摩根士丹利 (MS) 2004 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Crescent Real Estate first quarter 2004 earnings conference call with our host Miss Keira Moody.

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

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

If you would like to ask a question during this time, simply press the star key, then the number one on your telephone keypad and questions will be taken in the order they are received.

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

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

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

I would now like to turn the call over to our host, 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 today.

With me in the room I have our Vice Chairman and Chief Executive Officer, John Goff.

President and Chief Operating Office Denny Albert, Executive Vice President, Capital Markets, Jane E. Mody and Executive Vice President, Chief Financial Officer, Jerry Crenshaw.

We also would like to welcome Harry Frampton, Manager Partner of East West Partners, who is our partner in the majority of our residential development projects and Craig Ferraro, who is the Chief Financial Officer of East West as well.

Everyone should have a copy of our earnings release supplement report and presentation for the call.

But if not, you can find them quickly at crescent.com on the investor relations home page.

Two business items I want to note before we begin.

One is that we are scheduled to file our by tomorrow so look for this on the Web site.

Two, I want to remind you our annual shareholder meeting is held June 28th in Dallas.

Details about the meeting can be found on our Web site.

Certain statements made on today's call are forward-looking statements within the meaning of the Federal Securities laws.

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

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

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

Good morning, everyone, and thank you for joining our call.

We achieve $27.5 million in FFO before impairments before the first quarter or 23 cents per share.

We exceeded our expectations as well as consensus estimates by 2 cents per share, primarily due to timing of residential sales activity.

This does not, however, cause us to change our guidance for the year.

If you turn to slide five, we'll cover the guidance, which remains at $1.40 to $1.55 per share for the year, and I want to highlight that that's still very dependent upon two initiatives, one is reinvestments, which you will see are projecting will range from $10 to $20 million in FFO, which is the rein vestment of the roughly $260 million of available buying power that we have right now, which I'll cover in a moment and business initiatives we have ranging from $15 million ranging to $25 million, which consists of sales of undeveloped land, lease termination fees and other income items.

The FFO guidance that we're giving for the second quarter of 2004 is 26 cents to 28 cents per share.

This assumes no FFO from speculative re-investment or undeveloped land sales.

Turn to slide six.

We provided this slide in the last quarter, which covers the coverage of our dividend.

There's no real change in the outlook from the previous guidance we gave you.

We're still looking for coverage to come not only from our earnings out of operations, but enhancing that with the residential cash flow, this is in excess of FFO, which we're estimating to be $85 million to $90 million for the year, which covers the dividend under the low or high case.

You will find, however, that -- and we'll cover this in a moment, enhanced disclosure regarding our residential development business, which I think will shed a lot of light on this cash flow that comes out of the residential business.

We'll cover that in detail.

Slide seven.

I spoke about the $260 million of available cash.

That's been generated out of the AmeriCold Financing, which we closed in February, which generated $90 million dollars.

The sale of Preferred, which generated $74 million in January, and the sale of the Woodlands, netting out the purchase of Hughes Center, which once we complete the financing, one additional financing at Hughes Center, which will generate $97 million for a total of $261 million.

In addition we've sold two office properties in the first quarter to Liberty Plaza in Dallas and 1800 West Loop South in Houston which generated $40 million in cash which was used to pay down our line of credit.

Turning to slide eight.

Hughes Center in Las Vegas, we discussed this transaction on our previous call, but we closed on the properties in the first quarter.

Just to refresh your memory, seven office properties including one in a joint venture, it encompasses 1 million square feet, approximately 94% leased.

We also have nine leased restaurant parcels, $214 million gross acquisition price, $119 million which was in cash and $95 million in assumed debt.

We also closed on two tracts of undeveloped land for $10 million, which was included a $71/2 million note, $2 1/2 million of equity, the note back to Rouse.

We also intend to build on this land.

We've already announced the prospects of building 400,000 square feet additional office space, which is a phase one development on a piece of the land.

We anticipate, based upon assessing demand and pre-leasing efforts, breaking ground either late this year or early next year.

Slide nine, we acquired DuPont Center in Orange County late in the first quarter.

It is specifically in the John Wayne Airport submarkets, 250,000 square foot class A office property.

It's about 90% leased.

It was a $54 million acquisition, roughly $220 a square foot versus our estimate of replacement costs of $250, going in [ [ unleveraged ] ] return was about 8%.

We used equity of about $19 million and financed $35 million at 4.3% rate.

Slide 10.

We've announced the development of a Ritz-Carlton Hotel and condominium project just south of the Crescent on land that we own.

We've signed the agreements with Ritz-Carlton to develop this with us.

It's a 3.4 acre site, as I said, just adjacent to the Crescent.

It's 21 stories.

The hotel will be on the first eight floors, residences, 70 of them, on the upper 13 floors.

These residences will range in price from $800,000 to $6 million or more and we'll seek to pre-sale these prior to breaking ground.

This development we anticipate will probably break ground in early 2005.

The total cost is approximately $150 million.

And we most likely will bring in a joint venture partner for up to 75% of this project.

Denny.

Thank you, John.

And good morning, everyone.

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

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

In the first quarter, we reported office FFO of $68 million.

This was approximately $1 million ahead of our plan.

And it did contribute along with residential to us exceeding our estimates.

As of March 31, our office portfolio was 88% leased and 64.4% occupied.

That's excluding properties we hold for sale and I'll comment on that in a minute.

Again, this was in line with our plan.

Our leasing was basically flat the first quarter.

As I said on our last call, we think that we are bouncing along the bottom in our business right now, and we expect to stay at these levels for the next few quarters.

But it was in line with our expectation.

Our strength is clearly Houston today, where the velocity has been very good.

Dallas has started to increase activity somewhat.

We're actually seeing some expansions now in that market, and we've not seen that for some time.

Austin continues to be our soft market.

I'll give you more detail on a market by market basis in just a moment.

As you can see on slide 11, our first quarter same store NOI was down, but it is in line with our guidance.

Our guidance for the year was down 3 to 6% in the 3.6% number is at the low end of that range.

Like most other office REITs, primarily driven by year over year occupies decline.

In the first quarter, we leased 1.3 million square feet.

This was good.

This matched our explorations, which in effect kept us flat.

In 2003 you'll recall that our renewal rates on office space that we renewed declined approximately 10% below the expiring rates.

In the first quarter the renewal rates were down 16%.

This was influenced by two specific leases, one in Austin and one in Denver.

If you excluded those two leases, we would have been down approximately 10%.

For '04, we do expect the renewal rate to be down somewhat, and we think that's probably in the 2 to 5% range, so it will improve and be better than 2003.

In 2004, we have approximately 5 1/2 million square feet of gross leases expiring.

We currently signed 4 million of that 5 1/2 million, which is 74% of those explorations, that's very good.

If you add the leases in the final stages of negotiation that we will sign soon, our leases address position gets to 82%.

So I'm very proud of our leasing team.

I think that's a good start to this year.

Our retention rate in the first quarter was 73%.

This is excellent.

Higher than last year.

I think our customer service focus is paying off.

And again, the property management and leasing people are doing a great job retaining our customers.

Let's turn to slide 12.

Let's take a look at our primary markets and we'll start with Houston.

Our portfolio was 90.5% leased as of March 31st.

Our 2004 rollover in Houston is in very, very good shape.

At March 31, we were 89% addressed in Houston.

That's 80% of that was signed, 9% in final negotiations.

We're also in excellent shape in the CBD market in Houston.

Houston Center is now 94% leased.

And so we're in good shape there.

If you look at some of the research that's been published on Houston, both [ Turner Wheaton and the Reese Company ] are projecting positive net absorption for Houston for '04 and we would agree with that.

There is one area that I would mention that is an issue in Houston for us that we're watching closely, and that would be El Paso.

There's been a lot of press about El Paso.

Like others, we're waiting to see the financials that they release.

And if you have specific questions about that, Jane Mody will be prepared to discuss that.

Let's turn to slide 13.

Let's talk about Dallas for a second.

We are 87.3% leased in Dallas, which, again, is in line with our expectations.

We're starting to see some positive leasing signs in Dallas.

Again, both [ Turner Wheaton and Reese ] are projecting positive net absorption for Dallas in '04, and we would agree with that as we've seen additional activity pick up.

In 2004, we have approximately 1.4 million square feet of space expiring, and we are 77% addressed on those expirations right now. 72% of that is already signed.

So that's a real plus.

Quickly looking at a couple of our other markets, Las Vegas, we are 94% leased in Las Vegas, which is excellent.

In Miami, we are 93% leased.

They're extremely strong markets for us.

Austin and Denver are soft markets.

Austin is 72% leased and Denver 83% leased right now.

I will say, though, that in Denver, we are 86% addressed on our rollover, and we've got about 700,000 square feet of rollover in Denver in 2004, and 83% of that signed.

So that's a pretty solid start in Denver.

Maybe one final comment on office before I move before I move to our resort business.

As John said, we disposed of two office in the first quarter, 1800 West Loop and Liberty.

We do plan on selling five office buildings that total over a million feet.

They are in the market and they are under contract right now.

Four are in Dallas, one is in Denver.

And we expect those properties to close in the not distant future.

Some of these will close in the second quarter, latter half of the second quarter, some early third quarter.

These are some noncore properties that don't fit long-term into our strategy.

We have just been able to free these assets up for sale because of some [ INAUDIBLE ] we did on the original CMBS loans we had.

With the market as strong as it is right now for for sale property, we are going to move these noncore properties for us.

Let's turn to slide 14.

Our destination resort business had a solid first quarter.

It was in line with our expectation.

Our average daily rate was up.

Our occupancy was just down slightly and our RevPAR was flat.

We did finish the remodeling we were doing, the renovation at Sonoma Mission Inn, on some of the historic rooms.

Those are now in service.

Let's turn to slide 15.

Our business class hotels were down significantly in the first quarter compared to the first quarter of '03 as you see on this slide.

The first quarter of '03 was a tough comparison for us.

And let me give you some specifics on that.

The Omni Hotel in Austin was down, and it was down for really a couple of reasons.

The state legislature was in session the first quarter of '03, it was not in session the first quarter of '04.

That cost us some occupancy and revenue.

Plus in the first quarter of '03 we had the movie the Alamo being filmed in Austin.

I don't know why they filmed the movie the Alamo in Austin.

But it kept us full, and we were excited to have that group, and they took a lot of room nights there.

In both Denver and Albuquerque, we had fewer converges in the first quarter of '04 compared to '03, but we are seeing some strong group bookings for the remainder of the year, so we should have some pickup on both of those properties.

Today, as most of you know, the for sale market for business class hotels is just excellent.

And we think now is the time to take advantage of that.

We've talked about selling some of our business class hotels, because they are noncore to our business long-term.

We have put both our Denver Marriott and the Albuquerque property on the market.

They are actively being marketed right now.

We expect to close these sales in the second half of the year.

And based on the pricing we see in the marketplace, we're expecting a nice gain on these sales.

Let's turn to slide 16 now.

Before John introduces Harry, I just wanted to make a quick comment about the first quarter in our residential business.

I did want to comment on Desert Mountain.

We had a very good, as you recall, fourth quarter in Desert Mountain.

We closed 26 lots in the first quarter of '04 we closed 16 lots at Desert Mountain at an average price of $948,000.

This was ahead of our budget.

We had budgeted nine sales.

So we had a very good first quarter.

It also contributed to us being over our estimates.

And I will say that we're pleased with that.

So far second quarter is shaping up pretty good also.

I'm going to let Harry provide a lot of the color on his business.

But I just will say from my perspective, they had a very good first quarter in his business both on the lot side and the unit side.

We expect Harry to have a good year in '04, but a terrific year in '05 and '06.

And I think you'll understand that better as he goes through his business plan.

John.

I'm on slide 17.

We decided to dedicate a portion of this call to our residential development business.

It's one I think that's been very much misunderstood.

When we went public back in May of '94, I remember like it was yesterday all of the scepticism that surrounded this business.

It was predominantly at the time about our ability to grow it.

Because at the time we only had two projects.

They were generating about $4 million in FFO.

That scepticism was well founded, because those could have been anomalies or could be turned into a real business.

Well, since that time, we have invested in over 35 projects, every one of which has been successful.

We have not had one loser.

They have ranged in internal rates of return, obviously, but not one project have we lost money on.

And historically the internal rates of return have typically been well above 20%.

We've produced over $450 million, over $450 million in FFO over ten years.

The first three years we averaged $7 million per year.

The last three years, ending this last year, we averaged $64 million annually in FFO.

So I don't think that there's a lingering doubt about this being a sustainable business versus a one-time project.

I think the challenge now is to help our shareholders and the analyst community, really understand this business, so it can be appropriately valued.

We took aim at this issue this quarter by providing dramatically enhanced disclosure, which we included in our supplemental disclosure package.

It starts on page 43 and goes through page 48.

I think that you'll find this information very helpful.

We worked very hard on putting it together.

And you know, pushing our -- probably the boundaries in terms of disclosure and weighing that against competitive issues of how much you do want to disclose from the standpoint of being able to buy and market these kind of properties.

I think we found a healthy balance.

I think you'll find this to be very informative and will enable you to assess not only our performance going forward about but also value the business.

This business runs ride alongside the demographic changes we're seeing.

On slide 18 we talk about targeted the baby boomers.

This is our primary buyer.

Harry will talk about this.

They represent 79 million Americans or almost 30% of the population.

There's a huge wealth transfer.

You've all seen this information, I'm sure or read about it.

A big wealth transfer, $7.2 trillion of wealth will be inherited by this baby boomer population during their lifetime.

They are currently at their peek income earning years and they are searching for a gathering spot for their family.

They are looking for second homes.

That's predominantly our business.

Along with the new disclosure we provided, we thought it would be value to introduce our primary operating partner in the development business which is Harry Frampton.

I've known Harry for about 20 years.

We are very fortunate to be in business with him.

He's one of the best in the business.

I think he's the best in the business.

He has 35 years experience in real estate, predominantly in this area of real estate development.

He's a recognized leader in this area.

He's currently chairman of the urban land institute.

He has an organization that's filled with talent and experience.

In fact, their organization I think in total employee count is even larger than ours.

They have over 1500 employees, which encompasses 75 real estate professionals full time.

Harry is on the phone and he's nice enough to join us from a call in Europe.

He's on a ULI trip.

He's going to explain more about our business.

Keep in mind when you listen to Harry we've done over $9 million in residential sales for him.

Going forward he's responsible for about 90% of our future sales, which will be under his leadership.

Harry.

Well, thank you very much, John.

I thought I would talk about three things, a brief overview of East West Partners, talk a little bit about a couple of our projects in the Vail Beaver Creek area and then focus on Lake Tahoe, which is obviously important to all of us.

Our company started in business about 20 years ago, so we're not new at it.

We've got a terrific management team of professionals, most of which have been with us for 10 to 20 years, I think quite good at creating high value [ INAUDIBLE ].

We've got a lot of great partners.

We do business with Bank One, U.S.

Bank, Society General, Wells, Financial Partners who just recently committed $108 million of financing to us in Lake Tahoe.

It shows the kind of relationships we built up over these 20 years.

We're also in a series of partnerships with the Pritzker in timeshare projects, we're partners with two major ski operators in the company, Intrawest and Vail Resorts.

I mention this because I think we do have a strong foundation that will continue to let us prosper as we go forward.

Certainly our roots are basically in Vail and Beaver Creek, the original developer of the Park Hyatt in Beaver Creek.

We developed roughly 400 condominiums in Beaver Creek along with four timeshare projects.

Bachelor Gulch next door, we've got about 250, 275 condominiums along with a significant number of town houses.

As John has said, I think -- I know we have been able to submit to Crescent superior returns since 1994 when we started this relationship.

For the first seven or eight years, those returns were phenomenal.

The last couple years, they haven't been quite as good.

But they have still been extremely strong during a little bit of a soft time.

That gives us good comfort that our financial strategy is solid.

I think more important because of the hard work we've done in the last ten years, we are really poised to do some pretty phenomenal things as we move forward.

If you'll flip over to slide 20, I might just show you one project we're doing in Bachelor Gulch, which is typical of the way we've done business.

It's a 40-unit condominium project, which we're the developer of.

We have now pre-sold -- we have now sold 34 of those 40 units with the building not to be finished until this coming fall.

It has been in that respect quite successful, even though we show in this project the IR being 25%, it's really conservative in that I think we'll end up somewhere between 35 and 45% when the project is completed.

The units were sold at an average price of a little over $800 a square foot.

But it's a typical project because one of our strategies has always been to focus on pre-sales.

Before we start these projects, we usually have pre-sold somewhere between 40 and 50% of the project, taking 20% down.

It's a good solid business that we've got down.

We're now in a position to close all 40 of those units in November and December.

We've only got six left to sell, so we should be generating some significant profits by year end.

I should point out that we also just brought the market in Bachelor Gulch, another project called Humming Bird, which is one we're doing with Crescent.

There's 40 units there.

Even though we have not broken ground yet, as of yesterday we had 26 of those units under contract at over $900 a foot.

The good news about that is that that will be a project that you would close out in the fall of 2005.

Finally I should say to ensure that we continue to take advantage of the good infrastructure and the market in the Vail Beaver Creek area, we have three other pretty terrific projects we are in deep negotiations with now in the Vail area that we certainly plan on doing with Crescent as our partner.

I think what we've been able to do, because we know that market so well and because of a great long-term partnership with Crescent, we really are in a position that we've been able to pick the cream of the crop as we go forward.

So a good business and it's continuing to go well.

You turn to slide 21, a fantastic picture of Tahoe mountain resort.

Let me first make a couple of comments about California, we're locating in the north --.

Operator?

Yes, ma'am.

We seem to be disconnected.

With Harry.

It's Harry's line .

We're going to disconnect his line.

We apologize for this.

We're going to disconnect that line and we'll pick up where he left off.

Hopefully he'll rejoin us.

Mr. Frampton's line has been disconnected.

Okay.

This is Denny, I'm going to pick up until Harry can get back on and work through our slides and talk about the Tahoe opportunity.

Basically Harry and the team's next major opportunity for us and them we think is Tahoe.

We think that the Tahoe development can be similar to Beaver Creek and the next Beaver Creek for us.

We think that the market dynamics for Tahoe are are extraordinary.

We have approximately 15 million people within a three-hour drive for this resort.

It's a perfect baby boomer product.

We think we've got the right demographics coming in.

We are very excited about Tahoe.

Turn to slide 22.

Basically there are four very unique components to the residential community there at Tahoe.

The first is what we call Old Greenwood.

Old Greenwood is a Jack Nicklaus Golf Club, course that we have completed now.

We will have 104 lots on that particular development and 150 timeshare.

And I'm going to break down in just a second each of these in more detail.

The second is The Village, which will consist of 350 condos.

This is very similar to what we did at Beaver Creek, so we will be doing condos and redoing The Village there at Tahoe.

The third area is what we call The Highlands, which is 1450 condos on the North Star Mountain.

This is a terrific spot to be.

We think this very similar to what we've done at Bachelor Gulch.

The fourth project there is Grace Crossing, which is 410 lots and 130 town houses.

Let's flip to slide 23.

Let's start with old Greenwood.

We started marketing old Greenwood last fall.

We talked about that on our last call.

We have sold now and closed 88 lots of the 104 lots that we have out there.

We're very pleased with that.

We think we will sell the remaining lots this year.

We've also started 17 cabins and timeshare, which is a very unique product there on Old Greenwood, and we will begin delivering some of these units this fall.

We've already sold 75 fractional shares of those 17 cabins that we have under way, and so we're pleased with that.

We like to have a fractional component in our overall developments, because it provides a great move-up opportunity.

What we've experienced and what Harry has experienced over time has been we'll get a particular customer in a fractional, then we'll move them up to maybe a smaller condo, then we'll move them up to a bigger condo.

That formula that worked very well for us and we think it will work here at Tahoe.

As I mentioned our Nicklaus course is finished.

In August Jack is going to come out and play an exhibition round there.

It's doing to be an exciting event, a good kickoff.

It always boosts sales when Jack comes out for that type of event.

Let's turn to slide 24.

At The Village at Tahoe, we have just started our first 100 units under construction.

We have sold 81 of those units, which equates to over $100 million in sales.

We are completely transforming The Village at Tahoe.

I don't know if any of you have been there before, but see the slides and the renderings we have on this particular slide are very special and we think it's going to be extraordinary.

Also as part of The Village, we have sold club memberships.

And to date, we have already sold 250 club memberships to the Tahoe Mountain Club and it's generated over $10 million in cash to us.

Let's flip to slide 25.

Here we'd be talking about The Highlands.

I'm probably more excited about The Highlands than any piece of the Tahoe development.

We've got an opportunity over the next ten years to build about 1450 condos at North Star.

These are up on the mountain.

This is all of the units that can be built at North Star on the mountain, all of them.

We control the entire market there.

This is all of the condo units that are zoned in the North Star area.

So this is a very, very valuable opportunity for us.

We're going -- we think we're going to be able to harvest a lot of FFO over the next ten years and we're excited about that.

I know if Harry was on the line, he would probably express it this way.

He said very often that all he's got to do is sell his 350 units at The Village, and get the money owe and he'll get all his money back, we'll get a nice return.

And basically at that point in time, we'll own The Highlands free and clear.

That gives us 1450 units to develop over time, collect that cash, and we've got our money back out of the Tahoe mountain portion of the development.

I think that's a great vision that Harry has there.

And I think it's going to happen sooner than we probably all think.

Harry, are you back on?

Okay.

Well, I'm going to keep going then.

Let's flip to slide 26 and I'll spend some time going through some of the enhanced residential report.

Now we have him back on, I think.

Harry?

Harry?

Well, keep going.

Sorry, folks.

Operator, can you disconnect Harry's line so we get rid of the beeping?

Yes.

His line has been disconnected.

Thank you.

Until we can get Harry back on and he can continue discussing his business, I'll continue on with the residential reporting.

Why don't we turn to slide 26 and take a look at the numbers.

As John said, we decided to really expand our residential reporting to do a couple of things.

Number one, we want to help you understand our business.

And number two, we want to help you in the analysis of the residential net asset value.

I think this information will be quite useful.

As a matter of fact, a couple of analysts, John Lutzious and Jonathan Litt have encouraged us to do this over time.

I hope both of them and all of you will consider this a step in the right direction.

You'll find our information on our residential business in the supplement on pages 43 to 48.

So if you have a copy of our supplement, I'd suggest that you flip to that particular section.

Let's begin with page 47 on the supplement.

If you can find that page.

And this deals really with the residential development performance both historical, and we've given you a five-year projection with these numbers.

As John said, we started very small in this business at $14 million.

We have built it up over time to approximately $500 million in book assets.

And as you can see along the FFO line, over these 14 years we have generated over $450 million in FFO.

Our returns on this business are provided, our margins and returns, and as you can see, they have been very, very attractive.

We've also provided information on cash and the cash that we've generated out of this business in excess of our FFO.

And that has totaled over this time period extraordinarily large amount of money.

And you can see in 2003 on this particular schedule, it was $132 million.

So the history looks good.

What's the future look like?

We've spelled out in this exhibit also our five-year projection, and this business has been projected, without the Woodlands, obviously, and you can see from this information and the product mix that or strategy is to move away from lot development and into vertical development, ala, what Harry and his team have been good at.

You can see investment declines as we have a return of capital in this particular business.

But even as our investment declines were able to keep our FFO, we think in the $35 to $45 million range, there is a long tail on this business, particularly at Tahoe, even after we've gotten our capital back.

And we'll look at that when we get to our net asset value analysis.

But as you can see, there's a lot of cash generated out of this business.

You can see that at the lower part of that portion of the schedule.

If you look at over the next five years, we have over $400 million coming out of the business in excess of our FFO.

And that's after we have taken into account our re-investment about this business to produce that cash flow.

Let's take a look now at our property table on page 44.

A lot of information on this page.

I think the analysts will like this.

This information should help you really understand our current inventory positions, what's developed, what's undeveloped.

It should help you understand the build out timing of these particular projects.

It should help you understand how we get to our guidance in 2004, and we might just, as an example, just take a quick look at Desert Mountain.

Can you see at the top of the page there, Desert Mountain we have 164 remaining lots or units that we can build there.

We have 84 physically in inventory.

I think that's good information for you.

You can see the guidance section to the right that we are projecting 49 units being sold in '04.

We closed 16, as I said, in the first quarter.

That leaves us 33 to go, and 12 of those have been pre-sold.

So you can see that we're moving along in pretty good shape the early part of the year by analyzing that, because typically Desert Mountain is a fourth quarter business.

So this will help you on a project by project basis track where we are in each of these developments on a project basis, and help you understand our guidance for the year.

And finally, I think you will really like the slide or the exhibit of the residential NAV on page 46.

So flip to 46 if you've got the supplement in front of you.

A lot of information here.

In this exhibit, we broke out our ownership structure information, as well as the annual cash flow that we're getting off these projects, on a project by project basis.

In the past we've always highlighted and said that our residential business should be valued on an NAV basis at book.

Our book is about $490 million.

This analysis, which again we think is conservative, would indicate that that NAV is higher.

And you'll see in the column in the middle of the page that we're reporting $627 million.

We think this is reasonable.

We understand that it's been very difficult for the analysts to get their arms around the residential NAV.

We have just not provided the type of information that you needed.

One of the common errors, and it's because you didn't have this information, in calculating our NAV was not to factor in the preferred returns that we get.

This is obviously very important.

We don't just get the split.

We get a preferred return, then the split.

So that's important.

Now we've told you what the preferred and splits are and how that cash flows with that structure in mind.

Another common error that's occurred and is difficult to get your arms around in the residential business has been the amenity assets that we have.

A lot of the analysts have left that out.

And it is a real asset for us.

They are valuable assets for us.

This would be like our golf courses and club houses.

And so we have done -- we have taken a shot at giving you some information on those assets that will help you understand the real value there.

And these assets do have real value.

They will be sold at the appropriate time, either back to the membership or to other investors and we'll realize significant cash from those businesses.

I guess in summary what I'd say is we think this is a step in the right direction.

Hopefully over time we can improve on this information.

And as we work with all of you, there may be other ways to present this, which we can.

After you've had an opportunity to review it, if you've got questions, I'd really suggest we can take questions now, but also I would suggest that you follow up with Jerry Crenshaw.

Jerry and his team have done an outstanding job working through this information.

There's a lot of thought that's gone into it.

There's a lot of detail behind it.

So I would suggest that from a follow-up standpoint you call Jerry on these numbers.

John.

Thanks, Denny.

I hope it's helpful that we took this extra time and dedicated it to try to explain this business better to you and go over the new schedules that are provided for you to help you understand.

One thing I want to emphasize is that we do treat this as a business.

The one thing that is not included in the projections going forward is any new projects.

And as you can see, we've done 35 to date.

Every year we find new areas to invest.

And while we are going to continue to limit the capital that we expose to the business, we will find new transactions, because it's a business.

This is not just a project.

It's an ongoing business.

So there will be additional projects added into the future numbers.

And really all you're seeing in the future is the burn off of what we currently have.

So you can expect to see future investments as well.

And we also haven't assigned any kind of enterprise value for this business.

We have an exclusive relationship with Harry, and we think that is very valuable.

We've taken a lot of time on the presentation, but I hope that's helpful.

Let's open it up for questions.

Thank you, Mr. Goff.

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

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

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

Please hold for your first question.

The first question comes from Jonathan Litt of Smith Barney.

I'm here with John.

First off, I want to thank you for the disclosure on the residential, I think it's going to be very helpful.

The question I had, however, was on AmeriCold, which took it looked like a pretty big hit on the occupancy side during the quarter and the FFO number came in light relative to what we're looking for.

Just wanted to get an update there, when you thought maybe a lease restructuring would happen?

Well, let me make sure that everyone knows that, you know, we did do this financing.

So because of the financing we're down about a million dollars related to interest on that financing.

But we have $90 million in cash that we're going to go re-invest to obviously more than make up for that million dollars for the quarter.

So that's a piece of the reduction when you compare year to year.

The other piece does relate to occupancy, John.

And the management team is very confident that that's going to get back on track.

They have made a concerted effort to reduce occupancy on unprofitable business, what has been determined is that, yes, their occupancy was up, we had a certain component of that occupancy that was not profitable enough.

They are in the process of turning that occupancy over to more profitable business.

As we go through that, I think we will see a dip occupancy, we will see a dip in earnings a bit.

They are confident they are going to hit their budget numbers for the year.

At this time a quick question on page 46 in this disclosure.

I'm still trying to figure it out.

You're showing Desert Mountain, for example, estimated cash flow for '04 of $21 million.

The gross proceeds from the sales of those 49 lots should be closer to $46 million.

Is there somewhere where you explain what happens to the difference?

Well, it's pretty simple.

The difference is cost of goods sold and the cost of developing it.

And generally what we do is we'll have a development lone on that, Jonathan, so we will retire the development loan, excess cash we'll take back out to us after we pay off the development loan.

We do that in Harry's business also.

There's no return of capital between the 46 and 22 that goes into Crescent offers?

If you look at the FFO attributed to Desert Mountain for '04, it's going to be about $15 million.

The cash off of those sales is 21.

So the other seven is return of.

But some of the additional return of will go to pay down the debt.

That's Crescent debt or Desert Mountain?

Desert Mountain project debt, typical development loan on a project.

I'm sure we'll have more questions, but we'll do it off-line.

Thank you.

Denny, I'm back if there are any other questions.

Your next question comes from Mike Marron of Bear Stearns.

Good afternoon.

Just a follow up on that page 46.

For the five-year cash flows for all of the projects, those net proceeds are net of any anticipated new funding requirements?

Yes, Mike, they are.

We think they will be probably around $100 million of additional funding that we will have over the next three years to complete those projects.

And that would be all the funding that we need to handle this.

It has been netted out of cash flows.

Okay.

All right.

Sonoma Mission Inn, obviously the occupancy numbers are pretty low.

When do we expect that to start sort of behaving normally?

Should come back right away.

We had 90 rooms out of service for all of the first quarter.

That obviously drove our occupancy down.

That renovation has been completed.

About half the rooms have been put back into service.

The rest of the rooms should be put into service first week of June.

The lobby remodel that was done is completed.

So you should see the numbers come up.

The advance bookings at Sonoma look good.

I think Fairmont has done a good job with some conference work that they have booked.

So I think you'll see that come up.

Okay.

Then finally on the office side, you sold a building in Houston, which is your best market.

What was the thinking behind that?

Since it's closed, I'll comment on that.

I would say it's not a prime location.

If you look at the ingress and egress off of that particular -- to get in and out of that building, very difficult.

The parking was difficult, the floor plates were not what you'd really like in today's market.

It was a very difficult leasing asset for us.

We've got a great team down there.

They have done well in the marketplace, but this this is one we just struggle with, so we just thought we'd let somebody else have the opportunity to take over that building.

Good submarket, but it's a building specific issue.

Don't you own a number of assets in that?

Yeah, we like the submarket, we would own more in the submarket.

The submarket is about 92% leased with our buildings in that area and this project was 72, 73% leased.

It was time for it to go, and we got a good price on it.

Finally, do you care to offer any comments on sort of your outlook for Dallas?

One, two, three, four, five-year recovery?

Well, the one thing that we're seeing, Denny and I both may answer this, but the one thing we're starting to see is more and more relocation activity and interest.

And that as we've always said is always the light switch for Dallas.

There's in question they are going to get more than their share of relocations.

And I think that's going to come over the next 12 to 18 months, and that will really energize that market.

Also as Denny mentioned, and Denny may want to cover this in more detail is just the expansion activity we're seeing.

That's what's got me excited, Mike.

I'm not here to say the next three-quarters you are going to see us 95% leased in Dallas, but it's moving up.

I reviewed the expansion opportunities that we have with John Zoggin and Mike Lewis, our two top leasing people.

The on lease looks pretty good.

Where over the last couple of years, you're probably hearing this from other office companies, everybody was down sizing, we starting to see people talking about needing more space and expanding.

There still is some shadow space in the marketplace.

We don't have as much shadow space in our buildings as many others, I think because of the quality, but our customer is talking about expansion and that's just something we hadn't seen for a while.

Care to make a guess on when rents might actually go up?

Rents are going to lag occupancy.

Occupancy is going to start moving up in Dallas toward the end of the year, [ Turner Wheaton and Reese ] are both projecting about 3 million square feet absorption in Dallas for this year.

So occupancies will start up. '05, occupancy will continue to go up, will go up.

But I really think it's probably late '05, early '06 before you see any rental increases.

You will see some reduction in concessions, TI and leasing packages.

Which we're seeing a little bit of that now.

But occupancy has got to go up before you see it and it will be the concessions before the rate.

Great.

Thank you.

Your next question comes from the line of Brian Legg with Merrill Lynch.

Yeah, again, I want to echo that I appreciate this new disclosure.

Maybe in the future could you provide a little more detail on the expected revenues and the cost of goods sold or this $100 million that you have by project?

And also, it might be helpful if you would extend this beyond 2008, because a lot of the present value seems to be particularly in Tahoe seems to be in the out years and their after line.

That's the kind of feedback that we'll want, Brian.

We couldn't get any more on the page.

Maybe we need to use two pages.

I couldn't read it if it was any smaller.

If you could go to a landscape.

I assume your Tahoe is a ten-year project.

This is really 2014, 2015 type project to really understand --

The thing to keep in mind on that, sure, you can break out year by year.

Our models obviously do that.

But those numbers change a lot as we plan and replan developments.

Tahoe will go through a dozen iterations over the next 24 months as we look at demand, as we look at the through put of our sales.

We will decide to either escalate certain projects or defer certain projects.

And there's a lot of that decision making that goes on that moves those numbers around.

I don't want to get -- I don't want to set the precision such that everyone has very certain definite expectations and those numbers are set in concrete.

You need to understand this is a very, very dynamic business that requires a lot of day-to-day management and a lot of attention to the market and demand.

And so I just want to caution that we provided a lot of detail here.

To go beyond -- the present value, once you start going five or six years out, it's not going to make a whole lot of difference.

Tahoe will, though.

Yeah, Tahoe will.

I think the surprise that is we'll see in Tahoe will be better than the numbers that we have here.

So I think these are pretty good numbers for now.

And again, the thing that we haven't tried to encompass in those forward numbers are any new investments and there will be some.

Right.

I understand.

It would just be easier if we could reconcile this to your [ INAUDIBLE ] and also look at the $100 million in cost per project so we could sort of see not just that the net cash flow, but how you get there.

Also, just going through some, can you explain again the hockey stick from the first half of '04 in your guidance to the second half of '04?

Yeah, Brian, referring to hockey stick, that's just the timing of earnings generated out of your residential development business, which historically always for us has been a fourth quarter activity, when you look at over the last three to four years.

As Harry alluded to earlier on Horizon Pass, that's a 40-unit project that's delivering into fourth quarter that will generate something in the neighborhood of 3 to $5 million in FFO.

Desert Mountain has historically had quite a bit of absorption or velocity into fourth quarter.

Okay.

Looking at your interest expense line versus the fourth quarter, it increased by $2 million, what went on there to increase interest sequentially?

This is Jane Mody.

You had two things really contributing to that.

If you recall you added that funding 12 financing, which is the financing that we put in place to defease the CNBS loan.

So that is going to show up even though that numero loan is affectively offset by government securities that whose maturity precisely offsets both the interest expense as well as the principle when it's due.

You now have the impact of that incremental interest expense, plus you're also picking up the interest expense on the debt that you assumed on the Houston.

So the number in this quarter is more of an inappropriate run rate than it was last quarter?

Yes.

But just don't forget when you're really looking at that to effectively the way we look at it is we back out that numero financing at this point in time.

That has been 100% addressed.

It is still running through from an income statement, but from a cash flow it kind of sits off to the side.

Okay.

Okay.

And what was the timing of the -- when the Hughes Center actually hit in the first quarter?

It was late January.

Late January.

Early February.

First of February.

Okay.

Okay.

And in your guidance, what are your total acquisition disposition assumptions in '04?

$260 million is what John had laid out in the slides.

Of net acquisitions?

Well, that was of cash generated proceeds, as relates to acquisitions, you know, we've targeted $240 to $250 million.

Great.

Thank you.

Our next question comes from John Lutzius of Green Street Advisors.

Good morning.

Thank you again for this additional disclosure and also for inviting Harry to the call.

Can we just discuss briefly again the relationship between Crescent and Harry?

I heard the word exclusive, but I also heard Harry was working a bit with the Pritzker Family I think.

Where is the relationship exclusive, what's the remaining duration of the agreement, and are there any potential changes to major terms in the future?

Well, the relationship with the Pritzker Family, first of all, is on our projects.

Those are developments we have done together.

So they have been partners with us and with Harry on the same thing.

There's no partnerships outside of our that are with the Pritzker's.

The relationship is, again, Harry we've known for a long time.

It's one based on a lot of mutual trust.

So there's not like a formal document that -- David, correct me if I'm wrong -- that outlines the term of the agreement.

But it is an exclusive arrangement in that anything Harry does, he looks to us first as the capital source.

There have been a couple of instances where we have passed.

But for the most part, you know, I'd say 90%, Craig, their CFO is sitting here with us, 90%, 95% of what they are doing is Crescent projects.

And it will continue to be that way.

Okay.

And I guess there's not a lot of documentation.

But the relationship in terms of the split of profits from ventures, et cetera, you expect no changes in that going forward?

No.

We obviously reassess that as new projects come on, you have to look at the specifics of a new transaction to determine whether or not those splits are appropriate.

So from time to time, we do make modifications.

As you will see in detail, there are some differences from project to project.

For the most part we have a template that we've agreed upon that works for the majority of the projects.

Okay.

On page 46 of the disclosure, you outlined the net present value calculation.

Can you comment on your thoughts about the choice of discount rate of 12%?

Yeah, John. 12%, again, is somewhat norm, I think, out there.

I think [ INAUDIBLE ] uses 12%, as well as others we have seen in the industry.

We're comfortable with 12%.

It's a risk factor.

Most of our projects are identified projects presales.

You could make an argument it could be lower than 12%.

Okay.

While I have you, Jerry, I'm just lining up page 46 in the supplemental with 48, and is it apples to apples to compare on page 48 the net book value of $487 million with the evaluation on page 46 of the $627 million?

Yes, John.

That's an apples to apples comparison.

Okay.

And then just last question on the residential land business.

Can you talk a little bit about the competition in the Tahoe area for your project there, the north star project?

Can you give us some sense of other major competing projects in the area?

Harry, are you on?

It would be great for you to answer this, if you're on.

Craig.

Really, there's very little competition out there.

As you're aware, you may be aware, getting entitlements in the area is very difficult.

There's no other land of any significant size in the north Tahoe area that has entitlements on it.

And so at this point, although there are some very small projects there, we feel that there's really not any significant competition in that Tahoe market for us.

So you have the only project of this size up there?

Very much so, yes.

Okay.

And then just a couple of questions outside residential land.

You mentioned briefly El Paso.

Can you provide any additional color on how you think that might shake out?

For example, how much of their space are they using and do you see some sort of a lease termination for a portion of that space in the future?

Well, obviously, John, this is Jane.

I think I would tell you we try and stay as close to it as you possibly can.

As Denny mentioned, we're anxiously awaiting to kind of see how they come out with their reserve evaluation and their year-end numbers.

In terms of the usage and the space, the 900 square feet they have over at Green Way, it looks like most of the space is being utilized with the exception of 5 Green Way Plaza, which is about 80 some-odd thousand square feet.

But the balance of it is still getting pretty good usage.

So it's difficult at this stage of the game, to really be able to comment beyond that.

Current on their rent.

Yeah.

And they are current on their rent.

I guess when I look -- I will just make this comment.

When you go back and really look at what El Paso has been able to accomplish since they went through this restructuring, both in terms of their business initiatives and their sales, they have really come an extraordinarily long way.

I mean, it looks to us like they are through the bulk of the sales activity that they had outlined for themselves.

So, you know, I think it's going to be a question of just saying whether or not the market is going -- how much time the market is going to give them to kind of settle down their operations at this new base level.

Okay.

That's helpful.

Then just last question, I guess Moody's had a downgrade yesterday.

Can you give any color on your interpretation of their thinking?

And I guess one of the issues that they brought up was, I don't know, some concern or some notation of future pending debt maturities.

Can you, perhaps, just address your plan there?

Yeah.

I guess a couple of things.

First off, we were very disappointed by the Moody's action yesterday.

You know, the rating agencies when you go through a real estate cycle are supposed to assign a rating that will get you all the way through that cycle.

And at a point in time when you see both markets stabilizing, and in our case where we have had demonstrated success in executing a number of strategic initiatives, it really -- we were just surprised by the decision, given that they already had us on a negative outlook.

It is not something, though, that has any other repercussions to it.

We don't have any ratings triggers in any of our loan documents.

And it -- historically Moody's has been one notch above S&P on the unsecured debt.

This now just kind of puts them on a parallel level.

I'm sorry, the maturities.

The 2005 maturities that they were addressing are really just the maturity of the line of credit we'll be addressing probably in the third, fourth quarter of this year as well as the maturity of the residual piece of the -- that term refinancing that we have on the funding one aspect, that's $161 million.

Neither one of those.

It's just timing.

Neither of those maturities are a concern for you?

You think they will be refinanced in an orderly manner at similar rates?

Yeah.

I think we just move through it at the end of the year.

Revolver capacity is $400 million we only have $169 being drawn.

Nonissue.

Okay.

That's it for me.

Thank you.

Thank you.

Your next question comes from David Bell of Bell Investments.

Yes.

If I understand correctly, you said the expected lease renewal rental rate for '04 was going to be down in the 2 to 5% range.

If that's correct, is that net of the down 16% in the first quarter?

Yes, it is that will take that into effect.

Thank you.

At this time, there are no further questions.

All right.

We've gone over our allotted time, but we appreciate everyone's attention.

As always, we'll be available to answer questions by phone, so please give us a call.

Thank you.

This concludes today's conference call.

You may now disconnect.