世邦魏理仕集團 (CBRE) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Trammell Crow Company first quarter conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session; instructions will be given at that time. If you should require assistance during the call, press "0" and then "star". As a reminder, this conference is being recorded.

Now, I'd like to turn the conference over to Mr. Gerard Carney [phonetic] of Torrance Company [phonetic]. Please go ahead.

Good morning, and thank you for joining for management's discussion of Trammell Crow Company's first quarter 2002 results. This is Gerard Carney of TorranceCo in New York, Trammell Crow Company's investor relations firm. This morning we faxed the earnings release to each of you and hope you have had a chance to review the results. If there's anyone on the line who requires a copy of the release, please feel free to call my office at 212-521-5233 and one will be faxed to you immediately.

This call is also being taped and will available for playback until next Wednesday, May 15. Again, please call my office if you would like the playback number. In just a moment Trammell Crow Company's management will provide an overview of the first quarter results and then we will open the line up for a Q&A session. However, before I introduce management, I would like to remind you that comments during this call may include certain forward-looking statements. Actual results and the timing of certain events could differ materially from those projected in and or contemplated by the forward-looking statements due to a number of factors, including those set forth in the company's 2001 form 10K as filed with the Securities and Exchange Commission.

On the line with us today are Bob Sulentic, President and CEO of Trammell Crow Company and other members of the company's senior management. At this time I'd like to turn the call over to Bob.

Thanks, Gerard. And, thanks to everybody for listening in. I'm going to introduce a few people here before we start. Derek McClain, our Chief Financial Officer whose with us; Pryor Blackwell, President of our Development and Investment Group; Bill Concannon, President of our Global Services Group; and Arlin Gapner [phonetic], our Chief Accounting Officer.

Derek will start and give us a little bit on the financial performance of the company. Then Bill, Pryor and myself will come back and talk to you about our operational results.

Thanks, Bob. Our first quarter results are characterized by the following: first, a dramatic increase in facilities management revenue, resulting from wins and expansions during 2001. That line was up over 27 percent. Second, significant revenue declines in transactional business due to the economic slowdown. As we mentioned in our release, brokerage and corporate advisory services were down a combined 16.8 percent and development and investment revenues were down 18.3 percent. And, third, significant cost savings that allowed us to perform on a bottom line basis consistent with expectations.

Unreimbursed salaries and benefits were down about 13 percent and G&A was down about 6.5 percent. The end result is that we reported earnings per share of a penny, compared with earnings per share of breakeven, or no cents, in the first quarter of 2001 on revenues that were down 2.4 percent from last year's first quarter.

Comparisons of the quarter's results with last year's first quarter are also affected by two accounting items. First, consistent with FAS 142, we no longer amortize goodwill. Approximately 1.1 million of goodwill was amortized in first quarter of 2001, but for the new rule we would have amortized around 900,000 of goodwill in the first quarter of 2002. Second, as required by FASB 133, about 1 million of interest that would otherwise have been expensed in the first quarter of 2002, was instead booked against the liability we established in 2001 when we took charges marking to market our interest rate slop [phonetic]. Our segment results were impacted by the factors I've already mentioned. Global services total revenues were down less than 1 percent, but the shift in revenue composition, away from transactional revenues with a higher contribution margin, toward facilities management revenues with a lower contribution margin, had an adverse impact on profitability.

Global services results declined quarter-to-quarter from pre-tax income of 2.8 million in the first quarter of 2001 to a pre-tax loss of around half a million in the first quarter of 2002. The global services pre-tax income for the first quarter of 2001 has been restated to roll-in that period's loss in the e-commerce segment, consistent with the elimination of that segment at the beginning of 2002 when operational responsibilities for our e-commerce activities were transferred to management of the global services group.

Development and investment revenues were down from 19.5 million in the first quarter of 2001, to 16.2 million in the first quarter of 2002, but profitability improved from a pre-tax loss of 2.7 million in last year's first quarter to pre-tax income of around 800,000 in the first quarter of this year. And, the improvement is due to cost cutting and the elimination of certain unprofitable business units.

With regard to the remainder of the year, at this point, we don't really see any significant signs of improvement in market conditions. We're sticking with our EPS target of a 20 to 25 percent increase from last year's adjusted earnings per share of 64 cents, but we've indicated that we expect our second quarter EPS to be negatively impacted by about 2 cents due the expected write-off of pursuit costs in Trammell Crow's saddles that relate to a very large international deal that had elements of both an acquisition and a very large outsourcing contract. After being selected as the exclusive negotiating parting on that transaction and working on the deal for over a year, we lost the deal just last week when the party with whom we where negotiating withdrew from the transaction. We'll absorb the impact of the pursuit costs write-off in the second quarter results in the global services segment. That said, we're now expecting to post second quarter EPS of 10 to 15 cents.

From a balance sheet perspective, borrowings under our $150 million line of credit increased during the quarter consistent with their seasonal pattern. Annual incentive bonuses for a large portion of our employees are paid during the first quarter, which is also generally a low point in the year for us from a cash flow perspective with transactional activity generally concentrated late in the year.

Borrowings under the line of credit, including a short-term facility that gets closed to the line, rose from 49.5 million at year-end to 69.7 million at March 31. as a point of historical reference, borrowings under the line were 84.5 million at the end of the first quarter of 2001. It's important to point out that we continue to be cash flow positive even in these tough times. We had positive cash flow of over $4 million in this year's first quarter and expect substantial positive cash flow for the year.

With that, I'll turn things back to Bob.

Thanks, Derek. I'm just going to make a couple comments overall on what we're seeing operationally and then Bill and Pryor will comment more specifically on our respective areas of the business.

First of all, we did [technical difficulties].

Ladies and gentlemen, please continue to hold, we've temporarily lost contact with the host site.

Okay. Gerard, can you hear us now?

You're clear.

Okay. I'm going to start back over. I'll give a few brief comments on generally on how we're seeing things operationally and then Bill and Pryor will comment more specifically on their areas of responsibility.

In general, the market remains difficult still. We achieved what we expected to achieve in the first quarter, but that was not through revenue, a lot of that came through cost control, which was an important initiative for us. Company's incorporations are not yet in the mode of hiring people or taking space. There's some signs in the economy that things may be turning around, but I don't think that the business community at large has felt that turnaround yet. And, in fact, when they do feel that turnaround, some time within a few months thereafter we should feel it. So, we continue to be in a difficult market now.

But, even in the environment we're in now, there are a number of opportunities for us to improve us business. And, notably the outsourcing trend, outsourcing continues to be a strong trend and we continue to be aggressively participating in that trend. So, that's good news for us.

Some of the shift in focus in the areas of business we're pursuing, particularly in our development, build to Suites, medical facilities and higher education facilities, Pryor will talk a little bit more about that. But, those elements of our business tend to not cycle with the rest of the economy and we're gaining some momentum there, so that's good news.

Becoming better, fundamentally better operationally. We've got a lot of room for improvement there and we're making improvements. Things like cost control, things like better quality products are a big part of where we're focused now and we're seeing some momentum in progress there. And then another big area of focus for us right where we think there's an opportunity is just brining on new professionals in various parts of our business. in general, in our industry, people get demoralized when the cycle is where it's at right now and there's an opportunity to move very good people into our company in response to that. And, so we're taking advantage of that opportunity. Again, Bill and Pryor will comment a little bit on that.

Specifically, if you look at the areas we're focusing on in our business, on the global services, just growing that base business. It's not going to be as profitable growth as it is when the market's hot, but it's very important to position us to level off that base of business as the cycle turns around. Quality and customer service are a big focus. We've got a number of initiatives underway there and our Chief Operating Officer on the global services side, John Stoic [phonetic] is making it his absolute top priority to improve our company in both those areas.

A big, big area of focus is driving cost control into our culture, as opposed to just having it be a crisis response, you know, this industry cycles and we tend to respond to cost issues when it cycles. But, the fact of the matter is, we have an opportunity to become a much better company by just making that an ongoing part of our culture, and both Bill and Pryor are very focused on that.

On the development investment side of the business, Pryor will talk more about all of this, asset management is a big focus, very necessary at this point in the cycle. These thematic areas of development that I already mentioned, higher education and healthcare, we've got key people responsible for each of those areas now and we're driving hard in that regard. Capital markets and identifying new sources of capital. There's still capital out there for real estate and in particular there still sources of capital that are interested in various types of programs. So, we're focused on that. And, we think that at this point in the cycle we can take advantage of the lack of opportunity that some of these capital sources are seeing from others.

On the financial side of our business, two big areas of focus, keep the balance sheet strong and we've been out --Derek and I have been out talking to a lot of our large investors. That's something they really want to see and that's something we're really doing. So, we're going to keep the balance sheet strong and then cash flow. We will have cash flow this year significant cash flow, and even in a quarter like the first quarter, where we basically broke even, we had cash flow, as Derek described.

Another big area of focus for us is the moral of our team. I mentioned a second ago that in our industry when it cycles down, it can be pretty tough on oral because so many of the people, so many of the people in our business have their personal income tied to productivity and productivity's tough when the market's down. And, in addition to that we've cut costs, which means we've cut jobs. So, there's been some moral impact that we've had to face in the last year. We're very focused on building that moral back up. Last week we had our annual principles meeting, which is roughly 180 senior people in our company. We stressed very aggressively at that meeting the things that we talk about in our annual report this year: our mission, our strategy, customer service, the fact that we can take ground even in a down market. We implored our people to kind of see beyond the short-term problems that the industry's facing. And, I will tell you that in my view, the moral of our senior leadership team is better than it's ever been at a tough point in the market cycle. and, it was a very encouraging meeting for our team.

Finally, with regard to our outlook, Derek already commented on that. Basically, we see the year as we saw it at the end of last year. We expect an outcome much as we expected before. Notably, even though we're at a tough point in the cycle, this year's going to be better than last year. And, the reason this year's going to be better than last year is because some of these operational improvements we're making. So, that's very encouraging. And, then, of course, when the market cycles back up we hope to be positioned for very substantial gains.

With those general comments, I'm going to turn it over to Bill to comment specifically on global services.

Thanks, Bob. Similar to what Bob and Derek have said about our overall Trammell Crow Company's revenues, our global services business performed inline with expectations with quarterly revenues that are comparable to what we earned in the first quarter of 2001.

In terms of cost, first up, as Bob just said, we are very focused on all costs related to the business. during the first quarter we continued to manage costs at all levels and are continuously and aggressively assessing the cost structure we have in each of our key business lines and geographic markets as well. Our approach will allow us to be proactive to changes we need to make based on where we see the business, including reevaluating certain contracts that are not as profitable as we expect.

We will be proactive on all aspects of cost savings and profit expectations in the service lines and customers we're in business with. And, we're also seeing our customers, both on the institutional side and the corporate side, continuing to drive their decision making around cost containment as a priority in their portfolios. This year we will continue to work towards our four-pillar strategy, which we formed last year. Those four pillars being large markets, large customers, a focus on reinventing the service delivery, as Bob just mentioned and unifying sales.

Operationally speaking, as part of our large customers pillar, we are placing extreme focus and emphasis on expanding relationships with our existing customers. And, we're doing this by dedicating ourselves to becoming operationally excellent. And, for us, what that means is doing all the things we do for our customers better than we've ever done them before and better, frankly, than anyone else in the industry is performing them. This means building the bench strength of the -- our people, making our service quality more consistent and using technology to be more efficient.

I just returned from a corporate real estate conference called CorNet Global [phonetic], which is made up of 6,000 members of corporate real estate provider -- corporate real estate organizations and service providers like Trammell Crow Company. The feedback is the business across the industry is down. Large corporations that typically have 8 to 10 percent vacancy in their portfolio are showing 20 percent vacancy. And, with that volume of subleased business in front of us, those fee dollars are harder to earn, but probably more appreciated than any other dollar of fees we earn.

I think our portfolio advisor strategy where we involve our best brokers and make them accountable for our major customers has gained tremendous momentum in the first quarter. And, that is [technical difficulty] really help us in this time of slowdown in terms of these large portfolios.

So, because of our focus on existing customers when the market turns, we're going to be more efficient and a more process driven company. And, we'll be in a stronger position to grow. In terms of growth, in a softer market like we have today, we have already seen the benefits and results of our focus on our existing customer base through expansions of Bank of America, McKesson, Exxon Mobile and EDS, among others, along with the continued growth of our top institutional clients.

During the first quarter we were fortunate to add new contracts in both our investor customers such as Beacon Capital, Invest Corp, UBS Global Asset Management and other corporate customer business. so, strengthening our relationships with these large customers will help us achieve more accruing revenues.

We've also signed new multi-year contracts this quarter with Shell Oil Corporation on a major rebranding program and World Travel for lease administration and transaction management services, becoming their national real estate provider. We have also added over 6 million square feet with new property management this quarter with favorable reviews coming from our existing clients.

In terms of new business, as you know, we track closely our new business pipeline and I'm very bullish and optimistic about the outsourcing pipeline in our portfolio advisory pipeline, because our outsourcing advisors and portfolio advisors have reported very strong activity in all of these opportunities.

So, with that, I will turn it over to Pryor Blackwell.

Thank you, Bill. I hate to pile on, but it continues to be tough sliding out there in development and investment areas as well. As reported earlier, our revenues declined from 19.5 million in the first quarter of 2001 to 16.2 million for the quarter just ended. That said, I am encouraged by the results of the cost controls actions we initiated last year as evidenced by the improvement in income before taxes from a loss of 2.7 million in the first quarter of 2001 to an income of 800,000 in the first quarter of 2002.

I'll be brief in my comments today, but I am pleased to report that we continue to make progress on all six of our previously described initiatives and rather than report on each individually, maybe, instead, I'll just give you a few highlights. First and foremost with respects to expense control and the sizing of our business, we will continue to be rigorous on costs and make adjustments as necessary. I'm also very pleased with the progress of our capital markets team, particularly with respect to managing our balance sheet risk and maintaining the rigorous underwriting and deal approval standard.

I'm happy to report that after reviewing our in process deals in the first quarter, we found no impairment. We did experience a modest reduction in our end process volume from roughly 4.9 billion to 4.6 billion. This is largely due to the completion of a large healthcare project and the sale of the facing business. I'm pleased to report, though, that we initiated eight new projects in the first quarter, six of which were healthcare build to suite related, four, actually were corporate build to suites, two in healthcare, further evidencing our conscious shift toward more risk mitigated activities.

I'm also pleased, I mentioned in the first quarter -- I mean, in the year-end call that we were pursuing and close to hiring an individual to lead our acquisition effort. I'm happy to report that gentleman has been hired. His name is Jeff Chavez. Jeff has 17 years of real estate experience, most recently as a senior executive, a managing director and a member of the investment committee of Croix Family Holdings [phonetic].

I'm also pleased to announce the promotion of Tom Liser [phonetic], an 18-year Trammell Crow Company veteran, most recently in charge of all development investment activities in the Dallas/Fort Worth market. Tom has accepted a new role as the senior managing director of national initiatives. And he will, in this role, assume overall responsibility for our build to suite higher Ed, healthcare and airport development initiatives. Tom is personally been responsible for over 100 development deals in the last 18 years and has a reputation for high-quality projects with compelling profitability.

We continue to enjoy a health pipeline and are making nice progress toward our strategic initiatives. The number of exciting prospects in healthcare, higher ed, and airports, are note worthy and I expect that Jeff, when he joins us this summer, will make progress throughout the year and we should, beginning next year, begin to see the results of our efforts in the area of acquisitions.

So, in summary, I'd say while the market remains tough, I'm pleased with the quality of our pipeline, our plan, and our progress. And, coming out of the first quarter I can see how our strategy, the strategy we've put in place in 2001 will help us through another difficult year in the economy. We'll continue to work tirelessly to produce compelling results and I appreciate the opportunity to report on our progress.

Thanks very much, Pryor and Bill. Let's go ahead and open it up for Q&A now.

Our first question today is from the line of Matt Estroyer [phonetic] with Morgan Stanley.

Good morning. Just a quick question -- a couple quick questions, one, you talked about the negative impact of a couple pennies in the second quarter, but you're keeping your annual guidance constant. Can you sort of describe something, obviously, is doing a little better than you thought. Can you describe how it's making up for that for the year?

Matt, I tell you, you know, it's just the, kind of the level of precision and the guidance in the first place, you know, 20 to 25 percent up from 64 cents adjusted number last year. I guess what I'd tell you is we just think that that's something that we should be able to absorb and still make our number.

Okay.

And, Matt, this is Bob. I'll add to that by saying in the course of the year, as you know, we have elements of our business that are more process oriented, the management side of the business, more predictable. And, then we have significant, very significant transactional elements for the business. They'll be big things that happen that we don't expect and don't happen that we do expect over the course of the year. So, that when you sit there a year in advance and try to pinpoint where the outcomes going to be, you acknowledge and accept the fact that there's going to be a handful of these moderate size events that will move in and out over the course of the year. Unless we saw a trend to suggest there's moving in one direction than the other, we wouldn't be inclined to change our annual guidance.

Great. And, then on this charge this second quarter, are you -- I guess it leads me to the question are you thinking about doing other acquisitions? This, obviously, was one thing you were exploring, are there other things that you're exploring on the acquisitions front?

I'll answer than and then I'll ask Derek to give you his view on it. We're not aggressively looking at acquisitions, Matt. We're aggressively looking at making our operations better, doing a better job for our customers, hiring really good people that are available in the market now because of where we're at in the market cycle, improving our products, keeping the moral of our people up, all those things, that's where the big focus is. We will have our antenna up for what we would consider to be extraordinary acquisition opportunities. But, we won't get below extraordinary opportunities to get them done. We'd just as soon let the cash flow come in, reduce our debt and keep our powder dry for the future before we'd yield to the pressure to do deals just to get deals done.

So, it's not a front and center part of our plan this year. By the way the thing that we talked about, the European thing, we thought it was exceptional. I think that the company that we were working with thought it was exceptional. But, there just in the end wasn't enough overlap and neither company felt like it could back off. We certainly didn't feel like we could because, again, we're going to keep our standards very high. But, the good news is in the course of that we established a very strong relationship with a large, prominent international corporation and we're going to continue to work with them to figure out ways to either serve them or do business jointly with them.

Okay.

The only thing that I'd add to that, Matt, is that that has as much, if not more, of a flavor of kind of a long-term outsourcing contract as it does an acquisition. So, I wouldn't want you to think that, you know, we're on the acquisition trail.

Yes, we don't--.

That was a bad piece of business.

That was the more interesting part of it, frankly.

Okay. And, then on the property management side, I continue to see, it sounds like you're selectively letting go some of these institutional management contracts. Is that what explains the decline in property management revenues on that side of the business?

Yes. I'll comment on that again, Matt and let Bill follow up if he wants to. This is something that is awkward to talk about, but the fact of the matter is, as you go through a good economy in a cyclical business like ours and a transactional oriented business like ours, you tend to do some things that you wish you hadn't done with the benefit of the hindsight. One of those things in you add people. You add businesses and you add accounts, which makes sense in a good market and don't make sense in a bad market. Now, most of what you add, hopefully, will sustain into a bad market and you'll be happy you have it. But, you'll have some of each of those three things: people, business units and accounts that don't work when the market turns.

We're trying to exit all three of those things aggressively. And, we got most of that exiting done last year and some of it was identifying business that we couldn't make money at. And, we're huge intelligence his arena of customer service, but part of good customer service isn't losing money working for customers. So, on accounts, where we're losing money we're going to exit them. We had a few of those on the institutional side, the traditional property management side, we had a much smaller amount of that on our corporate business, but in the end, we even had a little bit in our corporate business where we were serving customers at margins that were thin but worked when times were good, and were thin but didn't work. They were thin in the other direction and didn't work. And, so that's exactly what you're seeing there. We closed a couple small offices where we had some industrial property management that wasn't profitable. It only made sense because we had transaction business that went with it during the good market transaction business went away and it didn't look like it was going to come back and the management stuff didn't work so we exited that.

We had a couple corporate outsourcing accounts, FM accounts where we, in the end, we just couldn't make money and we had good people dedicated to them, so we're going to move those good people on to assignments where we can make money.

Is that -- is it swinging the needle and we've always thought of your profit margins in that business as being sort in the low single-digit range, is that noticeably moving your margins? Should we be thinking about that differently going forward?

Well, you should think of our margins long-term in the high single-digit range, first of all, and they're in the low single-digit range in a year like last year and part of getting them back up to the high single-digit range is getting rid of the business that doesn't work. And--.

You're talking about property management specifically, right, Bob?

Property and facilities management both.

Okay.

Yes. Bill, do you have anything?

No, I think that's it. I mean some of this that we really proactively exited, Matt, you know, we've tried to go out and buy, as I mentioned, expanding existing customers. We've added back 6 million square feet of better business that we think, long-term, is business we can care for better. And, that we're in, you know, a better position to growth from there.

Right. Last question, I'm sorry to hog the floor, just on the international capital flow side, this may be a question for Pryor, are you -- we're sort of hearing from other companies that we cover that there are significant amounts of international capital, sort of looking at U.S. real estate. Is that something that you're noticing as well? and, how do you see that affecting your business?

Matt, we have a number of domestic capital partners that we're working with. And, we are working very hard to find opportunities for them. Now, I would say in general we have more capital available with our domestic capital partners than we do deals to give to them right now. And, as a result, that's where our focus is. Pryor, you might want to talk about Tom McNearny {phonetic], the guy you put in charge of capital markets and where his focus is.

I will tell you it's not raising capital internationally.

No, Matt, we've spent no time focused on that. In fact, I'd say we've spent all of our time making sure that we're directing the opportunities that we are encountering to our existing capital relationships and to other -- well, I'll tell you, basically that's it.

Great. Thank you.

Matt, let me just dwell on that for a minute. But, in the more we can get people to understand our development business and investment business, the better off we'll be. That business is centered around doing development work for other people, not for our own account. And, central to that strategy was to find capital partners that, through all points in the cycle, wanted to do a reasonable level of development, because they wanted to, on a long-term basis, grow their portfolios. That worked extremely well for us. The reality of it is right now, we've got this half dozen or so capital partners very, very much wanting to grow their portfolios. And, us not being able to surface enough deal flow, given the point we're at in the cycle to keep them happy. That's exceptional news if you understand the history of our business. that's one of the problems we want to have.

But, as part of that, it would by definition suggest that we're not going to be aggressively, you know, searching out capital in all corners of the earth.

To say it another way, Matt, we're finding more capital than we have good deals.

Right. So, said it even another way, the international sources may be serving, to some degree, as competition for getting business for your Houston clients?

Yes--.

Well, I suppose that's possible. We haven't seen it surface as a compelling model yet.

Okay. Thank you.

We have a question from Will Mertz [phonetic] with Joelson Return Partners [phonetic].

Good morning everyone. I had a few quick questions. First of all, the -- can you refresh me, Bob or Derek, on the guidance for the full year?

We said that we were targeting earnings per share 25 percent up from the adjusted 64 cents we reported last year. And, then, we, at the time we reported on the full-year 2001, we said we expected results to be around breakeven in the first quarter and for the -- as they were in the first quarter of 2001. and, then for the earnings to be spread over the reaming three quarters of the year and roughly the same percentages they were in 2001. And, I think if you do the math, you know, that works out to around 15 cents for the second quarter.

Okay. What is --what was the comparable number for the first quarter of `01 using with 142 taken into account?

Are you saying -- well, the depreciation and amortization that flowed through our results in the first quarter of 2001 was 1.1 million.

Okay.

And, of course, then in the first quarter this year nothing flowed through.

Right.

If 142 had not been adopted by us effective 1/1/2002, we would have flowed through 900,000 of amortization of goodwill in this year's first quarter.

Okay. Okay, a question for, I guess for Pryor, maybe you can -- on the healthcare and the airport business and the education business, can you tell me a little about the competition? I feel like I don't hear about it from of the other public companies in your sector?

Well, increasingly it's becoming some of the other companies in our sector. But, I would say it's been largely comprised of different groups of service providers that have a pretty small group of service providers that have really worked within those two arenas without a lot of competition, frankly. And, so, we've -- but in terms of specifically who, companies like Aero Mark and Service Master and some of the more traditional, you know, facility or project management type work. And, then on the airport business there's a handful of companies that are also competing in that, most of which are not companies that I think you'd be familiar with.

The other thing on that, Will, is that's a pretty -- our traditional business is fragmented, but that's a really fragmented business. You'll get a universities, for instance, you'll get construction companies that have people who have in tier management team who have been big contributors to universities. That will have a relationship with the university and they'll fill the project management role as a general contractor. You're got everything in the world going on there and part of the opportunity is to organize that thing a little bit. And, that's what we're trying to do.

Okay. One other question, the -- one the jump line with Saul conference call, they mentioned that they --I think they see the -- some of the transaction business starting to pick up a little bit and they think that looking at historical numbers, when that does pick up a little bit, it's a signal indicator that the rest of the business is on its way up. Can you comment on that at all, what your feelings are?

I would say that it's very accurate to say that the transaction business picking up is a predictor of the whole business picking up. I have to tell you, we haven't seen -- I mean there's antidotal evidence that things are picking up. You know, you'll talk to somebody in LA who will say wow, it's getting better because I'm working on a deal, or, you know, somebody in Chicago that's working. But, that's truly antidotal evidence. If you look at the numbers for the whole industry and we've tried to review the numbers for the whole industry, or if you look at our numbers in terms of actual transaction revenue there's not broad based evidence that it's picking up yet.

But, I would agree with JLL's statement that it's a predictor of the whole business picking up without a doubt. I just think the evidence is antidotal as opposed too systematic at this point.

Okay. And, a final question for Pryor, where do you look for, what kind of indicators for the turnaround in your business?

Well, I think it's very demand driven. So, you know, when you start to see transaction volume increasing, we'll be watching that carefully and we'll be looking for those requirements that are unavailable to be served in existing product. And, we'll be looking for expansion opportunities where people have a specialized product that's just not available.

But, is there generally some sort of lag?

Yes, I would say there's definitely a lag. We're -- I would think that our business people begin to be suspect of it when they start to see the economy slow down and they're not convinced that it's back until it's probably really back. I mean, I think you'll see the economy showing us signs of improvement before you'll start to see compelling improvement from us.

Okay, great. Thank you all.

We have a question from Ashish Cont [phonetic] with Fairwell Capital [phonetic].

Good morning. Just a few questions. I wonder if you first, you know, really talk about the carpet service lines? We saw a decline of a couple of clients and I know, Bill, you have target to add clients this year. I think you guys have been rationalizing some contracts here. But, can you sort of, you know, considering that the trends of outsourcing is growing as Bob mentioned, you know, I mean what should we expect on this end? Is this number below what you want it to be and, you know, what's the target in terms of number of carpet service lines for the year ended, have you revised that?

No, we have not revised that from our previous discussions. I would say a couple of things are going on in the market. One is the companies like ours on these larger portfolios that the market will slash question on who's the competition. The market for the larger outsourcing contracts is getting smaller and smaller in terms of the number of companies that can adequately really serve those kinds of opportunities. And, that's reflected in our outsourcing pipeline of pursuits that we monitor, as you know, very, very carefully and have biweekly conference calls.

We look at shifting the business from a mentality around being kind of a deal business to a solutions business. and, that's the kind of people we're hiring. Those are the kind of people that are getting promoted. Those are the kind of people that we're really trying to put in front and working daily with these largest customers. So, I would say no revision to the earlier focus around adding new clients other than what Bob has said and we have said that our focus will be 2002 and beyond. And, that is to be operationally excellent on all of the business that we have today, first and foremost, to create, you know, great products and to turn our customers that we have today into being advocates, real positive advocates at Trammell Crow Company.

Two questions related to that, first, what is the target for the number of, you know, number of carpet service clients by the end of the year? And, secondly, you've been in this business now for some time, it's a low margin business, but in terms of profitability, I mean, you know, how has the experience been since some of these contracts have, you know, are not at a stage in life of the contract where you can assess whether the base case presumptions et cetera that you might have need for held or not. And, you've probably been through a couple of negotiating processes with your clients. I mean how is the experience been? Is this really a profitable business?

Yes, the first piece of that question is we'll have more than 110 outsourcing clients and we may purge more, but we'll continue to add as well. The key is, very important for us is to add customers that want to be business partners of Trammell Crow Company. We do not want to be a vender to our customers. We want to be a business partner to them. We want to provide high-value added services. That's the shift that you're seeing in Trammell Crow Company in 2002 and beyond.

So, some of the reasons that we were hired in the past, some of the engagements and contracts that resulted from those, really put us in a mode where we were acting more as a vendor and I'll tell you candidly that's not the way we want to build the business. That's not where we can achieve the kind of profit margins that you're talking about. So, the answer is over time some of these things don't work out. You learn and you build your kind of lessons learned from that. And, where our focus is on specifically on the larger contracts that are more full service, facilities management, project management, transaction management, the whole portfolio management piece.

In those contracts we can achieve our profitability targets.

So, you primarily require cross selling efforts to be able to achieve that? And, how is the, you know, organizational structure? I know you guys have been through a bunch of changes, is that holding up to provide that integrated suite of services?

Yes, absolutely. John Stirek, our Chief Operating Officer has four distinct product experts that are really building, kind of industrial strength, what I call industrial product capability across our global service business. and, in addition to that, probably the area that we've had the most momentum in the first quarter is our portfolio advisor program whereby we bring our very best brokers, our most accomplished brokers, the brokers that can think the most strategically about our clients' needs and actually making them accountable by giving them real responsibility across our biggest clients. So, with what our customers will feel as 2002 goes on, is more value from Trammell Crow Company.

In talking to some of your customers, [indiscernible] my feeling was that, you know, the strategy of sort of appropriating the greater share of the transaction business hasn't been [indiscernible] by tying these people up in sort of strategic relationships is validated. However, the customers mention that probably you likely to see fees going down or sort of the -- what they pay for transaction business going down a bit because you're selling costs are going to be reduced as you get, you know, large chunk of the transaction business. Any evidence of that happening in terms of commission rates et cetera on the transaction business with your existing clients, you know, your carpet service clients?

No, I don't think there's any evidence of that. As a matter of fact, you're going to see fees go up on some of this huge overhang at sublease space. They're going to want -- the bigger issue is if I'm a 20 million square foot portfolio and I've got 7 million square feet empty and it's all shadow vacancy. It's all that what we call the Swiss cheese effect, the fee isn't the issue, it's getting rid of that occupancy that's the cost. That's where our clients are focused is help us build a strategy that eliminates the rent obligation that we have on our vacancy. It's not the fee.

Bob, just a question for you, the change in compensation structure that you all was implementing, I'm not sure what state that's at, can you sort of update us on that?

Sure. That was rolled out late in the second quarter last year. But, the fact of the matter is it really all takes place at year-end because it's all aimed at our bonus compensation structure, or mostly aimed at our bonus compensation structure. And, what we did there, Ashish, was we basically moved away from a scenario in which each one of our principals had an individually constructed bonus target that was kind of independent of the next principal, number one, and it was independent of, to a certain degree, independent of customer, -- or, excuse me, company profitability. And, we had lots of what I would call one off, one-time bonus payments. We eliminated all of that. And, in its place put a pool mechanism out there where a certain percentage of our pre-tax, pre-bonus profit dollars fund the pool. That pool is sized and determined by the compensation committee of our board of directors, which is, of course, all independent directors. And, then that pool is allocated out to the principals in our business based on a combination of factors. Obviously, very prominent among those factors is the contribution that principal made to our profitability. But, it also includes things like customer service, cost control and other initiatives that we've -- written initiatives that we've established for our leadership team.

We went through that for the first time at year-end last year. Of course it was a process that involved a lot of rigor and a lot of emotion and things like that that you would imagine. But, I will tell you that we viewed it as being very successful. And, we talked about it again last week at our principals' meeting. I think our principals feel much better with that program in place. That's part of why I was able to comment that given where we're at in the cycle, our principals' moral is better than it's ever been during a down cycle. And, I will tell you that our board of directors, our independent directors, notably, feel that it had a very positive impact on the company. And, they're very, very pleased with the way that came out. So, it's in place and we think it's going to help us run the company the way we want to run the company going forward.

Thanks a lot.

Thank you.

We have a question from David Cuth [phonetic] with Robertson Stevens.

Hey, good morning, here with Jay Loop [phonetic] as well. as a follow up on the management and leasing portfolio, you know, you did see a fall out there, a lot of that voluntary, you know, where we should be looking for that portfolio size to go over the next couple of quarters? Then, again, the same question on broker count?

I think, broker count will stay relatively the same. It won't move up much. If anything, the comments I made about our portfolio advisory strategy, we're going to look to that team of people across the United States to pull more of the train than, you know, kind of the largest part of the portfolio.

In terms of our focus on the management business, obviously, the facilities management business really comes around the addition of new clients. And, that business will continue to grow. On the institutional side, it's all focused around our top 25 national accounts. And, as I mentioned, we've added 6 million square feet the first quarter on new clients like Beacon Capital and others. And, I would think that business will continue to show that kind of growth through the remaining quarters of 2002.

David, this is Derek, just specifically on kind of the loss that we've had in square footage on the institutional side, property management portfolio. I mean, really that is explained by the phase in transaction, the exiting certain geographic markets that no longer made sense. That -- things like that explain the entirety of the decline there.

Okay, and then you mentioned using free cash flow to pay down debt. What's your view on share repurchase at this point?

We have I think dating clear back to first or second quarter of last year an authorization from our board to, you know, buy back up to $15 million worth of stock. And, we announced that last year. And, from time to time when we can we're in the market buying back shares, but you know, with window period concerns and the limited flows and SEC volume restrictions et cetera, it's tough to make an impact there. I think last year we spent 5 million of the 15.

That's, you know, an authorization that's, you know, still there for us, still active, and from time to time we'll be buying shares back.

Okay. Thanks.

We have a follow-up from Ashish Cont of Fairline Capital.

Bill, I think you mentioned in passing about the number of competitors in your global services business reducing, but it clearly, as regards to the larger corporate clients. Can you sort of give a bit more color in terms of even amongst, you know, there are four to five really large, sort of, national real estate service providers. Would you say, you know, sort of the Fortune 500 corporations the choice is really between two of the five, or, you know, are people looking for international capability now and how's this [indiscernible] sort of helping that?

Well, I think the number is smaller on the large full service engagements, just as exactly as you said, Ashish, I think if you're talking about a Fortune 500 that wants to engage a service provider just for transactions or just for design in construction or project management, then they're really speaking to one of the service lines that that smaller group can provide. So, you know, you'll get another couple of providers there. But, in the case of Bank of America last year, as you'll recall, they had five service providers. They went to two on their 70-million square foot portfolio. They wanted a full service provider, which, again, with facilities, all project management, move management, transaction management and the accounting and reporting. And, we and Joe Lang LaSalle [phonetic] Trammell Crow Company and Joe Lang LaSalle were selected.

So, in that tier of business, that's -- your point is exactly right.

Thank you.

Mr. Sulentic, there are no further questions at this time. Please continue.

Okay, well, if there are no further questions we'll wrap it up. I appreciate everybody joining us and we'll talk to you again in about 90 days.