摩根士丹利 (MS) 2003 Q4 法說會逐字稿

Good morning.

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

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

With your host Kiera Moody. [Operator Instructions]

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

Thank you.

Ms. Moody.

You may begin your conference.

Thank you.

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

In the room I have our Vice Chairman and Chief Executive Officer, John Goff;

President and Chief Operating Officer, Dennie Alberts;

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

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

If not, those can be found at Crescent.com on the investors relations home page.

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 that they are based on reasonable assumptions, our future operations and actual performance may differ materially from contained in any forward-looking statements.

You may find additional information that can cause actual results to differ materially from these statements in the press release issued this morning with our [inaudible] report.

With that I will turn it over to John Goff.

Thank you, Kiera, good morning everyone, again, and thank you for joining the call.

For those of you following the slides on our web site, I'm starting on slide four.

FFO for the fourth quarter was 78 cents per share or 91.2 million dollars.

FFO for the year was $1.82 per share, or $212.6 million. 46 cents per share in the fourth quarter or $54 million was from the sale of the Woodlands, which we closed on December 31st.

We discussed this sale in a previous special call, but just to reemphasize the strategic importance of this transaction, including the acquisition of Hughes Center, this really allowed to us accelerate our receipt of residential earnings and reinvest the proceeds into assets creating earnings that are recurring, and more predictable.

The Woodlands investment was a huge win for us, and the aggregate it returned nearly four times our original $80 million investment, and generated a pretax internal rate of return in excess of 40%, over a six and a half year period.

The sale allowed us to generate approximately $172 million in liquidity, of which approximately $75 million will be deployed in the Hughes Centers office assets in Las Vegas, leaving roughly $100 million available for reinvestment.

Slide five.

We remain focused on three key components of our strategic plan.

First, we're very focused on increasing return on equity and frankly if we get this right, everything else falls in place.

You will continue to see us joint venture select office assets in our existing portfolio, as well as new office acquisitions in order to maximize return on equity.

We recently joint ventured the acquisition of One Brier Lake Plaza in the West Chase submarket of Houston.

Our expected return is 300 basis points over what it would have been had we bought the asset 100% with our dollars.

We went into Hughes Center in Las Vegas at year-end without a joint venture partner to expedite the process; however, this asset is one that we would consider joint venturing in the future.

And it's providing very acceptable returns on a wholly owned basis here in the interim.

We're also focused on continuing to sell down our land investments where capital is tied up with little to no current cash return, and to remind you this land inventory still exceeds north of $100 million in value.

Secondly, we remain focused on increasing FFO growth in its predictability.

Again, selling non-income producing land investments or raising capital through joint ventures or other sales and redeploying this capital in new office investments.

The Woodlands Hughes Center transaction alone shifted 7--10% of our FFO from less predictable residential land income to more predictable office investment income.

Third we remain focused on strengthening our balance sheet.

As you will see in a moment, we have been focused very much on this, and very busy on the financing front.

Among other things, we completed the miracle financing earlier this month that allowed us to reduce our current investment in this business by 30% or $90 million.

This is a five-year financing priced at [inaudible] plus 295.

Additionally through a methodical series of financing activities over the last several years, we now have access to the bulk of the assets on our balance sheet for purposes of sale or joint venture.

There's six assets that are tied up in one remaining funding that we have access to through de-freezing and throughout this year I think that may even make economic sense to the extent we want to access those assets.

Slide 6.

Let me cover the strategic highlights for 2003.

First, focused on acquisitions and dispositions.

Office acquisitions, the most notable was the Hughes Centers in Las Vegas which is 7 class A office buildings totally 1 million square feet.

That's down from what we originally announced which were eight and that's because one property fell out due to a partner of Ralph's that exercised their right of first refusal and acquired the asset.

Hughes Centers, the premier office address in Las Vegas, as we have discussed in the past, is located adjacent to the $1.9 billion Steve Win development.

It's the dominant address in Las Vegas, housing all the major financial institutions.

It represents 25% of the 4 million square feet of class A office space in Las Vegas.

Everyone knows about the high growth that Vegas has experienced and it is projected to continue to experience this job growth and lead the nation over the next five to ten years.

It has had positive net absorption every year for the last 20 years in the office business.

These assets currently are 95% leased.

Our acquisition was at $214 million or $200 per square foot, which is definitely below the replacement cost of the assets.

Our stabilized year one return un-levered is approximately 9.5%.

Additionally I want to remind you that we have land, that we acquired, which we are poised to add additional office space when the demand dictates and this actually could be sooner than later.

We acquired the Colonnade, in Miami, which is one of the most prominent corporate addresses in Miami at 216,000 square feet, 92% leased.

We acquired it at $250 per square foot.

Low replacement cost.

Year one un-levered return is roughly 9%.

Levered return is well north of our targeted 15%, it's closer to 18, and this is a future joint venture candidate, at some point in time.

In addition, we acquired One Brier Lake Plaza in Houston, which is a newly minted asset, it's acquired in a 30/70 joint venture with JP Morgan Fleming Asset Management.

It's one of the highest quality buildings we now own in Houston.

It's 502,000 square feet, 89% leased.

We acquired it at 150$ per square foot versus a replacement cost which is north of $180.

We generate management and leasing fees, as well as have an opportunity for a promoted interest.

Stabilized year one un-levered return is over 9.5%.

Once you factor in leverage in the joint venture arrangement, clearly we're in the high teens in terms of leverage return, and adding in the fee structure.

We had non-core dispositions of $72 million in 2003, net proceeds.

The first was Ritz Carlton Palm Beach, where Crescent and Westbrook, our partner each sold our 50% interest for $19 million in net proceeds.

And a -- that was to us, $3.6 million gained, including our earned promote.

Las Colinas Plaza in Dallas was a retail center that we sold for 21 million in net proceeds at a 7.7% cap on 2003 NOI for a $14.5 million gain this leaves us with no retail outside of mixed use projects.

We thought it was a great time to be selling a retail center.

We also sold 31.9 acres of non-income producing land.

Houston land sold at a very attractive price for $32 million in net proceeds.

Realizing a $13.1 million gain.

Slide 7.

Let me cover -- continuing with strategic highlights cash generated.

In late 2003, and early 2004, we completed three initiatives that would generate a total of approximately 260 million in cash for reinvestment.

I have already talked about the AmeriCold financing in the Woodland Hughes transaction.

The third was an add-on to our existing series A preferred in January of this year which generated 74 million in net proceeds, price yield 7.68% which we thought was pretty darn attractive.

While it is dilutive to not immediately put this capital to work, we intend to be very patient in finding the right opportunities for investment.

As we all know, it is fairly competitive out there right now.

There's a lot of capital-chasing deals.

We do anticipate investing cash in Q2 -- in Q3, and in our 2004 guidance, you will see that we're projecting earnings between 18 million and 24 million in FFO on this invested capital, which I feel is pretty conservative on a run rate basis, timing is clearly the issue there.

Slide 8.

Looking forward to 2004, we're initiating FFO guidance in the range of $1.40 to $1.55 per share.

The investor supplement goes into more detail by providing business drivers by segment and Dennie is going to discuss our assumptions in more detail, particularly in the office segment.

Operationally we believe the office markets have stabilized.

We do not expect to see material improvement in greater occupancy in the office markets until 2005.

We expect our average occupancy to remain relatively flat for the year.

We believe pricing momentum will remain allusive in 2004; although we feel concessions have peaked.

Leasing momentum has picked up in the fourth quarter and should persist throughout 2004, but similar to 2003, it more than likely will not materially move the needle on occupancy.

For the resort hotel segment we expect flat year-over-year FFO contributions, but if you remove the Ritz Palm Beach from 2003 and look at this on an apples-to-apples basis, which Ritz Palm Beach contributed approximately $3 million, we actually show we will be up slightly over 2003 on a same-store basis.

For the residential business, we have $30 million expected at the low end.

For its FFO contribution.

This compares to $23 million for 2003, when the Woodlands was included.

The increased expected in 2004 relates to the timing of new CRD products that our business that Harry Frampton manages, as well as modest projected increase in activity at Desert Mountain.

As always, residential FFO is expected to be weighted heavily into the fourth quarter of the year.

For temperature control logistics we are expecting 2004 FFO anywhere between 19 and 21 million dollars for comparison purposes, without the additional debt service on recent financing.

We would have expected FFO to be in the $24 to $26 million range, which is a slight improvement over 200's 23 million.

As previously discussed strategic initiatives will generate 261 million in cash, which will be dilutive, until we reinvest that cash.

As noted, our assumptions on reinvestment are investing this capital in Q2 and Q3, at a return on equity that's clearly below what we have been achieving.

We're using a range of 8% to 12%.

I can assure you, we are not going to be too interested in doing anything at the low end of that range, but we are, again, trying to be realistic and, perhaps, there could be some short-term investments that we put the capital to work throughout the year until we find longer-term opportunities.

We have also built into our assumptions income from business initiatives of $10 to $20 million, included in this category are land sales, as in the past this has been a very real source of both income and cash for us.

And secondly, additional lease termination fees and other corporate items.

Clearly 2004 is very much dependent on our ability to redeploy the $260 million of capital that we generated.

The other business initiatives outlines are well within the ranges that we have achieved over the last several years.

For budgeting purposes we have assumed that these initiatives; however, are back-end loaded during the year.

Regarding quarter one guidance, we are assuming no reinvestment and a typically low level of residential FFO.

The result is somewhere in the 21 to 23 cents per share FFO range.

Slide 9.

Discuss dividend strategy.

We're looking at the same analysis we've shared with you during 2003, now updated for the 2004 FFO guidance.

On the low end of the range we expect 163 million in FFO.

If you deduct 70 million for recurring capital expenditures, which is in line with the 74 million which was recurring CapEx in 2003, this leaves you with $93 million in cash available.

You added up the cash we received from our residential segment in excess of FFO generated, for 2004, we project that number to be between $85 and $90 million.

In 2003, excluding the Woodlands sale itself, our residential developments generated cash of $105 million, and FFO of $35 million, which left us with the $70 million in excess cash that came out of that business over and above FFO in '03.

To address how the Woodlands sale affects 2004 excess cash, its contribution in 2003 was only $8 million.

The large contributors are, of course, Desert Mountain and the Frampton projects.

By adding the 85 million we have 178 million just covering our $175 million dividend.

Remember this is on the low end of our guidance range.

We recognize that resulting coverage is type -- is tight, fortunately we do have capital -- return of capital component for residential development business to bridge the gap until operations recover and new investments kick in to eliminate the need to use this source of capital to cover the dividend.

Slide 10.

In a stabilized environment, our business clearly has the capacity to grow back into the current level of dividend.

There are three major components of this growth.

First, we believe that operations in total have $45 to $65 million of upside in FFO before new investments.

The largest component is clearly the office segment, which is about 30 to 40 million of this 45 to 65 million, as it recovers from the current 84% occupancy to a more normalized, say, 92%.

Second we have investment capacity now, which by the way we intend to grow this capacity, that on a full year basis, assuming a 12% return on equity, which is below our target and below what we have recently been achieving, which would generate $30 million at the 12% level and a more acceptable -- at a more acceptable 15% return, it would generate approximately $40 million.

So without any further sales or joint ventures and continuing to make some prudent investments, and factoring an economic recovery, operating upside is in the range of $70 to $105 million.

The third component is continuing to execute on the strategy of joint venturing additional assets, unlocking embedded equity and recycling this capital at higher returns.

This strategy, by the way has the potential to exceed any of the other individual components that I have already mentioned, but because it's more speculative, I hesitate try to "dollarize" it, but clearly everyone can -- make their assumptions on that and look at our track record of now having joint ventured over $1 billion in assets.

I'm confident that we'll continue to execute this component of the strategy.

It's going to be dependent upon market dynamics, our ability -- there is a lot of capital out there now so we're certainly looking to try to take our fair share of that capital and find some great partners to partner with going forward.

Hopefully this helps you understand our decision to leave the dividend at its current level, work hard to achieve this growth that is available in the business.

With that, I will turn it over to Dennie to cover operations in more detail.

Well, thank you, John.

Good morning, everyone.

John asked me to take a few minutes this morning to bring you up to date on our fourth quarter business operations, and I will do that.

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

In the fourth quarter, we reported office FFO of $68.7 million, which compared to FFO of 73.9 million in the third quarter.

As you may recall, we had some extraordinarily high lease termination fees in the third quarter which bumped that number up.

For 2003, we reported $283.8 million of FFO, which was in line with our guidance for this segment of 284 million to 286 million.

For '04, we expect office FFO to be in the $276 million, to $280 million range, and I'm going to provide a lot of detail and color on that in just a minute.

As of December 31, our office portfolio was 86.4% leased, this compares to 86.2% leased, as of September 30th.

So it was up 20 basis points.

The portfolio was 84.0% occupied.

As I have said on our last call, we think we are bottoming out now.

We're going to be bouncing along the bottom.

We expect to stay at these levels for the next few quarters and I will describe on a market-by-market basis where that will be in just a minute.

Our strength is clearly Houston today.

Our soft spot continues to be Dallas.

And we'll break that down in a second.

As you can see on slide 11, the fourth quarter same-store NOI was down.

This was what we expected, like most REITs, this was primarily driven by occupancy decline, and some early terminations that we had in the fourth quarter.

If you will turn to slide 12, you'll see that in the fourth quarter of this year, we leased 2.3 million square feet which was very good.

This compares to approximately 1.7 million in the third quarter.

In 2003, we leased 6.4 million square feet, which was a record year for our company.

And this compared to 5 million which was a good year last year.

Again, like many office REITs, the issue for us has been a high level of expirations and rollover, and a number of early terminations that occurred in '03.

The expirations and early terminations totaled 6.8 million feet, which caused -- caused this to climb.

We had approximately 1.5 million square feet of early terminations this year.

That equated to about five points in occupancy.

So it was a significant amount.

Probably a third of those we initiated because we needed to move some customers around to make room for some new leases that we put in place.

But, still, an unusually high level for us.

We think that should go down in '04.

In '04, we have 4.9 million square feet of gross lease terminations.

As of December 31, we had signed leases of about 3 million square feet or 62% of our gross expirations for '04.

This is a very, very good starting point for us.

The best in several years.

If you add to the signed leases, the leases that are in the final stages of negotiation that we -- we feel like are going to -- going to be able to be signed, our 2004 leases addressed position reaches 83%, which is, again, a good position for us.

So I'm pleased with the progress our leasing team has been making.

We signed a lot of leases in '03.

And we're off to a pretty good start in '04.

Turn to slide 13.

Take a look at the lease economics for just a second.

And talk about what that looks like today, and for next year.

As I said, we had about 6.5 million feet of leases commence in '03.

At a full service rate of $21.15.

This was about 10% below our renewals that -- the leases that expired and was a pretty big number for us this year.

In 2004, we have approximately 2.6 million square feet of net leases expiring that have a full service rate of $21.79.

Our company has quoted rates for the space that is expiring of $21.55.

So we are quoting rates that are slightly below the expiration rate.

So we would expect that the 2004 renewals to be somewhat below our expirations, but not as much in '04 as we had in '03.

If I had to look at the rate decline there, I would think it would be in the 3 to 5% range on a conservative basis.

And the reason I say that, and that compares to 10% the year before, is if you look at the leases that we've signed year-to-date, the 2.3 million square feet that expires in '04, that we have already signed, those leases are slightly up.

So -- and that's -- and that's probably about half of what we need to do.

So, a pretty good start there.

Let's look at the mark-to-market for the whole portfolio.

The weighted average in place rent for our entire portfolio is $22.63.

The quoted rate on that portfolio is $21.19 on a space-by-space basis.

So our quoted rates are now about 44 cents below our in place rents.

Turn to slide 14.

Take a quick look at our tenant improvement and leasing commission that we paid for the last four quarters.

As John said, it looks like things are stabilizing here.

If you look at each of the last four quarters, we have been relatively flat.

The figure is still higher than past years, but it looks like it stabilized.

For '04 we budgeted these numbers to stay about where they are right now.

And hopefully we'll see -- see some improvement in '04.

Turn to slide 15.

We continue to focus on customer service and customer retention.

Obviously, that's the name of the game in our business.

For the third year in a row now, we just were named Bomaciella [ph] A Award winners which ranked us one of the top five office companies in the United States in customer service.

Turn to slide 16.

You can see on this slide, that our 2003 scores increased in every category and I'm very proud of our people for these results, that increased every year for the last three years.

I'm particularly proud of the first category, readiness to solve problems with a 93.4% in that category and also renewal intention, 90.1% of our customers said they intended to renew.

Again, customer retention is the name of the game and we are doing everything possible to provide that level of service.

Turn to slide 17.

Let's look now at our markets and let's begin with Houston.

Houston was 91.4% leased at the end of the year.

This is the fourth quarter in a row that we have reported increases in leasing in Houston.

Our leasing velocity there has picked up, and we are very pleased with -- with what's happening there and the performance of our leasing people there.

Clearly Houston is our star market.

Our 2004 rollover in Houston is in very good shape right now.

At year-end we were 94% addressed in Houston, 74% of that 94% is already signed.

And the other 20%, that's in negotiation, we feel very good about that.

At Houston Center we signed leases in the fourth quarter that brought us to a 94% lease position, which is very strong downtown Houston.

And at Post Oak [ph] we announced signing leases in the fourth quarter that brought us over 90%.

So, very good there.

Just a quick comment on the market before we move to Dallas.

In the fourth quarter we saw positive absorption in Houston, about 95,000 square feet.

If you look at the re-studies that -- that are out today, the Reese group is projecting absorption in '04 class A space of 1.2 million square feet and in '05, 2.9 million square feet.

And they are also projecting a significant strength in office and job growth there, 30,000 in '04, new jobs and 60,000 in '05.

So clearly our bright spot, our bright light is Houston for us.

Turn to slide 18.

Dallas remains very competitive.

As of December 31, we were 82.1% leased.

This is slightly up from where we were lease wise on September 30th, 81.8%.

This is a low level.

We're not happy with this level.

But this is the first time that we have seen a positive move in leasing in many quarters.

So we feel like, maybe, the worst is behind us and there is a little bit of light at the end of the tunnel.

Dallas remains capital constrained and there's only 181,000 square feet of class A space under construction.

When you look at the absorption numbers in the fourth quarter, Dallas absorbed 144,000 square feet.

And according to Reese again, the '04 numbers, the projections that they have is a positive 1 million square feet and in 2005 they are projecting 3 million square feet.

Reese is also projecting some additional job growth in Dallas in '04 and '05, 40,000 new jobs in '04 and 80,000 new jobs in '05.

So we're starting to see a little pickup in the Dallas economy now, and we think that will begin translating into some higher leasing levels.

If you look at our '04 rollover in Dallas, we're in pretty good shape.

We are 71% addressed in Dallas.

And 64% of the 71% is signed.

So, again, that's -- that's pretty good start.

So some positive signs in Dallas, but not the strength there that we're seeing in Houston.

Let me make a couple of quick comments on Denver and Austin, before we go into the hotel business.

In Denver, the good news for us in Denver, we're 78% addressed there.

Absorption was positive in Denver, in the fourth quarter, class A 375,000 feet.

Again, Reese is predicting a positive '04 absorption of 500,000 feet and 1.5 million in '05.

Austin continues to be a difficult market for us, and others.

The absorption in Austin for the fourth quarter was a negative 153,000 square feet.

The good news for us there is 87% of our rollover in '04 is addressed.

Reese is projecting positive absorption in Austin in '04 and '05, 750,000 in '04 and 1 million feet in '05.

So, if you look at the guidance, our guidance for office for 2004, we're going to, I think, put out some pretty conservative numbers.

We are projecting 84% to 85% occupancy levels for '04.

Which -- which I feel like are appropriate.

We are projecting same store NOI at a negative 3% to of 6%, which, again, hopefully these are conservative and much of it depends on the level of early terminations that would occur in '04, but we are now starting to see some positive momentum.

Let's turn to slide 19 and talk about our business class hotels for just a second.

If you look at the numbers there, the year came in at about what we expected.

If you look at the 12 month numbers there, we were relatively flat on RevPar, ADR, occupancy and NOI.

The only hotel that we felt a little softness in, in '03, from the business class standpoint was the Houston Renaissance hotel.

Let's turn to slide 20.

Destination resorts showed an increase in same-store NOI in the fourth quarter by a pretty big number.

If you will recall, the fourth quarter of 2002, we had, what I would call non-recurring expenses, and that primarily related to bringing Fairmont into run Sonoma.

We took some start-up charges there, so really fourth quarter '03 was an easy comparison to '02.

We were pleased with the run rate that we had in the fourth quarter for resorts.

For the full year 2003, resorts were virtually flat over 2002.

For '03, resorts and hotels were 51 million, which was exactly in line with our guidance of 51 to 53.

For '04, as John said, we expect the resorts to come in, in $50 to $52 million range, but remember, we're taking out the Ritz Florida property that we have sold.

So we are expecting to see some benefits from the economy, and that business improved somewhat.

We have, although factored in a little bit lower number for Sonoma, because we have some rooms that we're remodeling right now and this was part of our repositioning of Sonoma with Fairmont.

We have 90 rooms that we're remodeling.

They will come online in April, part April and some in May and some in June.

So we have factored that into our numbers.

Turn to slide 21.

Take a look at residential.

Of course, we -- as John said, we're very pleased with the sale of the Woodlands.

It was a terrific strategic transaction for us.

Moving from residential into the Hughes situation.

For 2003, the operating FFO was below what we had anticipated at the Woodlands.

It was a significant decline year-over-year and it was primarily attributed to some residential sales decline, but primarily commercial sales drop there at the Woodlands.

So we're now glad to -- to have a more stabilized income stream going forward.

Desert mountain, Desert Mountain got off to a very slow start, if you will recall.

The war in Iraq in the early part of the year reduced traffic, slowed sales, and we did not make up all the sales that we had hoped to for the year, but we had a very good fourth quarter.

We closed 26 lots, pricing on those lots, was very good.

We opened the sixth golf course there, Outlaw, which created a lot of energy, a lot of excitement, and so we reported $9.2 million in FFO in the fourth quarter.

We continued to hold our pricing at Desert Mountain and that seems to be the appropriate thing to do there.

And we're starting to think that the wind is to our back a little bit at Desert Mountain.

We're starting to see -- see some good activity and the activity so far the first quarter has been pretty good.

When you look at '03, both the Woodlands and the Desert Mountain combined were probably in the $6 to $7 million range, lower than what we really like for them to have been, and we will see some improvement, particularly in Desert Mountain in '04.

Let's turn to slide 23.

As unusual, Harry Framptom [ph] and the Crescent resort development business came right in on plan.

Fourth quarter, Crescent resort reported $6 million in FFO, which was a good number of what we had expected, primarily because we closed 36 condos and 184 lots in the fourth quarter.

I mentioned that we began selling our first lots in Tahoe, had a terrific fourth quarter, both sales and closings, and we were pleased there.

If you look at 2004, Harry's business there, the pipeline looks very good, particularly for our condo product.

We've got a couple of developments underway in Beaver Creek, Horizon Path which is Bachelor Gulch, Hummingbird which is also at Bachelor Gulch.

We'll start seeing closings on those condos at Bachelor Gulch in the fourth quarter of this year.

So we're excited about that.

And those are presold.

The activity at Tahoe remains good there.

We've got condo units that we're starting there at Tahoe, as well as some fractional.

We'll start seeing some closings there in the fourth quarter, which will be carried on into '05.

And likewise, some of the development that Harry is doing in Denver right now, again, very strong presales, and we will see -- we'll see some good strong closings for the second half of the year there in Denver.

So we expect really the FFO levels in residential to be in the $30 million plus range in '04.

This will be up from where we ended up in those two businesses.

Most of that, and a good portion of that, and I will say 75% of that, will occur in the third and fourth quarter, it is back-end loaded and I would say that probably half of that 30 million will come from Desert Mountain and half will come from Crescent Resort, but I do expect a good year in both of those businesses.

Finally, we're seeing -- seeing activity and we're seeing a lot of a -- a lot of wind to our back -- in both of those upscale residential businesses.

John.

At this point we would like to open it up for questions.

[Operator Instructions]

We'll pause just one moment to compile the Q&A roster.

Your first question comes from Jon Litt of Smith Barney.

Good morning.

It's Gary Boston here with Jon.

Dennie, on the office guidance for '04, it sounds like the momentum is good, and you've got a lot of it put to bed already.

And so I'm just sort of struggling with the relatively conservative guidance on the occupancy front.

You mentioned early terminations being a factor in '03.

Maybe you could give us some color on what your outlook for terminations is going forward into '04 and if that is sort of the cause of the conservatism.

Well, you know, I think we want to be conservative right now in our numbers and so -- well, that is a factor, Gary.

I see the early terminations going down, in '04, relative to '03.

And, again, I am pleased with the level that we have addressed.

You know, we're in pretty good shape in Houston from an occupancy standpoint.

So you don't have the opportunity, really, to push occupancy in Houston that much.

Okay?

So you really got to step back and say, I've got to get it in Dallas, Austin, and Denver, and I really feel like we've probably got another soft year in those markets -- in those three markets in '04, and so I don't want to step out there in '04 on those three markets.

I think, you know, '05 could be a good -- you know a good year for us, but I want to be fairly conservative on what we think is going to happen in '04.

Okay.

And just follow up.

In terms of investments, particularly in the office sector going forward, I know you talked in the past about new markets.

I think there's been some discussion in the press about entering Southern California, potentially Orange County.

I just wanted to get your thoughts on the markets up there.

Well, as we mentioned, I think, on the last call, we have a platform -- this is John Goff.

We have a platform now in California.

We hired Tom Miller who was at LaSalle.

He's -- he knows that market cold.

He has a lot of contacts and so we're looking.

We've been outbid on many, many projects which is, I think, pretty typical now in this environment.

But we're certainly in the flow and we're trying to find, you know, the right entry point.

So it's a market that we're focused on, but it's -- you know, we're -- as you have seen, we have also been focused on Florida, which we have had a lot of good success in and we would like to have a bigger presence there, South Florida.

And, you know, continue to look for other markets that may offer opportunity.

At the moment, you know, I'm not prepared to say there's anything that just really sticks out as a wonderful opportunity, other than the markets we're already in.

Your next call comes from Greg Whyte of Morgan Stanley.

Good morning, guys.

John, you went through an outline of the dividend coverage which was useful.

Can you just give a little more color here in terms of -- to to the parts, there's one if you can give us some indication of how far down you think the pair ratio will be in the first half of the year, because obviously a lot of this is back-end loaded and then secondly if you can just sort of comment on, you know, how you think about this from a stress tested perspective.

I mean, what are the things that are out there, that may not occur that could ultimately put the dividend in jeopardy?

Where is the risk here.

I think the biggest risk is, you know, another significant terrorist event of some form, which really rattles the economy here, perhaps through something overseas that rattles the economy, you know, China banking system breaks down or the something, you know, of that nature that is a real, you know, worldwide-type calamity.

I don't -- we feel confident with our position on the dividend.

We have the flexibility to continue to this level.

I hesitate to break down, Greg, the quarter by quarter coverage because we are not giving guidance, it backs us into having to give you guidance quarter-by-quarter, so -- you know we are just -- we're not doing that other than the first-quarter guidance.

But clearly the coverage builds from the first quarter to the fourth quarter.

And, you know, we obviously run our models here, not only quarterly, but monthly and we feel very confident in the position that we're in.

And we think that we've got a lot of flexibility here with -- with the balance sheet to cover it.

And with the cash flow coming out of the residential business which, as Dennie said, that's looking -- that's looking much better.

We've got really good activity out at Tahoe, Colorado, and at Desert Mountain.

So I think we're in -- we're in good shape here.

Gary, you have something?

Yes [inaudible], I'd just -- I'd leave -- I would point back to the slide where we were showing residential cash in excess of FFO of 85% or 90%, you know, of which 70% approximately is coming in the latter half of the year.

Okay, okay, and then I just a, one, sort of follow-up here, Dennie, you know, I mean, you talked about occupancys having stabilized and -- you are not painting a rosy picture, but you've certainly put to bed a significant component of your role, I'm just surprised that you, you know, your TI and leasing commission costs are staying as high as they are, given the fact that you are able to put to bed such a large component so early in the year.

Well, we -- we're starting to see some break in that.

We have budgeted, you know, pretty high levels for '04, we tried to be conservative in our planning, and we are starting to see some break in that.

We signed a pretty nice lease in the fourth quarter, Greg, actually in December that the TI and leasing commissions were in pretty good shape below what we thought we would have to -- have to pay.

You know, we won't specify what lease that was, but early signs are good, that we are kind of peaking out on that, and so I hope to see the second half of year some pretty good improvement in that, which would help us in '05.

Okay.

Thank you.

Your next question comes from Fred Taylor of Fleet Securities.

Yeah, my first question, I think, was answered on the dividend gap and I appreciate the answer there.

I'll just ask, I'm out of the office and away from my notes, can you describe sort of your debt maturity schedule in '04, and what your plans are to deal with that?

Yeah, Fred, this is Jane Mody, and really just a couple of maturities in '04, so very minimal rollover of debt in '04.

We have had our line of credit, which was maturing in May of '04, we have elected a one-year extension option in December, extending that already, until May of '05.

And the only other significant that we have outside of the normal construction activity in the residential business is a $220 million [inaudible] facility that secures three office buildings, and we're in the process of evaluating options on that right now.

Would it be likely --

It does have extension options.

Okay.

Would it be likely you would use the same type of secured facility or might you use other capital market solutions.

No, I think that would would probably be a secured facility.

Okay.

That's all I had.

Thank you.

Your next question comes from David Loeb of FBR.

I just want to go over a couple of numbers.

On the income statement, the gain was listed as $86 million net, that is net of taxes?

No, that is not net of taxes.

That is a gross gain.

So what does the "net" refer to in that.

Net gains and net losses?

Gains and losses netted together.

Closing costs, David.

Okay.

If you look down into the income tax provision, you will see there's $35 million sitting down there that relates to taxes on the Woodlands transaction.

That was my next question.

Just trying to piece that all together.

And what other gains were in the fourth quarter.

Just the Woodlands or were any of those other transactions, the Las Colinas.

Yeah, Las Colinas Plaza was $14 million that came through in the fourth quarter and Ritz Carlton, that was 4 million, came through in the fourth quarter.

Okay.

Great.

Thanks.

Sure.

Your next question comes from Stephanie Crewson [ph] of BB&T.

Hey, everyone, excellent quarter.

Great job.

Quick question on page 13 of your slide show presentation, could you provide any color on, even just round numbers, on what net rents you have there for those statistics?

I have a good feel for what they are, but I would just like to confirm my gut.

Yeah.

Typically our operating expenses are running in the $9 to $10 range.

So our net leases are in the $10 to $12 range and for those specific numbers right there, they are $12, Stephanie.

Okay.

And then on leasing could you give us sort of the high and low of what your nets were in Houston and Dallas for the quarter or for the year in terms of what you signed.

Well, obviously Houston, the net rents were better.

We were signing leases in the low 20s in Houston.

So your net rents are in the $15 range.

And in Dallas, you would be signing leases in the $20 range, $18 to $20, so you are talking about net rents of around $9 to $10 there.

You know, we have signed some specific leases and renewed some specific leases in the $7 range, so I can't tell you that there haven't been some below that, but we've not seen, you know, some of the -- we've not done, I will say, some of the negative deals that -- that people have been talking about in the marketplace.

Excellent.

Thank you guys.

Thank you.

Your next question comes from Greg Whyte of Morgan Stanley.

Guys, just a couple of follow-up questions here.

The first is, G&A sort of spiked pretty significantly in the fourth quarter.

Can you give us a little color on that.

I will comment on that, Greg.

It really -- about a third of the -- of the increase related to professional services.

That would have been accounting.

That would have been legal.

And those type of items and a good portion of that related to SARBOX.

So that has occurred.

The other two-thirds relates to personnel, and basically what we're talking about there is as John said, we opened an office out in L.A., which we made an investment in people there.

We added a couple of other people, one specific person in research here in Fort Worth, which we added -- added to the staff there.

We did give some raises in '03, which brought that number up.

I will tell you that for '04, we are not taking any raises as officers in the company.

We are not -- we are not doing that.

So it was really a combination of those factors.

Okay.

And then just one other thing, on the Bank One side, have you had any discussions, you know, sort of subject to the JP Morgan merger and stuff as to where you would potentially stand on that lease.

Well, it's too early to tell right now.

We have a total of about 550,000 feet of Bank One leases.

The largest one is, obviously, in Dallas. 350,000 feet, which is the building we're partners with Trizac.

Right.

The good news about that is the lease expires in 2010.

So -- and there are no early-termination options.

So we feel like that's bluff.

Okay.

Thanks a lot, guys.

Your next question comes from John Lotsios of Green Street.

Good morning, on your slide show at page 8, you talk about your expectations for FFO for the residential development business for '04, versus '03, projecting there a pretty significant increase, I think, in FFO '03, versus '04, despite having sold the Woodlands.

Can you give a little more color and background as to how that happens.

Yeah, I will comment on that, John.

If you look at where we are excluding the Woodlands, and just look at 2003 FFO for Harry's business and for Desert Mountain, it's $23 million.

Okay?

You take that number and you look at the increase, it's about $7 million to the low end of the range, and $10 million to the high end of the range.

I think that will be split about half Desert Mountain, and half Crescent resort development, and, you know, looking at the -- the momentum that Harry Frampton has got, I feel pretty good about that.

And it really relates to condo sales that will occur in '04 that have been presold.

So that's why I feel pretty confident about stepping out and saying that residential is going to look pretty good this year.

When you -- when you think about that increase for Crescent residential, you are saying that a lot of what you are projecting has already happened in terms of presale?

In Harry Frampton's business, yes and what we are seeing in Desert Mountain, the sales that we think we will make there for those lots happen to be pretty good lot sales.

They are high margin lots, and so we think we'll going to drop, you know, some pretty good numbers to the bottom line.

Some of the lots that we sold in '03, particularly in the early part of the year, were lots that we had taken back in trade, and so we didn't have the margins there that -- that I think we've got in '04 at Desert Mountain for some of the new lot [inaudible]

Okay.

And just briefly on the point you just made, it seems like the CRD is much more presold, more certain, if you will, the Desert Mountain is much more -- will continue to be a fourth quarter business with considerably more risk.

That's exactly right.

Harry Frampton is more of a vertical product business, and Desert Mountain is a lot business.

We typically don't break ground until we have a significant level of presales.

So we actually have pretty good visibility on the Crescent resort development business.

Yeah, really there are two projects that Harry has got coming online in the fourth quarter that are in Beaver Creek, where it's the vertical product that -- where we have the presales in excess of 80%.

The biggest risk is construction timing but that's one that's fairly controllable.

How much of the CRD, FFO in '04, will be Tahoe?

In '04?

The FFO at Tahoe would be a third of it, two-thirds would be out of Colorado.

Okay.

In your presentation on page 9, you talk about your residential cash flow in excess of FFO.

Your projection for '04.

Did you -- what was the number in '03 for that?

And how much of that was Woodlands?

$70 million in '03 and the Woodlands was --

8 million.

Eight.

I was surprised in your prepared remarks to see $8 million it struck me as a lower number than I would have guessed for Woodlands.

Can you help me understand that a little bit?

Well, keep in mind that the investment at the Woodlands, the original investment was only $80 million.

We're six and a half years into the project so we have gotten most of the capital back.

And so it's never been a big component.

Oh, I see.

Right.

Right.

Okay.

It is something of an accounting thing in the sense that the return on capital had already been reflected?

Yeah.

Exactly.

Correct.

Okay.

Okay.

And then on the office you talk about how much of your lease expirations for '04 have already been addressed.

I'm just looking back at my notes for your comments last year at this time, you had said, I think that 70% or so of the maturities were addressed.

I remember at that time taking comfort in that statistic and looking back on it now, I'm kind of surprised at the '03 year, how much occupancy was lost.

Well, it really is a function -- it was 70%, and we had a record leasing year in -- in '03.

At over $6 million fee.

The problem that we had, like a lot of REITs, and I'm sure you guys are hearing this on other calls, were early terminations.

And, you know, some of them were -- we caused and some of them we didn't cause.

The -- you know that is the difference.

You take 1.5 million fee for us, John that's 5 points in occupancy.

So that's a pretty big swing.

The surprise for us was the level of early terminations.

As I talk to my peers, that seems to be the surprise also.

I will comment, though, as far as collections are concerned, we had a real good year on collections.

We actually had a net recovery for the year as opposed to a net charge-off.

Okay.

Thanks very much.

Thank you.

Your next question comes from Brian Legg of Merrill Lynch.

Yes, just real quickly, looking at Tahoe, that's more of an '05, '06, '07.

Where -- and I know you are not projecting '05, but how -- how much of an increase can the Tahoe business be over the '04, which is -- you said is about a third of the CRD?

I think it could be pretty interesting.

I really do.

We're just starting to develop condominiums there.

We've gotten a very strong -- strong support from the community there now.

I think we're coming into a great economic cycle.

I think -- I think '05 and '06 for Tahoe could be very good years for us.

Okay.

And just looking at the 30 to 33 million for residential development, and Tahoe not being a huge component of that, you know, Desert Mountain you get into higher price per lots as you move out, as you sort of finish off that development, I'm -- is there a potential that there could be some dropoff in CRD, as you sell most of your units in CRD?

I'm just trying to get a sense of the magnitude of what the $30 to 33 million could grow if you start assuming that Tahoe really kicks in?

Well, Tahoe -- we have the opportunity and we control the opportunity to develop 2,000 condominium units at Tahoe.

So we've got a lot of future ahead of us there.

And we're just now starting the first hundred condominiums and we're just now starting our first grouping of fractional.

So it could be an important source of FFO for our company over the next five years.

If you look at the market dynamics there, they are very compelling.

There's not much in the way of competing projects like there is in Colorado or even in, say, you know outside of -- or in Utah, other markets like that, that tend to be more developed.

There has been a lack of product in that market, because of all the development restrictions and you have a population base that is close by that far exceeds what is there in Colorado.

So the potential here is -- it is very interesting.

You know, which is why we took the position there.

Yeah, but is there any falloff in '05 and '06 from the CRD business ex-Tahoe that might increase from Tahoe, might be offset by that business, because it doesn't look like Desert Mountain will fall off in '05 and '06.

The '05 business in Colorado is still good because we're finishing the Bachelor Gulch.

We'll have some '05 cash flow from Bachelor Gulch there, Beaver Creek.

So the answer is '05, no. '06, yes.

Some in '06, and we think Tahoe will pick up the slack.

Last question.

The 17 million of impairment charge, what do those represent?

The $17 million, three properties.

They are two in Dallas and one in Houston.

That are currently on the mark or under contract for sale.

And would the majority -- given that Dallas is a weak market, Houston is a fairly strong market for you, on a relative basis, would most of the impairment be -- relate to the two Dallas properties?

The actual impairment for the quarter was about $8 million. 7 of that was coming out of Dallas.

I mean basically two properties that had zero to no occupancy that are under contract.

So they are not core assets.

Okay.

These aren't core assets and what we do continually here is we run the math on lower occupied properties to determine, you know, do we want to lease it up and extend the capital or can we get a present value that's more attractive and in the case of these two properties we felt compelled that the present value is better on a sale than it was spending our own capital.

Okay.

Great.

Thank you.

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

We'll pause for just one moment to compile the Q&A roster.

Oh, Jerry Crenshaw just reminded me let me make a point on the -- I think I misspoke on first quarter guidance, is that what you were referring to Jerry?

Yeah, John.

Where I said 21 to 23, it's actually 20 to 22 cents per share and that's in the slide.

I apologize for that.

It's on slide 8 of our presentation.

At this time -- at this time there are no further questions.

Well, thank you very much for joining us the call.

As always, we're available for follow-up questions.

Just give us a call.

Thank you.

This concludes today's conference.

I may now disconnect.