Crescent Expects $2B-Plus Harvest From Sales

Crescent stock historically has traded at significant discount to its portfolio value. "I think people will be amazed at how under-valued that stock has been for several years," Stephanie M. Krewson, a BB&T Capital Markets Equity Research analyst, tells GlobeSt.com. "Fast forward to the end of this year, and I think, the disconnect at which Crescent has traded for years will have evaporated." She pegs the stock's value at $26 per share whereas the NYSE's 52-week range has been $17.54 to $23.93.

Krewson, like the majority of analysts, supported the Fort Worth-based Crescent's tactical plan to shed all resort and hotel properties, part with its resort residential developments, sell significant stakes of the office portfolio and cut operating costs to repackage itself as a ""pure office REIT" with less debt, development opportunities and a crown jewel portfolio. But until now, she's been one of the few to place a "buy" rating on Crescent.

Krewson says Crescent's public markets' presence will be "noticeably improved" if it can execute on the plan that it has laid out--and should result in the company and the office portfolio becoming "more approachable" for suitors. Not for wanting, but Crescent hasn't been able to follow its peers into a big-ticket buyout by the private capital markets.

"It's always been a superior manager," Krewson points out. "What they are doing is leveraging their human infrastructure. They are doing what's right for their shareholders."

Crescent plans to complete the makeover before the year ends. "There are questions about this being a lot to execute," says John C. Goff, the REIT's vice chairman and CEO. He says Crescent's past speaks for its ability to do what it sets out to do. "We have surgically removed those pieces that are highly valued by the public markets, but we're not taking out any critical assets from our office strategy," he tells GlobeSt.com.

The only non-office components that will remain are Atlanta-based AmeriCold Realty Trust and Canyon Ranch developments in Lenox, MA and Tucson. Goff says all options being explored with the Canyon Ranch partners.

Goff's philosophy is well-known in the industry: don't fall in love with your real estate. The assets that are being held are being done so for their long-term value and not sentiment, even the prized Crescent in Dallas' Uptown. All assets, Goff stresses, were on the possible sales block as the management team ran more than 4,000 computer models of outcome scenarios. "We gathered our emotions into a box, left it outside the door and went into the room to do our work," he says.

Goff says it wasn't easy to run in silent mode during the four-month brainstorming lockdown. "It's difficult to go this long and not communicate. It's hard for me not to communicate, but we came out of the bunker today." Next week, he will be at Citigroup's CEO conference, where more questions will be lobbed about the emerging pure office REIT.

Crescent's portfolio is valued nearly $2.5 billion. During the conference call, Goff says the sales could yield more "well over $2 billion of gains." The plan is to start marketing the properties in April. In essence, Crescent plans to part with 60% of its gross assets, deploying gain into lowering its $2.1-billion debt load. It plans to leverage the future by repaying the present and setting a plan into motion so it can borrow capital at cheaper rates for development and acquisition initiatives.

The New York City-based Lehman Brothers has been hired to market resort and hotel properties. JPMorgan & Co. has been tapped as the investment bank. As reported earlier today, a Holliday Fenoglio Fowler LP in Dallas/Fort Worth will be selling 3.1 million sf in suburban Dallas, 301 Congress in Austin and the REIT's lone holdings in Seattle and Phoenix. CB Richard Ellis also won a place at the table, getting a contract to hawk the balance of Crescent's Austin portfolio.

Crescent intends to immediately start operating in its new form. When the dust clears on the sales, the office REIT will have 22.6 million sf of managed space in its joint venture partnerships and 14 million sf of owned trophy space. Underwriting the strategy is a projected rent growth of 15% to 20% in the coming years and NOI growth of 3% to 5% annually for several more years, according to Crescent's president and COO Dennis H. Alberts.

On the development front, Crescent has enough banked land in prime markets to build more than three million sf of class AA office buildings. In Dallas, the team's sizing up projects for land in Uptown, the Tollway near the Galleria and Central Expressway in Richardson. In Houston, Crescent is in planning stages for a 600,000-sf 6 Houston Center. And in Las Vegas, it's wrapping up work on a 240,000-sf addition to Hughes Center and planning to start a 175,000-sf building right next door.

With the change, Jerry R. Crenshaw Jr., part of the founding team, will be stepping down as CFO and managing director and moving into an interim advisory capacity. Also leaving will be Kenneth S. Moczulski, managing director of investments. In turn, Jane E. Mody, managing director of capital markets, will assume the CFO duties and Suzanne M. Stephens, senior vice president and controller, will become chief accounting officer. Managing directors of investment Paul R. Smith and Thomas G. Miller will assume Moczulski's duties.

Goff points out that 12 office companies have gone private or merged in the past two years. "This has opened up a void of options for the public market for a pure-play office REIT," he told shareholders and analysts. "We have the fuel to grow what we think is a very powerful business."

And Goff has ponied up out of his own pocket to show his confidence in the company and plan. Through options and outright purchases, he recently paid more than $18 million to ante up his stake in Crescent by another one million shares.