D Magazine

The Big Deal Makers
by Sally Giddens Stephenson
July 1, 1997

RICHARD RAINWATER IS SOMEWHERE 37,000 FEET over West Texas, talking like a proud papa about one of his brightest children: Crescent Real Estate Equities Company, a publicly traded Real Estate Investment Trust, or REIT, based in Foil Worth that has been buying up Dallas as fast as it can. Flying at 540 mph in a Business JetSolutions twin-engine, wide-- body Challenger, he’ll be in Fort Worth before 1 can get there from my office near NorthPark Center.

But Richard Rainwater is used to getting there first. During the past decade, the former chief financial architect and deal maker for Fort Worth’s Bass family made his mark on Wall Street and a variety of industries, including high technology, oil and gas, health care, retailing services, manufacturing, insurance and gaming, just to name a few. Now Crescent is hard at work shaking up the real estate industry-although many of the company’s tenants and competitors might say "shaking down."

One of the REIT’s primary strategies to make money for its shareholders is to swoop in and buy enough Class A office buildings to dominate a market, then jack the rental rates through the roof. The Crescent folks are also known for taking the bully approach to business, squeezing brokers on commissions and making 11th-hour demands. They haven’t made a lot of friends along the way to being Dallas’ largest office landlord and, in fact, one of the biggest REITs in the world.

Two years ago, when Crescent purchased The Aberdeen on the Dallas North Toll way in Far North Dallas and subsequently leased it to several divisions of PepsiCo, there was no customary signing dinner to commemorate the $51 million deal. According to several people familiar with the transaction, Pepsi officials had no desire to fraternize with the guys from Crescent, who are said to have behaved like 800-pound gorillas during negotiations.

Yet Crescent president and CEO Gerald Haddock isn’t bothered by the company being labeled a little overbearing. "You would expect and hope that the acquisitions group of a company like this would be pretty aggressive." he says.

So far, for shareholders at least, all of the above is just more good news. Crescent’s growth since its initial public offering on May 5.1994. has been nothing less than phenomenal. And it shows no signs of slowing down. To the contrary, Rainwater says that his baby spent more than $800 million in the first 45 days of 1997 on acquisitions-and the way the pace is running, total purchases this year will approach $2 billion.

All of those deals are in Texas. And, Rainwater says, the buying has only started.

One transaction announced in mid-February-a buyout of Carter-Crowley Properties, a company controlled by the family of Don Carter-made Crescent die single largest office landlord in Dallas. The Carter-Crowley acquisition included 14 office properties totaling 3 million square feet in seven suburban Dallas markets. Also part of the package were 1,221 acres of undeveloped land, marketable securities, and equity and debt interests in the Dallas Mavericks NBA basketball franchise. The transaction was valued at $383 million.

As if that weren’t a full day’s work. Crescent was simultaneously in pursuit of the signature building named for another Dallas dynasty-Trammell Crow Center. Crescent refinanced the 50-story landmark office building in downtown Dallas for $162 million in cash. Harlan Crow, belying Crescent’s tough-guy image, says, "It was a gentlemanly transaction. They are smart guys and good negotiators."

A snapshot of Crescent at the end of May showed a company consisting of 72 office and six retail properties, primarily in Texas and Colorado, totaling 21.5 million square feet; 90 behavioral health-care facilities; four full-service hotels totaling 1,471 rooms; two destination health and fitness resorts; and economic interest in six single-family residential land developments.

While Richard Rainwater’s aura casts a golden glow over Crescent and certainly was key to the success of the company’s IPO, he rarely sets foot in the office and has little to do with operations. "Crescent would continue whether I show up or not," he says. "It’s like giving birth to children. You are always a parent. I feel the responsibility just like I do for the other 10 or so companies I have given birth to."
Instead, it is stellar performance and salesmanship under the guidance of vice chairman John Goff and CEO Haddock that have made the company’s two subsequent stock offerings record-setters. Among the 1996 highlights are a 55 percent stock appreciation, a 61 percent total return to shareholders, an II percent increase in annual dividend and a 14 percent increase in Funds from Operations, a REIT performance measurement that can be compared to bottom-line earnings.

Crescent raised $484 million last year in the biggest secondary stock sale ever by a REIT. That offering came on the heels of the PepsiCo lease, which Crescent highly touted in its prospectus, a deal that was more dumb luck than brilliance because, unbeknownst to Crescent, Pepsi had been quietly eyeing the building before Crescent purchased it.

Goff and Haddock took two Crescent teams on the road this spring from April 7 to April 22 to talk to major investors and brokerage houses, and as a result, they topped the previous record by raising $600 million more in equity.

"There’s tremendous demand at the individual level for a piece of paper like this that provides income and growth," said Rainwater just after completion of the third offering. "All 24.5 million shares could have been sold entirely at retail from one brokerage firm." Of course, all of the stock was not purchased by one firm for individuals, because institutions are clamoring for it as well. Some 70 percent of Crescent stock is held by institutions.

So why is this such a hot investment vehicle right now? REITs, which had earned a bad reputation among investors in the ’70s when many of them became overextended and failed, became attractive again in the early ’90s when low interest rates on money markets left investors hungry for better returns. REITs were paying 6 percent and higher and offered the hope of long-term gains as well.

Today, REITs are the closest thing investors can get to the tax shelters of the ’80s, because they are exempt from corporate income tax if, among other things, they distribute at least 95 percent of net income to shareholders as a dividend.

With real estate still severely depressed in Texas in the early ’90s, the upside looked good to Rainwater. He knew Wall Street, and, more important. Wall Street knew him. The vast majority of REITs traded then and today are run by real estate veterans who are not at home on Wall Street. It was easy money to Rainwater and his partners, who had profitable experience with the stock market. Haddock, a lawyer who earned his B.B.A. and J.D. degrees at Baylor University, had been working with Rainwater since 1984, structuring and negotiating corporate and real estate transactions. Goff, a graduate of the University of Texas and once a KPMG Peat Marwick CPA, had served as Rainwater’s senior investment advisor since 1987.

So Crescent Real Estate Equities Company was born by joining forces with Rosewood Property, owned by Caroline Rose Hunt and her family. Rosewood put in the five-building Crescent complex in Dallas (thus the company name), and Rainwater put in Continental Plaza in downtown Fort Worth and MacArthur Center in Las Colinas, plus residential developments in suburban Fort Worth and Houston.
In the beginning, Rainwater’s role was to provide the vision and the strategy and put up the original capital, Goff’s was to test that strategy and execute it on a daily basis, and Haddock’s was to make sure everything worked. In December, the triumvirate at Crescent moved up the food chain. Rainwater says, with Goff setting strategy and Haddock executing it.

"Gerald and I use Richard in dropperfuls," says Goff, "when he can be helpful in a deal and from a strategic standpoint to apply his view of the world on a day-to-day basis."

Sometime in May, Goff was to begin concentrating his efforts on a new company. Crescent Operating, Inc., a spinoff for Crescent’s non-real estate assets. Because REITs are required to have 75 percent real estate assets, the new Crescent Operating would hold 50 percent interest in Magellan Behavioral Health, 100 percent interest in the financial operations of Crescent’s six hotel/resort properties and the minority ownership share of the Dallas Mavericks. The purchase and subsequent spinoff of such diverse assets sets Crescent apart from other REITs. This company won’t be confined to a narrow definition.
While growing to be one of the largest REITs in existence, Rainwater, Goff and Haddock have put their money on the line right along with investors. Haddock writes in the company’s lengthy 1996 annual report: "John and 1 have dedicated over 80 percent of our net worth to the success of this company. Richard committed $100 million of his own funds to the creation of the company’s original portfolio and, subsequently, invested $66 million in our first two stock offerings. Today, his holdings represent $400 million or approximately 30 percent of his net worth."

John Goff sits at his big, white desk in Crescent’s open offices in downtown Fort Worth. You can write on any wall in the place, and there’s a multimillion-dollar deal being hammered out in every scribble. Goff is armed with two phones-he’s often on both at once-and a computer with stock quotes constantly running across the screen. He’s just recovering his voice, which was ravaged on the company road show that kept him talking about Crescent’s strategy and track record from six in the morning until eight in the evening for more than two weeks. Integral to Crescent’s strategy is the Dallas story, since Dallas was the primary testing ground for the theories formulated in the early ’90s by Rainwater, Goff and Haddock. The strategy is simple if layered: Identify cities expected to outperform national averages for office employment growth (read: office space demand). Within those cities, zero in on the healthiest markets. Find the properties in those markets that are the highest quality. Buy them all.

"Crescent acquires markets not buildings" is a quote commonly attributed to Haddock, who wrote in the ’96 annual report, "After all, when you find a good thing, why not gel as much as you can?"

But, of course, it’s not like buying ice cream. Market dominance carries with it a great deal of power. In Las Colinas and Far North Dallas, where Crescent is the largest office landlord, the company has begun to raise rental rates for new and renewed leases by 25 percent and 30 percent.

Crescent expects to do the same with its more recently acquired properties. Rents, for example, at the company’s flagship property, The Crescent Office Towers, are in excess of $30 per square foot, while at the recently acquired Trammell Crow Center nearby, they are only S2I per square foot. Crescent plans to jointly market the buildings and expects that rental rates at Trammell Crow Center, which is roughly 20 percent vacant, will soon be more in line with rates at The Crescent Office Towers.

And with its strategy thoroughly tested in Dallas, Crescent has moved on to Denver, Phoenix, Austin, Houston and New Orleans.

Here Rainwater’s vision reenters, says Goff. If Rainwater thinks a boom time is coming for oil and gas, then the attitude at Crescent is "Let’s buy Houston." If Rainwater’s vision sees baby boomers seeking quality leisure destinations, the attitude at Crescent is "Let’s buy the best resorts in the world."

And as long as Crescent performs well enough, the company will have access to more and more capital, and the buying will continue.

GERALD HADDOCK IS BREAKING UP. HE’S ON HIS CAR PHONE somewhere between Dallas and Foil Worth, having jus! spoken to some 250 people at a business forum at Cityplace in Dallas. This telephone interview did not come easily. Gerald Haddock is a busy man; his time is valuable, and he’ll tell you about it.

Now that Goff has passed him me baton, Haddock says he spends a substantial amount of time passing Crescent’s corporate culture on to the real estate talent that operates the company’s properties, essentially blending the corporate vision that comes from Rainwater, Goff and Haddock with the acquisitions team, headed by former Dallas Cowboy Jim Eidson, and the people on the property level. "Our strength today is we have put together a coherent, competent core group of 275 people," Haddock says.

This team will be charged with keeping Crescent on top if and when the company’s acquisitions mode slows. To keep Funds from Operations climbing. Crescent’s challenge in the years to come will be to manage properties profitably for the long term, which involves maintaining relationships with tenants and keeping them happy-a task that takes a kinder, gentler touch.

According to Rainwater, though, that kinder, gentler touch won’t be needed for some time. "There’s a trillion dollars worth of real estate to be owned by me public marketplace." he says, "and 100 billion is owned now. The securitization of real estate has just started, and it’s not about to be over. If you take a look at what we own in Dallas, we could double the size of the company focusing on Dallas alone."

So, Dallas, keep your hand on your wallet and say hello to your new landlord.