Returning in 1999 after a two-year hiatus from day-to-day management of Crescent Real Estate Equities Co., CEO John Goff found the company floundering and without a focus. Almost immediately, Goff and his management team developed a plan to resurrect the company. The main agenda was to concentrate on office properties and to begin exiting the under-performing businesses.

The game plan appears to be working. The company beat Wall Street expectations as it posted second-quarter funds from operations (FFO) of $.66 per share for a total of $81.4 million, which equates to a 4.8% increase over the prior year. Leading the second-quarter charge for the Fort Worth, Texas-based office and resort REIT was the office sector, which posted same-store, net operating income (NOI) growth of 7.6%.

“They [management] have done a tremendous job of meeting much of the strategy he outlined,” said David Loeb, managing director and senior analyst for Arlington, Va.-based Friedman, Billings, Ramsey & Co. “They [Crescent] continue to rationalize and monetize various investments that are outside their core businesses.”

Mapping out a strategy

Goff's vision of Crescent was a streamlined one. “The plan was to really turn the company around by cleaning up the balance sheet, selling off a lot of assets that weren't carrying their weight.” As Crescent began simplifying its structure, it was able to use cash from the sale proceeds of non-core assets such as Charter Behavioral, a group of psychiatric hospitals located across the United States, to pay down debt and make investments.

“First, we bought back [roughly $300 million] of our [Crescent] stock, because we thought the stock was really cheap,” Goff said. “The second thing we're doing is strengthening the balance sheet with that capital. In doing so, we're able to recycle capital back into markets and assets that we think offer substantial growth.”

The decision to buy and sell assets was part of the strategic plan. “We like to have a dominant position in the markets where we operate,” Goff said. “A lot of the assets that we've sold off were in markets where we neither had a dominant position, nor did we feel we could get one.”

Crescent's asset buying strategy is to purchase Class-A office assets in markets with fewer barriers to entry such as Houston, Dallas, Austin, Texas and Denver. About 70% of the company's assets are office properties. Within the next year, Goff wants to increase this number to 80%. Crescent both owns and manages the office facilities.

Another chunk of Crescent's assets, 16%, is invested in the resort and residential development sector. The company owns resorts with partners who developed the properties. In this sector, Goff describes Crescent's position as capital facilitators. The partners in the resort brands manage the daily operations of the resort properties. Crescent also has investments in residential development companies and business-class hotels.

Back to basics

This year the company is continuing its mission to simplify the business. In May, Crescent finalized $970 million of debt refinancing arrangements, which returned the company to the status of an unsecured borrower.

Then, in June, the REIT Modernization Act paved the way for Crescent to enter into a $78.4 million agreement to purchase its spin-off company, Crescent Operating Co., which manages resort, hotel and residential lease holdings. The deal is expected to close in the fall.

To further strengthen its position, Crescent has entered into two joint ventures in the office sector. “We created two strategic joint-venture alliances in the office sector, both of which have furthered our efforts in generating capital organically for future opportunities,” Goff said.

In June, Crescent entered into a joint venture with a pension fund advised by JPMorgan Fleming Asset Management. This venture gave JPMorgan Fleming a 75% equity interest in 5 Houston Center, Crescent's Houston office development project. Crescent holds the remaining 25% equity interest, and the company will manage the building upon its completion in 2002.

In July, Crescent announced a second joint venture with an affiliate of General Electric Pension Trust involving two of its existing office properties. GE Pension now owns an 80% interest in Four Westlake Park, a 560,000 sq. ft. office property in Houston and Bank One Tower, a 390,000 sq. ft. office property in Austin, Texas. Crescent realized proceeds of approximately $120 million with this venture.

Loeb, who just upgraded Crescent from a “market perform” to a “buy” rating, said that the company has made progress in focusing on what it determined were the core areas of its business. “Looking forward,” Loeb said, “I see a strengthening balance sheet, better dividend coverage, relatively strong earnings and growth prospects.”

Crescent at a glance

Crescent Real Estate Equities Co. is a Fort Worth, Texas-based REIT with 78 office properties located primarily in Texas and Colorado.

• NYSE symbol: CEI
• Price as of 8/2/01: $24.25
• 52-Week High: $25.24
• 52-Week Low: $19.50