摩根士丹利 (MS) 2006 Q3 法說會逐字稿

Good morning.

Welcome to the Crescent Real Estate third quarter 2006 earnings conference call with your 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, Operator.

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

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

We have present, 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 presentation for the call.

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

Within those documents you will 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.

John?

Thank you, Jane.

Good morning, everyone and welcome to our third quarter call.

If you are following on our website, I'm going to begin on page 4.

For the third quarter, our funds from operations diluted as adjusted came in at 34.1 million or $0.28 per share compared to third quarter of last year of 22.8 million or $0.19 per share.

This third quarter of '06 was below our guidance on the low end by $0.01.

And on the high end, by $0.04 due primarily to two things.

One, the anticipated closing of Three Westlake in Houston that did not occur.

That has been pushed out.

We did close Four Westlake, but we did not get Three Westlake closed in time for the quarter.

Secondly, we had lower than expected lot sales at Gray's Crossing in Tahoe.

Harry Frampton is going to be on our call and will cover the residential-- Resort/Residential business in a moment.

However, if you look at quarter-to-quarter this year to last year we're up 47% on a per share basis year-over-year, and that's led principally by the continued releasing of the El Paso space in Greenway Plaza.

That releasing effort is going very well.

And the realization of an earned promote on our Four Westlake office building sale in Houston that closed in the third quarter.

This sale is, I think, a very good example of our joint venture strategy in action.

This strategy can be very powerful.

When you buy assets right and you sell them at opportunistic times.

Four Westlake, we acquired 100% of that asset back in '98, July of '98.

It's a 561,000 square foot office property in the Katy Freeway submarket called the Energy Corridor of Houston.

That submarket has performed very well, those assets performed very well during our ownership period.

We joint ventured it, and three years later in July of 2001, with a pension fund, and we have now sold it five years later and we realized a profit of 55 million for the total partnership, but the benefits of the joint venture structure allowed our 20% interest to share in roughly 44% of the total profits.

So we realized a gain on the transaction of 24.2 million, 9.5 of that being the gain on the sale of our 20% interest and 14.7 million being our promoted interest, which is included in our FFO calculation.

If you look at the year-to-date results, we came in at 90.4 million in funds from operations or $0.74 per share, versus year-to-date results of 84.8 million or $0.72 per share.

Just stepping back and looking back at the business in general, the office business is coming back very nicely, and Denny is going cover that in more detail in a moment.

And I think we will have continued opportunities to harvest additional joint venture profits, as we go forward.

We'll try to pick the appropriate times with our partners to harvest some of those gains.

We are cautious about our resort residential business as we enter into the critical selling season.

There's been a lot of media noise about, and some of which is substantive and some of which is not regarding that business and the housing business in general.

In fact, I think Harry can shed some light on that, just as he did in Q3 of last year during our call.

The hotel and resort business is continuing to experience very strong results.

AmeriCold had a quarter that was slightly below last year if you back out the FEMA business that resulted from the hurricanes of last year.

And that was disappointing.

We expected there to be more growth in the quarter than what occurred.

I will say that the partners are all very focused, along with the management team of that business, on achieving growth and cash flow and EBITDA, and we still think it's a very attractive business and, at the right point in time it's something that, perhaps, we can harvest.

We do have a very attractive financing, totaling approximately $1 billion that we are in the final stages of and expect to close in quarter four for AmeriCold.

Slide five.

Strategic review.

There's been a lot of noise in the press and we want to provide some clarity on this.

Throughout 2006, the Company has conducted an extensive review of its strategic alternatives, and in late August, the Company received an offer to purchase certain of its assets.

The Board of Trust managers established a special committee of independent trust managers to assist in the consideration of these strategic alternatives and to respond to the offer that was received.

A special committee hired an independent investment banker, as well as independent counsel to assist them in their review of the offer.

The special committee rejected the offer and the Company is continuing to review its strategic alternatives.

The Company does not expect to provide further announcement or provide any further updates regarding this strategic review until the review has been completed, or in the event an announcement is required under Federal Securities Laws.

Due to the fact that we're in this review of strategic alternatives period here, the Company will not provide further earnings guidance until the review process has been completed.

Accordingly, we withdraw our 2006 FFO guidance, as well as our 2007 FFO target that we have discussed in the past.

We have also determined that our ability to meet 2006 FFO guidance will be dependent on the occurrence of several significant events, none of which we can provide certainty on.

We're obviously working hard to make those happen and this is a fairly routine process around here, but not unlike most fourth quarters, we do have a number of significant events that could impact Q4 results and the results for the year significantly.

I recognize that we're going to be fielding a thousand questions on this very topic and I want to be very clear that this announcement stands on its own.

We're going to get questions, perhaps, today on the call, as well as at NAREIT, but please understand we can not go beyond what is in the press release.

That's the just the world we live in, and whether it's Sarbanes-Oxley or an overabundance of lawyers, which we've got to be very careful and we are going to, perhaps, sound rude at times saying "No comment."

But if I was you, it would save time if you would just hold those questions, because we are not going to be able to go beyond what you've read in the press release.

Let me add though, that we are very fortunate as a company to have some excellent assets as well as real estate investments.

We're also in the midst, we recognize we continue to be in this midst of a period, where there is substantial liquidity in the real estate market.

Collectively as a company, a management team and the Board, we have identified what we feel are some very attractive alternatives to consider.

And we're deep into that process.

The Company and the Board are committed to handling this process expeditiously, and 100% by the book, and we will consider all alternatives.

I want to recognize that the special committee has been working very hard and is doing a very good job of overseeing the process and will continue to do so.

I also want to state that Richard and I, Richard Rainwater and myself, have been partners for many years.

We have see this-- we see the opportunities for the Company very much in sync, and we are very much aligned with the shareholders in this process, given the fact that between the two of us, we own close to 20% of the Company, and we are the number one and number two largest shareholders in the Company.

So clearly we have shareholder interests at heart.

The management team, I want to emphasize is committed to running the business.

We will avoid, as best we can, distraction of the process, but it's going to be a busy Q4.

But we're very excited about the future at Crescent.

Denny?

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

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

And if you will turn to slide six, we will start with our Office segments.

We had a very good third quarter, as John said, in the Office segment.

We expanded our leasing activity and we ended the quarter at 91.8% leased.

We were 89.8% in economic occupancy.

We are very pleased with those levels.

This compared to 91.1% leased and 88.2% in economic occupancy last quarter.

So we had an increase in 1.6% in economic occupancy quarter-to-quarter, which is very good and very pleased with the results and the performance of our operating team in the Office segment.

The Office segment FFO was $72 million in the third quarter, compared to $54.6 million in the third quarter last year.

And as John said, much of this FFO growth was as a result of the success we had releasing the El Paso space at Greenway Plaza in Houston.

We are now-- a little over half the space has been released.

And, as you recall, the way this transaction was structured, we are able through '07 to collect double rent as well as lease termination fees.

So it's been a real benefit to us in the third quarter.

Our goal for '06 year end, with respect to leasing, as we have said, it's to be in the 91, 92% range.

We feel very good about this.

We should meet or exceed those levels, based on the book of business that we're seeing in front of us.

In the third quarter, we leased 1.3 million square feet which is a good quarter for us.

Our renewal rates were up 3% in the quarter, which was a plus.

In the third quarter, I will report to you that we recorded rental increases in every one of our major markets.

This is first time in many quarters we can say that.

Our same store NOI was down slightly in the third quarter on a GAAP basis.

We do expect that to turn positive next year, but we were up 4.2% on a cash basis.

So we flipped to the other side of that equation.

Turn to slide seven.

I want to comment quickly here on our markets.

All of our markets are experiencing healthy absorption and good job growth, and as a result, we're seeing our occupancies move up, as well as our rental rates.

Our strongest market continues to be Las Vegas, as expected.

We were 98.7% leased on September 30th.

We are under construction on our new 239,000 square foot Hughes Center building, we are now over 70% committed on the space and we are seeing rent in the high 30s and north of $40 a foot now in this project.

Next we have Miami Center, which continues to perform well for us.

We are 96.7% leased in this market.

And Houston also remains strong for us, at 93.3% leased.

Houston has a good positive story right now that I will add some color to.

In each of the last two quarters, there's been 1.3 million square feet absorbed for a total of 2.6 million square feet in the market place.

And we see that trend continuing.

The big news in Houston right now is in the CBD area.

This last quarter, Chevron has just announced that they signed a lease to take all of 1400 Smith which is the old Enron building.

They are consolidating much of their space in the suburbs, downtown now, as well as relocating some of their regional employees back into Houston.

So that's going to be a very important event for the CBD.

If you consider where the CBD will be when this transaction is completed and this move-in has occurred, it should move leasing up north of 89% downtown and it's been a while since we've seen those kind of levels.

We are also seeing some pricing strength now in Houston.

A number of the buildings are now quoting rates that are 10% -- approximately 10% higher than last year.

So the trend is right there.

Outside of CBD in Houston, the energy corridor, which John mentioned a minute ago, is now 95% leased.

Sugar Land is 94%, the North Belt is 94% and Woodlands 95%.

So we are seeing some strength also in those submarkets.

Dallas was at 88.7% leased on September 30th.

This compared to 87.7% at the end of last quarter.

So it's a nice increase for us there, a point increase.

The Dallas market continues to report positive absorption, and in the last two quarters in Dallas, the Class A space, we've seen a 2.3 million square [feet] absorbed.

So this growth continues to occur in our market place.

In the third quarter, the leases that we renewed were up 10% in rental rates for us.

So it was nice to see a positive move in Dallas for that quarter.

Denver is holding steady at 90.8% leased.

Austin is starting to see some improvement.

As you recall, about 12 months ago, we were in the low 70s.

We are now at 86.3% leased and we are starting it see some upward movement in rental rates in that market also.

Turn to slide eight.

I wanted to take just a few minutes and comment on our development pipeline.

Both in the office and the hotel sector, we have seen significant opportunities in these areas, and I want to comment first on the office side.

As you can see, in this slide, we had $285 million worth of development underway in the office arena.

We are excited about that, and I want to break down or highlight two or three specific developments that we're working on right now.

If you will turn to slide nine, you can see that we have just completed construction of a 232,000 square feet office building in San Diego.

As all of you know, the San Diego market is attractive from a leasing standpoint, as well as a for sale standpoint.

Our building is now over 70% leased.

And the significant thing here is the building cost us about $350 a foot to build.

We do plan to sell this asset in the future.

And we really expect to get north of $500 a foot for this asset.

So it's a -- a good example of what I think we can do with our development capability in creating value for our shareholders.

Let's turn to slide ten.

I mentioned earlier, the Hughes Center development that we will open in early 2007.

Again, this project cost us approximately $300 a foot to build, and we think it's valued and could be sold at over $400 a foot.

We're not looking to sell it right now, but we think we created significant development value in the Center.

Turn to slide 11.

We are underway.

We are topping out of a project in Orange County, right across from the airport.

Called 2211 Mickelson, it's a [inaudible], and we are seeing progress there and it will not be completed until the middle of next year.

So we will be back with you on the results of that next quarter.

Turn to slide 12.

One quick comment on our Ritz project in Dallas.

We are scheduled to open the hotel and start closing our Phase I Condominiums in August of 2007.

We are on schedule, a little bit ahead of schedule.

We've had very good weather here in Dallas.

And we're over 90% presold on Phase I. So we think that project is doing quite well.

We've announced Phase II, we are in the early marketing stages of that Phase II.

We are in the presell program right now.

We have seen good interest.

So stay tuned there and we will continue to update you on the progress there on the Phase II project.

Turn to slide 13.

Just a quick comment on the Luxury Hotel Business and the Upscale Business Class Hotels before I turn it back to John to talk about Canyon Ranch.

You can see that we had a solid third quarter in the business.

We've continued to have good returns in the first quarter, the second quarter, and the third quarter.

Our same-store sales comparisons are getting tougher as the market is recovering.

But we're still seeing very nice numbers there.

We excluded the Park Hyatt Beaver Creek from these numbers-- areas.

We are in the process of converting a number of these rooms into residential units and upgrading the hotel.

So we'll have him comment on that development and the progress there.

He will have a report for you a little bit later.

Now I'll turn it back to you.

On slide 14, to talk about Canyon Ranch, we had a very exciting announcement in the third quarter at Canyon Ranch, and that was the addition of Dr. Richard Carmona who was the 17th Surgeon General in the United States, who left his position as Surgeon General to join Canyon Ranch.

Rich is Vice Chairman of the Company, he is Chief Executive Officer of Canyon Ranch's Health Division, which is a significant avenue of growth for the Company, and he will be very much involved in all aspects of Canyon Ranch and is just a wonderful addition.

I encourage you to look at his resume.

I won't go through it in detail, but it's extremely impressive.

I mean everything from being a decorated Vietnam Veteran in the Special Forces to graduating first in his class in medical school, to being a very well respected surgeon and then going back and earning a master's in public health and becoming-- seeing healthcare from a businessman's point of view.

He adds so much credibility and reach to the brand, it's going to be very significant and it's very exciting.

He's a heck of a nice guy and he is a very focused businessman.

I've spent a fair amount of time with him over the last quarter and I will tell you, I'm very impressed with his business acumen and I think he brings substantial value to the Ranch and we're very excited to have him as part of the team.

The business, Canyon Ranch, talking about the resorts, they are doing quite well.

Occupancy has held pretty steady, in the mid-80% range.

The daily rate continues to grow nicely in that business, as does RevPAR.

So we won't give any specific updates beyond that, but in general, Canyon Ranch continues to have very [inaudible] prospects and we are excited about the addition of Rich.

Resort/Residential.

I'm going to let Harry really cover this.

Q3 is usually a pretty quiet quarter.

There's a lot of anticipation every year about what's going to happen in Q4, and the first quarter of the following year are the two big selling seasons, and we thought it would be very helpful to -- for everyone to hear directly from Harry as opposed to hearing it filtered through Denny and I. So, at this point, I would like to invite Harry to join us.

Everyone, I think, knows who Harry is, he's our Principal Operating Partner.

He's done a terrific job for us, created a lot of things and we are pretty invested in Harry.

We have a lot of capital in his hands, and we're very committed to his business.

So at this point, we would like to open it up to Harry.

Thank you, John.

I will be delighted to answer any and all questions to the end.

I would generally say that our strategy that we adopted with Crescent three or four years ago, five years ago is really paying off quite well.

Our strategy always was to be in high-end resort/residential, and we, most important, comment I would make would be in recent supply constrained markets.

The free markets that we're primarily in, Colorado mountains, Lake Tahoe and downtown Denver.

For a whole series of reasons, each one of which has significant [indiscernible] to entry.

And no one of those three markets has any unsold inventory.

Because, the demand remains quite good.

The fundamentals remain good, in terms of demographics, wealth transfer, technology changes, et cetera.

So although we read about some of the debacles in places like Vegas and southwest Florida, et cetera, et cetera, the three markets that we adopted as a part of our long-term strategy are holding up extremely well.

We do have a couple of hiccups that I will describe in a minute in the northern Lake Tahoe project, but basically I would describe them as hiccups.

From reading the "Wall Street Journal" and the "New York Times" and, et cetera, et cetera, you would tend to believe that [loss day] in resort communities was a debacle, that is just absolutely not true.

Let me give you a few examples.

If we look at the Vail area, this year we will sell roughly $3 billion worth of residential real estate.

Our company, [Seifer], Smith and Frampton, will put under contract, over 2 billion in residential real estate.

That in effect is almost 2,000 units at an average of $1 million a piece.

There's not one single condominium built, finished and unsold in the entire valley.

Now this will end up being the second biggest year in Vail's history, and now I'm talking about new written business, only behind last year, by maybe 5 or 10% at the most.

But the second biggest year in history.

And I think that as we look, what is interesting to me, in September and October, in Vail, we had the two biggest years in the history of Vail.

Now, those are not our biggest months, but September and October, we've never sold more resort real estate than we sold in those two months.

Now if you go back to July and August, those were not good months, but it gives us a good feeling about the future.

The demand clearly is still there.

Particular projects that have been focused on users which is what our primary business has been.

If you look at the overall market, whether it be Vegas or southwest Florida or San Diego, you name it, in almost all of those markets, they were clearly in kind of a spectacular -- a speculative feeding frenzy where a significant number of the buyers were flippers, people that were buying for the short term.

But the good news is, because of this thoughtful strategy that we put forth, we just do not have those problems.

Now, it would be improper to say that people don't walk into our sales offices and say, wouldn't I be stupid to buy real estate?

They've read something in the "Wall Street Journal" articles, but the reality is, we find it very easy to convert those, particularly ones that are users into buyers and are continuing to do that in a very, very positive way in all three of these markets.

I have my weekly sales report from my brokerage company this morning and I saw where we did about $60 million last week, including one house sale the week before for 24 million.

So I would like to at least, very aggressively, argue that the common wisdom is not the case in supply and constrained markets going forward.

As we look specifically at how we are doing, we're still going to have a very good year overall.

We did have a little hiccup on two of our projects in August, when we went into the market with a number of single family home sites, some in Tahoe and some in Eagle Ranch, and did not do nearly as well as we thought.

We probably came up about $15 million short.

But it was a bad month, to say the least, as we think back.

It was the peak of bad articles in The Journal, we had in London, airplane debacle, the violence in Iraq peaked and gas hit $3.50, so our timing was bad.

I think if we would have come to market in October or November, we would have done much, much better.

But the good news in both of those projects, we basically [inaudible] in our own company, own roughly 100 home sites in each of those communities that are fully developed and require no more investment on either our part, we have no investment basis left in them, and both of them are terrific projects that will sell out.

But in spite of all of that, we still had a pretty darn good year.

As we look to next year, we feel very good about it for a couple of reasons.

One, we've got a lot of real estate under contract that we put under contract this year that will go -- that will close next year.

We've got now 23 of 24 Village Walk units under contract.

We'll close five or six this year, and the rest next year.

Those probably average somewhere around 4.5 of $5 million with big profit margins.

We have got Beaver Creek Landing where we have got 50 units under contract.

We have got roughly 65 or 70 units under contract in California, in Phase II of the Village.

We have got a number of units under contract in -- in Denver.

So I feel very good that that will make us quite -- we will be very significantly cash positive to Crescent in 2007 and generate very good FFO for them.

In fact it could -- I think it really might be the best year in our history.

So we feel very, very good about that.

Using Denver as an example of a market where you read, again, these bad things, we did a joint venture project and actually facilitated with partners to do a high-rise condo in August in downtown Denver, and we went to market and sold 389 units in the month.

A huge success story.

So overall, I think that we are well positioned to have a good solid year as we go into next year.

That's another view and, John, I would be delighted to answer any and all questions on any subject.

Well, thanks, Harry.

Why don't we, operator, open it up for questions.

And that will give us plenty of time to cover that business, as well as everything else.

Thank you. [ OPERATOR INSTRUCTIONS ] Your first question comes from the line of Jonathan Litt with Citigroup.

[inaudible] here for Jonathan Litt and Michael [Billerman].

Can you guys just discuss the extent of Crescent's exposure to Barnett Shale and natural gas deposits around Dallas-Fort Worth given, I guess the 5.4 million square feet you guys own there, and if there's any potential up side there?

I will cover that.

This is John.

The Barnett Shale really does not apply to Dallas so much as it does Fort Worth.

We own one office building in downtown Fort Worth.

The benefit of the Barnett Shale here is essentially zero because it's a downtown office building.

However, we do own -- we still own an interest in Mira Vista, which is a development that we have sold all the lots in, but it's in southwest Fort Worth and it's right in the heart of Barnett Shale.

And there is active discussion going on there with the homeowners and with adjacent land owners to try to, perhaps, take advantage of the market on that particular property.

And there we have a fair amount of acreage because we still own the golf course.

And, with benefits now, of course not all drilling, a drilling site can be found away from the development itself, and you can horizontally drill underneath the development.

And the homeowners could benefit as well as Crescent via its ownership in the golf course.

And that could be a material number.

At least compared to what we had invested in that property.

Of course, we've -- that was a big win for us all together.

It's been a great development.

All right.

Can you provide a range for that at all or any type of ballpark figure?

It's too speculative at this point, but it is something that's being worked on.

It's probably -- Jerry is -- we've got probably 150 to 200 acres that we have ownership in, and it's tough to say what that could be worth but it's probably north of $10 million.

It's considerably more than that, don't know.

Okay.

Can you guys discuss the rationale for withdrawing the '06 guidance and the '07 target?

It's just kind of something that we haven't seen before.

Given the fact that we are in the midst of an extensive review on strategic alternatives, we are at a point where we are considering anything and everything as part of that process.

And the special committee is very much engaged in that.

Obviously, the management team, and the rest of the board is cooperative part of the process.

And because of that, we feel it is best, given that many things could change and we could elect to sell certain assets, we could elect to do a variety of things which could impact the results for Q4 or could impact the results for next year substantially.

We need to get specific direction and a specific plan before we begin giving specific guidance.

Otherwise, I think there will be another meeting with the shareholders.

Okay.

Great.

Can you just talk about the price of homes and the velocity in the residential development business?

It seems like the biggest piece, the resort/residential unit sales at pricing resort development kind of had a downtick in prices and you guys sold quite a number of more units.

If you could just give some further color on that?

I will let Harry take that but it's going to be where the properties were sold.

Yes, Jonathan, it's a real mix issue.

I mean, we've not seen any reduction in prices whatsoever.

I think that really relates to the mix across the board.

We continue to have good sales in Tahoe, as an example, our Old Greenwood project where we are selling fractional cabins, we sold roughly 40 to 50 units over the last four months each month, which is really terrific.

It's more than we sold the prior year.

We put 15 new condos on the market in Old Greenwood, whole ownership.

We sold all 15 of them and are closing them.

We've actually-- what I have seen is, in terms of price reductions, it's kind of like the guy who buys a condo last year for $1 million, and he puts it on the market six months later for 1.7 million.

And, he kind of gets upset then he has to sell it for 1.1 million, which is still fine.

So we just haven't seen a break there in any respect, except for those individual resale units where people have significantly overpriced them.

Okay.

Just finally, what drove your other expenses higher in the quarter?

That relates to our strategic review.

Great, thanks.

That's also associated with our strategic review.

Thank you.

Operator, next question.

There are no further questions at this time.

All right.

Given there are no further questions --

Excuse me, you do have a question that came through from Robert Kirkpatrick from Cardinal Capital.

I couldn't let you guys get off that easy, could I?

I thought that was pretty easy.

John, can you share with us, who are the members of the special committee?

Obviously, it's board members that are independent, but beyond that we're -- we can't answer, Robert.

Okay.

And I think that I actually will let that stop at that point.

Thank you.

You bet.

Your next question comes from David Cohen from Morgan Stanley.

Hey, good morning.

Last year at this time, you put out your NAV of 2350 to 2550.

I'm just wondering if you could comment on whether you guys think that's still about the right range?

David, we're not going to address NAV on a specific basis.

I think that what I would -- what I point you to is some of the methodologies that we used last year, just in terms of evaluating individual segments.

And would at least argue that those methodologies are still sound methodologies.

Okay.

Just on the residential segment.

I guess the price dropped.

You are saying that the prices aren't dropping, but kind of the drops are kind of surprising when you look at it on a year-over-year basis.

In terms of the stuff that you are talking about, like [inaudible] that you have under contract, for the fourth quarter in 2007, can you talk about your ability to kind of close on those?

I mean how confident are you on that, and, I think you have -- can you just review how much everybody had to put down in terms of those contracts?

Yes, let's address them separately.

If you look at the projects here in Colorado, we have somewhere between 50 and 20% down payment on all of those projects.

As an example, on those 24 Village Walks units, the average price is say approximately $5 million.

That's probably a little bit high but let's say 5.

So that means generally we have got a $1 million deposit, and that's completely non-refundable with no contingencies.

If we go to The Beaver Creek Landing project, we do have 20%.

The average condo price there was probably $1 million, so we probably got roughly $200,000.

We have been doing this since 1985, probably close to 1,000 condos in Colorado, and we have only had four people out of 1,000 not to close.

Those were right after the 1987 stock market, and in those four particular cases, we kept the entire deposit.

So I think the chances of any of those units dropping out is almost zero.

The same thing would be true in Denver, and we've got a fair number of units there in the contracts, et cetera.

As we look to the project in Tahoe, it's -- it's not quite as -- it is not as secure as those and I think, maybe in the end, we might lose three or four or five of those units that are under contract.

We were a little bit late delivering those units, we had originally hoped to deliver those units this November/December, now we're not going to deliver them until probably February/March, so we might lose a few and have a few people to walk from their deposits, which would be less, but most of the people there want to close and want to buy.

So I don't think it will be anything significant.

Okay.

And --

Let me, I could, let me add one comment to that.

When you made the comment that the comparative per unit pricing is surprising, or reflect a surprising drop, be very careful in that analysis, because, keep in mind we will have an introduction of a product, for example, that may be $50,000 lots at Eagle Ranch in the third quarter of this year, compared to introduction of $400,000 lots last year at another development.

So it's -- it's -- you have to really peel back the layers here and say, okay, what product came to market during that quarter to really do an accurate comparison.

If you look on a year-to-date basis, and I would refer you to page 39 of the supplement, if you look on a year-to-date basis and compare '05 to '06, the per unit sales price on resort residential is, is 939 last year and it's close to 1.8 million this year and on a lot basis it was 87,000 last year and 104 this year.

On a year-to-date basis.

But, again, you really need to look behind that and say, okay, what product was really taken to market, because don't try to draw conclusions just looking at the data right on the surface.

You need to dig a little further.

Okay.

We can help you do that.

Okay.

That's fair.

But your tone is definitely -- you and Denny seem to be a lot more cautious on this call than you have on the prior calls, but it sounds, based on what Harry has said, it sounds like things are holding up pretty well.

So can you just kind of talk about why you -- why you said cautious, whereas I think that's kind of different than what you've kind of talked about in the past.

Well, we're cautious because -- I think the media, unfortunately, does have an impact in this business, and if you look at the -- if you step back and you look at the economy and you look at all the economic data, we've got one of the strongest economies we have ever had, with corporate profits at a record pace over the last three years, I mean, just go down the list, unemployment, et cetera, wages are up.

The stock market is up, so wealth is up.

There are many factors that cause you to think that we are still in a wonderful environment to sell second home residential, which is, by the way, distinctly different than selling primary housing, which is not our business.

And in spite of that, though, all of the media reports, everybody reads, and psychologically, it does impact our buyer.

And that's what I think Harry was referring to.

And so we are always concerned when we see so much media pontification on the subject that does have potentially some impact on our buyer.

Typically that's temporary, is what we have found, and generally it settles back down, and, hopefully when people start going back on vacations and they go to Beaver Creek and they go to Vail and they go to Tahoe for winter vacation and they see new product being built, they're going to be enticed and they're going to walk in, as they have in many years past, and continue to buy.

But I say we're cautious just because of all the noise.

There's just a lot of darn noise in the system right now.

Okay.

I just have two quick questions, if you don't mind.

Can you just talk about the increase in supply in Dallas, and what you are thinking about rent rates there going forward?

Yes.

There's a number of construction projects going on primarily up north.

And they tend to be the two and three-story buildings.

A lot has been developed up in the Plano and Frisco area, and customers are going there, but they have not been as directly competitive to what we have got in our in-field markets.

We are seeing good pricing power now in Dallas that, quite frankly, we hadn't seen in three or four years.

This last quarter, as I mentioned earlier, we had a 10% increase in our roll in the rate, which is really pretty good.

And we pushed rents.

We've passed on some deals at the lower prices, just to push the rents in our markets.

We are doing very well now at the Crescent.

We are doing -- we are getting very good rents at [Tramaco Center] at [Tram] Place.

So, I think the in-fill product that we've got, there are some announcements in the in-field markets.

Victory has announced a couple of things.

Lincoln has announced a project.

They are not under construction yet.

So we are just seeing some pretty good pricing power.

And so we're enjoying that right now.

Okay.

Just the last question.

The promoted interest that -- why is that not included in NAREIT FFO?

As opposed -- I know you included it in your adjusted, but most companies include that in the NAREIT FFO, if I'm not mistaken.

We received an SEC comment regarding that and they asked for it to be excluded.

Okay.

So that's why we -- we show it both ways.

We will show FFO as adjusted which is our interpretation, which we think is more indicative of our business.

It reflects what the business is doing but we also reflect the strict NAREIT definition.

And it's consistent with how other REITs are reporting their earnings.

Okay.

Thanks very much.

Your next question comes from David Bell from Bell Investments.

Yes, John, in the past regarding the business class hotels we said that we would be looking to put those on the market when that market turned, and it seems like the hotel market is quite good now.

So I wonder if we are actively pursuing that?

Well, we can't say specifically, David, but I agree with you.

It is a -- it's the -- the timing is very good and the performance of those properties is very good.

They don't fit our core business strategy going forward and so it's -- this is a good time to strongly consider that.

Fortunately, the results continue to improve and there's a lot of capital focused on that sector.

So timing could be good.

Very good.

Thank you.

Good to hear from you.

I haven't heard from you in a long time.

Your next question comes from Steve Sakwa from Merrill Lynch.

Hi, good morning.

John, could you comment on the Irvine Development project?

I know it's not slated to be delivered for a couple of quarters, but we are noticing a pretty about uptick in supply in that market, and I noticed that this project at this point is not leased at all.

What are the prospects for that?

And are you concerned at all about achieving the pro forma yields you expected maybe a year ago?

Obviously, this is Denny, monitoring that.

We have a number of transactions that we are working on, and our partner Heinz, I think, is a terrific partner to have in that particular area.

If you look at a number of the buildings in, directly competitive to us in that area, they are pretty well leased.

So we are still feeling good about it.

We've got -- we've got our cost in line on it.

And we are aggressively marketing it right now.

We are about 24% committed on the property right now and so -- and we've got good prospect pipeline.

So we feel good about it right now.

Could you just comment, Denny, maybe about where those rents are on those kind of [lettermen] tenants for that space relative to your pro forma?

They are right on.

They are right on.

We are seeing some TI requests there that are probably a little bit higher.

We have allowed for that in our costs.

We have about $3 million that we increased our budget for additional TI's.

There's some of that going on in the market place but the rents are holding firm, Steve.

Okay.

And then I guess, John, I know you are not going to comment on the strategic issues, but, just kind of what is your appetite today for new acquisitions and new investments?

You didn't really comment on that.

What are you seeing?

Are you guys pursuing much?

Has the market changed for the types of projects you want to acquire?

Obviously, we are focused on the strategic review right now and that's going to be our primary focus for the time being.

We have had a modest level of acquisition activity this year.

We only bought one office building.

And -- but we have made a few mezzanine investments, which have been attractive, but for the most part we're focused on coming up with the plan.

Okay.

In terms of the environment, this is a -- this tends to be more of a sellers market than a buyers market.

There's a lot of capital out there and it's smart capital.

But there's a lot of capital out looking to acquire assets.

If I could ask a question about Four Westlake or maybe Three Westlake, which didn't sell.

Was that just bumped from 3Q or 4Q?

Did that kind of fall out of contract or do you expect that to close and recognize or promote in Q4?

There were some closing conditions that we are in the process of satisfying and most likely will close in Q4.

There's a chance it gets pushed beyond that.

But we are working on it.

Okay.

And then just lastly, just to kind of help us think through the term fees with El Paso.

I mean you guys had a big term fee this quarter.

How should we be thinking about term fees from that and it burning off over time?

It will -- when we sign a lease and collect the double rent, Steve, we obviously accelerate the term fee from the amortization that we originally established on a per year basis.

So we are moving some of those term fees forward.

So I would say it would smooth out a little bit over the next four, five quarters.

So down from third quarter's run rate?

That was a pretty high -- Yes, a pretty high run rate there.

We made -- we made a number of leases over the last two quarters there, as you have seen and throughout the years.

So I think the run rate is down from where it occurred in the third quarter.

And I guess what's the balance to collect?

Jerry?

The balance to collect on the terms, Steve?

Yes.

Approximately 13 to $15 million.

Okay.

And that should come in over the next sort of five quarters?

Correct.

Okay.

Thank you very much.

Your next question comes from Jon Litt from CitiGroup.

Hi.

Can you guys just talk about the [promote] that's expected to be recognized with the Three Westlake project?

I don't think we have made any mention of that in the past and probably should keep that under wraps until we have a sale that's -- that's real.

Okay.

And then on the Park Hyatt at Beaver Creek --

It's a good deal.

It's a good for us, it's a good deal for our partner, put it at that way.

At the Park Hyatt at Beaver Creek, can you just explain what's the state of that asset?

Given that it kind of dropped off the property table?

Harry do you want to comment on what we're doing there?

Yes, we're excited about what's going on here.

We have undergone a major reinvestment program in the Park Hyatt where we are spending approximately $22 million to upgrade the facility and really stabilize it for the next 10 years in a new competitive environment,and that includes a number of important things.

It first includes about 6 or $7 million to air condition the building.

When we built this in 1989, it was colder.

And there is a little bit of global warming here to say the least, and we've had a real competitive problem the last two or three years without air conditioning, as our new competitors around the country, even in ski resorts, have really hurt us there.

So we've had to go back and retrofit in a very, very major way the air conditioning in the billing.

Secondly, our common areas we had done in 1989, when we built the hotel, and quite frankly, with the new Ritz Carlton and the new Montage, they were dated.

So we have gone back into all the [common] hotel areas and we're redoing it.

And third, we are doing a major spa redevelopment that will open here in about three weeks.

I think it will unequivocally make it the best spa in all of North America.

And what's pretty cool about it is it not only serves the hotel but serves the rest of the Beaver Creek community.

So I think the -- the numbers on it are quite exciting.

Now, the good news about that is that we have been able to pay for that $22 million of improvements by timesharing one wing of the hotel as a Park Hyatt Timeshare.

And we are under construction with that right now.

And we will not finish that until roughly mid-December.

It's 15 condos that we're timesharing and we are telling them at about 2,200 a foot.

It will take some rooms out of the hotel and make the hotel a little smaller, but the rooms that we're timesharing were the worst hotel -- the worst rooms in the hotel, and I'm absolutely convinced that we will be kind of better sizing the hotel and so we're going to end up with -- it's pretty cool.

And I think much higher cash flow out of the hotel in the next two or three years.

Obviously, we have done this past year-- we have done poorly this past year because the hotel has been basically a war zone.

The good news is that we are only about three or four weeks away from finishing.

Our numbers next year, in terms of our prior bookings for groups, we will do a lot better next year than we did this past year and I think that the year after that, we should really hit our stride.

But it's really been a war zone in the last 12 months.

Okay.

Great.

And then finally on the El Paso lease, I guess you said you are re-leased about half the space.

From what I can tell it seems like El Paso's exited about 424,000 square feet, so does the 3Q results fully reflect the corrected run rate for, I guess, the new rent that you are getting from the new tenants?

Or is there some kind of slippage based on the timing of when the lease is signed or when [inaudible]?

No, most of that at 50% has commenced.

Or will have commenced by the end of the year.

Great.

Thank you.

Your next question comes from Michael McGowan from Kensington Investment Group.

In your interview analysis last year, for Canyon Ranch, you used the Four Seasons as one of the suggested comps.

I was wondering, based on yesterday's results, or the bid yesterday, do you still think that's a valid comp?

Well, it's obviously, in our opinion, valid at the time as a part of the comp set.

It was one of several data points used.

I would say we haven't analyzed the trading, I've seen what analysts have written on the multiples of EBITDA and multiples of earnings and multiples of NOI on this deal, which has not closed ye,t and I think the last time I looked, the stock was actually trading above where the offer was or slightly above.

And it's too early to say whether that is comparative.

My guess is the buyer set for Four Seasons brings a lot to the table on the growth side.

And probably even [inaudible] and Bill Gates, and so it's hard to say on a pro forma basis.

I just don't have enough information to really draw a conclusion from it yet, but it is something that we will look at.

I'm mainly an office type of guy rather than hotels and resorts.

There's such a disparity between, say, Starwood with a multiple that's down that 10, 11, 12 range and this multiple that's in the 30 plus range.

So I was wondering if you thought which one it leans more towards?

Well, I think there's always -- in the market place has always put more value on very focused, high-end brands.

And Four Seasons is probably one of the single best examples of that.

And even in the REIT space we see that, very highly focused entities tend get better multiples, particularly when there are particular categories in favor.

Four Seasons has always received a better multiple.

And I think partly-- predominantly because they do a wonderful job of executing their brand and they are very thoughtful about the expansion of it.

And I would say there's a lot to be learned from kind of following what they have done in the process of Canyon Ranch.

And it is something that the [inaudible] at Canyon Ranch have looked at.

Four Seasons has done a spectacular job of executing that growth platform.

They have done it very carefully.

Thank you very much.

Thank you.

It's time to wrap up here.

We will be headed to NAREIT later this month, and for those of you that are attending our meetings, we look forward to seeing you.

Otherwise we are reachable by phone, and [inaudible] take the call.

Thank you.

This concludes today's teleconference.

You may now disconnect.