摩根士丹利 (MS) 2004 Q3 法說會逐字稿

Good morning.

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

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

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

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

If you would like to ask a question during this time, simply press the star key, then the number 1 on your telephone keypad.

And questions will be taken in the order they are received.

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

In order to ensure that all our participants will be allowed to present their questions, we ask that each participant limit themselves to one question and one follow-up question before returning to cue.

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

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

Thank you, Ms. Moody you may begin your conference.

Thank you.

Good morning.

We want to thank you for joining our call today.

I hope that you've had a chance to see both of our press releases this morning, the third quarter earnings results as well as an announcement of Joint Venture's certain Trophy Office Assets in our portfolio What would also be helpful is if you will refer to the presentation in the investor relations section of our website that was designed to accompany this call today.

And before we begin, I would like to introduce you to who is on the call.

We've got John Goff, Vice Chairman and Chief Executive Officer, Dennis Alberts, President and Chief Operating Officer, Jane Mody, Executive Vice President, Capital Markets, Jerry Crenshaw, Executive Vice President, Chief Financial Officer and David Dean is also with us, Executive Vice President, General Counsel.

I'd also like to point to you our forward-looking statements in our presentation and earnings releases issued this morning and with that I go ahead and turn the call over to John Goff.

Thank you, Keira.

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

As you know, this morning we announced our earnings for the third quarter of 2004.

We are very pleased with those results, which exceeded our expectations.

We also announced this morning two very significant joint ventures with a institutional investor for 1.2 billion of our Trophy Office Assets.

This announcement comes right on the heels of last Thursday's announcement of our Americold transaction.

If you've not seen these two releases, they are available on our website at Crescent.com.

Because we want to devote sufficient time to these important transactions, I've asked Dennis to first provide a condensed review of our quarterly results then we will discuss in greater detail the transactions we announced this morning and the impact of these transactions that we've completed or that are pending.

Then we will obviously answer questions, and if we run over our allotted hour time frame, we're happy to go on beyond that.

Before I turn the call over to Dennis, I want you to know that I believe that we have made excellent progress in transforming our business model into that of a investment manager of real estate assets.

This is a part of the strategy that we have been following since I rejoined Crescent in 1999.

The office transactions announced today, the Americold transaction we announced last week and the other transactions that are pending and completed so far in 2004 will have a dramatically positive impact on our company.

Collectively these transactions are very beneficial to our shareholders.

They strengthening our balance sheet.

You will see that they will reduce our debt by 25% or over $700 million.

They validate our net asset value.

These transactions collective represent a gain on net book value of roughly $480 million.

They generate cash for us of over $500 million for new investment opportunities.

Which will enable us to grow FFO and further enhance our return on equity.

And finally, they reaffirm our commitment to our $1.50 per share dividend.

We will discuss each of these transactions in greater detail shortly.

But let me conclude my opening remarks -- remarks with a thank you.

These transactions, excluding all the new investment opportunities that we've also been working on simultaneously, represent a face value of over $3 billion.

We've been working diligently on them for months.

I'm very proud of the enormous effort that the Crescent team has put into getting these transactions done.

Many of them are on the call.

And I want to thank each and every one of them for making us a stronger company and putting us on a course of enhancing returns for our shareholders.

Now I will turn the call over to Dennis to review the third quarter results.

Well, thank you John and welcome everyone.

We have a lot of strategic information to cover today, so I'll be brief.

But I did want to take just a few minutes this morning to talk about our third quarter operations which -- which were good.

If you will turn to slide four, we'll start by taking a look at third quarter FFO.

And as you can see, we reported $31.3 million in FFO or $0.27 a share.

As John said, this $0.27 a share is ahead of estimates.

We beat both our guidance and analysts' estimates by $0.05.

Included in this $0.27 a share is a gain on the sale of Houston Center, which we have continued to liquidate our non-income producing assets and this was an ongoing part of that program.

John's going to cover our fourth quarter guidance in just a few minutes.

Turn to slide 5.

We ended the third quarter at 88.8% leased.

And I was very pleased with this level.

This is up from 88.1% at the end of the second quarter, and up from 86.4% at year end.

So a 240 basis points improvement since year end.

Our strongest occupancy gains have come in Las Vegas.

We're now 98.5% leased there.

Also in Miami, we're 94.3% leased there.

And in Houston, we're 90.6%.

We're also seeing some significant improvement now in Dallas and Denver.

In Dallas, we reported 86.8% at the end of the third quarter, this compares to 82% at year end.

A nice increase.

And in Denver, we were 86.7%, compared to 80.8% at year end.

So both of those markets have a positive upward trend.

And I'm very pleased with that.

And it is in line with our expectations.

And I want to also thank our -- our people for a great job done there.

John's Zogg's team and Jane Page's team I think are highly professional both on a leasing and management side and so we're starting to see the results of that their hard work.

As you can see on slide 5, our third quarter same store sales was down.

This was in line with what we expected and in line with our guidance.

We said for the year we would be down three to 6% and we now believe it will be at the lower end of that range.

We also had a large lease termination fee in the third quarter of '03.

We did not have as large a lease termination fees as we did in '03 in the third quarter of '04 so it did somewhat affect our margins.

Turn to slide 6.

In the third quarter, we leased 1.9 million square feet, which was the second highest quarter that we've had in our company history.

The third quarter renewal rates were down 4.2%, which was better than we expected.

We did see some relief in our TI packages in the third quarter.

And it's nice to see a little momentum in that particular area.

In 2004, we've got approximately 6.3 million square feet of growth leases expiring, and I'm happy to say that we've now addressed 99% of those expirations, 97% are signed and 2% are in final negotiation.

So I think we're in excellent shape from an office leasing standpoint this year, with regard to expirations.

And we've got a real good start on 2005.

Which we will cover on our next call.

Turn to slide 7.

We were very pleased with our third quarter resort results.

Our same store NOI was up 13%, which is very good.

We increased our occupancy.

We increased our ADR and our rev par was up 10.7%.

We did finish the renovation of approximately 90 rooms at Sonoma and the new product has been very well accepted in the third quarter.

At Sonoma we are into our next improvement phase, which includes improving the Sonoma Golf Club clubhouse and we're converted that now from a public course to a private course.

We're in the process of selling memberships there.

We've sold about 200 memberships.

The current price is $125,000.

We think we can run that total up to probably 300, 325 members.

But as part of that you saw a small impairment charge in our numbers for the third quarter, and that was really taking down the old clubhouse to make way for the new clubhouse so that we can convert to a private facility.

There's not a lot of golf courses up in the Sonoma Valley, so we think this will be successful for us.

We also had a very nice quarter at Canyon Ranch and also at the Park Hyatt at Beaver Creek and I would just refer you to our supplement to take a look at those specifics.

Turn to slide 8.

Our residential business continues to be very robust.

Year-to-date at Desert Mountain we've sold 44 lots, this compares to 34 lots last year.

And we've got a lot of momentum there.

We anticipate selling 60 to 70 -- lots for the year, and I feel very confident in that level.

And I do expect Desert Mountain to meet our FFO plan there this year.

So we have nice momentum at Desert Mountain.

At Crescent Resort Development, which is Harry Frampton's business, it's just simply extraordinary right now.

It's, it's on fire.

Basically I do expect Harry to meet and really exceed his budget this year.

Virtually all of the vertical product that Harry has underway at Beaver Creek and at Tahoe is sold.

And so we've got a very strong pipeline of product now that we are in the process of closing.

About a month ago, at Tahoe, we put the next phase of what we call our Gray's Crossing lots on the market.

And I think I mentioned before we had about 100 lots that we had to sell.

Well, we received over 500 reservations for those 100 lots.

And since then all 100 lots now have gone under contract.

At prices that were slightly higher than we expected.

And we expect to close at least 80 of those in the fourth quarter, could be more, which will be a nice source of FFO for us in that quarter.

So in 2004, we should receive in our residential business about $140 million in cash.

This will meet or exceed our expectations.

The same thing is true with our FFO guidance.

We had given you 30 to $33 million out of this business segment, and I think -- I'm very confidentiality that we will meet or exceed that level.

Slide 9.

On our last call, I mentioned our new Ritz Carlton Hotel and Residential condo development that we are planning and working toward on land that is just south of the Crescent.

That development is approximately 217 hotel rooms and 70 condominiums.

I am very pleased to say that we now have 65 of those 70 units now under contract.

The market acceptance for the Ritz condos has been very strong.

We've set new pricing standards in Dallas, and we are now in the process of preparing to start this project in the spring of 2005.

I think this project will create significant value for our shareholders, and I also think it will be really a wonderful amenity for our office customers at the Crescent.

So it will be a wonderful project, we'll fit in nicely and so we're excited to take this next step at the Crescent.

John?

Well, let me summarize the transactions that we're going to cover with you today.

I'm on slide 11.

First, joint ventures.

We have told you that joint venturing of our existing assets as well as new acquisitions is a very important component of our strategy going forward.

We also said that we had a goal to grow our joint ventures one to one-and-a-half times the current level of roughly a $1billion by December of 2005, a year from now.

Well we achieved our goal far ahead of schedule by announcing today $1.2 billion in joint ventures of some of our trophy office assets and we're going to cover those in detail in just a moment.

I'm actually going to ask Dennis to do that.

But let me remind you that the joint venture structure is very attractive to us because it significantly enhances our return on equity.

We'll cover that in detail in a moment.

We think that this business model is far more attractive to our shareholders in building long term shareholder value than the traditional model of wholly owning the assets.

Secondly, Americold.

We stated that we would further reduce our investment in Americold at a appropriate time and possibly that we would be able to attract outside capital to the business.

We also represented that Americold offers very attractive upside and I think there were doubters, more than a few, in the market place about that.

But if you look at what we announced last week, which is jointly with our partner Vernado, we have now reached an agreement to sell 20.7% interest for $145 million at a very attractive $1.45 billion enterprise valuation in interest in the business to Ukipa, and alongside of that we're dramatically simplifying the structure of that investment.

Third is Canyon Ranch.

We don't have a specific press release on Canyon Ranch but we have entered into an agreement with the founders, Mel and Enid Zuckerman and Jerry Coen, that we are in the process of documenting, that enables us to take advantage of the opportunities that that brand presents.

We've stated in the past that the brand could ultimately be worth more than real estate itself and I think we're going to find that that ultimately will be the case.

We are simplifying the structure of this investment.

We are raising -- we intend to raise $110 million of private equity and $95 million of new debt and we're going to grow the brand.

Fourth, non-core assets.

We've continued to pour through our portfolio with real estate values where they are today, looking to capitalize on investments that we can sell and further concentrate our focus.

We've sold 140 million of non-core assets this year and we will detail 135 million plus or minus that we expect to sale -- to sell over the near-term.

Slide 12.

Why are we so aggressive in pursuing these transactions at this time?

Essentially, we feel that the stars are aligned for Crescent at the moment.

It's the right time in the market, with abundant capital, and attractive pricing and we feel it's the right time for us.

We have premier assets that are attracting premier partners, that want to be in business with us for a long period of time on these par continuing assets, and it is the right time for Crescent because we have ability to absorb the tax gains that we're generating out of these various transactions.

And finally it is the right time for Crescent to close large transactions such as these because they truly accelerate our growth plan.

When we go through and assess our strengths and weaknesses as a company, and continue to evaluate our strategic plan, one important strength identified is our ability to assess the market and our willingness to act on our assessment.

If you look at our sales since our 1999 strategic plan was announced, we're now at roughly $3.2 billion in total asset sales and joint ventures of existing assets and within that number is $2.1 billion now of office joint ventures under management.

Slide 13.

These transactions viewed -- viewed together offer many benefits to us, including strengthening our balance sheet.

We're reducing debt by $710 million, which will either be paid off or defeased which is a 25% reduction in our consolidated debt.

Our debt to gross assets ratio will be reduced from 54% to 39% and we're generating over $500 million of invest table cash.

We're validating our net asset value.

Total gain on net book value of 480 million, $240 million is expected to be recognized in the fourth quarter of this year.

These transactions also position us to enhance our FFO, as well as our return on equity.

In each of these transactions, we not only validated net asset value but we're also enhancing the return on equity of those particular investments.

And we'll grow FFO as we reinvest this catch at higher returns and higher growth rates.

These transactions are very positive for the dividend.

While they're diluted to FFO in the near term, we're confident about the growth of our existing business, coupled with the reinvestment of the cash generated and, in the meantime, we feel that we have sufficient resources to cover the dividend and we'll cover that in detail in a moment.

And we also have the ability to return the tax gains to our shareholders through the $1.50 dividend in the meantime.

A highlight of today's announcement are the joint ventures of 1.2 billion of some of our trophy office assets and I've asked Dennis to cover this transaction with you in more detail.

Dennis?

Let's turn to slide 15 and get started.

Take a closer look at our $1.2 billion office joint ventures.

We are very excited about this announcement and our plans to form these joint ventures with JP Morgan.

They will include, as John said, several of our trophy assets, they will include the Crescent, Houston Center, the Coast Oak Central in Houston, Trammel Crow Centre in Dallas and Fountain Place in Dallas.

And I'm very excited about having JP Morgan as a -- as a partner.

They're obviously a premier institution, a great real estate investment company.

And we've already done a number of joint ventures with JP Morgan.

And they work very well.

They are great partners.

And so this is an opportunity for us to expand our relationship with them, and we are excited to do that.

The first joint venture that we are forming, which we have signed, and it will fund this week, will include the Crescent Houston Center and Post Oak Central.

And these assets are valued at $898 million and will be owned about 60% by JP Morgan and 40% by Crescent.

We do plan to sell down 16% of our interest as noted on the slide to a new institutional partner.

We think that this will occur by year-end.

We have been working on that side of the equation also, which would leave us at a 24% interest.

Now, this partnership will be leveraged approximately 60%.

We're also in final negotiations to form a second joint venture with JP Morgan and that is expected to close shortly, which will include Trammel Crow Centre and Fountain Place in Dallas.

JP Morgan in this transaction will retain 76% ownership and we will retain 24%.

This partnership will be very lowly -- low leveraged at only 30%.

Turn to slide 16.

As I said, these are five of our really trophy assets.

And we think that the capital markets are giving us a fair value for these.

We will discuss specific metrics regarding this transaction at a later date when we finish closing all phases of it.

But -- but we're pleased, and we think it is a fair valuation.

We will serve as general partner in this partnership, and we'll receive market leasing and property management fees, as well as promoted interest.

We think the promoted interest is going to have meaningful value to us over the long term.

We are recognizing as John said significant book and tax gains in this transaction.

And fortunately, through 10/31 exchange structuring and paying our dividend, we are able to shelter this $355 million tax gain and not have to pay a current tax on this gain.

So there is no tax leakage to cash in this particular transaction.

And as John said, we wanted to double our joint venture program prior to December 31, 2005.

Well, we've accomplished that well ahead of schedule.

And with this transaction, it brings our overall joint venture platform now to $2.1 billion.

Turn to slide 17.

When both joint ventures are closed, we will be able to pay down or defease debt totaling $612 million.

And we're -- we're anxious to do that.

And as John mentioned, when all transactions are closed, this and the other transactions we're working on, our overall leverage should go from 54% down to 39%.

We will have a total equity investment in these ventures of $143 million, which will generate net cash to us, as you see on this slide, of $316 million.

Turn to slide 18.

When these joint ventures are completed, we'll be able to -- and when we take the $316 million of cash that I just mentioned, and recycle that into new investments, we are able to substantially increase our return on equity.

This is a very powerful tool for us.

And I want to look at this for a moment and show you how it works.

Basically if you look at our current five properties and 100% ownership in them, leveraged at 56%, they generate approximately $53 million for us in FFO.

This equates to approximately a 10% return on equity, based on the $1.2 million valuation.

After we had completed the joint venture, we will have approximately $23 million in FFO coming from our $143 million equity investment, which is a 16.1% return on our equity.

Then we have $316 million in this transaction to reinvest.

This should generate for us approximately $57 million in FFO.

And this is a return of 18% return on equity, when we fully get this capital reinvested.

So the total new FFO generated by this transaction should be roughly $80 million.

Which compares to our existing FFO of $53 million.

So it's a very powerful transaction for us.

And overtime will be accretive to us, we think, in the neighborhood of $27 million.

Now John's going to talk more about our reinvestment strategy and the timing, and -- and how we pursue this strategy in just a minute.

So I'll turn it back to John.

Thank you, Dennis.

I'm going to start on slide 20.

And discuss the Americold transaction.

We announced last Thursday along with Vernado, our partner, that we signed definitive agreements to sell 20.7% of our investment in Americold.

We received a private letter ruling back earlier in the year from the IRS that allows us to combine the real estate and the operating companies that have previously been split into two different businesses and actually owned by different entities.

This was a very powerful ruling because what it does, is it enabled us to combine the operations and then attract outside capital in a much more efficient way which is what we are announcing here.

It also resolves our investment -- or our issues with COPI 100%, so that goes away and it eliminates any need for lease structures going forward.

So it really simplifies the Americold business and it simplifies our business.

We think these terms are very attractive.

It equates to a $1.45 billion value or a 10.75 multiple on 2004 EBITDA.

The transaction is that $145 million which I mentioned was 20.7% interest, so our interest will now be 32% in the combined entity which will be structured, by the way, as a REIT.

We have a very experienced partner in Ukipa.

We're very excited to have them as part of the team here.

They have a proven track record in this industry.

They have a lot of not only industry expertise but operating expertise within their organization.

They are already in the offices there, with their shirt sleeves rolled up, working on the ground.

And they see enormous opportunity here.

I think it's important to note that Ukipa is not a firm looking to make a real estate investment yielding 10%.

They are really looking for returns that are 25% or better on their money.

And so clearly we will be participating right alongside them going forward.

We think that the timing of this is very attractive.

We are realizing a gain on the sale of our -- of 20% of our interest, at $11 million.

And we're also generating investable cash net of $56 million.

This further reduces our investment.

As you may recall, our original investment was roughly 300 million, we did a financing earlier in this year that reduced our investment by $90 million down to 210 and then this transaction takes us down to roughly $150 million or half of where we started and if we mark that $150 million investment to the valuation that Ukipa is paying it's worth 70 million more than that 150 or 220 million.

Looking forward, I see much potential here for very attractive gains in our remaining investment alongside our partners in Americold.

Slide 21 we detail out for you the old structure and the new structure so that you have a pictorial understanding of how the restructure takes effect.

Canyon Ranch.

As I mentioned, we don't have a specific press release on Canadian Ranch but we have an understanding with our partners, the founders of Canyon Ranch to do what I think is a very interesting deal here.

Canyon Ranch has been a winning investment for us since we made it back in 1996, the resorts have been consistent performers for us and they've offered substantial growth.

In our investment alongside the founders in the brand is particularly interesting.

We have -- if -- if -- once we complete this, we will simplify the ownership of this investment as well, we will be combining the real estate, the operating business, the management company and the brand essentially into a new Canyon Ranch company.

The new entity could be capitalized with a $110 million in new private equity and up to $95 million of mortgage debt on the real estate.

The impact to us is very meaningful.

We will -- we project to receive in excess of $50 million in cash in addition to reducing and defeasing approximately $36 million in debt.

And the -- ourselves, alongside of the founders, will retain roughly 50% each in that ongoing business.

Before any dilution relative to the new equity.

And the founders are going to continue to control the day-to-day operations, which they have done a fabulous job of to date.

And the real reason for this is not to just simplify the business.

It is not to sell equity and -- but it is really to create a growth platform to take advantage of the enormous opportunities that we keep getting presented with in this company.

You probably noted that we've expanded the brand to the Venetian Resort in Las Vegas with that spa which is operating very well.

In fact, we're already engaged in an expansion of that potentially.

The Queen Mary II now has a -- a fairly large Canyon Ranch operation within the ship.

And we've announced the Canyon Ranch Living in Miami Beach, which will be a combination condo/hotel project which is doing very well in terms of pre-sales.

So there are many opportunities and the team has done a very good job of cautiously executing this extension, which is what we will continue to do with this capital and this new structure will allow us to do that in a very efficient, effective way and it really aligns everyone's interests.

I hope that you see that there's a pattern here, of...

identifying attractive operating platforms to invest with and investment in their growth, where it's Harry Frampton in his business or Canyon Ranch in their business or now even Americold, we have a track record of identifying interesting real estate operating platforms that allow us to invest in their future growth and this is an important part of our strategy going forward.

Slide 25.

We have consistently reviewed our portfolio for none core assets that we can sell at opportune times, we're not bashful about doing it, thereby freeing up capital that we can re cycle into our core businesses.

Included in our transaction summary today are the sale of business class hotels, the Hyatt Albuquerque for $33 million, which is complete.

Where we recognized a $4 million gain.

And also the expected sale of the Denver Marriott, which is currently being marketed.

We also have non-income producing land that we have sold in Houston, two parcels for 11.3 million in a $7.6 million gain, and we have eight additional land parcels under contract or being marketed for 33 million and a 13 million plus or minus gain which we expect by early 2005.

And furthermore, this -- the whole non-core asset section of our balance sheet offers continued opportunities.

We still have 170 to $200 million in cost basis of non-core assets and over time we will continue to find opportune times to further reduce that number.

Let's discuss the collective impact of these transactions over the near term, specifically our 2004 guidance.

On slide 27, we outline that for you.

We had previously guided you to the lower end of our range, or a $1.40 for the year, prior to announcing all of these transactions.

We add to that the gain on sale of Americold, common shares of $0.09 which is the $11 million that I mentioned.

We estimate that the strategic transactions will impact dilutively in the fourth quarter somewhere between $0.08 and $0.10.

We have pushed forward the timing of land sales, in other words, they're delayed a bit.

We're not -- we're not losing them.

They're just simply -- it is a timing of issue.

That's $0.07 to $0.09 reduction for the fourth quarter -- or for the year.

And timing of reinvestment, we've been a little slower to reinvest capital during the year.

As we've mentioned many times, we're not going to get in a rush on this.

We're going to do it the right way, and that's dilutive $0.07 to $0.09 and then there are other miscellaneous operating items that account for one to $0.03 which brings current guidance on the year from $1.20 to $1.25.

Most importantly though, is to really review the impact of these transactions over the longer term.

We'll start doing that on slide 28.

We've outlined for you the transactions, the status of those, and the expected closing and as you can see the bulk of these deals are expected to close in this month, as well as in December, with a few of the non-core assets falling into the first quarter of this next year.

The total valuation of all of these deals is listed here at 2.8, but that does not include the Canyon Ranch, since we don't have that definitively announced or definitively signed.

But, as I mentioned earlier, it's a -- it's in excess of $3 billion in total.

As I mentioned, we're paying down debt of 710 million and generating cash of over $500 million.

Clearly, the improvement in the balance sheet comes at a cost over the near terms in terms of diluting our earnings, but that is a cost that we thought was well worth taking.

And we're also very confident that we have the ability to address that over the near term, reinvest this capital and more than make up that difference.

We have a box on page 28 that just shows a very simple analysis of year 1 reinvestment sensitivities, if we were to reinvest that capital on a analyzed basis at 12%, it would be accretive at about $0.04 relative to the dilution of these deals.

At 15% the accretion would be roughly $0.17 at 18% the accretion would be $0.30.

Now, that's year 1.

As we go forward, those accretions would grow.

The accretive impact of re-investing the money would grow.

Now, I know everyone is going to ask well, how are you going to put this money to work?

This is a tough environment?

And slide 29, I think, is very telling in this regard and hopefully answers a lot of those questions.

If you look back at what we've done in 2003, and 2004, we've acquired roughly 2.4 million square feet of office properties.

Which is a total investment of roughly $406 million and a equity investment of 164 million.

If you look at our current return on equity, and this is current going in.

These are all relatively fresh investments, done over the last 12-24 months, the weighted average return on equity is 14.2%.

And that's with leverage that is roughly at 60%, maybe a little -- yeah, right at 60%.

And the weighted average secured debt rate is 5.9%.

So that's a -- that's a very respectable return on equity.

And we show it to you by line item, by each investment that we do.

And one important thing to point out here is the very first transaction which is One Briar Lake, which we did with JP Morgan investment as our joint venture partner and you will note that our return on that is somewhat higher than the other returns on the other investments, and that's because that's one that we joint ventured, again illustrating the positive impact to return on equity of the joint venture structure.

What you can expect us to do at opportune times is to continue to joint venture perhaps some of these other acquisitions, as well as other assets on the balance sheet.

But it's important to note, again, how that is such a positive impact by putting office properties in that structure.

Now also, our pipeline is actually looking really good.

We are currently committed on new investment opportunities of roughly 240 million.

Which involve equity of close to 100 million and our expected return on equity of those deals is right in line with what we've done over the last two years, 14 to 17%, very consistent with the track record that we have shown you for our recent activity.

Slide 30.

Let me detail what our priorities are and how we intend to put this $500 million of cash to work.

First, it's important to note that we have an opportunity to reduce secured debt further over the near term.

Of 268 million which we've identified that's at a 6.7% weighted average rate, and we could pay that down now, pick up some benefit, mitigating a dilution at that 6.7% rate and then we can re lever those assets down the road when we find uses for the capital.

So that's one immediate use that we've identified.

And that we will most likely execute on.

Secondly, reinvest in our core business.

I just mentioned that in our pipeline we have close to $250 million, 240 million to be exact of acquisitions that we have committed to that are in our pipeline and those are very attractive returns and in addition we continue to see opportunities in other real estate operating platforms.

We're very selective in that front.

We're not going to do that many, but when we find great opportunities, we will execute on those and there are some that we are currently in the process of discussing and -- and hopefully executing on.

And, finally, share repurchase.

We have a -- the ability to repurchase additional shares and we will do so.

Obviously that's a function of pricing, as to whether or not we will actually end up doing it.

But we -- we have not been bashful about share repurchase in the past.

And as I've often stated, we are very cautious about executing new investments.

We have very stringent reinvestment guidelines.

We look at hundreds of deals to find one that fits.

But we do find them.

And I think it's -- our track record over the past two years proves that even in this environment that there are very interesting opportunities out there.

We're going to be very disciplined, opportunistic at the same time and we're going to be patient and we now have the ability to be patient given the improvement of our balance sheet.

We will not get in a hurry.

Let's talk about the dividend.

Slide 32.

The management team and our board are significant stakeholders in this company, right alongside you.

We value the dividend greatly.

And in many ways, these strategic transactions help ensure our ability to continue to pay at a $1.50 and ultimately grow that dividend.

Let me walk you through our thoughts.

We view the current dividend at a $1.50 as a combination of a regular difficult debt and a special dividend.

It's our view that even on the -- over the past three years, we have in essence been paying a special dividend.

Unfortunately we haven't called it as such, we probably should have and perhaps we may have received better credit for having paid that out, but we've returned a significant amount of capital, as well as capital gains to our shareholders over the last three years.

And we've done that intentionally.

We thought it was the right thing to do.

And we continue to think it's the right thing to do.

Our new strategy of being an investment management platform does not require the same level of capital that we had back in the '90s.

So returning capital to our shareholders works for this new platform and we can continue to grow this business on a lower capital base and we're very confident of that.

We have extensive modeling that we've done on this and we're confident that we can execute on it.

We anticipate that by 2007 our dividend will be covered by AFFO, and this is going to be achieved through the growth in earnings of the existing portfolio, which we're now seeing traction on, and also through the deployment of this 500 million-plus in cash, as well as other growth opportunities that we see in existing businesses.

During the interim period we now have more than sufficient liquidity to cover our special dividend.

Over the near term, and this year we actually need the dividend to cover the gains that we're creating, and potentially even part of 2005.

And we have two sources beyond our operations.

As we've said consistently and I think with our added disclosure, the market is -- has come to accept is that we have a significant return of capital coming out of our residential business.

That will continue to occur over the next three years.

In fact, it actually ramps up a bit.

And then we have as a fall back the proceeds from these transactions, although we don't intend to have to use the 500 million plus to cover the dividend, it's certainly there to provide added comfort to the shareholders that there's liquidity to cover the dividend in the meantime, until 2007 when we project our AFFO will cover the dividend.

As with any plan, there's always risk factors, and I know I will get a question on this so I'd rather address it up front.

What are the risks of this policy, of this plan actually works?

Well we're confident that it will work but clearly we're in an environment where we are counting on the economy to continue to improve.

That's important.

And that's a key factor for the success of this going forward.

And in addition, we are hopeful that there's no disruption in the capital markets from any world event, terrorism or otherwise.

And that's a -- that's a new risk that we're all facing with respect to capital markets, and the world economy.

In addition, our policy is dependent on our ability to re-deploy capital at acceptable return levels and within a reasonable period of time.

That's one that, while it is a risk, I would say, in my opinion, it's much less of a risk.

I feel very confident we're going to be able to do that.

That's -- we've got a good pipeline today.

We've got a terrific investment team and while we've been executing these strategic offensive moves they've been out combing the market for opportunities, and we're finding -- we're finding quite a few to take advantage of.

Slide 33.

What does Crescent look like in three years?

What are we going to be doing over the next three years?

Clearly the next three years is going to be a period of growth for Crescent.

These strategic transactions that we just announced are a significant offensive move that we have been planning to make, we've been looking to make.

In many ways, we internally define them as as like a light switch.

These are offensive moves that really escalate our growth process and enable us to grow the company going forward.

Don't expect the moves beyond this to be quite as dramatic perhaps as what we just announced.

But at the same time, I think we'll make smaller but very meaningful moves going forward in the way of attractive acquisitions.

We continue to try to get our timing right on both dispositions and acquisitions, we'll continue to try to capitalize on -- on what we think is a pretty good insight to the markets, and good times to acquire and good times to sell particular assets.

We've strengthened our balance sheet through these transactions and we intend to maintain that balance sheet, we will increase the predictability of AFFO and FFO and as I mentioned we intend to cover our regular dividend by 2007.

We intend to grow net asset value, not only through the existing portfolio, but also through these acquisitions, to $25 a share in that period of time.

We'll continue to enhance our return on equity on both new acquisitions, as well as existing, wholly owned assets by four to 600 basis points through the joint venture structure.

We'll continue to execute that plan.

I think we've proven now that we have the ability to do it and do it in a big way.

In the office business, we'll continue to focus most of our acquisition effort in this sector and we'll be doing much of it alongside of joint venture partners and we'll also find development opportunities, like at the Houston or with our joint venture -- some with joint venture partners, some with out.

Our award-winning office management and leasing platform is something that has been very important to the success of the execution of all of this.

I will tell you, while I don't know that shareholders understand the true importance of that, I will tell you the joint venture partners do.

That is something they really are keenly focused on, is wanting to be in business with someone who's not only willing to invest alongside of them, but someone who has a track record of performance and who has a terrific relationship with the officer customer base.

We intend to increase our occupancy on the office side to over 93% and thereby significantly increase our FFO.

In the other investment segments, we will continue to cautiously allocate capital as we see interesting opportunities to selected operating partners, such as Harry Frampton where we look to produce internal rates of return of 25% or better.

And I think our track record in that category speaks for itself.

We'll continue to capitalize on our portfolio of resorts, particularly the Canyon Ranch brand...

That we just announced and we will further improve the value of our Americold investment along side of our new partner Ukipa and our partner Vernado, who has been terrific and very good to work with throughout this whole investment period.

Let me summarize before we open it up for questions.

We're very pleased with our financial results this quarter, which exceeded our expectations.

Most importantly we are very energized as a management team by the significant transactions we have announced which will accelerate transformation of our business model into a real estate management business.

These transactions clearly will have a dramatic impact and should yield significant benefits to our shareholders, and I think we've outlined those benefits to you today.

To summarize, we have avenue significantly strengthened our balance sheet, we've validated our net asset value, we've provided substantial cash for future investments of over $500 million to re-invigorate our growth plan, and each of the investments involved in these transactions also will yield a higher return on equity on the residual piece that we hold.

Finally, we've reaffirmed our commitment to our dividend of $1.50 per share.

I want to thank you for joining us on our call today.

I'm now ready to, along with the rest of the team, to respond to any questions.

Operator, if you would open it up, please.

Thank you, Mr. Goff. [Operator instructions] Your first question comes from Brian Legg of Merrill Lynch.

Hi, John.

Can you -- can you -- can you talk about your potential share repurchase activity, and given that you -- you think your NAV is going to grow to $25 a share by '07 you would -- you would think that the current NAV is not too far off of that.

And can you talk about why you would be out buying assets when your shares might be the most attractive investment out there?

Well, it's a great question.

First of all, we think the current NAV is in the $20 range, call it.

Clearly the growth from $20 to $25 is going to require not only a execution of the operating business to enhance the value of what we currently own, but it's also going to require the deployment of that 500 million.

Now the share buy back can also be accretive to NAV obviously because you are reducing the denominator of the calculation.

But, what we will do is measure the opportunity and the returns that are implicit in the acquisitions that we're seeing.

Alongside of buying the shares.

So the -- our desire to buy -- to buy shares at this point is solely a function on where the shares trade.

Once all of this information gets absorbed into the market.

And, you know, furthermore we clearly want to remain leverage neutral.

We're not going to be leveraging up to buy shares.

But, you know, we are certainly not bashful about acquiring shares if -- if that opportunity presents itself by the market.

I think that's about as specific as I can be.

I mean, I think it's -- we're going to see how the market responds to these -- these deals over the -- over the near term, and we'll respond accordingly.

Okay.

And a follow-up question.

Can you just go through the buckets of how you -- how you can cover your dividend through AFFO by '07 when I look at your little chart here, it says that, you know, a 15% return on equity, which higher than what you've been doing only adds $0.17 you still have a ways to go to -- to cover your dividend.

Yeah, Brian.

That's a good question also.

In '07, the analysis that we've done as a -- has a couple of components.

We have -- we have some growth in our office resorts and residential business.

And we think we've got a pretty good handle on what that looks like.

We're taking our office growth to 93%.

We've got a real good -- -- we've got good visibility on our residential business now with -- particularly with what's going in with Beaver Creek and Tahoe so we know what's coming on stream there and resort business is showing a nice recovery.

And we're not really factoring in that much growth in that business.

But I think we might be surprised, particularly with some of the initiatives that come about at Canyon Ranch and so the real variable here is what do we earn on reinvestment?

And if you take the capital at that we have in either buying back stock or reinvesting the -- the proceeds, if we hit in the -- let's say 12 to 13, 14, 15% range, which we think we can do, and -- and matter of fact, when you refer to the numbers in the slide, you notice that, you know, most of those investments were returning high 13's, 14's, low 15's, and those are not joint ventured.

And we think that that will add significant to our return on equity.

So we feel pretty comfortable that, you know, the -- the downside there of us not being able to cover our dividend in '07 is reasonable, and that's why we're sitting here communicating that clearly in the market place, because we've done that kind of analysis.

And as John said, if something happens that is outside our control, obviously we would have though readdress that.

But we've done a lot of work on this.

And -- and the math works.

Okay.

Thank you.

Your next question comes from Greg White of Morgan Stanley.

Hi.

Good morning, guys.

Just to maybe continue for one second on that same theme, when you say covering with AFFO by '07, can you give us a little bit more color on where you think -- I mean, you must have done the work to see where your FFO is going to be by '07.

And I'm curious to know what debt levels you're assuming to get to that point.

Well, our debt levels are lower, Greg, than they have been in the past, we're going to drop down to 39% but we will reinvest some of this capital, it will go up.

It will go back to low to mid 40s but you won't see us going back up to 50.

So, number one, we're going to keep the balance sheet intact there.

The second thing is as far as cap ex going forward, it's a much better world than it used to be, one, because, you know, we're being better leased and, two, the TI packages we expect to improve.

And so we do expect the TI to go down, you know, at the same time our FFO is going up.

So it should help, you know, the net result there.

And if you look at our turnover schedule over the next three or four years, it's much lower, our expiration schedule, it's much lower than it has been in the past.

So we don't have to address as much roll as we have historically in the last few years, so we think that combination will allow us to get to where we can be.

Just ending, on that roll, can you give us some indication of what you think the mark to market will be next year?

Well, I think it ought to be positive, finally, Greg.

We're -- we're running now, you know, we've been running, you know, three to 6% on same store down and, you know, I kind of thought we might be the middle of that road or, you will know, maybe go up to 6% but looks like this year it's going to come into the lower end of that range, and we've seen TI go down this quarter.

We're starting to see less concessions in the market place.

So, you know, it's -- it's better than it's been for the last three years, I'm telling you.

Thanks.

Your next question comes from John Stewart of Smith Barney.

Hi, there, guys, it is John Stewart here with John Litt and Andrew Calderwood.

My first question, if you have, if you can see forward into what your '07 FFO looks like, can you tell us why you are holding back on the '05 FFO guidance?

Typically John we've gone through an extensive budgeting process in November and December.

As you know, we've got outside partners that we're involved with, the Harry Frampton's, the Desert Mountains, and so, you know, Canyon Ranch, so we bring that information in-house and so we just take our time.

We know exactly where we're -- we're going.

And so historically over the last five years we've always done it in the 1st quarter and we plan on keeping with that pattern.

Okay.

Fair enough.

How much of the $1.50 dividend do you view as a special dividend at this point?

If you look at the math today and take out our -- our cap ex, we would be about a $1.00 in regular dividend and approximately $0.50 cents in special dividends.

Okay.

John, I understand that the use of the proceeds from these joint ventures will obviously be a function of the returns that you expect on different investment alternatives.

But can you give us a sense for both the timing and magnitude of either a potential reinvestment in the office portfolio or a share repurchase?

Yes.

Well, I mean, to start with we have out of these transactions over 500 million to -- to put to work.

Over the near term, we have the ability to pay down some debt that's a little higher rate than our average that gives us -- at least mitigates the near term dilution, and I mentioned that the weighted average rate on what we might pay down is about 6.7%, and that's roughly $268 million.

So that's -- that's kind of step one in terms of use.

Over the near term.

And then we can re-lever when we find opportunities.

The opportunities are, you know, they're out there.

We have to look at a lot of deals, and we've got to be creative, like we were at Hughes center.

But we're able to find them.

And we've bought over the last two years, 2.4 million feet which is, you know, not a -- not a huge number.

But I'm -- actually feel pretty good about that.

I think I would be worried if we had bought 5 million in this environment.

I think it has been a environment where you really need to be very picky.

But I like what we did buy.

And the returns are right alongside the new deals that we're looking at, which is, you know, in the 14-7% kind of return on equity, and that's going in.

Going in.

So you know we obviously are looking to buy things that offer growth, either they are not fully leased or they have some reinvestment opportunity or, you know, there's some growth aspect to the investment.

But I'm pretty confident we can find investments that are in that range of 14-17% and then also in the operating platform side I think we'll have select opportunities where we can earn 25% or better internal rates of return and, you know, we've really turned that into a business, particularly with what we do with Harry Frampton and we continue to find new and interesting opportunities to take advantage of alongside of him.

So I'm -- I'm confident we're going to have that.

And obviously, as I mentioned, we measure those opportunities right alongside that of a share repurchase, and we look at the relative returns, and we look to maintain a strong balance sheet and that is the way we'll view opportunities going forward.

But let me put it to you a little bit differently.

At your -- the current stock price, which I guess implies a cap rate of about 785, what is your appetite for a share repurchase at these levels assuming no change in the stock price?

I think the stock would be very attractive to buy at these prices.

Okay.

$16.

But, again, it's -- it's going to be a measurement of, you know, that -- that opportunity and what we have in-house in the way of new acquisitions, and -- and maintaining a strong balance sheet.

But, you know, that's -- that's -- that's the nice -- that's the nice thing about these deals in -- in that what we did is we really unlocked equity value on the balance sheet, you know, and we're improving the balance sheet at the same time and unlocking that equity value gives us much more flexibility in terms of addressing new investment opportunities than we've had in the past, and in a -- a meaningful way, I mean just because of the sheer size of these deals.

Okay.

Lastly, Dennis, you gave the percent of '04 roll over that has been addressed.

What's that number for '05?

It is about 27% right now.

Okay.

We've got a pretty good start.

And John, one of the things I want to make clear, on the dividend comment I made, you asked how much is regular dividend and how much special, I was looking at '05 and '06 what it is going to take to get us to break even at '07, not talking about our return run rate so I think we've probably got an average, you know, of 50 to 75% -- special over those two years, not a $1.00 but probably 50 to $0.75 special during that period of time, as our earnings are growing back.

And by the way, we will most likely identify that for you, either in our annual letter, somehow I really want to do a -- a better job of disclosing what the special dividend component is and the dividend because I mean that is what we're doing.

There is no -- this is a -- a choice we're making with our eyes wide open, looking at all of the numbers and looking at the prospects of the company.

John, the number that I gave you, the 27%, that's sign.

If you add to leases in negotiation that number jumps over 60%, so that's a good running start on '05.

Okay.

Thank you.

Um-hum.

Your next question comes from David Loeb of Friedman Billings Ramsey.

Hi, Denny, first on the dividend, on the last page of the presentation I believe the -- the way it was worded was increase the predictability of AFFO and covering our quote regular dividend by 2007.

Does that mean in 2007 your -- you see your regular dividend as a $1.00 and you might not pay a $1.50 anymore?

No, sir, our goal is to get o a $1.50 where it is all regular.

So that -- that statement is you intend to be able to cover $1.50 by 2007.

That is exactly our plan.

Correct.

Okay.

What's the taxable nature of your partners that JP Morgan are bringing to you?

Are they pension funds, tax exempt?

Yes, they are tax exempt.

Is there any reason why you could not get the depreciation up front for these assets, the question that I'm getting to is, why be a REIT anymore given that you're becoming more of an investment company and you probably structure this so that you're not a taxpayer other than for gains.

Well, you know, are you asking a theoretical question that's a good question, but I think it's premature to -- I mean, that's something we've looked at, we've thought through, but it's premature to go there.

There may be some point in the future where that may be a logical way to go but not right now.

Okay.

And and it would depend on your future tax liabilities from additional earnings that we might have going forward.

With these transactions, the beauty of it is, it's been structured with a 10/31 and the dividend covering the taxes so we in effect have no tax liability on, you know, almost $3 billion worth of transactions so we didn't need to take any of those kind of steps.

Right.

But if -- for the next seven or ten years you could book 100% of the depreciation from the joint ventures and therefore have more than enough depreciation to prevent you from paying tax, wouldn't that eliminate the need to pay a dividend at all and you could buy back a bunch of shares and find ways to increase value, more opportunistically.

Well, yeah, David all of that is great corporate finance but, you know, we would evaluate that at a appropriate time.

But basically we like being a REIT, we like paying dividends to our shareholders, that's our charge in life and that's our plan right now.

Rest assured, we've run that analysis, the most efficient way for us to be structured today and over the near term is a REIT.

Okay.

But I understand your point.

Final question, on the five buildings put into the two joint venture groups, can you just run through what the expenses are on those?

Well, the expenses in -- in our portfolio in Dallas and Houston typically runs between $9 and $10 a foot.

So that's -- that's -- that's where these are.

And that's where these fit into that category there.

They're in that range.

A little bit higher at the Crescent because, you know, some outside elevators and property taxes are typically higher in that particular asset.

But we're generally in the $10 to $11 -- $9 to $11 range.

Okay.

The reason I ask, I know you're not going to give us metrics on these until after they close, I'm just trying to figure out if there's anything else that would at least prevent us from getting into the neighborhood?

I think you can get in the neighborhood.

Okay.

Good.

Thanks.

And keep in mind, we think there's a lot of growth in these joint venture assets which is why we're retaining ultimately such a large ownership of 24% and the promote structure is, we view as very valuable.

There's -- there's growth left in these assets.

Our NAV doesn't reflect any impact from the promote upside.

Right.

Yeah.

We've not tried to value for you what the value of that promote is.

We're just, you know, putting no value on it today.

But I think that what you'll find is that we'll start achieving some of these values out of the promote structures that we've been creating over the also three years.

Okay.

Great.

Thanks.

Thank you.

Your next question comes from Robert Kirkpatrick of Cardinal Capital.

Good morning or,oops, good afternoon depending on where you are.

First of all, do you have a current authorization for your share repurchase?

Yes.

And how many shares are left on that?

4 or 5.

Right at 400 million.

We had a 800 million.

$400 million.

Correct.

Okay.

Thanks.

We've acquired about 400 out of a $800 million authorization.

Great.

And secondly, now that you are further along the road, John, to making this into a asset management company with a number of joint ventures, how do you keep the transparency up for investors?

Because transparency is going to be directly related to the multiple of whatever, EBITDA or FFO, or earnings per share.

Well, I think what you are -- what you are wills asking is the fact that when you do these joint ventures you're typically taking assets off the balance sheet, right?

Correct.

And when you -- I think what's important to note here is that the purpose of the joint venture is not to take the assets off the balance sheet.

In fact, historically, if you look at our off-balance sheet liabilities, our assets off balance sheet are lever ranked less than the assets on balance sheet so we've not gained any benefit for taking investment off balance sheet that.

Is not the M.O. here.

The M.O. is to increase return on equity and it's oh by the way, the assets will be off-balance sheet.

So what our job will be is to provide, you know, really good disclosure in our earnings supplement of these joint ventures, and do so in a way that's really no different than if we owned them 100%, and that's what our intention is and, you know, that's what we will do.

We'll, give you full disclosure because it's only going to be, I think, beneficial to us because, I think these investments, are going to be you're going to find, are going to be very valuable and if we do not share the information with you it's going to be hard for you or any other investor to sink their teeth into the value of the structure.

And Robert, let me comment on that because on the big joint venture that we did, the billion-two, the overall averaged leverage on that transaction is about 53, 54% so that's pretty attractive leverage.

And when you take that off, and combine it with everything else that we have off-balance sheet, and do the analysis for the rating agencies, you find that we are just barely marginally higher in a leverage ratio by including all off-balance sheet debt.

So the policy here and the strategy with the type of institutional partners that we have is not to over-leverage any particular partnership, and that's what we've been doing.

Great.

As a follow-up to that, John, as you move to a joint venture structure, there is a concern among some investors that the source of your FFO is less secure than when you owned 100% of the assets.

Could you deal -- could you expand on your remarks to include some discussion of how these joint ventures are structured to ensure that the flow of FFO continues?

And that you are not so easily replaced?

Well, two things.

I'll answer one component and I'll let Denny answer another.

The -- the first component is you -- it's -- and this is kind of a soft answer, but it's very important.

You have got to identify and be in business with a partner that sees your capabilities and your platform as valuable.

And they want to be in business with you.

And they see the assets as something they want to own long term.

You know, we're -- we're not entering into joint ventures with, you know, that many opportunity funds on what we view as long term office assets.

We've been in joint ventures with opportunity funds on assets that were more short term in nature but things like the Crescent that we want to own for a long period of time, we identify somebody like JP Morgan who views it the same way and who values our platform and is willing to sign up for that and -- and give us, you know, a lot of comfort that this is a long-term income stream for us.

And Denny, you want to add to that?

I can't add to that, John.

It really is the type of partner and the type of asset and we are planning to have this stream of income for a number of years, now we could find an opportunity where someone would want to buy it for a two cap and our partners would sell that and the income stream would change but I don't think that's going to happen.

I think -- I think we're going to have a really nice scream off of these types of investments.

You know, clearly we try to protect ourselves contractually in the agreements, you know, as best we can and, you know, under market acceptable terms and we feel very confident that those are -- that that works.

These are people that we've been in business with before, that we've known for a long time.

And, you know, we see eye to eye on the business plan with the assets.

Well with the people at JP Morgan, I know we've all done business with them for 20 years.

So it's -- it's a very comfortable situation for us to be in to have a partner like this.

I think, you know, your -- your question would be -- I would be concerned if we were with someone new that we've never been in business with, a foreign investor or someone who you're not real sure what their long term goals really are or how they may act through the various cycles, we've been through the cycles with people like JP Morgan.

We understand them.

Well in the last three years, you know, we've won this national awards from C.E.L. and Bomba...

Which we've talked extensively in the past, and it's ranked us at one of the top five operating companies in the office industry for the last three years and I've seen the numbers for this year and they are better than last year.

So, the partners understand that, they recognize that, and, you know, some of our institutional partners like JP Morgan have been, you know, our greatest -- our greatest references for anything.

Great.

Thanks for that answer.

And -- and as a shareholder in the company, thank you for doing this because I think it does move the company forward.

Well, thank you very much.

We appreciate that comment and the confidence.

You have a follow-up question from Greg White of Morgan Stanley.

Denny, I just wanted to query you on the -- on the guidance that you gave today that would imply somewhere between a 43 to $0.48 fourth quarter, I have to suspect a large part of that comes from the residential side.?

I know you said it's going well so far but can you give us a little more color on that?

We're almost halfway through the quarter?

Well, let me say as far as Harry Frampton's business, everything that is closing in the fourth quarter that we've got in our budget is absolutely booked, okay?

It's -- it's signed up and the construction is complete, or is in the process of being completed in November and so, you know, we are very, very confident of that.

As a matter of fact, Harry should and will exceed his budget.

At Desert Mountain, you know, we're always real active there from Thanksgiving onto -- to New Year's, but I know the pipeline, I know the sales activity that's out there right now.

We're ahead of where we were last year significantly at this time.

And I -- I just -- you know, I would be very surprised not to be at or above those numbers, Greg.

Okay.

And then just -- on the Ritz Carlton development next to the Crescent, I'm assuming that's outside of the joint venture.

Is that correct?

Yes, it is.

It is outside of the joint venture.

And we have no partner on it right now -- and we will start construction on it in the spring of '05, we'll be delivering units in '07.

So, '07 would be a good year from a condo sales standpoint.

Okay.

All right, thanks then.

You have a follow-up question from Brian Legg of Merrill Lynch.

Yes, turning to the resort hotel business -- your segment FFO, you had it going down 4 million from the last quarter.

What -- what -- what's -- what resulted in that?

Is that just a asset sales that you didn't expect?

Could you repeat that question?

I didn't hear it.

I'm sorry.

Your -- looking at your segment FFO guidance.

Right.

The resort hotel dropped by 4 million both on the low and the high end.

Yeah, Greg.

That's correct.

What you have is a couple of million that's associated with the sale of the Hyatt Albuquerque, as well as just some operational items, the balance would be more transactional oriented.

Okay.

And then -- along those lines, looking at -- your -- your Sonoma and Ventana, I know you've been doing some rehab work there, and your -- your occupancy, it looks like picked back up from where it was in the 2nd quarter.

Can you talk about -- are you -- are you close to being stabilized at those properties?

Or how long does that take?

We are -- we are done with Sonoma.

And so we've got almost a full quarter there. third quarter, to, you know, enjoy that new 90 rooms that -- that we renovated.

And they're terrific.

They've been well-accepted.

I -- I think it's going to be, you know, a -- a good addition to Sonoma, so that's coming right along.

Ventana is a little bit later finishing up the 13 rooms that we've got underway out there.

So we didn't get the benefit in the third quarter from Ventana that we -- they're -- they're not in the numbers, but they will be in the 4th quarter.

So, I'm expected a real strong fourth quarter at Sonoma and Ventana and I think we should see an improvement next year.

We're very pleased with Fairmont and what they're doing out at Sonoma right now and the advance bookings for the fourth quarter are pretty good.

So the 78% occupancy that you -- that you had in the third quarter for those two properties, it -- it would on a normalized basis it would be higher, at least for the Ventana.

Yes, higher for Ventana and should be equal to -- for Sonoma.

Typically, at Sonoma you have a wonderful October and, you know, the last part of December that's kind of a slow time during Christmas season.

So -- but we expect to have a pretty good fourth quarter also.

Okay.

Thank you.

We'll -- we have time to take one more question, and before we take that question, and by the way we'll be available afterwards to answer any questions that you want to -- to call us with.

But before we do, I wanted to make one other comment because we've had some very good questions on the dividend.

One of the things that we looked at was whether or not we should simply pay a one-time special dividend now with part of the proceeds that we received and basically return that gain just day one and then reduce the dividend and then grow it back to the $1.50 .

And what's interesting is when we ran the model to do that, the shortfall that we have in operations versus the dividend over the next two years roughly equate to the amount of the special dividend that we would pay today.

So in reality, what we're doing is returning to the shareholders the special dividend and we're just simply doing it over a two year-period rather than in one feld swoop and, you know, I hope that everyone recognizes that that essentially is what we're doing.

And we think that's the right thing to do.

It's just a simply way to do it, it keeps the dividend at a buck 50 and we're confident that by '07 we'll be earning it out of operations.

And it enables us to manage the balance sheet here better in the meantime.

We've got time for one more question.

Your final question is a follow-up from David Loeb of Friedman Billings Ramsey.

And it really will be a quick follow-up.

On the joint venture math, with the -- the FFO going from 53 million to 23 million, are we to assume then that the fees are about 10 million?

Fees in the transaction are a little bit less than that, but that's a pretty good number, Greg.

Okay.

Just a matter of trying to --

Or David.

That's okay.

Just a matter of trying to figure it out, because your 24% of that 53 would be 12.7 million.

You are pretty good with math.

That's correct.

I have a spread sheet in front of me.

It works pretty well.

But going forward, assuming 20% of NOI for fees, if -- they'd be somewhere in that ballpark?

I think so.

Okay.

That's all I had.

Thanks.

Thank you.

Well, thank you everyone for joining us on the call and, as always, we'll be available to answer any questions that -- that you might have later.

We'll be -- we're actually up in New York right now.

So -- but we'll make sure that we're available, so please don't hesitate to call us and we'll get right back to you.

Thank you very much.

Thank you.

This concludes today's Crescent Real Estate third quarter earnings conference call.

You may now disconnect.