摩根士丹利 (MS) 2007 Q1 法說會逐字稿

Good morning.

Welcome to the Crescent Real Estate first quarter 2007 earnings conference call with our host, Mr.

Jeremy Sweek.

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

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, Mr.

Jeremy Sweek, Investor and Media Relations Senior Manager for Crescent Real Estate.

Thank you, Mr.

Sweek, you may begin your conference.

Thank you.

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

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

Vice Chairman and Chief Executive Officer, John Goff, President and Chief Operating Officer, Denny Alberts, and Managing Director and Chief Financial Officer, Jane Mody.

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 Investor 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.

Thank you, Jeremy.

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

If you are following along on our website or the slide presentation, I will begin on slide 3.

The first quarter 2007 funds from operations available to common shareholders diluted and as adjusted, came in at $14.9 million, or $0.12 per share, adding back one-time charges, which I will detail here for you in a second, the first quarter would have been at $0.19, compared to $0.20 in Q1 of 2006.

There were four one-time charges, two of which related to our strategic plan execution, which totaled $0.05 per share.

The first being severance costs of $4.3 million, or $0.035 per share.

As you may recall, we estimated 5 million in severance costs in total.

4.3 were charged in the first quarter, the remaining $700,000 will be booked throughout Q2 and Q3.

The second component of the strategic plan execution were professional costs totaling $1.8 million, or $0.015 per share.

So the two of those totalled the $0.05.

In addition, we had an impairment charge of 1.9 million, related to a mezzanine loan.

This loan was subsequently sold after the quarter at $0.91 on the dollar.

That impairment charge was $1.9 million that was booked in the first quarter, even impacting the sale at $0.91 on the dollar, we achieved an internal rate of return on this investment of 19%.

Lastly, we had debt extinguishment costs of $0.005 on a joint venture asset that we refinanced.

If you would turn to slide 4.

On March 1 we announced our strategic plan, which was the result of the strategic review, which we had been through with our Board and our company advisors.

To recap this plan, we elected to transform Crescent into a Pure Play Office REIT.

Recognizing the very healthy sales environment that exists today, we would harvest gains by selling roughly half of our assets, primarily our non-office assets, as well as some select non-core office properties.

We would pay down debt, improve our balance sheet, lower our cost of capital, and create capacity for growth.

The resulting office company would have attractive growth opportunities, it would be more efficient to manage, and would have lower overhead costs.

Our plan is to complete this transformation in 2007.

Slide 5 goes over the specifics of the plan.

First we would sell resort/hotel assets.

We would sell our resort residential developments, we would opportunistically sell select office assets, roughly 5 million square feet, 5 million square feet in total, or 26% of our office portfolio.

In Dallas it totals 3.1 million square feet out of 5.6 million square feet that we own in the city totaling 12 buildings for sale, and we would retain what we call our crown jewels in Dallas, including the Crescent office property, Trammel Crow Center, and Fountain Place.

We would sell 100% of our Austin assets, which are six buildings totaling 1.3 million square feet of effective ownership.

And our single properties totaling 600,000 square feet in Seattle and Phoenix.

Then lastly, we would review in collaboration with the founders of Canyon Ranch strategic alternatives for that investment.

We will turn to slide 6.

We detail out the progress thus far in the execution of the strategic plan.

First, we sold the Exchange building in Seattle for an $81 million gross sales price, or a $28 million gain.

We acquired this asset just 26 months ago roughly for $52.5 million.

The sales' price equated to $273 per square foot, which is just under a 4% cap on 2006 NOI, and a 5.2% cap on 2007.

We sold our development in Austin, a new development that was just completed called Parkway at Oak Hill, and Denny will cover that in a moment.

That was a joint venture with a development partner.

We placed our resort hotels and Austin Centre, which is part of the Omni Hotel development under contract for a total gross sales price of $620 million, and this was to an entity associated with Walton Street Capital.

If you look at the office building component of this, it was at $220 per square foot, or a 2.2% cap on '06, a 3.7% cap on '07 NOI.

The hotels in total ranged obviously, on a hotel-by-hotel basis, with the resorts being at a lower cap than the business class hotels, but in total it was roughly a 5.4 cap on '06 NOI, and a 6.4 cap on 2007.

We are very pleased with this execution, it is under contract, money is up hard, and we expect a closing later in the quarter.

We are finalizing the accounting on this sale, but it will equate roughly to a $250 million gain.

Continuing with the progress on the execution of our plan on slide 7, in Austin we have placed 301 Congress under contract.

This is owned in a 50/50 partnership with Aetna.

This is at $286 per square foot, $119.8 million, it is a 2.1 cap on '06 NOI, a 3.6 cap on '07.

The resort residential developments, we are well on our way with our advisors here who are JPMorgan.

We are very pleased with the level of interest that we are seeing and the quality of that interest.

The teasers have been out in the marketplace, and the books are, the detailed books and due diligence materials are almost ready, and that process has been going very well and is on-track.

Lastly, on Canyon Ranch, we are finalizing our collaboration efforts with the Canyon Ranch founders.

We are not prepared to announce exactly our plans on that yet, but we will unveil that when we are ready relatively soon.

Finally, the G&A reductions that we outlined in our plan, which totaled $17 million on a run rate basis, were announced at the same time as our March 1 call, they were announced on that date and were implemented internally.

That implementation is phased in through the year, and it will save us on a run rate basis $0.14 per share annually.

So if you will turn to slide 8.

What do we do with the capital that we generate from the sales process?

We do have a very accretive use of the capital that exists on our own balance sheet.

We can repay our 2007 bonds and 2009 bonds which total $625 million.

Those are at 7.5% and 9.25% respectively.

We intend to redeem our 9.5% Series B preferred shares totaling $85 million.

We will repay select mortgage debt and also repay all or a portion of the bank line of credit.

The collective impact of this will give us a very healthy balance sheet, and nice capacity to grow the business.

Slide 9.

This slide outlines our growth strategy for the office business.

Clearly, this is going to be a much simpler business.

It will be, it's a very straight forward business plan, totally focused exclusively on our office expertise.

We already are really running the business as such, we are looking at maximized cash flow from all of our existing assets, we are looking at each and every asset with our office management team, looking to drive occupancy, improve rates, as well as lower operating costs throughout the portfolio.

We want to try to see that we can't see more of the upside in rates and occupancy growth fall to the bottom line.

We have a number of redevelopment opportunities that we are currently very actively looking at, and this is where we have sizable dense developments like at Houston Center, Las Vegas Hughes Center, as well as Greenway Plaza.

We are actually spending money now in efforts in looking at those redevelopment opportunities, and Denny is going to cover the next bullet point, new development on existing land holdings.

If you look at the total, it's well in excess of 3 million square feet throughout our portfolio.

Clearly, we will be looking for value-added acquisitions, but this is a very competitive period of time that we are in, and so we will be looking to our institutional partners to make us more efficient, and we will be teaming up with them hopefully in both acquisitions and select development opportunities.

Denny?

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

As John said, we are pleased with the good progress we are making on our strategic plan.

I am particularly encouraged by the pricing that we are seeing in the marketplace, and so we will keep you apprised as we continue this program.

If you will turn to slide 10, I wanted to take a few minutes this morning to review with you our first quarter operating results in the office business.

We ended the first quarter at 93.4% leased, and 90.6% occupied.

This excludes our properties held for sale.

The properties that are in Dallas for the first quarter ended at 85.1% in economic occupancy, and in Austin 86.5%.

We have signed a number of new leases at Fulbright Tower in Houston.

We have had very good success on the CBD in Houston, as well as Denver and Miami that have not yet been occupied.

Therefore, you see a larger than normal spread between our leased number and our economic occupancy.

That is good.

That means revenue and income is on the way.

In the first quarter, our same-store NOI increase was 4.4% on a GAAP basis.

We had been able to push rents on the space that we renewed in the first quarter 11%.

So we thought that our results were very good in the first quarter, and we were actually ahead of our internal budgets.

If you will turn to slide 11.

All of our major markets are experiencing, I guess as many markets are around the country, very healthy absorption and some positive job growth, which is helping our occupancy levels, and it is helping us to generate some meaningful rent increases around the portfolio.

Our strongest market continues to be Las Vegas, which was 98.2% leased on March 31.

And I am going to talk about our development activity and development opportunities in just a minute.

Next we have Miami, which has continued to perform very well for us.

We were 96.2% leased as of March 31, and again we are seeing very strong pricing power in that marketplace.

Rents are moving dramatically and absorption has been good.

On March 31 we were 91.7% leased in Houston.

The CBD market continues to lease well, fill up well, and we are seeing some nice rent increases in the CBD market.

Looking at some costar data, the Class A space for all of Houston was up 13% year-over-year, and so we are enjoying those increases and I think getting more than our fair share, particularly in the downtown area.

We are planning to build 6 Houston Center, which we are excited about, and I am going to describe that also a little bit more in detail in just a minute.

In Dallas we are 94.7% leased now as of March 31.

These are the assets that we will continue to own.

It excludes the properties that are held for sale, so you can see the level of occupancy and the solid cash flow that we have out of our Dallas market now, and as John said, we are focused in this market now on the Crescent, Trammel Crow Center, Fountain Place, we also have Spectrum on the Tollway, and we continue to own Carter Burgess, which has leased very well in Fort Worth.

As you can see on the exhibit here, Dallas had approximately 4 million square feet of space under construction.

This is the highest level we have had in some time.

I will say much of this space, if you break it down, the Class A space is in far north Dallas, some in Frisco, some in McKinney.

Many of you probably don't know those markets, but they are very far north.

Many of these buildings are 100,000 square feet in size, and they are generally not competitive with the trophy product that we have left in Dallas that I have just outlined.

Those are very much infill-type assets.

We do see three new buildings totaling about 1.3 million square feet being built in our Crescent submarket.

Fortunately, and these are coming out of the ground now, they are under construction.

However, we are 99% leased at the Crescent right now, so we think we are in a pretty good competitive position.

We have a great customer base at the Crescent, a lot of long-term leases in place, and as a matter of fact, the last leases that we have been signing at the Crescent are in the high 30s, and we have actually tipped the $40 mark at the Crescent, it is a very unique asset.

Finally in Denver, we are 91.8% leased as of March 31.

I remember not long ago we were in the high 70s, the low 80s.

This market has really improved and in our portfolio we are pushing rents significantly.

Market-wise, if you look at what is going on in Denver, Class A right now, according to Costar Report, the Denver Class A market is up 19% year-over-year.

So that market is pretty solid right now, so in our office business, it looks like from a leasing standpoint, the wind is firmly at our back right now.

Turn to slide 12, I wanted to take just a few minutes and walk you through our development activity.

First off, the sale of del Mar, which is a 232,000 square feet office building, which is built in San Diego, I am very happy to report that we sold this building for $120 million, which was $517 a foot.

This happens to be a new record for Crescent, so we are again seeing a lot of pricing power on the properties that we are being able to sell.

This property produced approximately $10 million in FFO gain for us, and an IRR of approximately 65%.

So Tom Miller did an excellent job managing and directing this investment, and that is an excellent rate of return for our shareholders.

Turn to slide 13.

Next we have the Parkway at Oak Hills development, that we did with a joint venture partner in Austin.

We sold this building on my birthday, April 23, for $31 million.

What is interesting about this particular sale is we just had completed the shell.

We had not started on any internal tenant work, and we had a buyer come to us at this attractive $31 million price.

We chose to sell along with our partner, and we are going to report an FFO gain of approximately $4 million, which is net of our TRS taxes and promoted interest paid to our partners.

This produced, because it is such a short timeframe, a 90% internal rate of return for Crescent.

Turn to slide 14.

On the last call, I mentioned to you that we have over 3 million square feet of office space opportunities, new development opportunities on land that we already own.

I will say that looking at this inventory, that is a very conservative number.

We could build some bigger buildings on this property, that would take that number up significantly, so I feel very good about reporting this 3 million square foot opportunity.

We are well on our way and currently we are completing our 3883 Howard Hughes Parkway development in Las Vegas.

The project is 239,000 square feet.

We will open this build this quarter and we are 91% preleased.

So we are excited about what we're seeing in Las Vegas.

What is interesting about this particular opportunity and unique, is approximately two-thirds of the leasing on this new development came from our existing customers in our other buildings at Howard Hughes Center, which is nice.

It accommodated their growth, but what it also did was allow us to go back to customers in the existing buildings, and provide for their expansion.

So what we have been able to do here recently is virtually fill all that space.

We have backfilled all of the space now at Howard Hughes Center and accommodating expansions, and for us this is just a perfect result.

We will be looking at another building, and I will describe that in a slide in just a second to continue that program.

But rents in Las Vegas and for this particular new building are in the high 30s, low 40s at this time.

Let's turn to slide 15.

Next we have 2211 Michelson in Orange County.

This is a 267,000 square feet building, which we are developing with a great partner, the Hines interest.

It is near the John Wayne Airport, as all of you know.

We will be opening the building this quarter.

We are 34% preleased right now.

We have some good prospects on our list right now, and negotiating other leases, and we will keep you up-to-date on how we progress quarter-by-quarter this year.

Turn to slide 16.

As I mentioned on our last call also, we are actively planning and working very diligently on 6 Houston Center right now, which is approximately 584 ,000 square feet.

We plan to commence construction in early 2008 for this particular building.

We think it will probably be placed into a joint venture with our other partners at Houston Center, but that is to be worked out.

There are two or three other buildings in the marketplace that will be competing with us.

One has been announced, two are being worked on right now.

Trammel Crow and Hines and Brookfield are also working on buildings.

There is strength in the CBD market, but there is also some competition coming there, so we will monitor that and plan to act accordingly.

Turn to slide 17.

Finally, we are actively right now planning the 3893 Howard Hughes building.

As I said earlier, we are opening up 3883.

This building would be 173 ,000 square feet, so smaller.

It's zoned and sitting adjacent to the 3883 building, obviously.

We plan to commence construction in early 2008, we are designing right now.

I think this one will probably be a pretty easy one for us.

It is an easy-sized building and I think we may expect some of the same results, and some of the same moves that we saw at 3883.

So I am optimistic about this particular development also.

John?

Thank you, Denny.

Slide 18.

While we have more sales to complete, specifically the resort residential business and completion of the office sales, as well as resolving Canyon Ranch, we are well on our way to becoming a focused office REIT.

We have talked about the lower cost of capital, a balance sheet with capacity, and most importantly, a portfolio that we are left with that has substantial development, as well as redevelopment opportunities.

And we have retained all of the expertise to implement that.

In addition, we have talked about in the previous call, the adjusted dividend policy that will allow us to retain capital going forward.

Overall, we remain very confident that we have designed the right strategy to unlock shareholder value for our shareholders, and we are very pleased with our progress to date.

With that, we would like to open it up for questions.

Thank you, Mr.

Goff.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Steve Sakwa with Merrill Lynch.

A couple questions.

Maybe Denny, you could start on the development project down in Orange County.

It is only 34% preleased.

There has obviously been a lot of issues with the subprime mortgage issue, and I was just wondering if you could talk about how that's impacted preleasing, and whether you've changed your pro forma rents on that project?

Sure.

There is a couple of things going on there.

There obviously, is the subprime situation.

We actually had no prospects in that space, so I can report that.

It is slower than I would have liked.

I would have been liked to be more than 34% preleased there.

We think that is a good long-term market for us.

There is a building, 3161 Mickelson that is competing in the marketplace.

There's another building on [Von Carmen], which is 231,000 feet that is competing with us.

So we have competition there.

Historically, it has been a market that has been very tight, has leased up.

I will tell you that we do have some good prospects that we are working on, and I hope to have a little higher number on the next call, but I will say, Steve, it is a little slower than I would have liked.

Can you have rents adjusted at all in that market, or are you still holding firm on what you are asking?

We have been holding firm.

We just feel like long-term this is such a great area, and to discount the rates, and diminish the value is probably not the right strategy now.

So we have fought pretty hard on the rate.

Okay.

John, I know you are not really providing guidance, which is fine, but could you maybe talk about the debt repayment?

I think if I look at the money that is going to be coming in from the sale of the hotels that are going to be completed in the second quarter, there is very little debt against that, which I guess gives you, I think north of $500 million to repay debt.

You mentioned the '07 and the '09 bonds.

Is that something that you would look to do sort of immediately, or are the prepayment penalties in excess of the '09 debt, given the coupon?

Do you want me to address that?

Yes, sure.

Steve, this is Jane.

You are down to over $8 million in prepayment penalties on the 2009 contractual 2.3125%, I think.

So it is clearly, in my opinion, it is a mandatory kind of number.

You have kind of hit the nail on the head.

We do have significant cash that gets freed up through the sale of the hotels and the office portfolio.

Obviously, what we are going to focus on first are near-term maturities.

You have got a 2007 bond maturity in September.

We will be going through and evaluating how those proceeds get redeployed toward the debt extinguishment, once the sale actually closes.

You can expect us to report to the marketplace what we do with the cash.

Okay.

Thank you.

Your next question comes from the line of Sri Nagarajan, RBC Capital.

John, I know you can't talk in terms of absolute timing, but in terms of the relative timing of the various other assets that are coming for sale, should one infer that just based on the order in which you discussed, or is that something that could, is just a moving confident there?

I think the order in which I discussed it is the most likely way that they will occur.

We are well along the way on the office side, and we're confident about our ability to complete that.

That process is, we weren't able to get, it didn't fall in time for the call, but we are very close on that.

So the office clearly would be the next, and then most likely resort residential, followed by somewhere along the way, we will discuss our resolution on Canyon Ranch.

I think that is generally the order.

Our hope and plan is to have all of this completed in 2007.

Okay.

One follow-up question, a couple, actually, of follow-up questions.

In terms of the gains on sales, obviously you discussed that in some detail in your assets here.

However, are you going to book some promote fees on the JV assets, #1?

And #2, if you could touch upon the temperature control logistics segment, and what the overhead expenses was about?

Thanks.

There really thinking through the list, Jane, correct me if I'm wrong, there is really 301 Congress, which is the 50/50 joint venture with Aetna that, which is the only joint ventured asset.

Beyond that, there are no other joint ventured assets being sold.

And there is no promote associated with that, Sri.

It was an old JV.

That was one of the first JVs that we did, which frankly Aetna, that was one of the reasons we were able to buy the building.

Okay.

We have had that for some time.

On the temperature control logistics expenses?

Overhead expenses?

I'm sorry, can you repeat the question?

On the temperature control logistics, the overhead expenses that were a little high during the quarter.

Could you give us some color on that?

It was mostly related to workman's comp.

There were just some additional accruals related.

Part of it was Workman's comp and there were some other true-ups.

As much as anything, some of it was timing, Sri.

Okay, great.

Thanks.

Your next question comes from the line of Stephanie Krewson with BBT.

Hey, guys.

Very solid quarter, actually.

Just wanted to clarify.

The new construction that is going up in uptown Dallas/Turtle Creek.

I understand from talking to brokers, that while those buildings are Class A, they don't really have comparable amenities to your assets such as the Crescent, is that accurate?

Absolutely, Stephanie.

This is Denny.

In the new buildings that are being built, you can't afford to put the amenities in that you can at the Crescent.

The quality of the materials, and I am not saying these buildings aren't nice buildings, but they are totally a different class.

Whether it's the one on Cedar Springs, the building on McKinney, or the building down in Victory.

Nice buildings, but they can't compete.

What happens is because of the escalation in construction costs, they are needing to charge rents that are Crescent-type levels to make the math work.

So I think we are in a great competitive situation there, to have our Crescent project competing with those assets, because quite frankly for our rent, you get a better building.

Just as a quick follow-up, I shouldn't be too worried about any negative, any severe negative impact to the backlog of tenants that you have waiting to get into the Crescent?

Not at all.

We have no space.

We are at 99% leased right now at the Crescent, and it just seems to be the type of asset and location in Dallas, it is the financial center of Dallas, so we have got a lot of opportunities to lease space there.

I wouldn't be too concerned about the Crescent.

Thanks, Denny.

Happy belated birthday!

Thank you.

Your next question comes from the line of Michael Bilerman with Citigroup.

Good morning.

Jon Litt is on the phone with me as well.

John, you talked about in your press release that the office sales are coming in, the pricing levels are coming in above expectations.

Can you give a little bit more color behind that comment on the sales?

Well, I want to be careful what I say, because we are in the final throes of those negotiations, so I don't want to do anything to impact those negotiations, but I would say that we had a very high level of interest, in terms of number of interested parties and bidders across the board, both in Dallas and in Austin, as well as Phoenix and Seattle.

Good quality bids, very qualified bidders across the board, very competitive process.

The first rounds there were a wide range of numbers and valuations, but things tightened up, as we reduced the number of bidders down to the select few that got into the final rounds.

We are not prepared to talk about pricing, but other than I did want to give you indications of where we have come out on those that are either completed or under contract, and I think those are good, indicative numbers of where we are headed with the rest of the portfolio.

Obviously, Austin on a cap rate and square footage basis will look different than Dallas, but they are different-type assets and a different type of market.

Across the board in every market we are very pleased with the numbers that we are achieving, and they are, our reference is really to our internal targets.

We were able to, it looks like we are going to be ahead of our all our internal targets, which is very good.

Jane, when you look at the office NOI and the disc ops, it's about $11 million for the quarter for the office assets that you are selling.

Is there any lease termination fees in that number?

And adjusting for your share in 301, where does that number go to, and is that a good run rate when we think about an annualized NOI for these assets to be sold?

To begin with, you can save yourself a lot of back and forth, if you just really look at the statement of operations, because that is just going to be your continuing ops, okay?

And the answer is, that that would be a, that does have some lease term fees in it for the quarter, right about $4 million, which is just Crescent's share of it.

It is, remember that the portfolio at the end of the first quarter was like 90.3% actually occupied.

As Denny pointed out, you have actually got some pretty strong leasing that is in the pipeline.

So it's not going to be, hopefully it's not your run rate issues move toward the end of the year, and as you see occupancy strengthened.

I apologize.

It was within the discontinued operations, the assets that are to be sold, page 12 of your supplemental, when I look at those assets, not the ones that you are keeping, was there any lease termination fees booked in disc ops for the office assets?

I am just trying to get a sense of whether -- ?

It was not material, Michael.

Most of our lease team is El Paso.

Greenway.

El Paso transaction.

So most of it is there.

Just a final one.

From a tax perspective, you have talked a little bit about the substantial gains you are going to have on the hotel assets, and some of the office assets, I understand that some of it is going to go to repay debt, but are you in any kind of a situation where you will have to pay out a special dividend, or do a 2031 exchange, with the stuff that you've announced to date, and the stuff you are going to sell?

A lot of it is going to depend, Michael, on where things finally come in and when the sales actually occur.

To the extent that we have, as you know, REIT rules would require us to, if we have any undistributed gains at the end of the year, that we will either have to pay the taxes on behalf of the shareholders, or we will have to distribute that as a special gain.

That is something that we are monitoring very closely as we move through this process, and actually realize the gains that we are alluding to.

When you look at it today given what you have sold as well as the stuff that you are going to sale that sounds pretty imminent, where do you come out?

You haven't told us yet whether there is going to be a tax problem, or the distribute out of a special dividend.

Can you just give us a sense as to where that is?

To the extent that there are gains that are above what I distribute in, what I am required to distribute for REIT rule purposes, my 95% of the net income, are what I have already distributed as it relates to dividends during the year, then I think you can figure that there is probably going to be some level of undistributed gains.

Okay.

Thank you.

We will, I really just don't want to get, I don't want to tie down gains at this point in time because the sales have not been realized.

Once they are, we will be happy to walk you through as we are on all this, with where we are in the process.

Okay.

Fortunately, the REIT rules allow us to execute the bulk of the plan before we really make a judgment on that.

So we are not going to make that judgment piecemeal as individual assets or individual markets are sold.

We are going to make that decision once we see and have really good visibility on the collective impact of the overall sales.

So that is going to be a decision that will be addressed later in the year.

Okay, thank you.

Your last question comes from the line of Cedrik Lachance with Green Street Advisors.

Thank you.

I would like to start and go back to the Orange County development.

What have been the levels of TI packages that you've had to give in this building?

We have seen a little higher TI than probably we originally pro formad.

We were looking at about $35 in total package when we started.

We are at about $40 right now, Cedrik.

We had to make some concessions on TI packages, but we have pushed to hold the rents.

And it's for a ten-year lease?

We have got both, five and ten-year lease, but yes, those kind of TIs are for longer-term leases.

In terms of AmeriCold, can you give us a little detail for what is the long-term game plan for that business?

Well, there is nothing new to say to shed additional light on it.

It's a business that is, we have always said does not fit strategically with us long-term, and at the same time we have been very successful in having the business continue to be refinanced.

So we have continued to reduce our investment, and it's now down below $90 million in terms of our net investment.

So we have gotten our basis way down and we still have, to the extent we want it, the ability to finance, refinance even more of the assets, or put additional financing on the business, and pull more cash out if we elected, but we are, say the bulk of the focus right now is continuing to improve the operations, and we have the team that was assigned by Yucaipa to the business.

They are doing a good job.

They are certainly very qualified and very experienced in this arena, and it is getting a lot of attention from Bernado, ourselves, and Yucaipa, and we will continue to look at our options.

We're not going to do anything precipitous, because I still think it's a very interesting business, and we fortunately have stabilized it, and are now really looking for growth.

The ConAgra deal was very attractive that we did last year.

We are hoping to see good growth out of that investment this year.

There are many other opportunities to grow the business, and the question is whether you want to do that privately or publicly or, those are choices we will have.

Okay.

What's the level of loan to value that you have been getting on refinancing in AmeriCold?

It is in the 60%, roughly.

Okay.

In terms of residential land, I know last year you started talked about delaying some sales from 2006 from 2007.

Have some of those sales closed in the first quarter?

Cedrik, they sure did.

We reported 7.5 million in FFO for residential in first quarter, that compared to roughly 1 million in FFO last year.

A good portion of that is some of that rollover that we talked about that slid from the fourth quarter to the first quarter.

It really related to two projects, a project in Beaver Creek called River Walk, or Village walk, I am sorry.

That's a very high-priced townhome product.

Our margins were excellent on those.

We were selling these units at 5 to $6 million a piece.

That was very attractive for us, and we realized that.

We also had a very good sales program at the Hyatt Beaver Creek, where we introduced some fractional product, and again that's very high profit margin business, so we were able to have a good fourth quarter, a good first quarter in residential from some of that rollover.

And in terms of the Ritz Carlton hotel that you are developing in Dallas, what do you intend to do with that building, since it's going to be the only hotel you are going to own?

Well, the plan here is to obviously finish the hotel.

It will be open around the first of August.

We will complete the sale of the condos.

We have 70 condos there, we are at 68 sold.

We expect those to close.

I don't think there will be any fallout if there was, there might be one.

So that is going to be a very successful project.

It is not part of our overall long-term strategy to own hotels, so I would see us exiting that asset at some point in time, and we will just have to choose what the proper time to maximize return will be to do that, but it will not be a long-term asset for us.

Okay.

Finally, what are your profit margin expectations on the second residential development at the Ritz Carlton?

I think they are very good.

We are working through that process right now.

We have 100 units that will be available.

The pricing is coming in very well.

We have got about 65 units that are either under letter of intent or contract.

The letters of intent we are going to contract on and they are above our original pro forma, so they are good, solid pricing and so we think our margins will be the same as what we had on Phase 1 for the condos.

We think we are going to make about $22 million on those 70 units, so we talked in terms of make over $20 million on Phase II.

I think that is still a pretty good number.

Okay.

And those are pretax numbers?

Yes.

Okay.

Thank you.

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

Hi, good morning.

Just on the first stage Ritz condos, that's going to be a 3Q event?

Yes, that is when we are scheduled to close.

There'll be some in the fourth quarter, but it will be third and fourth quarter, yes.

And on the Canyon Ranch living project in Miami, are you guys going to be recording the franchise fee sometime in 2007?

No, I'm sorry.

It's going to be in, you start picking some up in 2008, David.

It's not an '07 event.

Okay, okay.

Can you just talk about the residential division?

Obviously the results came in better than expected because of a couple of projects, but can you just talk about the level of activity in a bunch of the same type of products, year over year and any type of traffic you're seeing?

Let's talk about Tahoe for a second.

We are finishing up the sale of some of our Village product, so that is underway right now.

Probably the area that we had the best activity in, particularly the first quarter was some fractional product at Old Greenwood.

That seems to be a wonderful price point for the San Francisco Bay buyer that can buy a 17th.

We have got a number of people that bought three or two 17ths.

So that seems to be a leader in the clubhouse, and the margins on that particular product is very good, because it's better than a high-rise, so you are getting low rise construction pricing and some excellent margins.

So that was a very strong situation there.

But again back to the Beaver Creek area, that is where the pricing power has really jumped, and we are starting to close this year some additional product that we are developing there, down in Bachelor Gulch, so that will begin closing third, fourth quarter.

I think that is where you are going to see most of the activity this year.

You probably won't be able to get too much into specifics, but I'm curious if you can talk a little bit about the complexities in selling the residential segment, just in terms of what steps the residential segment, just in terms of what steps might be required, and how would the club assets be dealt with?

Well, we are finishing up our offering memorandum right now, and we should be done with it shortly.

Again as John said, the activity has been excellent, the list is very good for potential buyers.

We are putting it on the market as selling the whole package, the whole package being Harry Frampton's business, as well as Desert Mountain.

It would be considered as an entire package.

We think that the amenities that we put in place, particularly at NorthStar, we did front end load some of those, but I think it has allowed us by doing that, to have an opportunity to get some premium pricing on the product that we have put on the ground, and I think at least the people that are on this list that are looking at both of these businesses understand them thoroughly.

So I think we will get credit for that infrastructure that we have put in.

All right.

Thank you.

Your next question comes from the line of Michael Bilerman with Citigroup.

Just had a quick follow-up.

Just on the amount of asset sales you are contemplating this year, certainly a significant percentage of your portfolio.

How do you get around REIT rules that limit the amount of sales per year of your asset base?

The REIT rules don't prohibit the amount of sales per asset base --

This is David, General Counsel.

The Safe Harbor has some indications, but we are not necessarily availing, going to take the position that was within that Safe Harbor.

And why not?

Well, because we are selling more than the Safe Harbor contemplates we can sell.

Right.

And so why wouldn't you fall under those regulations if you are selling more than it allows you to?

Well, the gains from the sale go into our income and asset test.

That's what regulates what a REIT is.

The consequences of all the assets we are selling we have held for investment purposes, and we are not selling them in the ordinary course of our trader business, and therefore they are qualifying REIT income.

Safe Harbor is designed to make clear when you have just a few sales in a year, that you don't have to worry about the analysis.

We have gone through the analysis thoroughly, we have embedded it in our mind, and with our outside counsel.

While the Safe Harbor is available, we are selling more buildings than is allowed under the Safe Harbor, but that doesn't at all change the fact that these are sale of investment assets.

Okay.

Thank you.

Your next question comes from the line of Cedrik Lachance with Green Street Advisors.

Thanks.

I just want to follow-up on the residential land segment.

To the extent of your boldest sale, all of these assets in a package, will Harry Frampton and his group stand to receive a promote?

We are selling our interest, Cedrik.

It could possibly be that the potential buyer may want to buy a portion of Harry's business, his interest.

And so to the extent that occurred, yes, he could generate some cash out of this transaction if he so chooses.

But that will be the next phase of the negotiation.

Obviously, because Harry Frampton is such a well-known, respected and one of the top residential developers in the country, it's attracting a lot of interest for us right now.

But we will need to, that's Harry's money so we will need to let him work that out with the potential buyer.

okay.

So the sale, what you are selling is essentially a partnership with Harry Frampton.

Exactly.

Okay, thanks.

Your next question comes from the line of Stephanie Krewson with BBT.

Two quick follow-ups on residential.

Jane, the cash margins that you have provided on your residential disclosure historically, are those on an after-tax basis or do we need to tax effect those cash margins?

No.

You should be looking at things that are pretaxed.

Okay, thank you.

I will make a comment.

Historically, as we handle our residential business, we have been able to manage the tax position very effectively through various intercompany loans, et cetera, the tools that are available, tax tools.

And it has been a fairly effective low tax rate historically.

Your last question is a follow-up question from the line of Stephanie Krewson with BBT.

Sorry, I guess I signed off a little too quickly.

Thanks for the extra color, Denny.

I understand the money goes through the TRS effectively that owns a percentage of each of the Harry Frampton projects.

So because of your G&A that you can associate with those ops, what would be a reasonable tax rate to apply to the cash flows we project out on the residential business to Crescent?

Stephanie, I tell you what, it is a more complicated question than --

Do you want to go over it offline?

-- than what you are asking because it's really a function of the sales activity in any given year, and the level of intercompany loans that are there.

So it's not one, frankly, that I want to give you just a straight guidance on.

Right, I understand.

Can we touch base later this afternoon?

Yes.

I would be glad to touch base with you.

Thanks very much.

Thank you, everyone.

We appreciate you dialing into the call.

If there are any follow-up questions, don't hesitate in calling us.

We will be happy to answer your questions one on one.

Thank you.

Thank you for participating in today's Crescent Real Estate first quarter 2007 earnings conference call.

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