Crescent Real Estate Equities
May Be Making a Comeback
Richard Rainwater's once-highflying Crescent Real Estate Equities Co. lost its luster after a blundered diversification during the late 1990s and the economic fallout of the Sept. 11, 2001, terrorist attacks.
But the Fort Worth, Texas-based real-estate investment trust appears to be showing early signs of a recovery after a change of strategy.
During the 1980s and the early 1990s, Mr. Rainwater earned a towering reputation for steering the investments of Fort Worth's Bass family. And Crescent, an REIT he took public in 1994, turned out solid returns under the direct stewardship of Mr. Rainwater's longtime lieutenant, John C. Goff.
But Crescent seemed to lose its step when Mr. Goff stepped aside for two years in the late 1990s, and Mr. Rainwater had his attention elsewhere. The company made some solid buys, including some of Houston's and Dallas's best office properties. But its bottom line was dragged down by investments in Charter Behavioral Healthcare Systems LLC, which then filed for bankruptcy-court protection, and AmeriCold Logistics LLC, a refrigerated-warehouse company, in which Crescent still holds about a 32% stake.
Since 1999, when Mr. Goff returned to Crescent, he has gradually divested what he regarded as noncore properties. However, with returns still lagging and Crescent's stock price as low as $15.97 in the past year, Mr. Goff decided on a strategic shift.
He decided to sell large portions of Crescent's most valuable office buildings to institutional investors, effectively turning the properties into joint ventures, and become a company focused on property management. Mr. Goff calculated that Crescent could redeploy the cash from the sales to other projects, and meanwhile earn higher returns on its joint ventures through management fees.
On top of that, Mr. Goff negotiated significant bonuses for Crescent on the joint-venture properties based on how profitable he can make them.
Contributing to Mr. Goff's decision was the sheer size and power of institutional real-estate investors. He estimates that REITs in the U.S. have $250 billion in assets, compared with $7 trillion held by institutional investors, making the latter group much more competitive in the market since it can afford to pay more.
"I wanted to harness that capital," Mr. Goff says. "I thought, 'Let's be an adviser to institutional capital in real estate. Let's utilize our platform to manage the capital for a fee.'"
So, among other sales, late last year he sold shares in five of Crescent's best office properties in Houston and Dallas to J.P. Morgan Chase & Co.'s J.P. Morgan Asset Management and General Electric Co.'s General Electric Pension Trust for a total of some $1.2 billion. He spent the money to pay down about $600 million in debt, helping reduce Crescent's debt load to 40% from about 55% of net assets. As of Sept. 30, Crescent had $2.3 billion in debt. Mr. Goff bought properties in the zooming markets of San Diego; Irvine, Calif.; Las Vegas; Seattle and Atlanta, and lent out $115 million in so-called mezzanine debt.
Crescent's stock price fell 82 cents to $19.81 on the New York Stock Exchange yesterday and is up 8.5% for the year. The company, whose shares yield 7.27%, still isn't generating enough cash to pay its $6 annual dividend, but, with its credibility on the line, is meeting the shortfall with cash from its sales of residential property and homes in Lake Tahoe and Vail.
The 50-year-old Mr. Goff, who calls the current period transitional to his vision of a property-management company, has called the sales a "stopgap" measure, and told investors that Crescent's income will cover the dividend in 2007.
Investors appear to be warming to Crescent's story.
The company's shares are up far more than the Dow Jones U.S. Real Estate index, which has risen 4.96% this year, though it trails some other high-profile REITs such as Vornado Realty Trust, which is up 11.05% this year. But Crescent clearly missed the long-running REIT rally. Crescent has returned an average of 5.69% a year over the past three years, behind Vornado at 31.32% and the Dow Jones U.S. Real Estate index at 18.71%.
Crescent still has its doubters. Jim Sullivan, a principal at Green Street Advisers, says "the jury is still out" on whether a turnaround is under way at Crescent. "It's still a complex story," Mr. Sullivan says.
But Brian Legg, an analyst with Merrill Lynch, says the value of Crescent's residential property in Lake Tahoe has risen, and notes that pre-sales of condominiums in its Ritz-Carlton Hotel in Dallas, to open in 2007, have been strong. Crescent has sold about 60 of 70 condominiums in the upscale project.
"Right now, we are only in the third inning of the plans, and I'd say they are on pace for doing what they want to do," Mr. Legg says.
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