摩根士丹利 (MS) 2006 Q2 法說會逐字稿

Good morning, welcome to the Crescent Real Estate second quarter 2006 earnings conference call.

With our host Ms. Jane Mody. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to our host Ms. Jane Mody, Managing Director Capital Markets for Crescent Real Estate.

Thank you.

Ms. Mody, you may begin your conference.

Thank you, good morning everyone and thanks for joining us on the call today.

Let me introduce who's in the room with me before we get started.

We have President, Vice Chairman and Chief Executive Officer John Goff, President and Chief Operating Officer, Denny Alberts, and Managing Director and Chief Financial Officer, Jerry Crenshaw.

Everyone should have a copy of our earnings release, supplemental report, and the presentation for today's call.

But if not, you can still find them on our website at crescent.com on the investor relations page.

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

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

Thank you, Jane, and thank you everyone for joining our call.

If you're following the slide presentation, I'm going to begin on slide four.

Funds from operations diluted and as adjusted for the second quarter of 2006 came in at 31.4 million or $0.26 per share, which compared favorably to our guidance of $0.20 to $0.22 per share for the quarter.

The positive results primarily relate to El Paso activity--releasing of the El Paso space in Greenway Plaza in Houston, of 258,000 square feet, which was signed during the second quarter, and Denny will cover that in more detail in a moment.

Year-to-date for 2006, we are at 56.2 million in FFO or $0.46 per share.

Our guidance for the year, we remain confident in the $1.25 to $1.40 per share funds from operations as adjusted for the year.

And if you look at quarter three, we are estimating $0.29 to $0.32 for the quarter, but I will tell you that that does include a couple of office sales that have promotes associated with them and that could end up being at the end of Q3 or the beginning of Q4 where we feel very confident in the sales occuring, but the exact timing a little tougher to predict.

But right now we're assuming that occurs in Q3.

Turn to slide five, we have the investment score card that we typically go over.

The bulk of the activity for the quarter related to additional mezzanine investments if you look at it on a year-to-date basis, we've made $190 million roughly in new investments which placed about $110 million of equity to work.

We now have virtually or actually all of the equity to work that we freed up in the strategic transactions back in late 2004, which generated cash proceeds of about $500 million.

If you look at the equity that's invested to date, some of this is committed, some is actual invested of the 504 million about 360 million is actually invested to date, and that's generating a run rate FFO today of about $36 million.

That $36 million in FFO is growing to roughly $50 million plus on a recurring basis as these investments stabilize.

And in addition, that equity will generate slightly more than $60 million in investment gains in the future.

Before I turn it over to Denny to go over the operations in detail, I also want to let you know that during July, you've probably seen the form 4 that was filed, but I acquired 580,244 shares of Crescent through an option exercise, these were options that were set to expire.

This represented an investment on my part of over $10.2 million, on top of that I had to pay taxes.

I intend to hold these shares and obviously I see this as a very attractive investment.

Denny?

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

Today I wanted to take just a few minutes to update you on our second quarter operating performance.

And as John said, we're pleased that our second quarter operating performance did exceed guidance.

If you will turn to slide six, we'll start by reviewing our office segment.

We ended the second quarter at 91.1% leased occupancy and 88.2 in economic occupancy.

The 91.1% leased occupancy was in line with our office expectations.

Our office segment FFO was 65.4 million, which was really at the high end of our expectations, primarily because as John said, we were very successful in the second quarter releasing some of the El Paso space at Greenway.

We signed four important leases that totaled over 250,000 feet, they were generally in the low 20s, and it produced approximately $4 million in lease termination fees, higher than we had in our budget.

So we ended at 16 million compared to a $12 million number we had in our plan.

For 2006, we've given you year end leased occupancy guidance throughout the year of 91 to 92%, which I do believe is very achievable for us at this time.

In 2006, we have only 4.1 million square feet of gross lease space expiring and to date we have addressed 86% of that expiring space, 79% has already been signed, 7% in negotiation.

So we do feel pretty good about our roll over situation and leasing goals being met throughout the rest of the year.

Our renewal rental rates were up 3% in the second quarter, and we believe that the pricing trends are positive in most of our markets and we see pricing power continuing throughout the rest of this year and into 2007.

Our same-store NOI was down slightly a GAAP basis primarily because of energy costs in the second quarter, but was positive 2.9% on a cash basis.

Turn to slide seven.

Our strongest market continues to be Las Vegas, which is 98.2% leased as of June 30th.

This is up from 88% when we purchased the assets.

We are under construction in Las Vegas on a new 239,000 square foot office building at Hughes Center.

We are about 60% committed for that space and the demand is quite strong.

The pricing power there on those leases are in the high 30s, low 40s now.

Next we have the Miami market, which continues to perform very well for us at 96.9% leased as of June 30th.

Houston also remains strong for us at 93.2% leased.

Please note at the bottom of the page, in Houston, we reported very strong net absorptions as a market for class A space.

In Houston in the second quarter, 1.3 million square feet was absorbed, very nice number.

In Dallas, we were 87.7% leased as of 6/30.

And this was up from the first quarter, Dallas also reported outstanding absorption in the second quarter.

We absorbed class A space 1.8 million square feet and it's primarily because we continue to see strong job growth numbers in our marketplace, and matter of fact, Dallas has been ranked one of the leading cities in the country over the last 12 months in job growth.

Denver continues to hover around 90% leased for us, this is up from the low 80s 12 months ago, and again we're seeing good activity there.

And as I said on the last call, Austin continues to be our softest market, but it is showing improvement, we were 83% leased at the end of this quarter compared to 79.2% at the end of the first quarter.

So all of our major markets seem to be experiencing healthy absorption and a strong job growth.

Let's turn to slide eight.

As you can see we had a good quarter, second quarter in the resort hotel business.

Our same-store NOI was up 13% and this is five quarters in a row now we've enjoyed growth in same-store NOI.

We had a very positive growth in our average daily rate, and we had a nice pickup in our [rev par] numbers also.

So that business is coming along.

Turn to slide nine.

We also posted, I think some very good operating numbers for Canyon Ranch in the second quarter.

We particularly had strong growth in our occupancy numbers and in our [rev par].

Turn to slide 10.

And we'll take a look at our Canyon Ranch living product activity , we continue to see good demand and pricing power in Canyon Ranch living.

The pricing in Miami has now moved over $1200 a foot.

And in [Bethsaidia], we're achieving initial pricing of $850 a foot, which is in line with what we had expected.

Turn to slide 11.

We recently announced our third Canyon Ranch living development.

We're excited about that.

This project is located in Chicago.

It's one block off the Miracle Mile on north Rush Street.

And we'll be done with the related group as developer.

This project will consist of 128 hotel rooms and 254 residential units, and we're very excited about being partnered with this very strong development company.

We expect to earn our usual branding fees in this situation, and we expect those branding fees to be in the 25 to $30 million range, as well as a 3 to $5 million annual management fee.

And again, here we have no equity investment in this particular project.

Turn to slide 12.

As you recall, our resort residential business had an outstanding year in 2005, we posted $44 million of FFO.

And in '06, we've given guidance of 35 to $38 million, which we feel very good about that guidance.

In 2006, the numbers are lower than 2005 as we have explained.

Simply because we're building fewer units.

We have fewer units for sale in Beaver Creek and a [Bachelor Gulch] this year.

And that makes up the Delta.

The demand for the product itself for the second home upscale resort property continues to be very robust for us, particularly in Tahoe, Beaver Creek, and also at Desert Mountain.

We anticipate Desert Mountain having a good year.

We have 38 villas under construction right now, we will begin delivering those villas in the fourth quarter, and the market acceptance has been excellent there.

We anticipate that Harry Frampton will have a good fourth quarter, this year because of units that he will be delivering, primarily at Tahoe, presale activity has been very good and so our visibility in Harry's business we think is excellent right now.

Recently we announced our plans to build a Ritz Carlton Hotel at Tahoe in the Highlands.

And in July, we broke ground on this project, which will consist of 172 room hotel and 75 full ownership Ritz Carlton residences.

A completion is scheduled for 2009 for this particular product.

We had a wonderful opening, we had about 300 people attend.

We had a strong media group from San Francisco and the Sacramento area there.

And so we got some very positive coverage on this grand opening.

Remember, the Highlands at Tahoe is at the top of Northstar and it is completely ski-in ski-out facilities.

And we will -- we will build over time there about 1,350 units at the Highlands, and so having the Ritz hotel as the center piece of the Highlands development is going to be extremely important for us, both from a pricing standpoint and to enhance our overall absorption.

So we're glad to have the Ritz as partners in Tahoe and glad to have the Ritz now underway.

Turn to slide 13.

Also in the second quarter, we announced phase II residence at the Ritz in Dallas.

As most of you know, we will complete phase I, which is a Ritz Hotel, a217-room Ritz Hotel and residents at the --in Dallas in August of 2007.

The phase I residences include 70 units, and we have already presold 65 of those units.

We plan to start phase II early next year, which will include 96 residences and 4 town homes, we estimate delivering those units in late '08, early '09.

And so now we are in the presales phase.

And the early results seem to be very positive.

We're very pleased with where we are there.

We estimate that we'll report approximately $20 million in FFO from phase I next year and approximately $22 million from phase II in late '08 and early '09.

So in summary, we believe that we're on track for 2006, we're on plan as a Company.

We continue to be -- to feel comfortable with our guidance of $1.25 to $1.40.

John?

Thank you, Denny.

Before we open it up for Q&A, just a couple of additional comments on the resort residential business.

I know there's a lot of noise in the marketplace about, whether the housing market is impacting this business, is there a slow down?

And keep in mind quarter two is typically a very quiet quarter for us.

The bulk of our activity always is experienced in quarter four, this year is no different.

Typically that's 70% plus of our earnings and that business occur in the fourth quarter when the closing occur.

I want to reemphasize that our focus is primarily on supply constrained communities like the Northstar of Lake Tahoe, like the Vail valley, these are markets that we think have the high barrier to entry results, very -- it's very defensive on our part and it also gives us a lot of pricing power.

We are not seeing slow downs in those markets.

In fact, if you look at our total portfolio today, we have over 4,000 entitled, fully entitled units, most of which that are not developed yet, most of which are located in these supply constrained markets.

I think where issues occur in the U.S. today are predominantly in markets where restrictions are not in place on new development and where there's a lot of speculation.

I spoke to our primary operating partner Harry Frampton last night just to get an update before the call.

And he made the comment that, he said "John, if we had this market that we're in today for the next 20 years, we would be very, very happy partners."

And he said we need to put this into perspective. "This is a good market".

A couple of data points that are just kind of fresh off the last couple of days of activity.

If you look at Gray's Crossing, we just started taking deposit checks for a drawing that's going to occur on a new phase of homesites that we're opening up. 75 homesites in this particular phase, and yesterday we started taking deposit checks, we got 73 deposits on those 75 homesites.

We budgeted I think 50 to 55 lots to be sold for the year.

So that actually looks pretty darn good.

In old Greenwood, we had one of our highest months ever in July in terms of fractional sales, we sold 40 fractional interests at about 150,000 each in the month of July.

That was one of the best months ever.

Harry reminded me, that in Vail, Beaver Creek, Colorado market as well as Tahoe, there is not that we can find one completed unit that is unsold.

Not one completed unit that's unsold in those markets.

If you look at new releases from Eagle County, which is Vail, Beaver Creek, of data you find that the number of transactions are down about 20%, but sales prices are actually up about 14%.

I think that's more of a function of there's still great demand, but there's just a lack of product, lack of new product in those new markets, and we have found that our presales of all new product in the Vail, Beaver Creek area have sold very, very quickly.

In fact, one-- the most recent offering Beaver Creek Landing we sold out in a day.

On the [Webston] product that we're doing just outside of the gates of Beaver Creek, we have 100 hotel condo units plus 100 condos that will be up for sale soon.

And we already have 2000 names registered for those units for the first phase of activity.

The business actually feels really good.

We keep a very close eye on the horizon for storm clouds, but we feel very good and we're-- we feel like we have very good controls over this business and very good activity and some very unique land positions that we can take advantage of over the next 5 to 10 years.

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

Operator, if you could open it up for questions please.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Chris Pike].

Good morning, everyone.

Just a quick question with respect to full year guidance.

I hate to ask these type of questions when I have your time.

But you guys basically accelerated the lease termination fee of El Paso adding, I guess $0.10 to $0.12 into '06 if I'm doing the math right.

Yet the guidance really hasn't moved all that much.

I'm just wondering if you can help get my hands around that and perhaps if I'm not thinking about it correctly, if you can perhaps steer me in the right direction.

Well, you are thinking about it right, [Chris].

We are ahead on accelerated lease termination fee from El Paso, and we're also starting to pick up some additional rent.

One of the things that we have done this year is invest in some development activity as opposed to buying some office buildings that are fairly low cap rates and low returns now.

Now buying office would put in some additional reinvestment income quicker than the development transactions.

But just doesn't produce the rate of return or the return on equity that we're looking for.

So I would say that we'll be down just a little bit on current year reinvestment and we're making up for it in development, we're making up for in residential development.

We will make up for it in these El Paso lease termination fees.

But that's a strategy by choice.

And so that's why we've left the range at $1.25 to $1.40.

And I guess for a follow up.

With respect to Hughes Center, I guess Denny indicated that fundamentals seemed to be pretty robust out in Vegas.

Yet, I think the project slipped a quarter.

And I remember when we were out there visiting you folks, you guys were very very bullish on folks you have coming in and the lease up and the occupancy.

I'm just wondering what's happening there or if there's any explanation for the slippage?

Well yes, we slipped a little bit as far as getting the development started, and it was absolutely a function of permitting and construction activity.

It is very difficult to build anything in Las Vegas right now.

The contractors, the city, the permitting people, the subcontractors are all incredibly busy right now as you well know.

So I would say we are slow getting started.

We're well underway now, we've topped out on the building.

We have extremely strong demand there, we're at over 60% committed.

And we are making plans to start the second phase project as soon as we -- as soon as we can there.

So I think it was more a function of nasty little construction process as opposed to anything to do with demand.

Okay.

Thanks a lot.

Your next question comes from the line of [Michael Billerman] with CitiGroup.

Hi, this is [Steve Brienacure] for [Michael Billerman].

Regarding your 3Q '06 guidance of $0.29 to $0.32, how many--how much of promotes is factored into that?

We've got about $15 million of promote in there.

And like John said, it could occur late third quarter could go into early fourth quarter, we're working on that right now.

But that's the level.

And then would Bank One Center have a promote associated with it?

No.

And then just finally, when are you guys-- when do you think would be the time you would release details regarding the '07 guidance?

I know you gave residential development guidance, but not anything for office or hotel.

We usually do that after we've completed our budgeting process and gotten all of the operating plans in from our divisions and our partners and so that would be toward the end of the year or right after the first of next year.

Great.

Thanks.

Your next question comes from the line of Stephanie Krewson with BB&T.

Good morning, fantastic quarter.

And I guess when everything is going so right for all parts of your business as it appears to be so far year-to-date, folks try and find something else to pick on.

I've been getting a lot of questions about your compensation plan.

I went back and I read it, and I don't understand what the contention is.

Could you hypothecate on that, and perhaps for people who haven't had time to read it, just give a quick overview of it?

Well, it's a very simple plan, Stephanie, it's--and there was a lot of thought put into this by the compensation committee along with outside advisors, and it is -- it -- it's so simple that I don't understand what the consternation is.

I'm with you.

And in fact, we have received very few direct calls questioning it.

But occasionally an analyst will write something.

But it's not--I can't think of a case where it's been a result of conversations with us.

So once we have the time to explain it to someone it's-- they generally think it's a good plan.

It's -- there are various -- they're two different plans.

One was in--put in place last year, one put in place this year, and the plans have a price target of the stock and if the stock trades for a certain number of days on average, I think it's --

40 days.

40 days on average at that price or above.

Then we vest in that increment of stock.

And so it's-- and these are restricted shares that go to the various members of Management that are participating in the plan.

And it's just--it's that simple.

It's based on the stock price.

The-- there was a lot of debate when the plan -- before the plan was put into place and when it was being designed as to whether there should be a hurdle of FFO, or a hurdle of growth rates or comparisons to other companies.

And the concern was that we were sort of at the bottom of the pack at the time in terms of price.

And if we hit our targets clearly, we might-- our FFO growth should be substantially greater than comparative data sets.

And consequently, the best measure was simply to do it based on the price of the stock.

I will say that the Compensation Committee also has the ability, if they so elect, to put additional hurdles in place in the future.

So depending on conditions, they can decide to put some of the hurdle in place.

Very simple plan is based on share price, and if we were to hit those share prices at varying degrees along the way during the time frame of this plan, I have to believe we're going to be at the top of the pack in performance on virtually any measure.

Right.

And like you said, I also don't really understand what the issue is, but I just thought I'd ask it in case I was not reading something correctly.

Overall, can you give an estimate of your ranking of total compensation?

Because perhaps it's the absolute dollar amount that's making people pause.

Just relative to your office peers for instance, or REITS overall, I don't know how you looked at competitive sets for compensation.

We're above the median.

We're in the top quartile.

We're not at the top, but we're in the top quartile.

And that's where we have typically been, and I think we're the -- our plans have typically targeted.

The dollar amount of this plan again, if we were to hit the price targets, if you look at the percentage of the value that is created that is being shared with Management, it is a relatively low number, relative to the value created.

So it's kind of hard to sit and look at future growth in the stock and say well, potentially this group of Management could be compensated, this number is too large, but the problem-- the issue is we don't earn it, we don't get it unless we earn it.

Right.

Once it's earned, I don't think those arguments would exist.

Because I think we would have a lot of happy shareholders.

Exactly.

Well for my two cents, I think that the turn around that you've effected in that Company, John, you and your team has just been phenomenal.

So in my opinion you deserve every cent.

Thanks a lot.

Thank you, Stephanie.

Your next question comes from the line of Robert Kirkpatrick with Cardinal Capital.

I'll stay far away from the issues of your pay, John, and just concentrate on the Company.

Could you or Denny perhaps walk through the Houston and the Dallas markets a little bit more and talk about whether the absorption that you're seeing, do you think is kind of a one-time catchup or whether this is now a higher kind of level that we're going to see for a while?

And then I have a follow up.

Yes, we're seeing a lot of activity, Rob.

We really are in both Houston and in Dallas.

And in Houston, I guess we expected the type of activity we've had, which is all, well not all, but a lot energy-related and even if it's the law firms or the accounting firms that are expanding down there, it's very much energy related.

And case-in-point, El Paso, we've leased 250,000 feet in the last few months there.

And we've got some excellent prospects also.

So that's good, we're starting to see some pricing power down there, and we're starting to see some TI and leasing commissions move down slightly there too.

Dallas has actually picked up also.

We're starting to see the type of business that we like to see and it's company expansion.

You know the Crescent is absolutely full now, [Tramo Crow Center] has moved way up, we're just seeing companies expand, which is, which is good.

Most of the new development that's occurred in Dallas has been way up north, Frisco, McKinney.

A lot of those one, two, three story office buildings that have been built up there.

But in the uptown area on the [Ross] Avenue side we have done very well.

So I'm seeing pricing power-- I have -- I'm very high hopes for both of those markets over the next 12 months, I think we'll exceed our guidance that we've given leasing wise in those markets and as a whole for the Company.

Okay.

And then since I've got you,Denny.

There's obviously been a lot of residential concern with real estate in the Florida market, but it looks like you continue to make progress with the sale of the condominiums in Miami and Canyon Ranch Living phase II.

Could you maybe expand upon your remarks there and give us a little more color, please?

We were at 72% preleased on the phase II --

Presold.

I mean presold on the phase II.

And the activity has been very good there.

I think there is an opportunity shortly to start another tower, which we're looking at right now with the developer there.

We don't seem to have the same investor market there that some others do down on the South Beach area.

The Canyon Ranch product is getting about a 60% premium in pricing per square foot.

So it seems to be accepted, and we're looking at potentially another tower there.

And when will the decision on the tower be?

Probably be early next year.

Early next year, great.

Okay.

I'll get back in line, thank you.

Your next question comes from the line of [Jack Ads] with AKA Enterprise Solution.

Hello, there.

I'm also asking about Canyon Ranch Living.

In each of them, you're having annual fee income, and I'm wondering if that's compromised of branding, as well and or if it's including income from operations on the hotel and spas?

Well it's both.

It's a fee no different than say a Four Seasons contract.

So it's for the operation of the property as well as operating it under the brand Canyon Ranch.

Okay.

And the other tower would be adjacent to the ones that are already built?

Yes.

Okay.

Thank you.

Your next question comes from of the line [Cedric LaChance] with Green Street Advisors.

Thank you.

John, in late '04 when you started the new strategic plan, you contributed a lot of office properties to joint ventures.

Since then, however, I think that those contributions have slowed down a lot and I don't think you've made more than three or four acquisitions that have been subsequently contributed to [JV].

Can you give us a little more details to where you stand now in regards of building more joint ventures and also more details in regards to the discretionary fund that you had discussed two or three conference calls ago?

Couple of things here, [Cedric].

First off with respect to investment activity, like I said earlier, we've in effect done more investing in the development side over the last, I'd say nine months than we have on the acquisition side.

And that's just a result of having some good opportunities with really good return on investments.

With respect to the big [Tex] investment that we made and the joint venture that we did there, we built that program up to where about half of our assets are in joint ventures right now.

And we have a half that is available.

I would say at some point in time, we would continue that program.

We would want to do that in an environment where where we pull the money out, we had a good spot to put it.

We could readily and easily liquify that office portfolio right now as you would well know.

But we want to match it up against what opportunities that we're seeing in the marketplace.

So that's been the strategy -- the strategy's not changed, it's a matter of allocating dollars properly.

And we're looking at a lot of different options right now.

In terms of the office market environment, I noticed that your guidance were same property NOI growth went down a little bit from a range of 1 to 3% or a range of 0 to 2.

What has changed in the office markets that's given rise to those change in guidance?

And in addition to that, given that you've both said two quarters negative same property NOI results, what are the drivers of the growth in the second half of the year?

Well, the slight alteration there, the tweak of 1% was just a function really of utility cost and some CapEx spending that we decided to do.

So we adjusted that.

As far as pricing power is concerned, it's like I said, we were up 3% as far as rolling up our renewal rate, which we think is very positive.

The same-store NOI has been fairly -- fairly flat to down, except on a cash basis we were up about 3% on a cash basis.

And part of that was as we move farther into this positive cycle, some of the early free rent that all of the office companies had to give is running off.

So what you see now in the numbers are the cash numbers outperforming the GAAP numbers and that's primarily because of the-- those free rents.

Okay and perhaps the final question.

You own six hotels outright.

What is your strategy on the hotel front?

Do you intend to increase your presence through more developments such as you're doing right now with two Ritz projects?

Or what do you intend to do with the platform that is relatively modest verses the platform with a lot of the large hotel owners and the public and private markets?

Well, I think we've been very clear on that in the past.

And our position is consistent.

We're not looking to grow a portfolio business class hotels.

We're not looking to grow a portfolio of resort properties.

What we are looking to grow is the Canyon Ranch brand, and we will continue to do select residential developments that is branded in select markets.

And we'll do that either ourselves or with our-- one of our operating partners like Harry Frampton.

So that's, that's the strategy and we're not looking to increase or build some substantial hotel portfolio.

If you look at the Ritz Carlton development in Dallas for example or even the Ritz in Tahoe, those are -- it was not about building the hotel, it was about applying a brand to a piece of land and creating a significant amount of value for the residential units that will be sold.

And am I getting your business class hotels right now?

Are we marketing our business class hotels right now?

I can't comment on that.

We've made no announcement to that effect.

Your next question comes from the line of [Unidentified Speaker] with RBC Capital Markets.

Good morning, it's [Mitch Germain] here for [inaudible].

Have you guys disclosed the FFO contribution for AmeriCold net of the debt paydown?

Net of the debt paydown.

We do break out AmeriCold separately, yes.

Well, net of the Morgan Stanley guide?

You're talking about the refinancing of the debt?

Well I mean what was the charge for the debt?

It was 1.2 million, which is our share of the preferred financing costs that were written off.

Okay, thank you very much.

Your next question comes from the line of David Cohen of Morgan Stanley.

Hi, good morning, sorry I was late to the call.

So if you've answered this, please excuse me.

The Hunt consolidated space that's out in place, they're expiring at the end of the year, is that correct?

David, this is Denny.

Yes, they are expiring, it's about 340,000 feet.

We have extended, extended it for another eight months into 2008.

They are building a new building as you probably know.

So that will be an opportunity for us to have a little extra time on releasing the space.

We have several large potential customers that we're working on right now.

And I think we've got plenty of time to release the space.

It's obviously one of our trophy premier properties located there in the [Arch] in the district.

But I'm happy to accommodate Mr. Hunt for another eight months.

What are the market rents verses the in place?

Or what would you think the market rent is?

The market rent will be in the mid 20s there, and his in place rent is mid 20s.

Okay and have you discussed-- just an update on a AmeriCold and potential IPO of that and the timing?

We haven't discussed it.

What we have said is that we're committed to liquifying that investment at the appropriate time.

And that's one of the things that is under consideration and that clearly is available to us.

Fortunately the business continues to improve.

We've got a good Management team, they're well incentivised and we feel very good about the prospects of that business, and I think the most recent refinancing illustrates the improvement there.

We were able to save substantial amount of costs through that refinancing.

And we feel good about the prospects for the business.

And that is one of the avenues to ultimately monetize the investment.

Okay.

Just last question.

The sale of the unconsolidated company, can you just give more details on what that was?

It was sale of an office building that was in an unconsolidated joint venture.

Okay, great.

Thank you.

Your next question comes from [Chris Pike] with Merrill Lynch.

Hi, folks.

In terms of the Mez financing, I guess looking at the press release and then footing it back to the Mez disclosure in the supplemental, once again perhaps I'm not reading it correctly, but I guess there was-- am I to assume there was some significant payoff subsequent to quarter end?

Well, we had $50 million of redemptions.

Okay.

That occurred.

Okay.

And so John, maybe you could just talk about that business line going forward.

I don't think you moved your expectations from contribution for that this quarter.

Maybe, I understand, your views on interest rates and how it really does not impact some of your residential sales given the demographic of the buyers.

But I'm just wondering, the same kind of thought with respect to folks who are looking to enter into Mez positions as rates move up, as [libor] moves up and perhaps credit spreads flow out.

Well it's a business line that we do like.

As I've said before it kind of goes back to our roots as a Company, many of the assets that we wound up with, we bought through buying the debt.

As I've also said before, I don't think the investments we're making today results in us owning the assets , but we do think on a risk adjusted business, these are very attractive returns, and I think it will continue to be part of our -- one of the arrows in our quiver in terms of acquisition and utilizing our investment team.

We also can as we go forward and we've done a small scale already with this Red Tail fund, we have the ability to roll that into our investment management business, and we, in fact we've already had discussions with a number of parties who would like to invest with us in that business.

Right now we find it a good use of our own capital.

So we want to own 100% of most of these investments to the extent they don't fit into the Red Rail fund, but going forward, as we find other investment opportunities we can always roll this under the investment management umbrella and utilize a smaller amount of our capital and raise funds from third parties and manage it in the mezzanine business, I think we have unique skill sets, we have good contacts in that business, and the deal flow is quite good.

Okay.

And I guess, Denny, maybe I missed this when you guys were talking about Houston and the El Paso space.

I realize that you took down a chunk of that this quarter.

And once again, I apologize if you went over this earlier.

What kind of indication do you have for the rest of the space?

And how robust is that?

How robust is the interest for that space going forward in terms of any type of revenue pickup going forward?

I think it's on schedule or ahead of schedule, Chris of what we thought we'd be able to do.

And the backlog in Houston is excellent.

So we've talked about being able to lease all the space up by the end of 2007 when El Paso jumps off the lease.

And I still feel very confident doing that.

Do you think you could maybe get that done a little earlier, may be in 2006?

Hope so, not all of it, but we're seeing good demand.

Okay, thanks a lot folks.

At this time, there are no more questions.

Mr. John Goff, would you like to make any closing remarks?

Well, thank you very much for joining the call.

As always we have open door policy at Crescent, so please give us a call and we're happy to handle your questions directly.

And hope everyone's having a great summer.

Thank you very much.

Thank you for participating in today's Crescent Real Estate second quarter 2006 earnings conference call.