S&P Revises Outlook on Crescent Real Estate Equities.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

May 15, 2001--Standard & Poor's today revised its outlook on Crescent Real Estate Equities Co. (Crescent) and Crescent Real Estate Equities L.P. to stable from negative. In addition, the company's double-'B' corporate credit rating, single-'B'-plus senior unsecured debt rating, and single-'B' preferred stock rating were affirmed.

The rating affirmations and outlook revision acknowledge the company's success to date in its repositioning efforts, which have resulted in improvements in the company's business and financial profile.

The improvements are derived mainly from the disposing of noncore assets (for gains, on average), the lengthening of the debt maturity schedule, and the reduction of exposure to variable-rate debt. Financial flexibility has improved, as the company appears to be much less reliant upon asset sales proceeds to finance its modest near-term strategic growth objectives.

Crescent is a $5 billion Fort Worth, Texas-based publicly traded umbrella partnership REIT, which has grown rapidly since its 1994 IPO. However, the company has spent much of the prior two years in a retrenchment mode, due primarily to an opportunistic and unsuccessful diversification strategy. A new senior management team at the helm has had success in refocusing the company on its initial core portfolio of well-positioned Dallas and Houston office properties, which now comprise the bulk (about 70%) of Crescent's assets and funds from operations, with destination resorts/spas and residential development (16%) and other investments (15%) comprising the remainder. The company has received $320 million of net proceeds related to the sale of noncore office and other assets during 2000, and realized a $47 million net gain. The company has disposed of nearly all of its behavioral health care assets, after experiencing asset write-downs of about 25% of this $400 million initial investment. With the portfolio repositioning nearly complete, the company has begun to target growth opportunities, including about $131 million (total project cost) in office developments over the next few years, which poses a mild credit concern; however, the company appears to be prudently pursuing this two-project pipeline with solid pre-leasing in place and a financial partner involved in the larger Five Houston Center project.

Crescent's financial profile has improved modestly. While leverage has declined, the company did use portions of its significant asset sales proceeds to repurchase $281 million of common stock during 2000. In addition, fixed-charge coverage declined during the year, primarily due to increased average interest rate on debt, but it remains acceptable for the rating category at 2.5 times (x), or about 2.0x if off-balance-sheet investments are fully consolidated. Coverage is expected to stabilize and could modestly improve over the next few years due to lower borrowing costs (from recent refinancings) and anticipated embedded growth as below-market office leases roll to market rates. Despite the limited financial flexibility inherent in a nearly completely encumbered portfolio and a relatively high dividend payout ratio, Crescent appears to have adequate capital resources to meet its near-term strategic objectives.

OUTLOOK: STABLE

Crescent's new management team has shown success to date in refocusing the company on its core business. It is expected that Crescent will maintain a solid financial profile while continuing its capital recycling efforts and pursuing a moderately sized development pipeline, Standard & Poor's said. -- CreditWire