摩根士丹利 (MS) 2003 Q1 法說會逐字稿

Good morning.

My name is Ashley and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Crescent Real Estate first quarter 2003 earnings conference call.

With our host, Ms. Keira Moody.

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, press the star key and 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 pound.

In order to ensure that all participants can ask a question, we ask that all participate limit their questions to one and one follow up before entering the cue.

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

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

Thank you.

Ms. Moody, you may begin your conference.

Thank you.

Good morning everyone and welcome to the first quarter earnings call I'm joined today by Vice-Chairman and Chief Executive Officer, John Goff; and Dennis Alberts, President and Chief Operating Officer;

Executive Vice President, Capital Markets, Jane Mody;

David Dean, Executive Vice President, General Counsel; and Executive Vice President and Chief Financial Officer, Jerry Crenshaw.

Everyone should have a copy of the earnings release, supplemental report and presentation for the call.

If not, those can be found on our website in the Investor Relations section.

In compliance with Reg D, any non-GAAP measures used in the materials and on the call, such as historical and expected SSO, are reconciled to GAAP measures in our supplemental report.

I also need to remind you that certain statements we will make in today's call are considered forward-looking statements within the meaning of the federal securities laws.

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.

You will find additional information that could cause results though differ materially from these statements in the press release issued this morning and with within the S.E.C. report.

With that, I'll turn the call over to John Goff.

Good morning everyone and thank you for joining our call.

Let me start by giving you our view of the economy and the impact on the business.

The broader indicators in the economy are indicating that we are in a recovery.

It is slow, but it is a recovery.

The chairman Greenspan's recent remarks were tepidly bullish over the short run and more definitively bullish over the long run.

Most economists' reports that we are reading point towards the second half of 2003 being the period that a more noticeable improvement in the economy will occur.

As the first quarter results would indicate, we are not seeing this recovery yet.

And the national as well as regional data indicates that we are still in a jobless recovery, much like that experienced in the early 90s.

We saw modest gains in jobs during the fourth quarter last year, while in the first quarter of 2003 we saw slightly negative growth and, in addition, the 2002 numbers were revised downward this year.

We're not about to try to call job growth by quarter, we do firmly believe the ability of our markets to outperform the national average by a healthy margin over the next three to five years and beyond, this is a principle tenant of our strategy.

In talking with the chamber of commerce, in each of our major markets recently, we're finding a very consistent message and that is that relocation activity, relocation interest by major companies, and smaller companies, is extremely active in each of the markets.

It is our belief that companies are looking to take advantage of the central US location, real estate cost savings, access to skilled workforce, low cost of living and very favorable state tax environments.

As I often say, I feel this trend will be amplified in a lower growth economy which is what we're faced with, where it is tough to grow revenues and businesses will be focused on continues cost-cutting measures.

The U.S. bureau of labor statistics recently projected that Dallas, Houston and Austin will each be in the top ten major cities in terms of job growth from 2003 through 2010.

Again, I want to emphasize we are not seeing that yet, but I think it is coming and the activity level being reported by the chamber of commerce is very high.

Specifically in the office business, we are seeing activity pick up somewhat.

We're also seeing weaker office owners willing to lease at what we feel are uneconomic terms.

We saw precisely the same phenomena occur during the last downturn in the '90s where the bottom of the cycle was essentially defined by this kind of activity where weaker owners made uneconomic deals simply to gain occupancy.

We've been very competitive, but also very disciplined at Crescent Real Estate, choosing not to participate in leases that do not fit our economic model.

This approach is costing us occupancy in the short run, but we think it is the right long-term decision.

We are also seeing renewed interest in companies looking to upgrade their space which we think will be a advantage to our company.

Denny is going to cover the specifics of our office business and will drill down on the portfolios occupancy and the lease economics in just a moment.

Let me cover the safety of our dividend.

We recognize the current short-term coverage issue of our dividend.

You know, it is a issue when you look at the -- the basic numbers.

We have absolutely no plans to reduce the dividend which is consistent with what we've been saying in the past, and here is our rationale: The low end of our projected range of FFO for the year is $1.80 per share.

Assuming this low end in FFO in backing out $1.50 for dividends leaves $0.30 for capital expenditures, not enough to cover the capital budget for the company.

Not factored in, however, is an estimated $0.70 per share in additional cash flow coming from the residential business not included in FFO, therefore, we have approximately $1 per share with which to cover capital expenditures as well as new investments or debt reduction.

That is more than sufficient.

Like other office REITs, our FFO has declined as occupancy has been negatively impacted by the economy.

We think this is a relatively short-term phenomena.

As mentioned earlier, occupancy is the primary driver of office earnings versus rental rates for every point we gain in occupancy we gain in excess of $4 million in FFO.

Our historical occupancy has typically been around 93%, representing approximately $28 million or above in incremental FFO from where we are today.

It is a function of time to regain this level of occupancy, not whether or not it will happen.

Finally, we are simply not going to make a long-term decision regarding this company based upon what we feel are relatively short-term issues ,i.e., the economy.

Our entire focus right now is on driving occupancy and most importantly delivering quality customer service, which is consistent with the premiere type of assets that we own in our markets.

I think there are a variety of strategies that companies can take at this point in time, to perhaps cut costs, cut services, but that is not going to be our strategy if anything we're ramping up customer service, focusing on that more than ever before.

I'm now on slide six, if you are following on the website.

Corporate governance.

As always, we take corporate governance very, very seriously.

We formed a governance committee in advance of Sarbanes-Oxley requirements, it's actually technically still not required but we've had in place now that we put in place last year.

It's comprised of three outside directors.

And the scope of the committee includes nominating directors, evaluating director performance, establishing and overseeing governance policies, establishing and overseeing codes of conduct, along with other things.

We have already formed governance policies.

We're in the process of implementing a variety of things with respect to what the governance committee is working on.

We have five independent members on our board of eight, two of which are new, outside board members that joined our board last year.

We're fortunate to have a lot of talent on our board, a lot of board expertise and management expertise.

And if you look at the audit committee, the members -- each of our three outside audit committee members technically meet the financial expert requirements under the new rules.

Only one obviously will be designated as the "expert" but all three technically meet those requirements.

In addition, we've had for some time both an internal audit function obviously as well as a external audit function.

Deloitte & Touche has been engaged for a number of years a as our internal auditor, this is more cost-effective and frankly we like the thought of having another outside firm engaged looking at our business on a routine basis.

Lastly, we also had a board retreat toward the end of last year, and the sole focus of the retreat was corporate governance where we covered a variety of issues for a couple of days with our board.

Slide seven, to cover the financial results and guidance for the year, funds from operations, for the first quarter, were 41.4 million or $0.35 per share, which was $0.01 over consensus expectations.

Our guidance for 2003 stands as previously discussed. 214 million to 244 million.

And FFO, which represents a $1.80 to $2.05 per share.

Our guidance for the second quarter 2003 is 44 million to 49 million in FFO, or $0.38 to $0.42 per share.

Denny?

Thanks, John.

John asked me to take a few minutes this morning to bring you up to date on the first quarter business operations.

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

As most of you know, our office segment represents about 72% of our FFO, and in the first quarter we reported office FFO of 72.3 million, approximately 1.5 million dollars above our plan and our expectation.

As of March 31, the portfolio was 87% leased.

We were 85.7% occupied, comparing to 89.7% leased and 87.2% occupied at year end.

We did anticipate this decline of 150 basis points in occupancy.

In the first quarter from our year end number.

We talked about that on our last year call, year-end call.

As you may recall, we outlined for you in detail on the last call several large leases that were expiring in the fourth quarter and in the first quarter.

I'll review that just quickly.

In the fourth quarter, we had KPMG for 130,000 feet that expired at the Crescent.

We had a early termination in Houston at Greenway Plaza with Aetna, that was 155,000 feet and we had also a expiration in Los Colinas with Cal Tech and that was 250,000 feet.

In all of those buildings, we're in the process now of backfilling those spaces.

I think our leasing term is making very good progress on these spaces.

And their work is going to show up in the second half of the year, in our second half number.

If you total that space it is about 535,000 feet.

And we have backfilled now about 345,000 feet of that space, and it is going up.

In the first quarter of '03 we had a major expiration in the telecom quarter of Dallas which is very competitive, a tough market right now.

We had Nortel expiring at 150,000 feet.

We talked about that on our last call.

We had also Burlington Northern for 66,000 feet expiring in Fort Worth.

And Anthem for 63,000 feet in north Dallas and we also had three other leases expire totaling 135,000 feet in the first quarter.

We had about 400,000 feet expire.

Only two of these expirations do we anticipate really any significant rolldown in rate, and I'm going to cover a lot of detail about lease economics in just a minute.

But, all's you may recall, the 250,000 feet Cal Tech's lease in Los Colinas was over market, it has been over market for some time, about $29 a foot.

We have now backfilled about half of that space, 125,000 feet at $20. $20 is a long way from $29 but $20 in that marketplace is a good, solid rate, and we're glad to have that backfilled at that level.

The 150,000 foot Nortel lease expired in January of 2003.

Again, this was the second over market lease that I wanted to mention.

It was at $21.

We have now backfilled about 24,000 square feet of that space since January.

In the 14 to $15 range.

So that -- that is the second rolldown.

In Houston, I will say that the backfill activity has been excellent at Greenway Plaza we had the 155,000 foot Aetna lease early term, we collected a termination fee on that in the fourth quarter of last year.

Exxon has now taken 250,000 feet at Greenway.

They backfilled the entire 155,000 feet of Aetna space and took a additional 100,000 feet.

They have now moved into the space into the second quarter at comparable rates.

So we're pleased about that.

So it is a difficult market out there.

We are signing leases.

We tend to and have continued to outperform the market in rate and occupancy.

And we expect to do that.

So we are seeing activity.

We're starting to see some light at the end of the tunnel.

And I'm going to talk about that specifically in a second also.

On slide eight, I did want to make a couple of other comments, one on same store NOI growth which was down.

The decline was primarily driven by loafer year-over-year average occupancy numbers, as John said, occupancy drives same-store NOI and that where our focus is.

I will say that we were able to keep expenses in line.

They were actually down in the first quarter compared to first quarter of 2002.

We were able to get some tax relief by appealing some tax -- tax levels, property tax levels on some buildings.

And we were able to manage some other controllable expenses.

Given the state of the economy, and what the country went through with Iraq, the first quarter, I think we had a pretty good first quarter leasing.

We leased 939,000 square feet, which is a good number for us.

But I think, more importantly, with that 939, our total leasing is now 2.8 million square feet that we have already signed that will commence in 2003.

That is 2.8 million square feet that we've signed that will commence in's 03.

Most of this takes effect the second half of the year.

For the remainder of 2003 we've got approximately 3.1 million square feet of space expiring.

I'm pleased to say that we're approximately 67% leased on that rollover.

I should say addressed.

We are 46% signed.

And 21% in the final stages of negotiation.

So that is a pretty good number also.

In Houston, we're 90% addressed.

The market is performing well there.

And of that 90%, 70% is already signed.

So let's take a minute and turn to slide nine.

And I really want to drill down a little bit for you on some of our lease economics.

In the first quarter we renewed or released 598,000 feet.

The full service rate on these leases declined 10% and the net effective rate declined 21%.

This is higher than our normal numbers.

It's a result, really, of two leases that were signed in the first quarter, and I'm going to review those with you, bullet points two and three on this slide.

Both leases were signed in the telecom quarter, which again is probably the toughest market in Dallas today.

And I would say that it is not indicative of the broader base portfolio and other renewals that we will be signing.

Let's take a look at these two leases.

The first lease in the telecom quarter was for a Nortel building.

We actually have two Nortel buildings in the telecom quarter. 150,000 feet that I mentioned earlier that expired in January of 2003, which we backfilled 24,000 square feet of that space.

We have another building that is 135,000 feet that expires in January of 2004.

This is the building that we just signed a lease on, the 2004 building.

We signed a lease to backfill the entire 135,000 feet with a very good company, with very outstanding credit.

This lease was signed at $14.70 full service rate and $5.82 net effective rate.

That is the market in this area today.

This compares to expiring Nortel rate of $21.50, and a $15.64 net effective rate.

The second tough lease that we signed was in the telecom quarter in the Palisades building and this was a 69,000 foot lease.

It had a $14.31 full service rate compared to a expiring rate of $15.41 and a net effective rate of $10.24.

These were two tough leases.

I wanted to highlight those to you.

If you exclude those two leases, I usually do not like though play the exclude game, if you exclude those two leases and look at the other leases that expired, the new rents on them were approximately equal to the expiring rent.

So let's move down to the bottom of the page, the final four bullet points on the page.

And I want wanted to talk a little built about mark to market for our overall portfolio.

And I think these four rates that I'm highlighting will really give you a good feel for our broader portfolio.

As I mentioned and indicated a minute ago, we have signed 2.8 million square feet of leases that will commence in 2003.

These leases have been signed at a full service rate of $21.77.

If you look at the next bullet point, the remaining leases that expire for 2003, the lease expiration rate there is $20.35.

So we've got a pretty good much there relative to what is expiring.

Now let's look at the overall portfolio.

The weighted average in-place rents for our entire portfolio is $22.83.

The weighted average quoted rate for the portfolio is $22.76.

So on a in-place rent basis, based on our quota, it is about a push on a mark to market basis.

The $22.76 that I've highlighted there is really down about $3.75 from a year ago.

So the portfolio from its peak to this depressed economic level has declined about 14%.

We think that the 22.76 is a good number for the space -- on a space by space basis in our portfolio.

We did not see a big decline in the quoted rates relative to some other markets.

And particularly I'm referring there to markets like San Francisco, maybe Boston, maybe some others.

Basically, we did not experience the big run-up in rates that some of the other markets did, so we've not had the drastic rundowns.

So in my mind, we do not have a big mark to market problem.

What we're focused on today is we want to see job growth and we want to see demand, we need to see absorption in our markets and occupancy growth.

We expect, as John said, to see some economic recovery in the second half.

But we really do not see office rents rising until after the markets absorb some of the vacancy that is out there.

Occupancy should start improving in most of our markets next year, and I think rents will follow after that.

Probably the latter part of 2004 or probably in -- more realistically into 2005.

We think that most of us that have been in the office business, we've seen better days, we've seen worse days.

I think we're going to feel better in 2004 as we see the job growth return, business confidence pick back up.

And I really think we will all feel much better in 2005 as we see rents start to follow.

So what does Crescent Real Estate look like for the remainder of 2003?

We think the second quarter will still be fairly soft for us from an occupancy standpoint, but we do start seeing improvement in the third quarter.

Based on the leases that we've signed, and when the occupancy occurs, I still think we're going to have, really, a pretty good fourth quarter.

The fourth quarter is going to be very important for us.

The goal of our company right now is to finish strong in the fourth quarter.

We want to have -- we want to have a good, solid occupancy base at the end of the fourth quarter, going into 2004.

We want to be well-positioned there.

And we've got the team really focused on that.

I might also mention that we have already signed about 1.2 million square feet that will commence in 2004.

So we want to finish 2003 strong.

We want to get a good jump start on 2004.

Let's take a look at slide 10.

Again, lease economics.

I wanted to take a quick look at TI and leasing commissions.

As you can see, on a person square foot basis over the life of the leases that we've been signing, our tenant improvement and leasing commission expenses have remained relatively constant over the past three quarters.

They're up from last year.

They're higher than normal standards, but we are starting to see that stabilize somewhat.

We continue to focus, as John said, on customer service, and customer retention.

I mentioned on our last call that we received for the second year, and I'm real proud of our people, the Boma CELA award for customer service, we got very, very high customer satisfaction scores and just have to do that.

The best customer that you have is the one you've got.

You've got to keep the customer happy.

So we're emphasizing service.

We're emphasizing retention.

And, as you can see, we are investing our capital into renewal TI and leasing commissions.

We want to hang on to these people.

We do not -- and we want to really avoid the downtime of vacant space.

That is the office strategy.

If you flip to slide 11, we'll take a quick look at some of our markets.

In Houston, our portfolio was 89.6% leased as of the end of the first quarter, which was ahead of the 85.9% that was recorded for all class A space.

Leasing velocity in Houston has really picked up.

We are seeing very good activity.

We're seeing the energy companies take space.

Our rollover in Houston is in very, very good shape, as I said before.

We're 90% addressed.

And 69.8% of that is signed.

So we feel very good about that.

Our five Houston center project we opened in November we're 90% committed there.

We're moving customers in as we finish off the space there.

The building is now 69% occupied.

It will go on up to 90%.

Rates in the project are in the low 30s.

The Houston CBD market has become very competitive, as we talked about on our last call.

The Enron buildings have come back on the market.

We do expect the CBD market to dip below 80% in occupancy.

I am pleased with where we are in our buildings in the CBD, and particularly from a renewal standpoint.

At Houston Center, we have really only one major block of space that we're trying to lease right now.

We're getting good activity on that particular block of space.

We've got three prospects right now, and I'm -- I'm hoping that we can make that conversion soon, and be able to have that in our numbers for year-end.

As you can see also on this slide, class A absorption in Houston was positive in the first quarter.

And we think that is a -- that is a great sign.

I should mention a couple of other things before we move away from Houston.

We do plan to sell one of our non-core office buildings in Houston.

We currently have it under contract.

It is 1800 West Loop.

It has been a strategy of our company to sell non-core, non-strategic assets, we've sold about a billion six in the last three years.

This particular asset has been hovering around 70% occupancy, and we have chosen to make that sale.

We will record a impairment charge on 1800 West Loop in the first quarter, and I wanted to call that to your attention.

I should also mention that we're very comfortable with the overall credit quality of the portfolio.

Our chargeoffs again in the first quarter were very, very low and very, very acceptable levels.

We do, in Houston though, continue to monitor, as you might expect, El Paso, who is at Greenway that has been downgraded to TAA1 by Moody's.

I will say that El Paso is current on their rent.

The space that they occupy at Greenway primarily supports their core gas pipeline business.

They are the largest core gas pipeline company in the United States, and it is being fully utilized.

The company has a new CEO now and they've added three new directors.

All three have excellent energy credentials.

And they seem to be making pretty good progress on their asset sales.

They've made good progress on their refinancing program.

And they've settled their litigation issues.

We're seeing improvement there.

The market responded.

The price of their stock has gone up.

And so, you for, we continue to watch but we've seen some positive trends in the last 90 days there.

Let's turn to slide 12, which is Dallas.

Dallas remains competitive, however, first quarter absorption was basically flat which -- which is good on class A space.

We expect Dallas to, I'd say, remain soft for most of 2003.

There's still not a lot of pricing power rates maybe off 3 to 5% the rest of the year.

TI and leasing commissions in this particular market are probably up 10 to 15% from where they are today.

So it is still a -- a soft area, although the velocity has picked up.

The good news in Dallas is that we remain a capital constrained market.

We have only 487,000 feet of class A space that is under construction.

Which is very nominal levels relative to historical Dallas or other markets around the country.

Dallas, like most cities, we're looking for job growth.

We're looking for absorption.

New construction and overbuilding is not a issue right now.

As of March 31, we were 85.1% leased in Dallas compared to 79.5% for class A space.

As you would expect, we are not as well positioned in Dallas as we are in Houston, with regard to rollover.

In Dallas, we're 78% addressed compared to 90% in Houston. 78's not bad.

That is up from about 52%.

At the end of last quarter.

The good news here is that 68.3% of that space is signed.

And so we -- we kind of know where we are in Dallas now.

Proud of the team.

It is competitive.

They're making headway.

But I will not be satisfied here until we get back into the low 90s in Dallas.

Turning to slide 13, just a quick comment on the Dallas CBD.

It gets a lot of press.

There is a lot of reports written about it.

About it being 27% vacant.

That is true.

It is true.

But it is a very misunderstood market.

It is a very highly fragmented market.

There is a big difference between the very high quality double A space and the C space.

You can see on this particular slide that the double A space is 91% leased it is historically run 91 to 93, 94% leased for several years.

There is a big drop in occupancy from the double A space to the C space.

It is 50% occupied, the C space, which really pushes up the vacancy numbers.

Crescent Real Estate owns, as you can see, 5.2 million of the 8.3% double A space.

We are 89% leased.

This is down from 91% leased because of the KPMG move out at the Crescent.

We think that will be backfilled and we'll be back up to 91% there.

Maybe one final comment about office before we move to hotel and resorts.

The area that we have work to be done is in Denver.

We only have 31% of our 2003 expirations signed in Denver right now.

Denver is, as most of you know, is a tough market, particularly in the tech center, from the Boulder area.

Cherry creek seems to be holding up really well.

We've got a major presence there and CBD area.

We have a major presence there.

And we want to make headway in the CBD.

We've really challenged the Denver team to get high behind it.

We've got some nice prospects in downtown Denver.

They are pretty large transactions, but we need to convert those.

And those are important to us for the remainder of the year.

Let's turn to slide 14 and take a look at our hotels and resort business.

For the first quarter, our business class hotels reported very strong, same-store NOI growth.

It was up 18% over the first quarter of 2002.

The occupancy levels of 75% were strong.

Our ADR [INAUDIBLE] par were also up.

Most of this was achieved because of our hotel in Denver.

The Denver Marriott.

And our hotel in Austin, both had very good first quarters.

For the des continuation re sorts, we were down somewhat in -- same-store NOI occupancy.

It was really primarily because of three resorts, the Canyon Ranch at Linux, the Sonoma Mission Inn and the Park Hyatt at Beaver Creek.

All three for different reasons, and let me give you a little color on that.

For Q1 O3 Canyon Ranch Linux averaged 83% occupancy, not bad, but it was compared to 94% in the first quarter of 2002.

In the first quarter of 2002 was really an exceptional time for Canyon Ranch, it was after 9/11.

We had many, many of our New York customers drive to Linux as a time to really get away.

We had a number of special programs that we put in place for these customers.

And it really was a special time, and I think the -- the Linux people did a terrific job at that time but as a result of that, the occupancy was unusually high.

So it was a tough comparison.

Sonoma did not generate the occupancy that we really wanted in the first quarter.

However, we are confident in our new partner, Fairmont.

We're hearing very good things.

The advance bookings are good.

We're going to have the rest of the year at Sonoma several months that will have occupancies in excess of 80%.

This is the first time we've had something like that occur since September of 2000.

These are advance bookings.

There are some wonderful corporate functions that are occurring.

A number of the corporations are not traveling internationally now.

They are staying in the United States, and Fairmont is doing a good job of picking up this business.

So a soft first quarter, but I do expect that to improve for the remainder of the year.

The other resort that was down somewhat was Park Hyatt at Beaver Creek.

First quarter occupancy was 75%, real respectable, down from 81% the first quarter of 2002.

Believe it or not, the reason it was down, we had too much snow in Colorado.

A lot of snow came into Denver.

It caused transportation issues, and so it dropped the occupancies back a little bit.

But still a decent first quarter for the Hyatt Beaver Creek.

Turning to slide 15, I'll comment on residential and then turn it back to John for questions.

You'll recall the first quarter of 2002 -- the first quarter of 2002 was a first quarter for us in the residential business.

We reported 15.6 million dollars of FFO.

This was higher than normal.

And it was primarily because, if you will recall, Harry Crampton had about 158 condominiums that had been under construction for about 18 months, this he closed the first quarter, so we had a terrific pipeline there under construction.

It was pre-sold as we closed in that quarter.

This quarter Harry closed 15 condos, which was in line with his budget and his plan.

So he was on plan.

If you'll turn to slide 16, we'll look at the Woodlands and Desert Mountain.

Again, the first quarter of 2002 was a strong quarter for the Woodlands because of commercial land sales.

We had a number of retail sites that closed the first quarter of 2002 that we did not expect to have and did not have in the first quarter of 2003.

In the first quarter of 2003 the Woodlands reported 218 lot sales.

This was compared to 227 first quarter of '02.

But we've been able to work up the average lot price to 65,000 a lot, so our overall lot revenues reached 14.2 million compared to 11.8 million in Q2.

So revenues were up, and profits were up at the Woodlands on the residential side.

They continue to see very good activity in overall home sales in the Woodlands, and so we're pleased with where they are.

Let's jump to Desert Mountain.

Desert Mountain closed 13 lots in the first quarter.

We had a budget closing of 13 lots in the first quarter.

Traffic in April in Desert Mountain has been down from last year.

It was down from what we expected.

I think a lot of it was related to, you know, some of the war activities.

So we need a busy second half of May and June.

It has started picking up the last couple of weeks, but April was fairly slow.

Overall, that is my report, John.

All right.

Thanks, Denny.

At this time, operator, if we could 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, then the number 1 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 speaker phone, please pick up your handset before presenting your question.

Please hold for your first question.

Your first question comes from Greg Whyte with Morgan Stanley.

Good morning, guys.

Denny, can you give a little color, there were two charges, an impairment charge and a discontinued ops charge I think it was in the first quarter.

Can you give color on those?

You alluded to one.

I want to understand what was going on.

Jerry Crenshaw, Jr.: Hi, Greg.

This is Jerry.

Hi, Jerry.

Jerry Crenshaw, Jr.: Those relate to one another.

The impairment charge was the 15 million in the discontinued ops, what happens is it nets down the minority interest but it is the same property.

Okay.

And so in terms of-- I mean, that is on the asset that is, what, in contract right now.

Jerry Crenshaw, Jr.: That's right.

Okay.

So in terms of your expectations for the balance of the year, I mean on assets that you no he that you are either, you know, going to sell or that you have in contract of, are there other charges that we might see?

Jerry Crenshaw, Jr.: No.

Okay.

All right.

I guess I have to limit myself to one question so I'll re-key in.

Your next question comes from Gary Boston from Smith Barney.

Good morning.

Denny you went through the two building in the telecom quarter that were tough from a leasing perspective, in terms of the leasing cost on those two transactions, could you give us any color on TIs and leasing conditions that may have gone into those.

Yeah, those were hi, Gary.

They were in the $25 range for TI and leasing commissions in total.

And what sort of term on the leases?

Ten years.

Ten years?

Um-hum.

Okay.

So you are getting down to those on true net effect of rents that are pretty close to.

They are positive, they are positive.

But it's a tough world out in telecom.

Is that the one submarket where you think you are seeing that type of activity in Dallas.

That is really the only area that, you know, we're getting down close to very low net effectives, economic net effectives.

Downtown in the Crescent we're still getting 10, 11, 12, $13 net effectives.

Thank you.

Your next question comes from David Copp with RBC capital markets.

It is Jay Leupp here with David.

A two-part, single question.

Could you talk a little bit about your debt strategy in this environment through the remainder of the year, secondly John with your guidance with respect to your non-return on investment income of $0.70 from your land sales, do you anticipate giving similar guidance for that number in 2004?

This is Jane Mody, let me just address the question regarding the debt strategy, at least as it related for 2003, we do not currently have any offerings that are on -- that are on the board.

And we would continue to really look at maintaining kind of a current debt posture.

As you notice, we have very minimal debt maturities in 2003 and 2004 and really the first time that we start really addressing a lot of our rollover is in 2005.

The one thing that we were able to successfully implement that I think has helped our average, weighted average debt rate, is that we were able that -- we were able to acquire on what I think were a very favorable basis a roll from swap that we had that began expiring in February of this year, and you're starting to see the impact of those lower rates from those swaps as you move through to -- 2003.

Yeah.

In terms of -- this is John.

In terms of anticipating the question on answering the question on the additional cash flow coming out of residential, yes, we will continue to give market guidance on the amount of that on a year by year basis.

It is a important component of the business, and it is something that we've always looked at very carefully and monitored closely because it is a material number.

Thank you.

Your next question comes from Steve Sakwa with Merrill Lynch.

Good morning.

John, if you look at what you did in the first quarter, and you look at your projection for the second quarter, you are kind of in a range for the first half of 73 to 77.

And your full-year guidance is still $1.80 to $2.05 so clearly earnings have very back-end loaded.

I wonder if you could short of address that.

I presume that is mostly from the land development business.

And, you know, given Denny's comments on traffic in April being slow at Desert Mountain, what are the points that we should be looking for?

And at what time do you start to become uncomfortable with that kind of rampup.

Jerry Crenshaw, Jr.: Steve, it is something that we are monitoring very carefully.

This is a tough environment in which to try and project earnings.

It is just really tough.

I want to admit that up front.

And we were doing the best to be that we can given, you know, the economy that we are dealing with.

Several points, one of which that Denny alluded to, and that is the signed leases, your know, office activity that we know will be kicking in towards the end of the year, and that is something that we are factoring in.

The rest is just the kind of historical norm for Crescent Real Estate where we do have typically a very strong fourth quarter and we are still counting on that, much to do with the residential business.

Denny, do you have anything to add to that?

Well, I -- I would say that in talking to the different business manager, they are staying right on their projections.

That the unit managers at Desert Mountains and Woodlands, they are not moving off of their year-end numbers right now.

You know, we think that this fourth quarter economically should be better than the fourth quarter of last year and we had a pretty good fourth quarter last year, as you recall, Steve.

So, you know, that -- that is why we're sticking with our numbers right now.

All of our managers are staying with theirs also right now.

Could I just ask maybe in terms of what is -- I guess how much lead time do you have with the people that you sell the lots to?

I mean the fourth quarter business did not necessarily all take place in the fourth quarter.

There must be some buildup to the fourth quarter.

There's -- there's some buildup.

But it's -- it's interesting.

Generally, around September we start seeing, you know, good traffic at Desert Mountain, at Woodlands, some of these lots and a lot of it does go to, you know, closing in the fourth quarter.

Now, that does not mean that it is the first time that the people have seen the lots or talked about the lots.

But, you know, this -- there is a lot of activity in the fourth quarter around here.

Jerry Crenshaw, Jr.: Steve, this is Jerry.

I would make one comment on Desert Mountain.

January was actually our activity wise one of the strongest we've had on record, what happened to us when we're looking at February, or more March time frame, I think we really were impact the by the war.

So we're optimistic and we've seen some activity over the last week pick up.

And, you know, as it relates to Desert Mountain and some of the other developments, it really can be contained within a quarter.

These things can close very quickly.

Your next question comes from John Lativas with Greenstreet Advisors.

Good morning.

I'm on page 9 of your presentation, your leasing economics, which I find very helpful, thank you.

I just wanted to clarify a couple of definitions.

The -- the full service and net effect of rents are they quoted on a cash basis or a GAAP basis?

Jerry Crenshaw, Jr.: They're -- it is really in -- it is on a GAAP basis and cash.

I mean, it is a average.

I'm sorry, it's?

I guess I do not understand that. "average"?

Jerry Crenshaw, Jr.: Well, John, it is the going -- it is GAAP.

GAAP?

Okay.

And I just wanted to clarify your definition of net effective rate.

Jerry Crenshaw, Jr.: Net effective rate is your full service rental rate plus recoveries, which are your expense reimbursements, less your expense top.

Okay.

And is there any amortization of TI numbers in that?

Jerry Crenshaw, Jr.: No.

Okay.

Thanks very much.

Your next question comes from Greg Whyte with Morgan Stanley.

Hi, just a follow-up.

John can you make some comments on buy backs.

It looks as though the activity was pretty slim in the first quarter and in prior quarters you've spoken a lot about the -- the value in the stock and your appetite for that.

Sure, Greg.

You know, we still think that in spite of the current economic environment, and in spite of kind of the current run rate of the company in terms of FFO, being disappointing, we still firmly believe in the value of the assets.

I do not think that any of this has impacted the value of the assets, and it has not impacted one bit our view of the value of the company and the attractiveness in our opinion of buying the stock back.

That being said, as we have maintained, any further stock buy backs will be on a leverage neutral basis which means that we need to execute either sales or joint ventures that create -- you know, that free up capital that allow us to recycle back into the business or buying stock.

Because we did not have a lot of activity in that regard in the first quarter, we did not buy back any stock, but it is something that we will continue to focus on going forward.

So you know the strategy has not changed.

Our view of the value has not changed.

If anything, we are more firmly committed that it is a heck of a buy.

Tell me, the assets that are in contract right now, I mean, are they -- is there net cash flow that you will receive on that after debt?

Yes.

Okay.

You have a follow-up question or comment from Steve Sakowa with Merrill Lynch.

I guess just two quick things.

One, Jerry, could you comment on your G&A feelings for this year, and Denny if you look at slide nine and look at economics, and look at the Nortel building for example, the gross rent -- yes, the gross rent was down 32% on a full service basis but the net effectives were down, you know, close to two-thirds.

And I'm just wondering, you talked about the portfolio being not far, maybe above market or close to market but that's kind of on a gross basis.

How do you sort of look at that at the net effective basis.

The nef effective -- this is an abhoration of these two deals, the net effective is because of the step up in the operating expenses, when you redid the least, you increase the base of the expense and that is what caused the gap.

You'll have that on all these leases, so presumably all the expenses have been going up.

Not all the leases, some of the leases.

This was particularly ugly.

Jerry Crenshaw, Jr.: Yes.

Steve, the G& A, we should see that pretty consistent with where we are at last year to slightly down.

I think we should punch out around $26 million dollars, last year we are we were at 27.

Steve, keep in mind, you know, our average lease term is typically shorter than that of many companies, which is a bad thing when rents are headed down in and the market is like it is.

It is a good thing when the market starts picking back up.

And the adjustment of expenses is typically not as great for us as it may be for other companies.

So, I understand your question.

And, you know, there is a there is a -- typically a pick up or additional expenses that we're absorbing when we mark that to current expense rates but it is not as material at our company as it is at others.

Jerry Crenshaw, Jr.: Our total expenses runs about $ per portfolio, a step up might being a dollar so it is not that material.

Okay.

Thank you.

Your next question comes from Mike Marron with Bear Stearns.

Is the average occupancy forecast of 88 to 89% and the same store NOI growth negative four to five, is that still attainable in light of the first quarter results?

It is, Mike.

But we do need a pretty good second half.

Just do the math.

Based on what we're seeing come in to the third quarter and the fourth quarter, on leases signed, that is why I emphasize that, we've got a good shot at -- at hitting those kind of numbers.

We've got a couple of big leases that we need to sign.

In Houston a couple in Denver to really get to where we want to be.

But we're going to work hard toward hitting those numbers this year.

Okay.

And just a quick follow-up.

On the 2.1 million square feet that you've addressed to date, can you estimate what the rent spread has been on those deals?

I guess it is the 70% of the 3.1 million square feet that is expiring.

Right.

It has actually been -- on that that has been signed it is about 2% positive.

Okay?

Okay.

Thanks.

You do have a additional follow-up question or comment from Greg Whyte with Morgan Stanley.

Okay, sorry guys, I promise this is my last.

On the cold storage site, I know it is a relatively small piece of the total now, but the results looked somewhat encouraging.

I just wondered if you could give a little color there.

Sure, Greg, you can ask as many questions as you like.

We don't have a quota.

No quota.

Temperature controlled logistics did look good for the quarter.

You know, I realize that these are mod why evident recoveries in the whole scheme of things but I wish every business we're in were showing these kind of improvements.

Alex is doing a good job of continuing to sign additional contracts when new contracts -- I say sign -- sign up long-term contracts we've had, in other words, he is making the existing business in my opinion more valuable and on top of that he is attracting new business and that is starting to flow through.

He's been really good on maintaining expenses.

If you look at the numbers, we're up for the over -- for the quarter over $4 million against our budget.

Yeah.

And we were up over, well, 4.6% over last year when you look at net income before rent expense.

If you look at the improvement 2002 to 2001, it was up a little over 3%, so we've had two consecutive quarter to quarter comparisons here that look very encouraging.

And if you look out in the business, and talking to Alex, you know, I feel that -- I feel pretty confident he's got his arms around it.

And if anything, he's a -- more -- certainly more offensive today than ever before and looking at winning new business and providing good customer service and he's doing a good job.

Okay.

That's helpful.

Thanks again.

Your next question comes from Gary Boston with Smith Barney.

Hello, again.

I was just following up on that point if you could just walk us through the thinking in the cold storage in terms of bringing the quarries back in to your balance sheet as well as the strategy of buying the receivables from Americold in the last few months.

Jerry Crenshaw, Jr.: Yeah, Gary, it is Jerry.

As it relates to bringing in the quarries, it is clearly to continue to clean up the business and between the actual landlord and the operator as it relates to the receivable, really it is working capital loan.

The operator being Americold is in the process of working on a 40 to 50 dollar working capital loan that they should have in place in the next 45 days.

So when that is in place, then you guys would stop sort of stepping in to do that.

Jerry Crenshaw, Jr.: Yes.

Okay.

Great.

Thanks a lot.

At this time, there are no further questions.

Do you have any closing remarks?

Well, as always, we'll be available by phone if there are any follow-up questions, do not hesitate to call any of us.

Thank you very much for your time and attention today.

Thank you for participating in today's conference.

You may now disconnect.