managing that office.

Houston is a great example.

We own 22 acres.

We sold.

Five-and-a-half.

Five-and-a-half, so we have 17 to 18 acres left.

And, you know, the implied gains on that residual acreage for which a third the city has an option on is, you know, north of $60 million.

We bought the land right.

We've been managing that in conjunction with our office investments, managed by the office team there, and it is consistent with the way we treated it all the way along.

Kind of the same when you have business-class hotels within an office driver's licence within an office investment.

We really mean that as part of the office investment, because it is just an added amenity for the office -- the within an office investment.

We really man -- and that as part of the office investment, because it is just an added I guess I'm not quarreling with your decision to sell the asset.

I mean, at that may have been the right business decision.

It is one more of, you know, deciding to include that gain in FFO where you've made other business decision significances to sell other assets and have not elected to put that in, you know, probably rightly so and so just trying to understand a little bit of the difference there.

Yes, Steve.

I mean, if you look at kind of consistently since 1994, we've always included commercial land sales and FFO, whether it is a gain or a loss, we've had numerous losses that we have also been a deduct.

Looking at our land holdings, we have approximately 100 acres that is attached to our -- or adjacent to the office product that we have.

If you look at the Woodlands, which we've been really consistent on, you have over 1500 commerce acres -- acreage in the Woodlands that will be sold off over the next ten years in the commercial arena.

So -- so I mean I think we've been, you know, really consistent in this.

And we've basically followed the guidelines as it relates to, you know, the monetization of these particular assets.

Your next question is a follow-up from David Copp, RBC capital markets.

Jay Coop again, to follow up on the resort hotel operations with the 54 percent drop in same-store NOI in the 4th quarter, it looks like you could potentially set yourself up for a very easy COMP structure a year from now if you maintain the earnings leverages in those businesses, could you come in on how you are positioning those businesses in this environment and how they potentially could do in a normal economy?

The -- well, what we're doing is, you know, paying attention to details, watching the cost first and foremost, okay?

With respect to the revenue side, you know, you are somewhat limited in what you can do in this economy with the uncertainty out there, so we are living with that.

What we felt like, if we, you know, got a little more broad-based marketing muscle, ala something like the Fairmont, we could drive revenues that way.

So when you go back and you look at our guidance for next year, you know, you're seeing same store up a few percentage points and basically it is the combination of all three.

But, you know, I think we've done a pretty good job on expenses, so we can ring maybe some more out of that.

But I think it is really getting the F and B and the spa business back up and driving the group business by having more marketing muscle to make that -- make that thing happen, the -- make it all happen.

The key thing is bringing Fairmont in with a lot more marketing pull to bring in, you know, to not rely upon the transient business so much at Sonoma.

Okay.

We would be highly disappointed if we did not show a positive variance year to year, particularly in that asset.

Right.

And the -- the budgeted information and the goals that we've got at Sonoma, you know, they are nice increases.

And Fairmont is very positive about it right now.

If they hit the numbers we've got on the page, we'll be very happy here .

And the -- the budgeted information and the goals that we've got at Sonoma are -- you know, they are nice increases.

And Fairmont is very positive about it right now.

If they hit the numbers we've alongside of us in the asset.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answer.

Mr. Goff, are there any closing remarks?

Just in closing, thanks for listening to the call, and if there are any further questions please call us directly and we'll be happy to answer those.

Thank you very much.

Thank you.

This concludes today's Crescent Real Estate year-end 2002 earnings conference.

You may now all disconnect.