Crescent's Strategies Under Magnifying Glass

The Fort Worth-based Crescent did not return telephone calls seeking comment by publication time. It's the second time in a year the SEIU's challenged Crescent policies.

Steve Abrecht, SEIU's executive director for the capital stewardship program, says yesterday's release about the SEC appeal was not intentionally tied to the REIT's Nareit appearance, but rather an advance move for the June 28 earnings conference at Hotel Crescent Court in Dallas. "We want to let the investing public know that we don't consider this a dead issue," Abrecht tells GlobeSt.com.

On May 19, the SEIU appealed to the SEC's full board to overturn a decision that put Crescent's related party transactions into the "ordinary business exclusion" category, thereby keeping details out of proxy statements. Abrecht admits the appeal could be set aside, but he claims the ruling contradicts one rendered last year for the Chicago-based Equity Office Properties. The SEIU, he says, is hoping the spotlight will force Crescent to respond regardless of the SEC decision.

The SEIU last year took a hard look nationwide at corporate governance. "The scope of the transactions, the number of loans to executives on a scale is more serious at Crescent than we found at other companies," Abrecht says. If the SEC appeal fails, he says the next step could target corporate laws in Texas.

At Crescent's 2003 second-quarter earnings call, the SEIU gained shareholder approval to declassify the board of trust. This year, the stage is set for a harsher confrontation since the buying and selling of assets--the focus of the related party transactions' allegations--have dominated the REIT's activities.

According to the appeal, Crescent completed at least 80 related transactions in the last six years in the form of loans, acquisitions and investments in funds. "What they have in common is Crescent insiders on both sides of the deals, and, in some cases, negative consequences for Crescent and its shareholders," the appeal states. The SEIU also set up a Website as a monitoring tool about the REIT's activities.

Despite the SEIU timing, Crescent's buying and selling activity was in the limelight at yesterday's Nareit forum in New York City. Crescent CEO John Goff says the team "combs through the portfolio monthly" to decide what goes and what stays based on returns versus costs to fill vacancies. As a result, several suburban office buildings, particularly in Dallas/Fort Worth, have ended up on the sales block or passed to brokers to find joint venture partners for the product.

"We are getting very attractive pricing," Goff says of office sales reaping $1.8 billion to date. He disclosed JV activity, with Crescent keeping a 20% to 40% stake, will be "two to three times" the present pace, predicting returns in the mid-teens for equity partners.

Goff says Crescent "quietly" spent the past few years freeing up assets from complicated financial packages so they could be easily severed from the portfolio when the right deal comes along. As a result, he says, "we have a lot of flexibility in what we can sell."

On the buy side, Goff says Crescent isn't in a hurry to deploy the capital and with some assets, not in a hurry to find a JV partner. A good example is the sole ownership of its premier purchase last year, the Hughes Center in Las Vegas, where the REIT is discussing plans to raise a 250,000-sf office building to feed demand from market newcomers and existing tenants looking to expand.

Dennis H. Alberts, Crescent's president and COO, told investors the REIT's office occupancies in all metros, except Austin, exceed market averages. Corporate downsizing appears slower and shadow space is starting to "go away," he says. But, he says, it will be 2005 before occupancy and office FFO have a significant impact on the REIT's books. A "broker-friendly" approach, including commission checks at closings, provide a leading edge for deal-making. The portfolio is 88% leased, but it's predicted to hit 96% in two years. A one percent gain in occupancy translates to $5 million of FFO, he says.

This year's FFO gain, though, is tied to residential development, primarily second-home properties at resort holdings in Colorado and California held in a joint venture with Harry Frampton. Since Crescent went public, the JV's achieved $450 million in FFO in a sector with development tied to pre-sales and 20% down. Lots and condos, he says, are selling out practically as soon as marketing begins on new phases at the resort properties.