摩根士丹利 (MS) 2004 Q4 法說會逐字稿

Good morning.

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

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

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

The after the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

I would now like 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, everyone, and thanks for joining us on the call today.

Let me introduce to you who is in the room before we get started -- Vice Chairman and Chief Executive Officer, John Goff, President and Chief Operating Officer, Denny Alberts, Managing Director of Capital markets, Jane Mody, and Managing Director and Chief Financial Officer, Jerry Crenshaw.

Everyone should have a copy of our earnings release, supplemental report and presentation for the call but if not, you can find them on our Web site at Crescent.com on the Investor Relations page.

Within those documents, you'll find a discussion about any forward-looking statements that we will make on the call today, so please refer to those.

With that, I will go ahead and turn the call over to John Goff.

Thank you, Keira, and thank you, everyone, for joining us today.

As always, I encourage you to follow along on the presentation with the slides that we have available on the Web site.

I think it will be very helpful in particular on this call.

I will start with slide 3.

Our FFO for the fourth quarter and the year were in line with our guidance.

Fourth-quarter FFO on an adjusted basis was 53.5 million or 45 cents per share.

The full year of 2004 came in at 143.2 million or $1.22 per share.

Net income was a bit unusual this year in that it was even greater than FFO for the year principally as a result of the 1.2 billion in joint ventures that we executed that treated gains of 266 million that did not flow-through FFO.

In addition to the 266 million, there were deferred gains that I will address in a moment.

The full-year net income was 141 million or $1.42 per share.

The highlight of 2004 were (sic) the significant strategic transactions that we executed.

Slide 4 summarizes these transactions, and you'll see that the results were very much in line with what we laid out for you in our third-quarter call.

Out of roughly 3.3 billion in total valuation of transactions, all but $86 million are totally complete.

We have completed the 1.217 billion in office joint ventures; we've completed the AmeriCold restructure and the equity sale; we've completed the Canyon Ranch restructure and the preferred equity raise; and we've collected, out of all of this, roughly -- once we complete the remaining small piece -- 525 million in cash, from which we will be acquiring assets.

Temporarily, we've used part that cash to pay down debt.

The required debt pay-down -- secured debt on these various transactions -- totaled $710 million, so that debt has either been paid down or defeased, and the economic gain of all of these transactions totals roughly $514 million.

The office joint ventures created 358 million in total, of which 92.5 is deferred, since we continue to own a 24 percent interest in these assets.

On Canyon Ranch, there was an $89 million economic gain that's not recorded because of our continued 48 percent common interest in that company.

About 300 million of the 514 are accounting gains, which equates to roughly $2.50 per share.

On slide 5, we outline why these transactions were so strategic for us.

First, it obviously creates a significant amount of buying power -- 525 million of net cash generated.

When you kind of step back from what we did here, I don't think it's coincidental that that 525 million of net cash is roughly equivalent to the economic gain.

I think a way to look at this is that we had a number of large assets which had appreciated in a very attractive way and we, in essence, extracted that appreciation in value, that economic gain, and we are seeking to redeploy that at higher returns.

I will discuss in a moment exactly what we plan to do with this capital, the 525 million, and will go over that in detail and even address the returns that we expect.

Secondly, we've substantiated net asset value.

Office joint venture was at a premium valuation of 1.217 billion, plus we have a very attractive promote structured on this deal that is up to 30 percent.

We will continue to own 24 percent of these assets and we have terrific partners alongside of us.

The value of AmeriCold we value now at 220 million, which is based on the valuation paid by the new investor.

Collectively with our partner Vornado, we brought in an industry partner, Yucaipa, who has a tremendous amount of experience in related businesses that we think will add a lot of value to the operations of this company.

This is the single largest investment that they've ever made.

Collectively with the financing we executed earlier in the year where we pulled out $90 million, our investment in AmeriCold has been reduced by over 140 million, or roughly 50 percent of where we began at the first of the year.

We have a 32 percent ongoing interest in the company, and we feel that that 32 percent interest is more valuable than what we started with.

The Canyon Ranch investment was dramatically simplified this year with the ownership structure being put all under one roof.

We raised a convertible preferred, which was -- totaled 110 million, and we also raised additional or new debt for this entity, and we raised 50 million that is retained in the company to fund future growth.

It was a big benefit for us because we reduced our investment by roughly $90 million, and we now have a net $30 million investment, we own 48 percent of the business and as you will see in a moment, we're very excited about the growth prospects that Canyon Ranch offers in the future.

We also continue to sell land that was not income-producing.

A total of 42 million is in the plan, of which 28 million has been closed.

If you look over the last 3 years, we've sold now $138 million of land and we've realized gains on those sales of 54 million.

Third, on slide 6, we have improved our balance sheet.

Consolidated debt will be reduced by 900 million or 31 percent.

Consolidated debt to gross assets has gone from 54 percent at 9-30 of '04 to 40 percent on a Pro Forma basis at 12-31-04.

When we say Pro Forma, it simply means that we have assumed -- all of the strategic transactions were completed at 12-31 and that no new acquisitions out of that capital have occurred.

Consolidated and unconsolidated debt in total to gross assets went from 56 percent at 9-30 of '04 to 45 percent Pro Forma at 12-31 of '04.

The final point I'd like to make is probably the most important.

These transactions have established our growth model for the future.

They not only generated new investment capital but they also have positioned our core business for higher returns than what we previously were looking at.

As I've said before, these transactions will be diluted in the short term.

That's the pain that we will suffer but we're willing to suffer for the future upside that it presents us.

That dilution will be there until we've reinvested the 525 million and the growth in the existing core business starts kicking in.

We clearly think that our decisions will enhance the long-term earnings growth.

We've provided 2005 guidance on Page 12 of our supplement, and Denny will discuss 2005 specifics in a few moments.

But I want to discuss our future.

Investment in Crescent should not be based on 2005 earnings but on our ability to grow our core business and to reinvest this capital over the next few years.

In our core businesses, we've seen our office business turn the corner, we've reintegrated Canyon Ranch, and we have a very clear visibility on our residential business.

I'm also confident in our ability to generate attractive new investments over the next 3 years, and I will detail our progress to date and what we expect out of that capital in a moment.

The bottom line is we are targeting $2 in FFO by 2007 -- $2 FFO by 2007.

This will allow us to cover our $1.50 dividend from operations.

Until then, we will continue to classify a portion of our dividend as a special dividend, as we discussed on the last call.

If you will turn to Slide 7, I will walk you through the details of how we will achieve this $2 target by 2007.

This slide is our map on how we intend to achieve the $2 in this 3-year period.

As just mentioned, our growth will come from our core business, as well as new investments.

In fact, if you look at the ratio of the growth coming out of core business versus new investments, it is about 50-50.

We've broken down our business into its component parts, and I will walk you through our assumptions on each and every component.

Looking first our core business, we break it into 2 pieces, our office business, which is 31.6 million square feet of office space which is 43 percent joint venture on a square-footed basis and is comprised of 78 office properties; and secondly, strategic investments, where we are merely a capital allocator.

We don't run these businesses; we are allocating capital to another real estate business or platform.

These investments include Canyon Ranch, our resorts and hotels, the residential development business, and AmeriCold.

For simplicity, we will discuss FFO without allocating debt costs to each component and G&A, etc.

We are going to look at it on a gross basis, which I think is far more simpler to look at and as you can see at the bottom of that slide, you can see the growth of each component and I will cover that now, starting with our office.

First, on Slide 8, let me go over some broad corporate assumptions we used in our modeling.

Consolidated debt, excluding develop financing, we are targeting during this period at less than 50 percent.

We are assuming no corporate common stock equity raises, obviously, during this period.

We can obtain additional funding as required through further joint ventures of office properties.

We are assuming the dividend remains at $1.50 throughout the 3-year plan.

As with any plan, there's always risks, and we tried to outline what we consider to be the primary risks inherent in this plan.

First, any unanticipated economic downturn that could impact the core business growth; second would be timing of reinvestment.

As I've said in the past, we're not going to get in a hurry; we're going to do smart deals and we are going to do them in due course and certainly with expediency, but we're not going to try to rush and do this in any haphazard way.

We're going to wait for the right opportunities.

As we all know, there is a risk inherent in this environment because it is a very competitive acquisition environment.

But I think as you will see later in the presentation, we have found some very attractive deals to date and we're very confident about our ability to continue to find attractive transactions.

There are, of course, execution risks strategic investments, such as Canyon Ranch and the residential business.

Those risks have always been there and they will continue to be there, and we're certainly relying upon those investments heavily here in the future.

Slide 9 outlines our core business, the office business, with 2005 based FFO in a range of 210 million to 215 million.

As I mentioned before, that allocating debt costs G&A, etc..

Our 3-year target for that business is 225 million to 235 million.

I think this is based upon very reasonable and hopefully conservative assumptions.

We are assuming that same-store ending (ph) occupancy goes from 89 percent to 93 percent.

We are assuming a same-store NOI growth of 3 to 5 percent per year, and we are assuming that lease concessions stabilize and we're already seeing evidence of that now.

As mentioned before, we have the capability to execute further joint ventures in the office sector.

We only have 43 percent of the total portfolio is JV to date, so we have additional capital, when the time arises, that we can extract out of that and even provide further upside.

We also have not included the value of any of the promoted interests related to those joint ventures in these numbers.

Slide 10 -- we're very excited about the growth plans at Canyon Ranch.

Before, we had an investment simply in the real estate and now we have -- as well as a 30 percent interest in the brand.

Now, we've put everything under one roof.

We've done away with the conflicts.

We have an invigorated and very talented management team, and we're very confident about the ability for this business to deliver some very exciting returns.

A quick refresher on the deal that we just executed -- we've put all the components of the business together.

We've raised 205 million in total, both debt and the convertible preferred.

Crescent received 92 million in cash.

Our cash investment is now at about $30 million, and the value of that investment, based upon the value of the transaction, is roughly 120 million.

So just as an aside, I think this was a very attractive deal for us in that we reduced our investment and we still have a very significant piece of the upside going forward.

It's also very important to note that $50 million of cash was raised for growing the business and also for corporate purposes, as well as refreshing the existing assets.

This year, FFO is expected to be from 5 to $7 million, but the 3-year target is 20 to 23 million.

That's going to come from 2 things -- first, operating improvements in the existing properties.

Again, a sizable piece of the 50 million in capital will be used to enhance, enlarge the existing assets.

We expect occupancy to increase from 79 percent to 86 percent.

Our average daily rate we expect to increase from 4 percent to 7 percent per year, and REVPAR to increase 5 to 8 percent per year.

The brand no doubt will expand.

It's one of the primary reasons for during this.

The annual fee income from expansion of the Canyon Ranch SpaClub is currently at about 3 million.

We expect that to grow to at least 5 million .

That's predominately coming out of the expansion of the Venetian in Las Vegas, which is currently in negotiations.

License, management and other fees from Canyon Ranch Living projects we expect to be 12 million to 15 million.

These projects have been identified.

In fact, one is under development now, which is in Miami, and we're working on many others.

We don't need to do all of it we're working on; if we do simply 2 or 3 of those, we can achieve these numbers.

These are typically condo/hotel developments with the Canyon Ranch brand.

We typically put up little to no capital in these transactions, and we have significant upside through license revenues and ongoing management fees and a participation in the profits of the condo development.

There will also be some component of branded retail products coming about over the next 3 years.

I want to emphasize that this growth requires no new capital on the part of Crescent.

Capital is now housed in Canyon Ranch, the team is energized and they are working hard to deliver these results.

Slide 11, continuing with our core business, let's look at resorts and hotels, where we expect relatively modest growth of 4 to 5 million from a base of 24 to 25 million in FFO to a target of 28 to 30 million in the 3-year period.

This is primarily coming out of the Sonoma Mission Inn, which is already showing improving results after recent renovations.

We expect occupancy to increase from 64 percent to 70 percent in the aggregate for these investments, the average daily rate to go increase 3 to 6 percent per year, and REVPAR to increase 5 to 8 percent per year.

To put this FFO target into context, these very same properties exceeded the upside of this target in the year 2000, so in 2007, we are expecting them to get close to what they were doing in 2000, and we've put more capital in the assets, so I think this is -- we think these are very realistic goals.

Continuing with the core business, let's talk about residential on Slide 12.

We've made some very important investments in our residential business over the last few years that we think will yield meaningful FFO growth over the next 3 years.

The 2005 base FFO is 35 to 37 million.

Our 3-year target is 77 to 82 million -- 77 to 82 million.

How are we going to get there?

Well, there are no speculative transactions in our projections.

These are all committed, existing committed developments.

First, our Mountain development should grow to 37 million; this is primarily Tahoe and the Vail Valley.

Our desert development will decline to 10 million -- that's desert mountain.

Urban developments will grow to 25 million.

That's primarily 2 components; that's the Dallas Ritz-Carlton that we're doing internally here, which is condo/hotel project -- Denny will cover that -- and we have -- where we're going to see I think great success -- and the downtown Denver project that we're doing with Harry Frampton (ph), which is predominantly residential.

That's 25 million in total.

Then other development is 10 million for a total of 82 million.

Now, I think it's important to note, to put this in perspective in terms of what have we done in the past.

If you look back at our levels in the past, in 1999, we did 75 million.

In 2000, 79; in 2001, 54; '02, 51 million; and in '03, 88 million, which included the sale of the woodlands.

So we think, again, these are very realistic targets, and it's entirely underwritten by committed projects.

Our other major contributor outside of the core business is redeploying the 525 million of equity we now have available.

Slide 13 outlines how we get there.

There are really 3 pieces to this, 3 options as we see it.

One is investing in future office properties, where we're targeting equity reinvestment in the range of 275 million to 375 million.

There's nothing magical about that range.

That's sort of our best estimate at this point in time.

It will obviously depend upon the value we see in this investment relative to the 2 others we've identified, which are Mezzanine and share repurchase.

The going-in FFO return on equity on the office we're targeting to average 12 to 13 percent, assuming we wholly own the assets.

If we stabilize that FFO return on equity and we do it with a joint venture -- bring in a joint venture partner, the returns increase to 16 to 18 percent return on equity.

We also have 3 new office developments in the pipeline.

We've talked about Las Vegas in the past; we expect to break ground this fall.

We have all of our approvals in place, and we are also working and are very close on 2 new developments in Southern California.

Mezzanine investments -- we are really taking the same expertise that we have in the office acquisition group and applying it to Mezzanine.

In many cases where we are unsuccessful as a bidder on an office property, we will turn around and propose to do a Mezzanine loan.

It's a logical extension, in our opinion, of our business, and at this point in time, we feel the risk-adjusted returns in the Mezzanine business are very attractive.

Not unlike the office business, you've got to look at a lot of transactions to find those that you like.

We try to mitigate our risk by lending on assets that we would like to own.

We don't intend to own them but if we do, we are very comfortable owning them and particularly at the basis at which we are lending.

We are targeting investments of 150 million to 250 million.

We have invested 39 million to date.

Our average unleveraged yields have been 7 to 900 basis points over LIBOR, or that's what we are projecting to be.

The average FFO return on equity, 15 to 18 percent, and that assumes we put 50 percent leverage on the investments.

We've not put leverage on them to date.

In order to support our assumptions on yields for new investments, we've provided details of the last 10 transactions that we've completed.

As you will see on Slide 14, the weighted average, stabilized return currently stands at 15.6 percent on these acquisitions.

It's important to note that we look at hundreds of deals to find 5 that we have a legitimate shot at, and there's always a story behind every deal that we end up landing.

This is not a high percentage business.

You do have to take a lot of shots to find those that you ultimately can hit but nevertheless, we've got a lot of feet on the ground, a lot of eyes looking at transactions, and we feel we have a very healthy deal flow and we are finding plenty to keep us busy.

We think 525 million is a very manageable number to put to work, even in this environment.

If you look at the first 5 transactions listed, those are, in essence, deals that have been done out of this capital that we've been raising.

In total, the investments are 315 million on us once we stabilize the investment -- in other words, we acquired it, we're going to put more capital in it because some of these are -- have substantial occupancy gains that we expect, and so we're going to put more capital in it.

So, what we've done for you is we have factored in that additional investment to get them to stabilization and we've analyzed the return assuming that additional investment.

So, this 15.6 percent is the projected stabilized equity return after that new investment is made.

But if you look at it prior to the new investment, those 5 transactions total roughly 271 million.

The equity that we would have in them, that stabilization would be roughly 131.

In total, the last 10 transactions would be 305 million.

We've assumed 60 percent leverage here at a 6.5 percent rate, which I think is a reasonably conserve assumptions, given this environment.

As I mentioned on the Mezz., 50 percent leverage at 6.5 percent.

Let's look at some of the recent transactions in detail since our last quarter call.

Beginning on Slide 15, probably the most exciting deal we've done is 1301 McKinney, which was formerly known as the Chevron Tower.

I like Ken Moczulski's description of this asset as the missing tooth in the smile of Houston Center.

This is the one asset in Houston Center we don't own, so we now jointly -- most of which we own jointly with our partners -- 4.2 million square feet of Houston Center.

This is a 51-story, 1.25 million square foot Class A office property.

It's a terrific asset.

It's 49 percent leased.

We do have a commitment to our partners and we intend to fulfill that commitment and close a deal.

In fact, it may be closing -- Jane?

Today -- with both JP Morgan and GE Pension.

It's a joint venture, that asset comparable to what we had done with the rest of Houston Center.

So, we would wind up owning 24 percent of this and have the same promote and key characteristics as the rest of the joint venture that we just did.

Even at 49 percent leased, this is close to 6 percent cap going in.

We are already working and are signing new leases, feel very good about the prospects for our ability to lease up the rest of the space.

This was a very attractive purchase, made possible because we had a first right of refusal, we had a first right of offer and we control the parking.

So this was one that we felt we had a really good shot at buying at a very attractive price.

In fact, we bought it for 101 million, $81 per square foot.

We think there's going to be an additional 35 million of equity required to stabilize it, so we will be in at $110 a foot all-in, which will still be 40 percent discount to replacement costs, which we estimate at $250 a foot.

Slide 16 -- we acquired One Live Oak in the fourth quarter, which is in the Atlanta market.

This will be managed by our Florida, our Southeast office team.

We will use local leasing, a local leasing team outside of the Company but we will be managing the asset.

It's 10 stories, 200-plus thousand feet.

This is an A- asset in an A++ location.

It's right in the heart of Buckhead; it's surrounded by 2 major malls, the Ritz-Carlton right across the street and the MARTA station.

It's 70 percent leased to purchase, and we think we will be at an unlevered 9 percent return on this asset within 24 months.

There was $31 million purchase price, which is $154 per foot, a 25 percent discount to replacement costs and I think one of the more interesting notes is the sister building, Two Live Oak, recently sold for $197 a foot and a building within the same block just sold for $340 per square foot.

It's a terrific location.

Slide 17 -- we acquired Peakview Tower in the fourth quarter.

It's a 10-story, 264,000 square foot Class A building recently completed in 2001.

This is a beautiful building that was announced in our press release as being 75 percent leased, but in actuality, we signed a new lease bringing it to 86 percent occupancy coterminous with the closing.

It was a $47.5 million purchase price, $180 a foot.

The going-in cap rate was 8.5 percent.

It's a 10 percent discount to replacement costs, 20 percent below the average per square foot price in recent transactions in that same submarket.

We have lease negotiations underway for 100 percent of the vacant space, feel very good about this asset, going forward.

It was a great buy in this environment.

The Exchange Building was acquired in the first quarter of 2005.

This is a historic building in the CBD of Seattle, has a beautiful lobby, recently renovated, spectacular views of Puget Sound, the city and the Olympic Mountains.

It will be managed out of our California West Coast office team.

It's 23 stories, 295,000 feet.

It was 90 percent leased at purchase, just below a 9 percent cap going in, $52.5 million price, $177 a foot, nice discount -- 30 percent to the replacement costs and it's 40 percent below the average per-square-foot price of other Class A buildings in the Puget Sound submarket.

Finally, to address Mezzanine investments, Slide 19.

We've invested 39.3 million up 2 Mezzanine loans to date and we have a very healthy pipeline of new transactions that we are in the process of.

The weighted current yield of these investments were 11.2 percent unleveraged, and what I like about them both is that they are floating off of LIBOR.

On a leveraged basis, using the assumptions I spoke about earlier, it would be 15.9 percent plus we get origination fees.

They are 2-year terms with extension options.

I like the fact that these are relatively short-term investments, so it's a good way for us to warehouse some capital until we find other great opportunities.

But in the meantime, I think these returns are very attractive and these are both backed by 2 premier office assets that we would not be embarrassed at all at owning.

They are great assets, one located in Los Angeles and one in New York.

I will now turn it over to Denny to discuss operations.

Denny?

Well, thank you, John, and good morning, everyone.

Today, I wanted to take just a few minutes to cover our fourth-quarter operations, as well as take some time today to cover, in detail, our residential development business like we did last year.

If you will turn to Slide 20, we will start with our Office segment.

We ended the fourth quarter at 89.8 percent leased, which is up from 86.4 percent at 12-31-03.

As importantly, we ended the fourth quarter at 88.5 percent in economic occupancy, which was up from 84 percent at 12-31-03.

So 2004 was an excellent year for us in gaining occupancy and leasing.

I'm very proud of the job our team did in generating additional absorption.

Jane Page's team and John Zogg's team did just an excellent -- had an excellent year.

Our same-store NOI was down in the fourth quarter.

This was completely a result of expense timing.

We expended some additional capital on recoverable expenses, particularly in repairs and maintenance.

For the year, our same-store NOI declined 5.3 percent, which was in line with our guidance.

We've given your guidance for the year at down 5 to 6 percent.

In 2005, we expect our average economic occupancy to be in the 87 to 89 percent range.

I think this is fairly conservative, considering where we're starting the year, and our same-store NOI should be up 2 to 3 percent.

Our Office FFO for the year is projected to be in the 210 to $215 million range.

Let's turn to Slide 21.

Our leasing activity, as you can see on this slide, reached 1.6 million square feet in the fourth quarter and 5.7 million square feet for the year, which was the second highest leasing year in our company's history.

Our 2004 full-year full-service rental lease rate declined 7.9 percent, which was in line with our guidance and our expectations.

In 2005, we expect our renewal lease rate to decline but not as much as '04.

I think it's probably in the 0 to down 5 percent range.

From a rental rate standpoint, we are seeing lease concessions but rental rate is generally lagging to the lease concessions improvement.

Our CapEx for 2003 was $3.14.

Our CapEx for 2004 on a per-square-foot-per-year basis was $3.13.

We expect that to go down in '05.

So the first improvement will be in lease concessions, second in rate, but we do see an improvement in rate in 2005, as well as occupancy.

Turn to Slide 22.

Our strongest leasing market is, as you would expect, Las Vegas.

At the Hughes Center, we were 98 percent leased as of year-end.

This is up from 88 percent a year ago, when we purchased the asset, and we're very pleased with that kind of occupancy growth.

The demand is very significant in Las Vegas and as John said, we're planning to build a new office building; it's an 11-story, 250,000 foot building.

We will start this fall.

We have all of the entitlements and we are excited to do that.

The prospects are very deep for this building.

Miami remains a very strong market for us at 93.6 percent leased.

Houston is doing also quite well at 91.3 percent leased.

We also experienced a very good year in both Dallas and Denver and we are excited about that.

Dallas reached 87.9 percent leased as of 12-31-04 and this compared to 82.1 percent leased as of 12-31-03.

Denver reached 91.5 percent leased as of 12-31-04 compared to 80.8 percent leased as of 12-31-03, so nice growth in both of these markets.

Austin remains our softest market at the top.

Also from this particular table, you can also see that we had positive lease absorption in all of our markets in the fourth quarter, particularly strong in Dallas.

All of our markets also experienced positive job growth over the last 12 months.

Again, as you would expect, Las Vegas led the way.

Also on this slide, you see very little new construction in our markets.

This has been the case for a long time and we continue to think that it will stay that way.

Turn to Slide 23.

As you can see from this slide and these forecasts, which were prepared by the Reese (ph) Group, our markets are projected to produce significant job growth over the next 4 years, in excess of the national markets.

Our markets are outlined in green and you can see Las Vegas, Austin, Phoenix, Atlanta, Orange County -- very strong markets.

The yellow is the U.S. average.

We have many markets that should be ahead of the national average.

Turn to Slide 24.

This is also projecting some very significant occupancy gains in our market over the next 4 years, well in excess of the national averages.

They are very bullish on Austin, Dallas and Denver.

You can see that those are at the top of the charts, and we are already seeing activity in Dallas and Denver.

We think that we will start seeing some additional leasing activity in Austin in the not too distant future.

With this kind of job growth and this kind of occupancy growth in our markets, we think that the FFO projections that we have in the Office area that John talked about, again, are achievable and conservative.

Turn to Slide 25.

We're very pleased to announce that Crescent has been named an A award winner by CEO for the fourth year in a row now, which ranks us 1 of the top 5 office companies in the United States for customer service.

This stride indicates the scores that we received in several key areas, and I'm very pleased with the level of these scores obviously, but I'm also particularly pleased with the increase that we've had over the last 4 years from the time we first won this award in 2001.

In every year, we've seen some major increases.

This is a real tribute to the hard work and dedication that our people have to customer service.

I'm particularly pleased with one number on this slide, and that is 91.8 percent of our customers intend to renew.

Renewing is the lifeblood of any office company, and it's incredibly important for us to have a very high retention rate, which we do.

In 2005, we have approximately 4 million square feet of space maturing.

We've already addressed about 57 percent of those expirations in the early part of this year, which I'm pleased with.

It's exactly where I hoped we would be.

Turn to Slide 26.

As you can see, with respect to our resort business, our resort same-store NOI was down somewhat in 2004 over 2003.

This was entirely expected and it was a result of, as we mentioned on our third-quarter call, the renovation that we've done at Sonoma and Ventana.

These reservations affected F&B (ph), they affected the Venetian significantly.

When you look at the overall statistics that we reported, they were fairly flat over the year as you look at these numbers, and up in a couple of categories, but yet Ventana had a very small impact on the stats, the occupancy stats, because it has very few rooms, but it had a big impact on NOI, particularly because of F&B (ph).

So the renovations are now completed at both Sonoma and Ventana.

We expect the operating statistics to improve dramatically in '05 as a result of this.

We also expect same-store NOI to increase.

If you look at the guidance that we're giving in this particular area, in '05, we are projecting FFO to be in the 29 to $31 million range.

This compares to $24 million on a same-store basis last year, so a nice pickup in '05.

Turn to Slide 27.

Our residential business -- we had a strong year in 2004 in residential.

We produced $31 million in FFO, and we have excellent visibility over the next 3 years, as John said, in this particular segment.

I'm going to take a little bit of time to detail that for you on an entity-by-entity and project-by-project basis.

In 2005, we're expecting our residential FFO to be in the 35 to $37 million range.

I'm very pleased with the results produced by both Desert Mountain and Crescent development, Crescent Resort development, which is Harry Frampton's business for this year.

Now, I will drill down on that in more detail in a second, but let's just quickly flip over to Slide 28.

I did want to comment on the residence at Ritz-Carlton.

In 2004, we launched the marketing of the Ritz hotel/condo development project in Dallas.

The project includes 70 condominiums, which were well-accepted; they are substantially presold.

We will begin construction of this project in late spring/early summer and we will finish in the summer of 2007.

It's going to be a very significant investment for us from an FFO standpoint.

We are highlighting here that the Ritz condos should produce about $23 million in profit for us, which will be hitting our numbers in 2007.

Again, we're very pleased with the market acceptance here.

So let's take a minute and turn to the supplement.

I want to take 5 minutes or so to walk through some of the information here.

If you have a supplement, turn to it.

We did this last year.

I would like to go through some of the detail.

You'll find it on Pages 43 through 48 of your supplement.

I wanted to specifically highlight a couple of areas here, and that would be our FFO and the cash received in excess of FFO over the next 3 years, because as we all know and as we discussed in the past, it's very important to us, from a dividend standpoint, that excess cash flow.

I think the best place to start here is on Page 46, and if you will turn to Page 46, we will walk through some of this information.

As you can see, we reported 31 million, as I said, in residential FFO in '04.

You can find that about the middle of the page on the right-hand side.

Harry Frampton's (ph) group reported 14 million;

Desert Mountain had 16 million.

From residential development, we've received -- you can see at the bottom of the page there -- $118 million in cash from this business and that's $87 million in excess of our FFO.

When you look forward, let's start with Jerry's business.

We are very excited about what we see ahead of us in that business.

As John said, much of it relates to Tahoe.

You can see the numbers jumping up dramatically over the next 3 years.

As John also said, these are fully identified projects, so the visibility is clear.

Let me kind of go through that.

In 2005, we're looking for a $25 million FFO from Harry and his team, 38 million in '06 and 39 million in '07.

Tahoe will provide a significant portion of that.

Every product that we've introduced at Tahoe has virtually sold out immediately.

Our initial 100 condos that we did in the Village, which we're about 40 percent complete on now, we have sold 92.

This will be delivered in 2005.

The next 92 condos that we will be building at the Village we will start this spring.

We have over 200 reservations right now on those 92 condos.

This project will be built in '05 and delivered in '06.

Our initial 100 lots at Old Greenwood, a Jack Nicklaus golf course development there, is complete and we have sold 96 of those lots.

Our fractional cabins at the Old Greenwood development is selling about 50 units or 50 interests per month, which is a phenomenal rate.

Our initial 100 lots at Gray's Crossing, which is also a golf course development, they are complete; the lots are complete.

We've not started the golf course yet and we've sold all 100 lots.

We had over 200 reservations on these lots.

Our next 195 lots at Gray's Crossing are about to start.

We have currently about 500 reservations on that 195 lots.

We will deliver 120 of those lots in 2005.

So, I hope you get a feel for what we are experiencing at Tahoe.

I think we're at the early stages and the business will accelerate from here.

We are about to begin also opening a new development, or a new phase, I should say, at Tahoe called The Highlands, which is up on the Mountain, which will allow us to build over 1,400 units at this location.

I'm going to talk more about that next quarter.

We've got several things working there that I want to highlight next quarter, but Tahoe is doing quite well for us right now.

Switching over to Beaver Creek, which is also in Harry's business, Horizon Pass, a condo development, and Hummingbird -- we have 30 units at Horizon Pass, 40 units at Hummingbird.

It's highly successful, it's virtually sold out and will be delivered in '05.

We're very excited about and I want to mention here 4 new projects that we have in the Beaver Creek, Vail Valley area. 3 of these projects, totaling 173 units, are very near-term starts and we are excited to get those projects going in '05.

They will be '06 and '07 deliveries.

We also have a fourth project in the Vail Valley that is considerably -- is a club (ph) of considerable size that should deliver in '07 to '09.

It's not in our numbers right now and should have a significant impact in '07 to '09.

I will be talking about that later as we are able to be more specific about these projects as the years go on -- as the year goes on.

But as I said, everything that is in these numbers with Harry, we're working on it; it's committed and underway.

Let's switch to Desert Mountain.

You'll see an FFO increase to $25 million in 2006.

You say, what is this?

This increase is primarily a result of us starting 40 casitas, which are condo-type properties, at Desert Mountain.

They are more moderately priced, if you will, compared to other projects in Desert Mountain.

They will sell in the 750 to $1 million range, and we think that this price point will be very well accepted.

We will start construction of the casitas this year; they will be delivered in '06 and will be part of our '06 FFO.

Also, you'll see here, in 2007, you'll see 33 million in FFO from other residential development.

This is primarily the Ritz-Carlton condo project that we described earlier that we'll be finishing up in '07.

It is a very -- clear visibility on that particular project.

Then one other residential property that we are invested in, we will reap the benefit in '07, and that's an investment that we have with JPI.

So, let's stay on this page for just another minute or so, and then we will finish up here, but I'd like to look at our cash position, if you will, at the bottom of the page.

You can see it in the lower right-hand corner, where it says "over the next 3 years, you can see that we will generate 216 million, 207 million and $277 in cash out of the residential business."

This totals $700 million in cash.

We will reinvest back in this business approximately $300 million to generate future cash flow in years beyond the 2007 timeframe.

So that will leave us, over this 3-year period, about $400 million in cash that we can use for 2 things -- 1, to support our dividend in the form of a special dividend, or 2, to grow our company with the excess cash, which we plan to do.

This is very powerful for us.

We have a lot of visibility on this cash, and we think it is a significant plus for our company.

The 700 million in cash is detailed and broken out on a project-by-project basis on Page 46.

I'll ask you to turn to that page for just a second.

You can see that cash flow coming in.

It's primarily Tahoe.

We have discounted this cash flow back at a 12 percent rate, which is the same rate that we did last year.

If you look at the bottom of the page -- (multiple speakers).

I'm sorry, Page 47.

Did I say 46?

Sorry, 47.

If you look at the net present value at the bottom of the page, it totals $667 million in value.

This is approximately 131 percent above our book value, which is roughly $500 million.

I'd also like to point out that this $667 million value does not include any enterprise value or our ability to generate future new developments, which we think that we will do.

So I hope this information will be helpful.

It generated a lot of discussion last year off-line, as people had a chance to digest and analyze it.

We want to give you as clear visibility on residential as we can, and we hope that this will help.

I'm going to take 1 more minute and then we can open it up for questions.

Turn back if you will to our slides and turn to Slide 29.

I wanted to make 1 last comment.

We wanted to talk about our business.

We are encouraged about what we see ahead.

I think we feel like we are on the offensive now, which is fun for us.

We see the office market is recovering significantly right now.

I think this recovery is going to create strong occupancy gains for us.

I think our resorts are recovering right now and the Canyon Ranch repositioning and invigoration is going to drive our earnings in the future.

Residential is very strong right now.

We're going to see a lot of growth in that business, and the earnings are very visible to us over the next 3 years.

We are encouraged about having the $525 million to invest.

We think we're capable of doing that and will do that, producing some significant ROEs for our firm and realize some earnings growth from that.

Before I turn it over to John, I wanted to make 1 just quick comment about Sarb-Ox.

I think everybody is going through this right now and is interested in how that is faring.

We've been through the process.

We ended up spending about $5 million on the process this year, which went through our G&A, which affected the comparisons there, if you will.

We are in the process of finishing up our 404.

It's been, like all public companies, a very time-consuming process for us this year.

We've completed our testing on our core entities, our corporate, our office.

I think we expect very favorable results on that.

We have not completed our testing on Canyon Ranch, so we need to finish that at this point in time.

Obviously, this is a smaller business.

It probably doesn't have the sophisticated systems that we have, so we're waiting on the final results on that but we're very comfortable with our 404 progress today.

John?

Thank you, Denny.

Well, we took up a lot of time, given the fact that it was a year-end call and wanted to go over in detail our plan to hit our target of $2 in FFO, but we are available here to ask questions, so operator, if you've would open it up for questions.

Thank you, Mr. Goff. (OPERATOR INSTRUCTIONS).

Stephanie Krewson with BB&T.

Good quarter, good year.

Could you please give an update on the El Paso lease in Houston?

Yes, Stephanie.

This is Jane.

Just very quickly, El Paso, as you know, announced I guess probably midyear last year that they would be consolidating their operations in a Class B building that they owned in the (inaudible).

They are substantially complete with that.

They've continued to work on sublet situations (indiscernible) space in Greenwood Plaza.

They are current on their lease obligation to us and if anything, I think we've been greatly encouraged by the progress that we've been reading about that they have been making in their strategic plan in terms of their ability to execute on refinancing their indebtedness, as well as just generally enhancing their overall liquidity through asset sales.

So you know, at this stage of the game, we feel very confident about our ability to continue to collect on that lease through the end of the lease term.

Obviously if you had a major tenant looking for that space, you would start negotiations with El Paso to let them get out of that lease, right?

Absolutely.

Could you also comment on -- the only acquisition I was surprised about was Seattle.

You know, they've got great coffee and it's nice to go hiking there but I don't exactly consider that to be a job growth center.

Could you please explain your rationale for going into that market?

Because like I said, that was really the only thing that surprised me lately.

Well, first of all, that particular submarket has about 14 percent vacancy, and we expect it to get much tighter.

It's actually a very healthy submarket within the city.

This building is one that actually Ken Moczulski can speak to because he used to work in that and develop in the Seattle market, so it's a market we understand very well.

I think he always fashioned himself actually being in that building.

So we knew the building very well.

It's a logical extension, Stephanie, of our presence in California, run by Tom Miller and of course Jane Page with her office team has the toehold in California.

It's very easy for us to venture up the coast and manage an asset in Seattle.

We feel very good about the economics of the deal and the prospect for that property and the market.

Okay, thank you.

I would also -- let me just add one other thing.

Part of our acquisition strategy is governed not just by what we want to own but also what our potential partners, JV partners, want to own.

We do get a lot of direction in talking to not only our existing partners but other partners that we are in negotiations with about markets and assets that they would like.

So that will guide us into certain assets, certain markets at times where we ultimately may pair up, say the Seattle building with the building in Atlanta and a building in Dallas, and we put together a little portfolio and joint-venture it.

So it's important to keep all of our acquisitions in mind relative to the investment management strategy.

Is my line still open?

I guess just being more tangible about it, the reason it surprised me, or the market, is because it doesn't have the common characteristics that Vegas, Texas, Florida have, which are very business-friendly governments throughout the multiple levels of municipalities you have to deal with.

That tends to be very pro-economic in job growth.

Seattle -- I mean, they lost Boeing.

It's just, in my mind, I just don't understand why your partner would want to go there.

I don't view Seattle to be a very pro-business city, but I might be wrong.

I guess that's why I was asking the question.

Because I also know that there has been another major project that was just started by an individual there, which I believe was in the paper last week.

So again, I'm asking, is there something going on in Seattle that maybe the broader market does not know about?

Jeanette, do you want to take that?

Jeanette Rice here, who handles all of our market analysis and intelligence, is standing here with us.

You know, one of the things that we looked at was also the fact this was a very supply-constrained market.

So Jeannette, do you have anything to add?

Good morning, Stephanie and everyone.

Yes, Seattle does have -- it is a supply-constrained market, particularly the downtown market, which as John noted, has one of the lower vacancy rates in the country.

It also is a market that has very good growth expectations, not from Boeing, certainly;

Boeing is declining in that market (inaudible) of the economy, but from high-technology, from international and local business (indiscernible) -- (multiple speakers) -- business sectors.

So if you recall the 2 charts that showed the economic growth and office occupancy growth, Seattle rated very well and rates very well in other measures.

That's why we do like that market.

Okay, thank you.

That's helpful.

Greg Whyte with Morgan Stanley.

This is David Cohen for Greg.

Over the past few quarters, you guys have definitely emphasized the investment management business model.

As I heard your comments today over -- (technical difficulty) -- 3-year growth strategy, I really didn't hear it emphasized as much, and so I was just wondering.

Is this really -- is there maybe a change in this strategy or has there been some maybe -- a JV asset is a little bit slower than you previously had anticipated, due to the acquisition market?

So I was just wondering about that.

No change whatsoever, no change in the strategy whatsoever.

I think what we were trying to address, David, is the question that I think is probably more in the front of people's minds is not how are you going to go raise more money through joint ventures -- which we I think have demonstrated we're pretty good at doing that, and that's not a difficult process -- but how are you going to deploy the capital that you've already raised?

So what we tried to do was address for you the tangible benefits of investing what we just raised out of all of these strategic transactions, which is predominantly mostly cash coming out of the joint venture.

So we thought that was the most pressing issue to cover, but in no way should you view that as a signal that we are off that strategy.

That is clearly the strategy of the Company.

So, in terms of the speed in which we might see more assets put into JVs, which would generate more proceeds for you to reinvest, can you -- (multiple speakers) -- by how much you might be doing over the next year or two?

It's 100 percent a function of how quickly we invest the capital we've already raised, 100 percent.

What we don't want to do is go suffer more dilution now.

We are willing to suffer this initial level of dilution and deliver kind of painful earnings expectations for '05 with the prospects of terrific growth through '07.

What we don't want to go do is execute something right now on the heels of that, raise more cash and further dilute earnings.

We think this is a very manageable amount of money and my guess is we will probably invest it faster than we had projected here and we will be in the market doing another JV clearly -- or several JVs -- within this 3-year period.

I would also add that, as part of this call, we announced that we just JV-ed 1301 McKinney in downtown Houston, so we acquired the asset last month and we are joint venturing it this month.

Okay, just one little question on TI and LCs -- it spiked again during 4Q.

I was just hoping to get some more comments on what happened this quarter and what you guys are expecting in 2005.

Yes, it's exactly flat year-over-year from 2003 to 2004, as I said it was, $3.14 in '03; it's $3.13 in '04, so it has flattened out.

It spiked a little bit in the fourth quarter.

It was strictly a function of what leases were signed. '05, it's going to go down.

We are already seeing a more friendly landlord market, and the first thing to go are lease concessions.

David, you'll see that number go down in '05 and you know, hopefully the latter part of '05/'06, we'll start seeing some pricing power also on the rate side.

Steve Sakwa of Merrill Lynch.

Good afternoon.

Could maybe somebody talk about just your G&A expectations for 2005?

I guess just secondly, with regard to the land business, I mean, obviously you've got a very sharp sort of hockey stick here.

If you try and look out maybe beyond '07, Denny you talked about putting somebody back in.

Would you view the sort of 75 to 80 million as a sustainable level, or do you see that kind of coming back down in '08 and beyond?

Good question, Steve.

The first one, on the G&A, we picked up -- we spent $5 million this year on Sarb-Ox, which increased a G&A.

That will go down.

We are going to give a few raises.

We're going to add a little bit of staff this year, so I would see, on a conservative basis, our G&A remaining flat to slightly down, okay?

With respect to the land business, it's very strong through '07, and I see the pipeline building beyond '07.

Tahoe is going to accelerate.

So the answer to your question is I think the 75 to $80 million is very sustainable.

We've been at those kinds of levels in the past and the machine that we've got working right now I think will generate that kind of business.

So we will carefully reinvest but I would really like to keep that level of business because the profit margins are extraordinary on those.

The IRRs on those individual projects are generating 25 to 40 percent IRR, so it's a very productive use of our capital.

But you would need to go out and find another Tahoe or Desert Mountain?

No, not at all.

We really would not seek finding another Tahoe.

We are able to mine in our own markets, and Harry Frampton and his team have done a terrific job.

I think Tahoe will go quicker than we all expected, so I think that will continue to grow.

We are actually adding, as I said, The Highlands project, which I will get into more later.

It will actually accelerate and give us -- it's like a whole new development that we've already paid for sitting out there that we've had no benefit from that to date.

So the pipeline is very strong and Harry is a very important, valuable piece of our business.

I guess my concern is you've got this Ritz-Carlton, you know, which is a big contributor in '07, which I don't know how many of those you're going to do.

It's certainly not an annual type situation, so --.

Logical question and you know, that's not an annual situation but Harry's business will offset that, Steve.

We have a team here that are focused on doing more those type of developments (sic), so we're looking at 2 additional ones on land that we currently own, not necessarily with Ritz-Carlton but comparable-type projects, so that's an ongoing thing that we're looking at.

I think the beauty of the model that we've now created is that we have a number of buckets to draw from.

Canyon Ranch -- I think there's even more upside than what we had -- we have in the model to the extent we have the capacity to go execute more just based on the size of the company.

They are just inundated with opportunity.

Of course, with Harry's business and the Desert Mountain team, they are looking for other ways to logically expand and extent that business and that team.

So we have a lot of people out there hunting for deals for us and I can absolutely guarantee you that the model of the residential business will have additional projects between now and '07.

Just you go back and look at the history, which we now provide you, I mean that's always been the case and it will continue to be the case.

That's a business.

But what we are evaluating there in our earnings stream is assuming we don't add any new developments; it's just what we have in-hand right now.

There's a dozen projects we're looking at right now that would be in '07 to '10 timeframe.

Okay, thanks.

Tahoe goes for another 8 to 10 years.

David Copp with RBC capital.

Good morning, thank you all.

I'm here with Jay Leupp as well.

Could you help me reconcile a couple of questions I've got with regard to your same-store pool versus your overall office occupancy?

You had a pretty dramatic improvement in occupancy in the overall portfolio, but not much in the same-store.

Given that you are requiring some assets with some lower occupancies, I would think that that would be kind of the reverse, if you will.

Yes, that is a good question.

There's a couple of things working there.

We added some assets that had higher occupancy than our same-store numbers, so you know, that did help the leasing percentage also.

Plus, we sold a couple of buildings that were under-leased, if you will.

So if you balance those 2 out against the same-store, plus the additional leasing that came in some of the properties that were not in the same-store pool, that would account for the increase, and particularly in Las Vegas.

I mean, we increased from 88 percent to 98 percent and you know, that's not in the same-store pool.

So then based on your comments earlier, you're looking for your overall portfolio occupancy to be relatively flat to '05?

That's what we've put in our guidance.

You know, and I think that's pretty conservative.

So what is it about the market that you think is happening that would -- it sounds like you're kind expecting the rate at which your occupancy is improving to slow in '05?

Is that true or not?

No, I think we're trying to be pretty conservative here in the world that we've lived in for the last 3 or 4 years.

On the ground, things are much better than we've seen them in a long time.

We're seeing existing customers expand; we've not seen that for quite a while.

That's absolutely the best opportunity that you have in the office business, because you can do that with smaller CapEx-type expenditures.

So job growth is occurring; the velocity of transactions has picked up, the attitude of customers; our retention rates are going up.

We were around 70 percent this year.

Last year, we were in the mid-'60s, so all of the metrics are improving right now.

So then just in terms of bottom-line same-store NOI outlook for '05, I'm just looking kind of at your 3-year plan. '05, we are probably not going to see much in terms of positive growth? (multiple speakers).

I think our same-store will be 2 to 3 percent and it will be driven mainly by occupancy as opposed to rate because we did put some lower rates on in some of renewals, which will affect you as our rates have gone down 5 to 7 percent like everybody else, so you've got to kind of work through that a little bit, so that will still stay in the numbers in '05, but it should accelerate dramatically in '06 and '07.

John Stewart of Smith Barney.

Hi.

It's Jon Litt here with John Stewart.

I wanted to follow up on (indiscernible) question.

If the Ritz is going to add $23 million in FFO in 2007, that will account for roughly 20 cents a share of FFO, which is clearly part of the way to the $2.

What happens in '08?

I mean, what kind of number are you looking for in '08?

I mean, it feels like this thing could fall back pretty quickly.

Not at all, Jonathan.

It is exactly what I told Steve. (multiple speakers) -- of business that is building.

We've got another dozen projects in the works.

We have Tahoe, which is accelerating, and so to the extent that that project goes away, we have other projects coming on in Tahoe that will hit in '08 and will more than make up for the $20 million that we have coming out of the Ritz.

Plus, as John indicated, there are 2 or 3 other opportunities that we have that we've not talked about yet that we could put into the pipeline, that we expect to put in the pipeline, to be able to generate that kind of 75 to $80 million run rate.

So the condo business is something which you're going to continue to grow.

This Ritz-Carlton is, let's say, your first one outside of Frampton but this is something that you are going to continue -- business you plan on growing?

Well, that's a rifle-shot opportunity for us.

Like John said, we've got a couple of pieces of land that makes some sense to put some condos on.

Over time, we will do that.

How are you addressing the tax issues on that, because the tax -- (technical difficulty) -- ordinary income, it's supposed to (indiscernible).

(multiple speakers) -- net of tax.

So you have no NOLs or anything to protect that?

No.

A question on your mezz. business -- you put out I guess those 2 pieces of pretty high yield.

Can you talk about the loan to values on them and just some of the other characteristics?

We are typically -- on those 2 deals, we are in the 90 percent, loaning up to about 90 percent loan to value.

These are assets that, again, we underwrite just as if we were going to acquire them, so we're very comfortable with that level.

We also -- in both cases, we think these are assets that will increase in value over the period of time based upon the operating plans that they are implementing.

What is the -- is the current -- what they're paying, is that what -- the yield that you are reflecting or is there a pay and an accrual?

No, its current cash base.

That's one thing I like about that; it's triple net -- (multiple speakers) -- LIBOR, so as interest rates go up, so does our yield.

What kind coverage do you have on that?

What's the fixed-charge coverage on -- or interest coverage on those deals?

It's generally 1.1, 1.2 times.

One of the two investments we did is actually 1.6, so --.

You talk about your Canyon Ranch investments and increasing your FFO from, call it, 6 million to 22 million.

Does that include a return on the $50 million that will be invested in there?

I assume it does, right?

Yes.

Then the rest is just from driving occupancies?

Yes.

Actually, we're not assuming that we have to invest all of that 50.

The 50 is there partially to renovate the existing properties and to expand the existing properties and partly is there to cede other either product lines, additions to G&A, etc.

On your strategic investment resort business, it's Page 11 in the presentation, is there money that you need to invest into that business in order to drive the FFO improvement there?

Not anything out of the ordinary, just out of the FF any (ph) reserves but the bulk of the major renovations have been done.

The same question on your strategic investment residential development business -- any more money you need to put into that -- (multiple speakers)?

Just what I outlined in the call.

I'm sorry, I don't recall what you outlined in the call.

Well, I said that we've got $700 million of cash coming in over the next 3 years.

We will reinvest $300 million of cash in new developments that will go beyond 2007 to generate additional FFO for us, which leaves us $400 million in cash available to support our special dividend or reinvest back in our business.

But you are going from, call it, 35 million to 80 million in FFO between '05 and '07.

Are you investing any capital?

Is that 300 million being invested prior to year-end '07 to drive that FFO growth?

Yes, some of it will drive that growth but most of the capital that has been -- gone into those particular development has been pre-committed in land, infrastructure, building the business.

That 300 million, more than half of it will go into new projects.

After '07?

Yes!

But so between now and '07, the residential development business won't require any reinvestment of capital into it in order to double the FFO contribution?

No, that's not what I said.

I said half.

So -- (Multiple Speakers).

(Multiple Speakers) -- go into existing business and half will go into future business.

So prior to the end of '07, you'll invest another 150 million into residential development business?

You've got it.

But good news is that comes back to you very quickly in that business, so you keep rolling it and redeploying it, but it will throw off a net 400 during that same period of time.

The other thing, back on your question on, you know, is the risk a one-off or are there other things?

I really want to refer back to the statistic I gave you -- is that if you look out or back over the last 5 years in the residential business, we have averaged $70 million in FFO per year -- 70 million.

So -- (multiple speakers) -- flash in the pan; this is something we focus on, we have development teams looking for new opportunities, and you know, as I mentioned, we've got 2 other projects outside of what Harry Frampton (indiscernible) is doing on our land that we see developing and actually, you know, and the opportunity that we have in Vegas on additional land there -- you know, we've got a lot of things in the pipeline that we will be pulling from not over the next 3 years but over the next 5, 10 years.

Yes, I did recall when you said that, that you generated 70 on average over the past couple of years.

Yet for '05, it looks like you're forecasting residential development 35 to 37 million.

That's right; that's right.

Why is it dropping, from 70 to 35 or 37?

It's not dropping from 70 to 35; it's actually increasing from '04 to '05.

It's increasing 31 to 36 but the reason it dropped from 75 to 31 was we sold the Woodlands, so we are now re-upping that business and building the cash flow back in the business.

We took the cash flow from the Woodlands and reinvested most of it in the Hughes Center transaction, which was a wonderful office opportunity ,but there's a lot of developable land there in Las Vegas.

I just wanted to turn to the 525 million equity available.

I guess that's been freed up from the joint ventures.

You're talking about stabilized FFO ROE of 15 to 18.

Maybe you could just back down to maybe cash cap rates, JV structures.

How do you get to a 15 to 18 percent ROE?

Well, let me point you back to the slide that I went over, and I think you can see where we are on the deals that we've done today.

I saw the ROE -- (multiple speakers).

That's Slide 14.

Those are actually -- the last 10 transactions, we didn't call (ph) anything over the last 10.

Actually, it's just the last 10 deals we've done and we are at 15.6 percent stabilized return before joint ventures.

There is one asset that's been joint-ventured in there, which is Briarlakes, 30 percent.

Let's take 1301 McKinney.

When we go through the JV structure, that 22.4 percent stabilized return will go to the high 20s, probably between 28 and 30 percent.

Okay?

The way you get there is, when you do a joint venture, as I've said many times in the past, it's math.

You reduce your equity basis.

You have fee income, so you get paid for your expertise.

It comes in the form of asset management fees, property management fees, leasing fees, and you're getting 100 percent of those dollars but you only own a piece of the property.

So you look at that total, relative to the equity investment, and your return goes up anywhere between 3 to 500 basis points.

In the case of McKinney, it actually goes up more just because of the characteristics of that property and the upside because of the low occupancy when we are going in.

On top of that, we're going to get promote.

I will tell you, by the time we get around to 2007, you will start seeing promote coming in from some of the joint ventures that we executed, and that can be meaningful.

I refer you back to the Woodlands deal.

When the promote kick in, that was very meaningful.

I guess what have you been doing in yield, though, on the acquisition cash -- (technical difficulty) -- cash going in yields, not (inaudible)?

Cash going in yield, 1301 McKinney, at 49 percent leased was 6 percent.

Cash going in yield on Peakview -- 8.5 percent.

These are NOI yields -- (Multiple Speakers) -- 8.5 percent going in.

You know, on McKinney, as you went through that presentation --.

On the Exchange Building -- just let me wrap it up.

On the Exchange Building, 8.9 percent going in.

So is it fair to assume you are in that 6 to 8 percent cap rate range in the money you are going to put out for that 525?

It would only be 6 percent if we have a lot of occupancy gains to be had.

You know, we would go in at a low cap rate if we saw a lot of upside in occupancy, or there was some other kind of odd characteristic, Jonathan, in the asset, but we're not going to go in and you are not going to see us paying a 6 cap -- (multiple speakers) -- just because it's fully leased and it's a beautiful building.

What we're looking for are value-added opportunities or fairly-priced opportunities.

On McKinney, I recall you (indiscernible) during your presentation.

What do you need to invest to get that, in addition to investments in that asset to get it to --?

$35 million.

How much?

35 million.

That's factored into your stabilized yield?

I don't recall -- (multiple speakers).

That's factored into the stabilized yield.

We go in at $81 a foot.

You put 35 million in and you are at 110 a foot.

It's a 40 percent discount to replacement cost.

Oh, I thought the 40 was before.

No, after, after you put in the additional money -- (Multiple Speakers) -- fifty dollars to replace the asset today.

A question --.

The unleveraged stabilized yield is 12 or better, unlevered, unjoint-ventured.

Just stepping back and looking at how you're going to double FFO from '05 at call it $1 to '07 to $2, if you look at the core office portfolio on Page 7 of you presentation, that is clearly not driving it.

Your strategic investment is going to drive $65 million or I don't know what that is, 60 cents a share in FFO.

Then you are investing of the equity (ph), so your available equity will drive another piece of it.

I guess there's kind of 2 questions here.

Why focus on offices if some of these other things are really what's driving the growth of the Company, going forward, particularly your strategic investment in residential development?

I mean, that seems like that's really where the growth really is. (multiple speakers) -- or consider spinning it out or doing something there -- (multiple speakers).

Well, it's a good question.

The office business -- first of all, we have terrific infrastructure here.

You know, these awards are not great just to put on the wall; they're great because what they do is they attract these very high-quality institutions that want to partner with us, like GE Pension and like JP Morgan Investment Management.

The office business today, as I've been saying for 2 years now, is not as attractive as it was in the '90s, where you were buying assets by the pound.

Today, it's a business that requires more financial engineering to make the returns equivalent to what we saw in the '90s.

The way we have engineered to do that is through joint ventures.

What's beautiful about this is we are at 43 percent joint ventured in the entire office portfolio.

That is the cookie jar from where we can extract more equity to redeploy in that business in a joint venture format, or in any of our other businesses, wherever we see the best return at the time, or even to buy back stock.

So, the joint venture structure is what allows the office business to achieve returns on a risk-adjusted basis, in our mind, that are about equivalent to what we're seeing in these other businesses with the exclusion of, say, Canyon Ranch and the exclusion of residential.

Canyon Ranch, though, doesn't require any additional capital.

We raised that from third parties.

We extracted 90 million of cash out of the business.

We only have 30 million net left in it.

We've got a business that will generate 20 million-plus in annual income for us.

That's a pretty darn good deal! (LAUGHTER).

If you look at the residential business, that has higher returns but arguably it has higher risk characteristics which warrant that.

On a risk-adjusted basis, we think that's about equivalent to an Office joint venture.

I saw, on your slide show, the share repurchase as one of your bullets of things you might do in the future, but maybe I missed it but I don't recall a discussion of it.

Can you talk a little bit about the share repurchase option?

You know, we still have -- we've not been bashful about buying shares in the past.

We will continue to analyze any deployment of capital in this company against a share buyback.

The market responded very favorably to the announcements of the strategic transactions.

You know, the stock was really up about $2; it's now drifted back down as a result of market conditions and perhaps the outlook for '05 versus people focusing on where the Company is headed by '07.

So we may have an opportunity here to acquire more shares.

I will tell you, each and every dollar we put out, we measure it against buying shares back. (multiple speakers) -- we've certainly not been bashful in the past.

Jonathan, we've got several people in the queue.

Do you have maybe one more question?

That's it;

I'm done.

Thank you.

David Loeb with Friedman, Billings, Ramsey.

Wow!

I wasn't sure I was going to get on!

I just have a couple of quick questions.

Not to beat the Ritz-Carlton dead horse but can you just explain why you take that profit all at once in '07 as opposed to percent of completion if it's presold?

You take that profit when you close the sale of the condos -- (Multiple Speakers).

Most other condo developers that I've seen and particularly condo hotels, if they have substantial agreements -- if they have hard money deposit contracts before or during construction, they will book percentage of completion.

Why is this different?

We have always done it on the most conservative basis, on a cash basis.

When we get the cash, we book the earnings.

So I think we've done that for the 10 years we've been in the residential business; we've done that with Harry Frampton's business religiously.

You know, he presells 50, 60, 70 percent.

I guess we could go ahead and book that if you did use a completion approach, but I think it's more conservative to wait until you get the cash.

You could have construction delays, something could fall out.

You could have a major catastrophe in the world and something happens.

So I think it's just more conservative, David.

Okay.

I had others but I forgot them about an hour ago, so thanks very much.

Well, we are available for everyone, you know, afterwards.

Just give us a call.

Your next question is from Robert Kirkpatrick of Cardinal Capital.

Good morning, or good afternoon by now.

A little bit more on the Mezzanine investments -- Who is in charge of that?

Is that something you're doing, John?

Is this -- (technical difficulty) -- competency of Crescent?

What are the sources for them?

What type of ownership do we have as collateral were they to default on these?

Okay, good question.

First of all, let me comment that the Mezzanine business is nothing new to us.

If you go back to the origins of Crescent, the bulk of the assets that gave rise to the public offering and even subsequent to the public offering, many of the acquisitions were in the form of acquiring debt or lending money, that ultimately led to the ownership.

In the case today, I don't think these loans will wind up enabling us to own the asset but we underwrite them just as we did in the early '90s and as if today we were going to own the asset.

We underwrite it no differently.

So these things are scrubbed 9 ways to Sunday to make sure that we feel very good about the value, the last dollar of value per square foot that we are loaning at.

In terms of the team, John Albright was bought in roughly a year ago and John heads that effort, has a lot of connections in the industry.

Our deal flow is very good, not only through John but also myself, because it's a business that we have been in in the past, and through the acquisition group led by Ken Moczulski and also through Tom Miller, so we have a lot of deal flow.

As I mentioned, one of the things we do, which I think there's nothing too clever about this but it's kind of an obvious thing to do, is that when we go and bid on assets and we lose, we simply go to the entity that won and offer to provide some Mezzanine financing.

Because boy, we've already spent all this time underwriting every lease and every property and we know the building very well, and it's kind of a logical extension of taking that acquisition group and getting paid for our efforts.

I think it's --.

Is that how either one of these came about, the 2 that you've done?

Actually, these 2 did not, but we're working on 2 or actually 3 currently that did.

These 2 came in just through connections that either John or Ken or Tom or I had -- Denny (indiscernible).

You know, we kind of all source these things just as we are out in the market a lot.

I will also say that one of the advantages, if you look at the debt structure today of how a lot of people are in opportunity funds and others are financing, you know, there's a lot of demand for Mezzanine dollars and there's also a lot of competition.

However, I think we distinguish ourselves from some of the competition because many of the senior lenders like to see an operator and someone with our experience in at that lower level owning the Mezz.

That is a plus.

It's probably hard to quantify but on the margin, I think it does improve the overall cost of debt to the borrower.

I'm not saying we have to price it differently, but I think the upstream capital prices a little better when they see somebody like us stepping up to the plate on the Mezz.

Then finally on the Mezz., you said that the coverage was about 1-1 to 1-2 on average for the 2 deals you've done -- (Multiple Speakers).

One of these was at 1-6.

So the other one was below 1 then is what you're telling me?

Our target range was 1-1 to 1-2.

We just happen to get a better deal on 1 -- (multiple speakers).

Oh, it's a target range, not an average?

Yes, we are seeing typically the deals you see -- (Multiple Speakers).

The nice thing is there's a fair amount of negotiating room here to kind of strike the deal the way you want it.

Obviously, it's subject to competitive pressures but you know, we feel very good about them.

These 2 assets, you know, we are not going to get a chance to own but we think that it's a good return and frankly it kind of has equity-type characteristics in the return.

Okay.

My final question is I realize that of all people, you guys would not be bashful about buying-in your shares and that you may have an opportunity to pick some up.

But my question is, do you currently have the ability, with your existing debt agreements, to buy back either any amount of stock or a material amount of stock?

Yes.

So, which one?

Both.

Thank you.

Have a good day!

James Shaynak (ph) of Juel (ph) Investments.

I was looking at chart 22 and was intrigued with the market absorption schedule plus the under-construction schedule.

I just wonder why, given the data there, you won't be more positive about unemployment growth -- I should add why you won't be more positive about rate and occupancy gains over the next couple of years than you are.

Well, that's a good question, James.

We're just trying to be fairly conservative now in the projections.

We are saying, for '05, we are showing a slight uptick to over 90 percent occupancy, which I feel very comfortable telling the market that.

If you look at our 3-year projection that we're talking about, we are saying that we're going to get to 93 percent, and I feel very confident about that.

We are seeing very strong economic indicators right now in our markets.

They are kicking in for the first time in probably 3 years but I just don't want to get out of our skis right now.

I might suggest that you add another line there, which would have relevant market size so one could compare absorption to the market size and draw some conclusions.

That's a good idea.

Anthony Porofino (ph) of Music (ph) Company.

First of all, thank you very much for taking the time to discuss things at length, as you have.

My question is regarding a clarification on your liquidity picture at this point.

With all of the transactions just -- and versus shelling year-end numbers, can you give us an idea of, at this point, where does cash stand.

Where just total debt stand, you know, credit facility, and versus the -- I think it was about 229 million of debt coming due in 2005?

I mean, is some of that already paid off or whatever you can tell us?

Yes, Anthony, this is Jane Mody.

Let me just address the debt issue (indiscernible).

If you go back and look at the overall kind of the debt picture of where we were at the end of the year and then Pro Forma in the transactions -- and really, the big ones that had not closed as of year-end were Canyon Ranch I think was probably the largest one.

We had also not completed the defeasion of what we call the LaSalle Note One.

So you would see your total consolidated indebtedness off of the balance sheet go from $2.1 million -- or $2.1 billion down to about $1.5 billion.

So that will kind of give you an idea, okay?

Now, in terms of the -- where we are in terms of the '05 renewal trends, the biggest thing that we had to do in 2005 was to renew our line of credit, which matured in May, and we're already addressed that.

At this stage of the game, we've 1 other small facility that is secured by a building in -- that's down in South Florida that I believe matures in the November/December time frame that will probably address probably in the next 3 to 6 months.

But that's really all that we have left to do in terms of pending maturities.

Anything you can say about the -- just about the 460 in '06?

Is that's -- it's secured debt.

Is that just something that's going to be rolled over, or whatever you can say?

Yes, I mean, most of -- (inaudible) give us one second.

Most of the debt that we have coming due in '06, the biggest piece of it relates to a loan that we did with B of A on assets that we are either in the process of stabilizing and putting in some permanent financing on, or they may be assets that we ultimately look to exit.

So that's the single-biggest piece that you've got.

Plus remember, too, that we still carry, in our debt numbers, the defease set, and so our LaSalle Two notes that we defease had, with that B of A loan, actually rolled off of these numbers.

So between those 2, that accounts for almost 80 percent of the 459 million in 2006.

Okay?

So that's offset by the treasuries that mature.

Great, that's very helpful.

Just lastly, you know, extension of this -- given the, you know, the Company's plans of putting more assets, rolling more assets into joint venture-type situations and reducing the amount of consolidated holdings, how should we view the absolute level of debt as that progresses where -- in terms of, you know, either absolute or relatively speaking?

Well, first of all, let me say that -- this is John -- joint venture structures are not in any way designed or intended to try to take debt off-balance sheet because, frankly, typically the partners are looking to put no more than 60 percent -- occasionally maybe they will go to 65 percent debt -- on the assets.

So, it's not a vehicle to do anything crazy with the debt and take things off-balance sheet.

Secondly, we will provide very clear disclosure of that debt, and so we will show consolidated and unconsolidated and give disclosure of the debt that we have on all the joint ventures and the characteristics of those and we will look, as we do, more and more we will look to enhance that disclosure as best we can to provide a lot of visibility.

So, I don't think that structure really impacts our debt, our corporate debt structure.

Would you say that is fair, Jane?

Yes, I think that's fair.

At this time, there are no further questions.

Ms. Moody, are there any closing remarks?

Well, thank you, everyone.

I'm sorry the call ran late, but we wanted to be available for the questions.

As always, we are available by phone.

Just give us a call and we are happy to interchange with you after the call.

Thank you very much.

Bye.

Thank you.

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

You may now disconnect.