摩根士丹利 (MS) 2003 Q2 法說會逐字稿

Please stand by.

The Crescent Teleconference will begin shortly.

Good morning.

My name is Christie and will I be your conference facilitator.

I would like to welcome everyone to the Crescent Real Estate 2nd Quarter Earnings Conference Call with our host, Miss Keira Moody.

All lines on mute to prevent any background noise.

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 one on your key pad 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 star and the number two.

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

As a reminder if you are on a speaker phone, pick up your hand set before presenting your question.

I would like to turn over to our host, Miss Keira Moody, Vice President of Investor Relations for Crescent Real Estate.

Thank you Miss Moody.

You may begin your conference.

Good morning everyone and thanks for joining us on the call.

In the room I have our Vice Chairman and CEO, John Goff;

President and COO, Dennis Alberts;

Executive Vice President of Capital Markets, Jane Mody; and Executive Vice President and Chief Financial Officer, Jerry Crenshaw.

Everyone should have a copy of our Earnings Release Supplement Report (inaudible) to the call.

If not, this can be found on the Crescent website at crescent.com in the Investor Relation Section.

I also need to remind you that certain statements we will take in today's call are considered forward looking statements within the meanings the Federal Securities Clause.

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

You will find additional information that can cause actual results to differ materially from these statements in the press release issued this morning and in our SEC Report.

With that I will turn it over to John Goff.

Good morning and thank you for joining us.

I think that you will find the slide presentation particularly helpful on this quarter call so I would strongly encourage you if you have access to the internet to sign on to crescent.com and go to the slide presentation.

I think that you will find the slide presentation particularly helpful on this quarter call, so I would strongly encourage you if you have access to the internet to sign on to crescent.com and go to the slide presentation.

Our 2nd quarter results were funds from operations for the quarter of $36.4 million, or 31 cents per share.

On a year to date basis for 2003, we stand at $77.9 million, or 67 cents per share.

The previously issued 2nd quarter guidance was a range of 38 cents to 42 cents, so we missed guidance by, on the low, end 7 cents.

This was principally a result of the commercial land parcel in downtown Houston that we had planned to finalize the sale in June.

It got pushed to July.

That represented 8 cents per share of funds from operations being pushed into the 3rd quarter.

Fortunately the transaction did happen.

We are just a quarter late.

The office segment was on plan.

While resort and residential segments were one penny and two pennies below plan respectively in the 2nd quarter.

Slide 7.

In reviewing the business for the remainder of the year, we see signs of a recovery.

The much talked about recovery.

But it is painfully slow.

I think we all are experiencing that.

And it is essentially jobless.

And we remain very cautious on how soon we will actually see material job growth to boost.

In particular our office business.

For purposes of 2003 guidance, we have pushed the impact of a recovery back into mid-2004.

At least in terms of seeing it in our reported office results.

Our FFO guidance for 2003 is now $181 million to $210 million, or $1.55 to $1.80 per share compared to a previous range of $1.80 and $2.05.

Our guidance by business segment, which is outlined on Slide 7 for office, ranges from $278 million to $284 million dollars of FFO.

Resort hotel, $51 million to $54 million, and residential, $41 to $51 million.

Temperature controlled logistics $25 to $27 million for a total property FFO of $395 million to $416 million.

The biggest differences there from previous guidance primarily are in the office and residential components.

Backing off expenses and other income items which are down relative to where we were, at least expenses are down relative to where we were, total FFO project at $181 to $210 million.

For the remainder of 2003 by quarter, the 3rd quarter 2003 FFO we expect to be between 30 and 32 cents per share and as usual the back end loaded in the 4th quarter.

We are projecting 58 cents to 83 cents per share.

Slide 9.

We wanted to share with you an in depth look at our office leasing for the last four quarters as well as for the forward four quarters.

I don't have this on an annual basis.

We are trying to look at it previous four quarters, next four quarters -- looking at it as of Q2 of this year.

I want to make two key points with this analysis.

First of all, it appears the office business is bumping along the bottom of a cycle and particularly from an occupancy standpoint.

Secondly, we feel we will continue to bump along the bottom until Quarter 2 of '04 when it appears we begin to climb up in occupancy and resulting FFO.

The point here is we don't feel there is much significant downside going forward.

Let me share with you how we are really concluding this.

If we look forward the next four quarters, out one year from this last quarter, we have approximately 4.8 million square feet expiring or terminating early.

This compares to roughly 6 million feet, which was quite heavy, over the last four quarters.

We have signed, or in final negotiations, on 3.7 million square feet or 77% of that 4.8 million square feet of space.

This leaves us with approximately 1.3 million feet in this projection which we assume we can lease on a speculative basis.

I feel at this point this is a pretty conservative look at the business.

And this would get us back to roughly 86% occupancy by the end of Q2 of next year.

Over the last four quarters, if you try to compare that 1.3 million of speculative leasing for the last four quarters, we signed new leases with new customers for roughly 2.2 million feet, (inaudible) substantially better than what we are even projecting for the next four quarters.

Again, I'm trying to emphasize, I think we are being cautious, realistic and hopefully conservative.

And that 2.2 million square feet over the last four quarters was leased in what I consider to be much more difficult environment than what we have today.

Not that today is wonderful, but I think it is marginally better than what we have been through.

Therefore, I think that we're providing you with a realistic conservative projection of our office leasing activity over the next four quarters.

I want to emphasize that in sharing this analysis with you what we are trying to do is project -- not to project -- potential upsides, we are trying to show you that there is not a lot of down side from this point forward.

Once we see real lift from the economy and job growth, we can expect to see roughly $4 million of positive FFO impact for every one-point increase in occupancy.

That's kind of a rule of thumb that we use.

So from 85% roughly where we are today getting back to where we were when all of this economic noise began, at about 93% occupancy, we could expect to see FFO gains upwards of $30 -$35 million dollars.

Which is obviously quite substantial from where we are today.

Slide 10.

We remain 100% committed to the dividend.

Nothing occurred in this quarter or in our outlook for this year or even next year to change our view on our dividend policy.

Slide 10 reflects our adjusted coverage, what I'm calling adjusted coverage, at $1.55 per share, the low end of our range of FFO and at the upper end of the range at $1.80 per share.

As you can see, at the low end of the range, after factoring in cash flow from our residential business, over and above what we received from that business in terms of FFO, that gets us to what we call adjusted -- what we're calling here for illustration purposes -- adjusted coverage for adjusted FFO.

We more than covered the dividend.

The $181 million of adjusted FFO versus $175 million going out the door in dividends.

In this coverage, obviously increases prorata as we go to the top end of the range to $215 million versus $175 million in dividends.

More importantly let me share the bigger picture.

On Slide 11, we will briefly discuss the long-term growth strategy.

In spite of all the near term challenges that running a business in a tough economy brings us, we remain committed and we continue to make, I think, very good strides on our longer term plan and growth strategy (inaudible).

The objectives in the strategy have not changed.

First of all, we are trying to increase return on equity.

Secondly we will be growing FFO; and third, we are going to be strengthening the balance sheet.

Two key components in doing this.

First is to recycle capital through asset sales and joint ventures of existing assets.

We have sold assets now totaling $1.3 billion, roughly, since initiating our plan.

That's excluding the joint venture proceeds, and we have joint ventured existing assets with a value of roughly $750 million dollars.

That plan has worked very well and we continue to focus more and more on further joint ventures.

In fact we plan to increase joint ventures on existing assets over the next four quarters by an additional $500 million to a billion dollars in terms of asset value.

The second key component is leveraging our operating platform in a way transforming the company more and more into the investment management business which is really in response to outside capital sources with lower return requirements than ourselves that we think are more efficient buyers of assets in this type of environment.

Rather than try to compete with those capital sources, what we have done is we've reengineered ourselves to be co-investors with them when we put up 20, 30, maybe 40% of the capital, depending on the transaction.

We co-acquire office properties with these partners.

We generate asset management, property management and leasing fees as well as promoted equity interest.

Accordingly we get a much higher return on equity than we otherwise would if we were to own the asset outright.

And I think we have a higher probability of acquiring assets under that formula than we would if we were out there competing on our own.

We're targeting over the next four quarters $500 million in asset acquisitions of this type and this will be in partnership of pension funds, foreign investors and other primarily institutional capital sources.

Denny will now cover the results in each of our segments in more detail.

Denny?

Okay.

Well, thank you John.

John asked me to bring you up to date on the 2nd quarter business operation, which I'll do, and talk in more detail about our guidance.

If you will turn to Slide 12, we will begin with our office segment.

As most of you know, our office segment represents about 70% of FFO.

In the second quarter, we reported office FFO of approximately $70 million which was exactly on plan of what we expected to earn.

That compares to about $72 million in the first quarter.

As of June 30, 2003, our portfolio was 86.9% leased and 81.5% occupied.

This compared to 87% leased and 85.7% occupied on March 31 at end of the first quarter.

We had anticipated this relatively flat quarter at 87%.

We talked about that on the last call.

As John pointed out in our Slide outlining the office leasing trend, our portfolio occupancy as of September 30, 2000, was 89.2%.

This compares to 85.1% on 6-30-03.

On our last call I talked about the result of this being some sizable rollout that occurred in our portfolio.

And this is the issue that we've in the decline in occupancy.

We've had several major rollouts that we are in the process of back filling right now.

They would include KPMG at the Crescent, which was 130,000 feet.

Caltex at Los Colinas at 250,000 feet and Nortel and (inaudible) at 150,000 feet and Anthem in North Dallas, 63,000 feet.

So you can see, most of this major rollout has been coming in the Dallas market.

Really in only two of these explorations did we have any significant roll down in rate.

What I call big rate exposure in these move outs.

That would be in the Caltex building in Los Colinas.

And over market rate of $29.

We knew that.

And we've been back filling that space at $20.

And that's affecting the same store number.

The 150,000 square foot Nortel lease expired at $21 per share and we have been back filling that at $14.

Our soft spot is Dallas and soft spot is Denver.

Our strength is Houston and I'm going to come back and go into each market in detail in just a minute.

Over all, as John said, we think we're bouncing along the bottom and we're trying to be very conservative in the estimates that we're giving you.

Over the next several quarters we believe that, and we are projecting that, we'll only be able to absorb our expirations and early terminations.

We think the lift in occupancy will not occur until '04 when we see some meaningful job growth.

As you can see in Slide 12, our second quarter same store NOI growth was down.

This was primarily driven by occupancy and that is the case with most office (inaudible) today.

We're going to talk about rate and TI and leasing commissions in a minute in more detail, but occupancy drives our business and it's affecting our same store sales right now.

Turn to Slide 13.

Given the economy and given the lack of job growth, the jobless recovery and the war activity in Iraq in the second quarter, I think given those factors, we did a pretty good job of leasing.

Our leasing team signed 1.4 million square feet which was better than the first quarter.

This brings us to a total of 3.8 million square feet in leasing that we have already signed this year.

That will commence year. 3.8 million will commence this year.

I think that's pretty good.

If you look at the remainder of this year, we've got approximately 2.2 million square feet expiring and I'm pleased that we are 69% of that rollover is addressed. 52% is fine. 17% is in final stages.

So, I think that's a pretty good number.

I feel confident about the numbers John presented to you.

Let's turn to Slide 14 and take a look at the lease economics.

Let's look at rents.

Let's look at mark to market.

On our entire portfolio.

I think this is an important slide.

As I indicated, we signed about 3.8 million square feet that will commence in '03.

The average rate on what we have signed is $21.12.

If you look at this 2.2 million square feet that I discussed a second ago that expires for the remainder of this year, the expiring rate averages $20.85.

That's not a bad number.

It's not an extraordinarily high number.

So, I think it's a pretty good indication of what to look for in the portfolio.

If you take a broader view of the portfolio and look at the entire weighted average of our in-place rents for the portfolio at large, it's $22.95.

Given this soft market, our quoted rates, and this is been looked at in a lot of detail, it's $21.97.

Our quoted rates are about 4% below our in-place rents.

And I think that, again, is pretty consistent with what we are seeing with many of the other office companies.

As a recovery occurs, our quoted rates will go back up and we will have a positive spread that we had prior to this downturn in the economy.

We do expect the economy to improve and expect job growth to pick back up.

But office occupancies will lag this and so we think that occupancies will be improving probably mid-2004.

Rates will lag behind that so you probably will not see any measurable movement in rates until probably early '05.

We have been through a tough two years in the office side.

We expect that with an election year in '04 and the economy improving, we should feel better in '04 and we think '05 will be a much better year for us.

Turn to Slide 15.

I did want to make a couple of quick comments about leasing economics, particularly what we're seeing in TI and leasing commissions.

As you can see here on a per square foot basis, our TI and leasing expense have remained relatively flat over the last four quarters.

These figures are higher than what they were a year or two years ago.

But what we are seeing now is some semblance of stabilization occurring here.

We are happy to see that.

We continue as a company to focus on customer service and customer retention.

As I mentioned in our last call, we received for the second year in a row, (inaudible) the A Award for customer service.

We received very high customer satisfaction scores.

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

So we are emphasizing retention and we are investing our capital in dollars and holding our customers with renewal TI and leasing commission.

We are driving retention and we want to avoid leasing downtime and that is obviously a PR business.

Looking at the year in the office segment from an FFO standpoint, from a guidance standpoint, we think we are in the $278 million.

The $284 million dollar range.

That's based on, we think, pretty conservative estimates about our leasing program.

If you will turn to Slide 16, we will continue discussion of the markets here.

We are focused on four market and Houston, Dallas, Austin and Denver.

In Houston our portfolio was 90.2% leased from 6-30, which was actually up from 3-31.

And significantly higher than market.

Our leasing velocity in Houston has picked up and it is our best and star market.

Our rollover in Houston is in very good shape.

We are approximately 90% addressed there and we are comfortable with what we see happening the rest of the year in Houston.

Our Five Houston Center Project which opened in November of '02 is 90% committed with rates in the low 30s.

In Houston Center in downtown, we are working on a couple of large new leases that total about 300,000 feet.

I don't want to talk about in detail right now, but if we are able to consummate 300,000 feet of leasing, it would take us to approximately 95% at Houston Center, which would be terrific.

If these leases were consummated, they would be first quarter '04 move in.

At Post Oak, we find a new lease there this last quarter.

A significant lease that takes us in that project to the low 90s.

We are pleased about that and also in the last quarter, ExxonMobil began occupying most of the 250,000 feet of space that they are taking at Greenway which also took us into the low 90s at Greenway.

So good news from Houston.

Houston is shaping up nicely and we are glad about that.

Turn to Slide 17 and talk about Dallas.

Dallas continues to be very soft and competitive.

We expect Dallas to remain soft the rest of this year.

For the entire year the rental rates will drop in the 3 to 5% this year.

TI's are up in this market, probably in the 10 to 15% range.

The good news here in Dallas is it remains a capital constrained market and there is 180,000 feet of (inaudible) space under construction right now.

As of 6-30, we were 84.8% leased.

This compared to 79.4% for the market.

We were a full 500 basis points ahead of the market, but still at a relatively low number according to where we have been over the last several years.

We need Dallas to resume its traditional very high level of job growth.

There a number of economists predicting that and predicting a turn around and predicting possibly 5 million square feet of absorption.

But we have to see the jobs first before that first.

We have been very conservative in our estimates in Dallas.

We are about 50% addressed in Dallas right now for the rest of the rollovers.

For the remainder of the year, we have one sizable rollover that is going occur in the third quarter.

That is (inaudible) moving out of a building that we have on LBJ that totals about 240,000 feet.

So we have that as an opportunity to back fill.

I am proud of the leasing team and I think we have an excellent group here in Dallas.

They out performed the market and we are just fighting to keep up with the expirations right now.

We are not getting any lift in the market place.

We need that lift and the job growth to get back into the low 90s which is our goal.

I want to comment on Denver real quick.

It continues to be competitive there.

We are 81.8% occupied in Denver, but starting to see some positive absorption there.

We think that our numbers should move up from that in the future.

Austin.

Austin is a very soft market.

Right now the good news for us there is all of the rollover is addressed for the remainder of '03 and so we've taken care of that.

If you'll turn to Slide 18, We'll talk about business class hotels.

You may remember from our last call we had a very, very strong first quarter.

In our business class hotels.

We expected second quarter to be down somewhat, particularly with the Iraqi War going on there.

People were just hesitant to move around.

The number was not bad, but the over all figure was down.

From a six month standpoint, we are pleased with the number as of year to date, 6-30.

I think we will be fine for the rest of the year in the business class hotels.

I don't see much exposure there.

We will turn to Slide 19 and talk about the resort business for just a minute.

Destination resorts for the second quarter, our FFO was about a penny below expectation.

Our occupancy was actually up which was nice in the second quarter.

Compared to 2nd quarter 2002.

The issue is the spa revenue.

The F and B revenues were down, particularly at Sonoma.

We saw decline in several of the resorts.

People are coming now to the resorts, but not spending the money, they're not drinking the wine and getting that second spa treatment as they had in the past.

We think that will pick back up.

As we mentioned on the last call, after 9-11, we had a number of our New York customers go to Lennox.

We had a very strong first quarter, 2002 at Lennox in both revenue and profitability.

When you look at a quarter-to-quarter comparison in the resort business, you see it down significantly and a big part of that is a tough comparison back to 2002 because of Camden Ranch.

The Camden Ranch business is very strong, but that was an unusually tough comparison.

One bright spot that we do see as we look ahead for the remainder of the year, particularly at Sonoma, we are seeing good advanced booking and we think the occupancy there will hold up for the remainder of the year.

We just need more S and B.

Over all the business class hotel and resorts, we expect to be in the $51- $54 million range from a guidance standpoint and that's a good solid number and a good conservative number.

Turn to Slide 20.

Residential.

Our residential business was approximately 2 cents below plan, below where we wanted it to be in the second quarter.

In the second quarter Harry (inaudible) business closed 25 condos which was right on our plan.

We are expecting a good strong fourth quarter from Harry and his business.

He has got about 100 lots in Tahoe that are ready to be sold, ready to be closed.

In the late third or fourth quarter.

About half of the lots are free sold.

The other half we've got reservations on.

We will see how those closings go.

He had good product acceptance and we feel good about what Harry is going to do in the fourth quarter.

Likewise, The Woodlands was right on plan.

In the second quarter they closed 227 lots which was a good number.

We are expecting a good solid fourth quarter at The Woodlands also.

If you look at the over all residential home sales at The Woodlands, they have been strong this year.

We expect them to continue to be strong.

We also are expecting some commercial land sales in the fourth quarter that are being teed up.

We think they will have a good fourth quarter.

The builder's inventory there at The Woodlands are fairly low, at historic low levels.

We think they will need to take down lots in the fourth quarter to meet their needs.

However, Desert Mountain, we only closed 11 lots in the second quarter at Desert Mountain.

That was about half of what we planned.

Half of what we would have wanted to close.

Traffic was very slow in April and May and that definitely affected our result.

As in the past, we don't expect much in the third quarter.

It's a seasonal business out there and not a lot of traffic obviously in July and August in the desert.

It's really a fourth quarter business.

If you look at our guidance for the year for Desert Mountain, we are in the 50-60 lot range.

We originally hoped for it to be in the 70 lot range and probably likely to be closer to the 50 level.

If you look at the first six months of the year, we've closed 24 lots.

That would mean that we would need to close another 24 lots, some in the third, but primarily in the fourth quarter if you hot those numbers.

Desert Mountain is an extraordinary project.

It's absolutely an extraordinary project.

There are six golf courses and the total build out for Desert Mountain is over 2200 lots.

Over 2,000 have already been sold.

Less than 10% of the inventory left.

The remaining 175 lots that we own are our very best lots.

They're located at the top of the property.

I think we will sell these lots at very attractive prices.

They are expensive lots and have excellent margins for us.

It's a matter of timing and when the economy improves.

We have a lot of dollars at Desert Mountain to harvest.

So for 2003 we expect residential FFO to be in the $41 to $51 million range.

I know that's an unusually wide range, but I think it needs to be.

It's totally dependent on lot sales in the fourth quarter and really from all three of our development partners.

Probably the easiest to call would be Harry Frampton's business and The Woodland and Desert Mountain.

Before we open it up for questions, let me make a few concluding remarks.

First of all, it's never fun to change guidance for our company.

That's not something we want to do and I want to say that as a large shareholder personally and the rest of us in this room having much of or net worth at stake in this company, we are as concerned about that sort of thing as anyone on the call.

But changing guidance for 2003 doesn't change our vision for the future.

We look out much longer term.

I feel very, very good about quality of our assets, the quality of our team, and the quality of our business and the prospects of our business, over that longer term.

While it's painfully slow, the economy will improve and the results will improve accordingly.

It's certainly no secret to any of us as investors that real estate is a cyclical business and the results will vary with the economy and its never has been more difficult, at least in my lifetime or business career, to try to predict the economy.

It has been very, very tough.

As a management team, kind of run a fine line between pushing the team hard and setting its high goals as you can, but also being realistic in setting the goals.

That's a tough line to draw, particularly in these economic times.

Secondly, as I mentioned before, our dividend is intact.

The investors are getting paid well for the wait.

Third, net asset value certainly (inaudible) or supports the value of the stock and we feel good about the value of the assets and we demonstrated that and the values we received in any of the sales.

And lastly, we continue as I mentioned to execute our long-term plan which will provide, no doubt in my mind, will provide growth and more stable earnings and more predictable earnings from our existing equity base.

We don't need another nickel of capital.

We have plenty of capital and we need to do is redeploy that capital at higher returns and that's what we are out to do through the recycling program.

With that, I would like to open it up for questions.

Thank you Mr. Goff.

I would like to remind everyone, in order to ask a question, 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 receiver before asking your question.

Please hold for your first question.

The first question is from Greg Whyte of Morgan Stanley.

Good morning, guys.

I wonder if you can just give some additional clarity and reconciliation on your guidance.

You have effectively taken the mid-point down by about 24 cents and your guidance for third quarter I think was in the 30 odd cent range.

Where I'm confused is in the second quarter you had slippage of 8 cents from the commercial land sale (inaudible) and obviously some weak fundamental results in the other businesses.

When I look at the third quarter guidance, it doesn't look as though you are capturing either fundamentals are weaker where you are not including the land sale capture of 8 cents.

I'm trying to reconcile that whole shift with the 25 cent guide down for the full year.

Greg, this is John.

Let me start and I'll let the pros here fill in the details.

We had never provided third quarter guidance.

Previously.

The 8-cent movement is still an 8-cent movement in the third quarter.

The third quarter does appear weak on a (inaudible) basis and will be weak unless something extraordinary happen and we are too far into the quarter to think that would happen.

In the fourth quarter, is where the bulk pick up is.

Really I think your question is more based upon where your previous, or the Street's previous, third quarter guidance was relative to where we have it.

Versus us never having given specific guidance for the third quarter.

You want to add anything?

I will comment on that, Greg.

It relates to two areas.

First and foremost is residential.

We don't expect much to happen in the third quarter residential.

When you look at -- you can't consider the third quarter as a standard run rate on residential, it's going to be down several million dollars. $4 to $5 million from an earnings standpoint.

The other area that we see off just a little bit in the third quarter will be the office side simply because we have to move out and grow which will affect us a little bit there while we are commencing from other leases and that will drop the FFO in the third quarter to probably the $68 million range.

It drops that number off temporarily.

I think it's really those two areas.

Resort and hotel will be down just a little bit in the third quarter.

From where they were in the second quarter.

When you add all that up, it gives you those kind of figures in the third quarter.

Your swing is pretty significant.

If we took the 8 cents out of the third quarter, we are talk about a 24-25 cent number.

The mid-point of your fourth quarter guidance is between 70 and 71 cents.

That's far short of a three-time fourth quarter over what third quarter will be.

The 4th quarter will be significantly higher in the 4th quarter because of residential.

Greg, you have about 60% of your residential you will do in the fourth quarter.

A lot of that has to do with planned closings.

That can't happen in the third quarter.

It will happen in the fourth quarter.

Okay.

The next question is from Jay Leupp of RBC Capital Markets.

Good morning here with David (inaudible).

Given the comments you made with Dallas and Houston office markets, Dallas in particular, what do you think are realistic asset sale cap rates, particularly in the Dallas market, for your portfolio and the likelihood we could potentially see accelerated asset sales and repurchases in the last half of the year.

I will comment on that, Jay

If you look at what trophy assets are bringing in the market place today, I continue to be amazed at the cap rates we are seeing around the country.

They are in the 7 and 8% range and I think because we have a dominant position here and we have wonderful trophy assets that comprise a large percentage of that, we are talking about low cap rates from evaluation standpoint.

Probably 8% in today's world.

If you look at the assets that we sold, some of the B assets we sold, we sold those in the high 8s and low 9s at very attractive price per foot and a couple of buildings after that we sold had leasing challenges and we were very surprised by the prices that we get.

We have continued to see pretty strong valuations in a pretty soft market.

Okay and just on the back end of that question, the likelihood that you would actually sell more noncore office market and possibly use the proceeds to buy back shares.

Absolutely we would do that.

Let's caveat by saying Dallas is going to come back -- and when Dallas comes back, it usually will come back in a big way, rapidly in a big way.

What you have to measure is the benefit of selling assets at a low cap rate versus realizing increased cash flow through increased leasing activity and taking the risk of cap rates to adjust, but you have more cash flow to cap.

We try to measure that, but noncore, absolutely.

Let me add one more comment to that.

What we would sell off would be our suburban assets that we would like to use for other purposes.

It's not likely two be a core asset, but some suburban assets we would entertain a sale.

Okay and then John, a follow-up on the comments you made about a possible joint venture acquisition activity.

What kind of acquisition yields would you be looking at in the back half of this year and what types of yield on equity would you seeing when the assets ever run through the joint venture structure.

Well, when you run through the joint venture structure, we are targeting mid-teens going in returns leveraged on our equity.

That's what it takes for us to pull the trigger and in some cases we can higher than that.

Upper teens.

That's after factoring in the increased fee income, promote, etc., because that come typically down the road.

But cap rates, we are looking for assets that we can, always hate to use cap rates because you get into the issue of what are you capping this year, or next year, or NOI cash flow.

I would say something in the 9% range.

That's very doable in this environment.

We are looking to buy typically depending on the partner we are bringing in and their appetite, higher quality assets that we se the substantial upside in.

Particularly under-managed asset that is something would like to find or increased cash flow through better management.

One last question on the in light of Denny's comments on land sale activity in your land developments and given the back drop of the potential purchase of Newhall land at a substantial premium.

Any likelihood of bulk sales here in the back half of the year?

It's -- those are things we would always entertain.

As I often say, we are not wed to anything on the balance sheet.

We are economic animals here and big shareholders.

We will make the right decisions as shareholders and don't see anything imminent there, but something we would consider at the appropriate price.

There is more and more capital focused on that industry as a result of the aging baby boomer and all the article and demographic data that we look at.

There is more and more capital focused on trying to invest in that and not a lot of really good operators.

I will tell you we have a very, very good operating team.

Thank you.

Sure.

The next question is from Jonathan Litt of Smith Barney.

Good Morning.

First, I would like to echo Jay Leupp's comment.

It would be a beautiful thing to bulk sale.

The land and take it and stop having it hit the volatility that it adds each quarter.

But that's not my question.

My question is on the joint ventures.

Why now and how close are to you making a deal with partners to put this thing together?

The joint ventures, when you say why now, we have been doing it.

We have $750 million of related assets.

We have a number of relationships already that have been productive, Jon, and think we are getting good marks in terms of ability to manage and lease the assets and they want to do more with us.

It's not a new phenomena, but something we worked on quietly and gone somewhat unnoticed on the Street and we have been doing it in a big way.

We will continue to do that.

And what we're planning, those existing partners as well as other relationships we established, not only do they want to focus the asset base, but what we do further in our existing market and potentially new market that is we think we would offer value to.

I guess that's the question.

You will be buying new assets.

Is there something that you see on the acquisition front that would cause you to do it now?

We completed one transaction in Houston, new asset with the partner.

I think we will see additional assets in the markets where we have competency and we feel we understand the market well and traffic in a lot of the customer base.

Are you buying them exceptionally well or are they being discounted appropriately to take into account the very difficult markets or is it just --.

I can't answer the question any other way.

We think we are buying well or we wouldn't be buying them.

We think there is value in assets that are under managed and haven't been given proper attention and they perhaps had an out of state owner or management team or leasing property management team that had no ownership in the building.

They were on on a for-fee basis.

We can typically go in and see an immediate pop as a result of going as an owner and doing an intensive job of managing the asset and leasing the assets.

Those are the kind of opportunities we try to find.

There is a lost capital that would like to match with ours.

We put up 20-30% of the money and put our team to work on the asset.

There is a lot of capital focused on real estate because of the deal.

Let me say one last thing and you can come back to me.

Without this structure, we are not that interested in putting whole assets on the balance sheet over -- that economics typically doesn't work given the level of capital floating around the market place trying to buy assets today.

However we have this team sitting on the ground that is in all these markets has a lot of expertise and excess capacity on the team.

It makes obvious sense to take that team, a little bit of the capital and get wonderful returns and be an efficient buyer and you are matching with far cheaper capital.

To the point you are making, there is a lot of capital looking to leverage these things up and buy them and how can Crescent be competitive when they can't operate at those (inaudible) levels.

Also take together in perspective of where stock is trade and the best use of cash.

You say we can't operate on those leverage levels?

The capital is chasing someone's assets puts on 75-80% debt.

Crescent will not operate at those levels, I assume.

I hear what you are saying and we are finding opportunities to do it and typically most partners we are talking with and have been doing business are interested in 60 to 65% leverage and not 70-75%.

That's typically a financial buyer.

That's an opportunity fund.

Most pension funds, most institutional buyers will not put that kind of leverage.

Let me give you the specifics on the transaction we closed in Houston on a joint venture basis with General Electric Pension Trust.

We bought that asset and it's a class A building in the (inaudible) area with 82% occupied.

We bought it from an insurance company.

We didn't think it managed it well and put 65% debt on it and it was yielding about a 9 and a quarter going in cap rate at 82% leased.

We think it will go to over 11 when we get it to the low 90s and we put terrific financing on it and we are collecting our standard fees from the partnership and we will make an extraordinarily high return on that on a return on equity basis.

It's was a perfect transaction for us.

The reason is it was in our back yard and we understood the business and think we can lease it up.

We know the momentum in Houston.

We will make that transaction work.

The next question, sir, is from Dan Oppenheim of Bank of America Security.

Thanks.

I was wondering about Desert Mountain.

It looks as though the pricing per lot declined versus the first quarter and relative to what you are getting in 2000, but the supplement is still assuming higher prices for the land sales later in the year.

Should we assume there will be more erosion and the higher prices somewhat unlikely?

That was just a matter of product mix.

We had some older lots included and the pricing was somewhat lower.

Most of the lots we've got left is are in the $1.5 million to the $2 million range.

At the top of the mountain, some are $3 million.

The profit margins are those are excellent.

Thanks.

Secondly, about the expectations for office leasing.

On page 9 of the slide show showing 1.8 million square feet in terms of expectation for leasing for the first quarter of next year.

I wonder if you assume that the 300,000 square feet of Houston Center will be a part of that for next year or is there something else there.

That would be part of that.

We feel pretty confident about it.

A lot of that 1.7 million square feet of leasing are leases we already signed.

Okay.

Thanks.

The next question is from Mike Marrin of Bear Stearns.

My question has been answered.

Thank you.

The next question is from David Loeb of Freedman Billing.

This is sort of a joint Denny-John question.

To your point about Slide 10 about the Capex income for residential land, you didn't change that range substantially.

You are at the $75-85 million and yet the residential land FFO range has been reduced by anywhere from $5-13 million.

As you sell less lots, won't you have less return of capital?

Yes, that is true.

A lot of the return of capital is coming out of Harry Frampton's business on the Tahoe lots.

That's the difference.

We have a substantial return of capital coming out of that business that we project as opposed to the Desert Mountain sales.

This Desert Mountain itself have a lot of return of capital as you get through the last couple hundred units?

Not a lot of capital because the profit margin is so high.

Okay.

More profit right now.

Most of the capital has been returned over the last five years.

The return of capital you are expecting in general over the next several years, is that mostly from Frampton's properties?

And Woodlands.

At what point in the cycle do you need reinvest to keep the cash flow stream relatively constant?

A lot of it has been reinvested.

It's a very marginal reinvestment to have an excellent cash flow over the next six or seven years out of the business.

Okay.

Thanks.

Thank you.

The next question is from John Stewart of Merrill Lynch.

Thank you.

Most of my questions have been answered, but quickly, Denny, you gave the expiring rent on the remaining 2003 expirations and the asking rent across the portfolio.

Do you have the asking rents on the mark to market on the 2003 rollover?

That's the million 6 that we have over the next two months?

Is that what you are asking, John?

Yep.

That's 4%.

Down?

Our company quoted is 2051 and expiring 1980.

It's up 4%.

And then Jerry, you can qualify the shortfall in the resort hotel and (inaudible) represented by the restaurant and spa business.

If ADR is down 3% and (inaudible) is up 4% and occupancy up 500 basis points, how do you get to the 23% decline in (inaudible).

Can you walk through the numbers for us?

Your margin on your resorts is down from 16% to 13%.

That's roughly a million and a half dollars when you look at the margins on resort.

People are still coming, in fact are coming in a bigger way, just not spending as much money.

(inaudible) side of the business, we are seeing the downtick.

They come to Sonoma and sit out with a sack lunch rather than spend together in the restaurant right now.

Thanks.

Our next question is from Todd Voigt of Cliffwood Partners.

Good Morning.

I would love to understand better your equity and earnings from your residential development property as lot of those are from condo and single family sales in the Colorado area.

It looks like it went from 6.1 million to 1.5 million and for the quarter and 18.6 to 2.5 in six months..

Is that just your burn through a lot ever your supply and having less sales because you are burning through or is there a slow down in condos in Colorado or what's going on with the line item?

Actually, you got it right.

It's the reduction of the inventory.

We had a big inventory that flowed through Harry's business in the first and second quarter of 2002.

We are rebuilding that inventory right now.

That's the Colorado business.

The Colorado business.

We went through that cycle and that's why the FFO is down.

We are rebuilding it.

We have a new project under construction in Bachelor Gulch adjacent to Beaver Creek.

We have 30 condos and the average price is $2-3 million.

A are a few $5 and $6 million units.

Of the 30, we sold 21.

That project will be completed next year and then we will close those units out next year.

We are just in a situation where we, fortunately or unfortunately, sold out of inventory.

You are building it?

Can you give me a sense of what the existing supply for the month of inventory on the market in general including you and your competition.

In this particular submarket that we're operating, the Bachelor Gulch, we are it.

Nothing else is under construction in the market.

That's a reason the sales have gone so well with this product.

It's at the top of the mountain and there only two sites left in Bachelor Gulch and this is one.

The other is a property that is slightly down the mountain from this particular project which we also own.

It's 40 units and we will start marketing that product.

It's a slightly lower price product than what I described at the top of the mountain.

We will start marketing that probably around Christmas time.

We're the market.

Okay.

That's grit.

As I look at your supplemental on page 43, (inaudible) for every property or area you are building out, I should look at what you have planned versus what's built and where ever the big (inaudible) ?

That's correct.

The next question comes from Greg Whyte of Morgan Stanley.

Hi guys.

Can you make a couple of comments on the cold storage and also an update on the El Paso lease?

Cold storage continues to perform on plan if not slightly ahead.

We have been pleased with the performance that (inaudible) they have been delivering and fields I think I said this time last year, and no one believed me, that this business would show better performance that anything else in our portfolio, and it has.

That being said, we still want to see continued improvement and I think he has the plans in place to do that, Greg.

I feel very good about where the business is headed and I think what his results will again to allow us to have options with our investment whatever that might be.

I'm not pointing to anything, but I'm saying kind of the continued quarter-to-quarter performance is certainly opening the door for us to have stable operations to look at and use for whatever strategy we want to take longer term.

You want to comment?

Greg, just on the El Paso situation, I'm sure you are monitoring it as well.

El Paso appears to be making substantial progress in terms of their over all business strategy.

They announced that they had replaced the CEO and have (inaudible) who recently joined them and I think all reports are that they have a lot of confidence.

Really the company made very, very significant strides in terms of its over all asset sales and debt restructuring.

At this stage of the game, their performance has improved dramatically from (inaudible) a low point of $3.30, up to where it trades now.

We continue to want to see good uses come out of the sites.

Thanks.

The next question is from Stephanie Krewson (inaudible) from BBNT Capital Markets.

Hey, guys.

I hate to ask the obvious question, but can you comment on your assumptions going forward for (inaudible) and also for mortgage rates and potential effect that may have on residential lot sales or are thinking of that in your residential guidance.

Really in the numbers from now until the end of the year, we're using a (inaudible) 2% and in our projections on a go forward basis, 3-4% for the next couple of years.

Sounds reasonable.

Thank you.

Let me remind you we have a substantial -- (inaudible).

I was thinking more along the lines of demand for residential lots.

Short-term impact from a spike in rates.

What we are hear for example people in the field is, Stephanie Krewson, with a little bit of spike in rate, it's actually increased traffic.

People are out saying --.

Blocking stuff in?

Yeah.

They bounce back up over 6%, which is higher than it was, but still not an (inaudible) rate at all.

It picked up activity.

Great, thanks, guys.

thank you.

The next question comes from Karen LaMark of Merrill lynch Investments.

I would like to go back to the planned acquisition and the JV structures.

You can give us more information about what asset classes you are talking about and which markets and maybe in the context of that refresh refresh your memories on the long-term asset plan and give us an update on the plan dispositions.

Thanks.

The focus on acquisitions and totally office.

Primarily and principally in markets that is we're already in and have a dominant position in and secondarily we are looking at other markets.

We continue to look more in Florida as well as California and recently hired a key individual in California to open up an office there and to increase our presence it there.

We have an asset in San Diego already, but we continue to scout around that market place for opportunities.

Most of the activity to date in the joint ventures have been in our existing markets.

And mix of asset types long-term?

Today we are 70% office and looking to grow that to 80-85% overtime.

Also, I will mention we hired Tom Miller to join us and he offices and will be officing in L.A..

Thomas spent his entire 25-year business in the real estate business in California and comes from Jones Lang LaSalle.

He has a terrific background and is a Senior Vice President in our company and we were thrilled to be able to get him.

We think that gives us an incredible position in California.

We have JV partners who are interested in doing business with us in that market and through Tom, we think that's a plus.

Just one follow-up.

Under what conditions would you guys consider divesting or exiting maybe the resort and or the residential properties?

A function of price.

I wouldn't want to state that price on the phone here, but it's a function of price.

We would exit anything and everything at a price obviously.

It's -- right now I don't think the environment in the hotel resort sector is really there for divestiture and I think we have pretty decent upside over the near term and the assets we have as the economy continues to recover and as we repositioned assets like Sonoma.

The residential side, same thing, but we are seeing more and more people that are coming not so much looking to acquire the business, but to invest in the business because they want to put capital to work and under the appropriate terms, that can make a lot of sense.

In essence, it would be like a joint venture format and we talked to various parties about that.

Thank you.

The next question is from Fred Taylor of Fleet Security.

Thank you.

Most of my questions have been answered and I did want to ask a little bit about the balance sheet and your feeling on leverage which increased because of cash flow.

And debt has gone up a little bit.

As well as looking at your maturities in 2004 and 2005.

Maybe I will leave it open ended and let you comment on that with most of the cash flow being paid out as a dividend and thaw don't make major divestitures soon, I assume they will stay at these levels.

If you look, Fred, this is (inaudible) if you look at the change in leverage quarter to quarter, it's up modestly.

What has affected leverage when you go over period over period, was the consolidation of the residential businesses,that occurred at the time that we actually were able to fully consolidate CRD and the Desert Mountain operation.

Right.

That tends to fluctuate.

When I look out over 2004 and 2005 time frame, we have really very minimal rollover.

We have got one secured note that is we're in the process of renewing right now.

That matures in the first quarter of next year.

We have a CNBS transaction that does have renewal options on it as well as - then the other thing that we have in the line of credit.

Right.

We will be addressing next spring.

okay.

You don't see a lot of change.

And again, I would remind you the same that we have been saying is that you really have to take into account the -- that excess cash flow (inaudible) .

That can be used to reinvest or pay down debt.

Thank you.

Our next question comes from Jonathan Litt of Smith Barney.

I just wanted to finish up on the JV.

Do you have anything in your numbers for '03 for money being put to work in that entity and in case I get cutoff, you quoted your rent for the first part of the year.

At least the share of 21.12 (inaudible).

That the straight line or cash?

First off on the joint ventures, we don't have anything in the number, Jonathan.

So too the extent that we do something.

That's a plus.

On the rent, that's full-service rent and a straight line.

When do you expect the JV's to ramp up?

We are wanting them to wrap up as quickly as we can.

We have transactions we are working on and we're hopeful we will get some things closed the remainder of this year.

We did not put them in our numbers.

And again, I want to say I feel like we ramped them up.

That $750 million (inaudible) over the last 18 months and you look during the period of time and it's been ramping up.

What we did is sold assets that were the obvious sales first.

We got that done and the assets that we still would like to continue to participate in the cash flow of, we started joint venturing.

What we found we really were able to construct those at about the same pricing level.

There is not a big (inaudible) if any.

So it's a great program to again maximize our infrastructure or the value.

The next question is from John (inaudible) from Green Street Advisor.

Good morning.

What's your remaining (inaudible) at Desert Mountain (inaudible) and also what will Crescent own when all the lot sales are gone.

Will Crescent have a valuable interest in the golf clubs for example?

At the pace of 50-60 lots per year, Jonathan, that's about a three-year sell out.

In the past we sold over 100 lots a year.

It's a fairly short cycle in the next 2-3 years and what's also interesting is we still own the golf courses, clubhouse and the restaurant and also the right to the termination fees as members turn over.

There is a nice pop in that which is several million dollars a year.

We think that is accelerating overtime.

What happens is we get all the money back and we get the profit from the sale of these last high-priced, high-margin lots and we still own the infrastructure and got the cash flow which is positive going forward.

Then the club has an opportunity to buy those assets from us in 2010.

They will pay us a multiple cash flow that could be tens of millions of dollars.

As I said when we were talking -- when I talked before, I said there is a lot of dollars out there right now and we've gotten most of the capital back from the transaction.

Denny, can you help out a little bit by maybe throwing out range of value?

Net value for Crescent after the lot sales are done?

I wouldn't want to do that because it will ultimately be based on the cash flow off of the business, but literally it will be tens and ten and tens and tens of millions.

Our next question is from Stephanie Krewson with BBNT Capital Markets.

Hi, guys.

I have two quick questions.

What effective cash rents have you been signing in the first half of the year and the second is a follow-up to my earlier question which is that I know historically you have not hosted Analyst/Investor Days, but it seems that is the majority does not understand the residential business, I do by virtue of the fact that my granddad was a developer, but I can't call everyone.

Do you have plans to reach out to the Street and host a day so that people can really understand what you are doing in your communities?

I actually like the business and the cash flow and the volatility.

I feel like I'm out on a limb here and I'm alone.

With respect to the rates, we don't have a lost straight line rent if you look through the numbers.

The cash rent and straight line rents are roughly the same.

With respect to the Investor Day, we talked about that and John, you might want to comment on that.

I think it's a very good point and we don't have anything planned to answer your question, however we are planning to plan.

That's fair.

I think it's a great idea and something that we certainly realize managing the company, we probably get more questions on that part of the business which is not that large, but it provides a swing in earnings.

The more we can educate the community, the better.

That's a good way to do it.

We ought to have it at Desert Mountain.

It would change their attitude fist they saw it.

Yep.

We -- it's a good point.

Thanks, guys.

It's tough to explain on a conference call.

One of those seeing-s-believing issues.

Really it's not a complicated business.

No, it's not.

It's a very simple business and made complex through all the various discussions.

Agreed.

There no further questions.

Thank you very much for attending the call.

Obviously we will be available by phone afterward fist you have follow-up questions.

Thank you.

Thank you for participating in today's Crescent Real Estate second quarter earnings conference call, you may now disconnect.