世邦魏理仕集團 (CBRE) 2002 Q4 法說會逐字稿

Good morning and thank you for joining Trammell Crow Company's fourth quarter and full year 2002 financial results conference call. All participants will be able to listen only until the question and answer session of the call. This call is being recorded at the request of Trammell Crow. If anyone has any objections, you may disconnect at this time.

I would like to introduce Ms. Barbara Bower, Principal, Trammell Crow Company. Ms. Bower, you may begin.

Good morning and thank you for joining us for Trammell Crow Company fourth quarter and full year 2002 earnings release conference call. This morning we faxed each of you the company's press release announcing its results. If there is anyone on the line who needs a copy of that release, please call 214-863-4111 and one will be faxed to you immediately. This call is being webcast live. It will be archived and available through March 5th. The call may be accessed from the Investor Relations section of T.C.C.'s web site at www.trammellcrow.com. In just a moment Trammel Crow’s management will provide commentary on its earning, then we will open up the line for Q. and A.

First I'd like to remind you that comments made during this call may include certain forward-looking statements. Actual results and the timing of certain events can differ materially from those projected and/or contemplated by the forward-looking statements. Due to a number of factors including those set forth in the company's Form 10(k) is filed with the Securities and Exchange Commission.

With that I will turn things over to Bob Sulentic, our Chairman and CEO.

Thank you, Barbara. Good morning everyone and thanks for joining us. With me here on the line are Derek McClain, our Chief Financial Officer, Arlin Gaffner, the company's Chief Accounting Officer, Bill Concannon, President of our Global Services Business, Chris Roth, President of our Eastern Development and Investment Operations and John Stirek, President of our Western Development and Investment Operations.

A as usual we'll start out with Derek giving us a little bit of a financial overview and then he'll turn it back over to the rest of us for some operational comments before we get into Q and A.

In the financial portion of the presentation this morning I'm going to focus on five things. I'm going to look at the consolidated results for the fourth quarter and full year. Then I'll touch on the results by segment, then I'll hit the financial condition, our outlook for 2003, and some financial statement presentation changes and reclassifications that we mentioned in our press release. Then at the end of the remarks, of course, Arlin and I will circle back around and take any questions you may have.

First the consolidated results for the fourth quarter and full year. Our earnings per share for the full year were 46 cents, that was consistent with guidance we gave in last year's second quarter and third quarter earnings releases. Earnings per share was 25 cents for the fourth quarter of 2002.

Net income was $16.9m for the full year. That was consistent with our historical pattern whereby a large portion of this, $9.2m was achieved in the fourth quarter. These results compare with gap net losses for fourth quarter and full year 2001 that were driven in large part by 2001 restructuring charges and write downs due to impairment of goodwill, intangibles and investments. EBITDA for the full year 2002 was $58.6m . Revenues for the year were $736m, down from prior year revenues of about $780m. Increases in facilities management and corporate project revenues, corporate project management revenues were more than offset by declines in our other service lines, property management, institutional brokerage and corporate advisory services and development and construction fees.

Quarter to quarter revenue comparisons have pretty much the same flavor.

Next looking at segment results, global to global services segment posted full year pretax income of $14.3m and EBITDA of $33.4m. The development and investment segment posted full year pretax income of $16.2m and EBITDA of $25.2m.

These results were worse than we expected at the beginning of the year from global services and a little better than we expected from development and investment. The reasons for the disappointment from global services are twofold. The market continued to deteriorate on us as evidenced by further declines in brokerage activity from 2001, and we incurred significant costs associated with exiting business or shutting down operations that we didn't think had the right risk reward profile.

Turning to our financial condition, as noted in the release our cash position improved substantially during the year and our borrowings under our line of credit continued to decline. Our cash position improved by over $40m during the year and our line of credit borrowings declined by over $30m. We finished the year with $19m outstanding under the line.

Our real estate owned declined by approximately $57m during the year and our total real estate debt declined by more than $44m. We're very pleased with our financial condition, particularly at this point in the real estate cycle, and we're excited about having the financial flexibility that that financial condition will afford us to consider the investment opportunities that we expect will come our way from this point in the cycle forward.

Turning next to the outlook, we're bracing for a tough 2003, as we noted in our release. We're still in a very difficult market for our services.

That said, we believe it's realistic to assume that we could report 10% to 20% EPS growth over 2002, driven by expected improvements in the operating [performance] of our global services business, that we expect should more than offset an expected decline in the profit ability of our development and investment business, which in turn would be driven by just kind of the-- being at this point in the cycle.

Visibility by quarter is very limited, but we expect our results to be back end loaded consistent with our historical experience, and we currently expect our first quarter results to approximate breakeven, consistent with both the first quarter of 2001 and the first quarter of 2002.

With regard to the financial statement presentation changes and reclassifications noted in our release, we have made some changes in our presentation, mostly to reflect recent accounting pronouncements, but also in response to a routine SEC review of our 10(k) and 10(q)s filed in 2002. And I want to emphasize that none of the changes in presentation are reclassifications, this had any impact on GAAP net income or loss for any year or quarter.

The most significant impact to the financial statement presentation is occasioned by our giving effect to FAS-144, accounting for the impairment or disposition of long lived assets. The consequences of giving effect to FAS-144 are twofold. The presentation of some income statement amounts previously categorized as gain on disposition of real estate in continuing operations are now categorized as income from discontinued operations. And certain balance sheet amounts previously carried as real estate held for sale are now carried as real estate held for development, real estate held for sale, and real estate held for investment.

The income statement consequences in particular FAS-144 are not at all intuitive. Accounting for a significant portion of our continuing real estate activities is discontinued operations, does not accurately reflect our business. Unfortunately, FAS-144 has left us and other companies having real estate development activities with no choice. Both the accounting profession and real estate industry groups have requested the FASB to reconsider the application of this pronouncement to companies with real estate development activities. But so far those appeals have been to no avail.

For 2002, a portion of our development activities was grandfathered and still reported in continuing operations as gain on disposition of real estate, but in future periods we expect more and more of our development activities to be accounted for as income from discontinued operations. Now, we intend to provide supplemental disclosure in the financial statement, footnotes and M.D. and A. and our 10(k) that should enable readers to better understand this aspect of our business.

Another change to presentation, in response to our SEC review we have now moved our income from investments in unconsolidated subs down below the income before income taxes line and we're showing it net of tax. And we have also done the same with minority interest.

Finally, we reclassified certain income statement amounts consistent with current period presentation and in response to SEC comments. Again, none of these reclassifications has had any impact on GAAP earnings or loss for any period, but some of them have had a modest impact on 2001 EBITDA and adjusted net income. These impacts are noted and quantified on the face of the press release tables.

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

Thanks, Derek. I'm going to make some very general comments on our operations last year and on our operational plans for the company in 2003. And then I'll let Bill Concannon and Chris Roth respectively provide more color in that regard on our global services and development investment businesses.

First of all I'd like to say that looking back on ' 02 I am extremely proud on what our people accomplished in a very difficult market environment. We made substantial gains in all parts of our business. We had challenges, of course, and some problems we had to solve, but very substantial gains both in terms of our financial position and in terms of our ability to serve our customers and in terms of positioning our company for the future.

Going into the year on the global services side of the business, we said we were going to have a big focus on customer service and operational improvements. There were substantial progress made in both of those areas throughout 2002 and Bill Concannon is going to provide you with more detail on that in a minute.

On the development and investment side of our business we wanted to focus in 2002 on two things reducing risk and making the business-- beginning to make the business less cyclical. Obviously the real estate development business is very, very cyclical and as a public company and in general we want to make that business less cyclical. Just to report on progress in both those areas, we reduced our real estate exposure, our exposure to real estate assets very significantly and generated substantial cash in the progress. Derek's already commented on that.

On the other side, we made very substantial progress in growing the portion of our development and investment business associated with user driven development and particularly, in the areas of higher education and health care. Now, both of these areas of development are substantially less cyclical than the development we've done historically and our starts in those areas practically doubled from six starts to 11 starts last year. We've got substantial progress and momentum in those areas. Our résumé is better, materially better than it was historically and our capability set is materially better than it was historically. So I'm very pleased with the progress we've made in that area and I think you'll continue to see more news coming out of our business in '03 and our development and investment activity for users.

Now, looking ahead at '03, how do I feel about the business? Well, I feel better than I did a year ago. I'm very encouraged with where we are, but I have to say, none of that encouragement flows from a view that the market circumstance has improved in any material way. The fact of the matter is, sitting here today, there is no real evidence that the market is better than it was a year ago or that it's about to get better. But there are other things that make me feel very good about our business, notably four things. First of all we're better positioned as a result of the initiatives that were undertaken and the accomplishments that were made last year.

Secondly, as Derek mentioned, our balance sheet which was strong going into last year is even stronger now. And it will get stronger throughout the course of '03. The morale of our people and I would say this was noticeable starting in about the fourth quarter of last year, the morale of our people has gotten noticeably better. And I want to dwell on this for a minute because we're a services company. The only thing we have to sell is the services of our people. We don't is plant and equipment, we don't have inventory. We have people and the services they provide to customers. And we're cyclical business.

When you couple those two things, some dynamics emerge. First of all, inevitably good markets are followed by bad markets and in an industry where a large percentage of your people derive their compensation in an incentive manner, commissions, payouts on incentive development opportunities, bonuses, so on and so forth, when you go from a good market to a bad market, there is a very, very dramatic impact on morale. There is a tendency to focus internally away from the customer, so on and so forth.

We coupled that with a very aggressive cost reduction initiative and what we believed and continue to believe was a very important reorganization of our company. We dealt with some of these bad market issues very aggressively very early. It hit morale hard here. By the end of last year, our people had adjusted to the market circumstance. They had adjusted to the reorganization. They had gotten refocused externally. We had gotten through that very distinctively gotten through that. The amount of time our senior people were spending on new business opportunities as opposed to internal issues had shifted pretty dramatically. And frankly, a lot of people who were unable to deal with the realities of a difficult marketplace moved on. And so I can sit here in the first quarter of 2003 and tell you the morale of our people is much, much better than it was last year. The focus is much more external. The balance of time we're spending on new business pursuit and customer issues has dramatically shifted in that direction and away from the internal issues. So I think this is the third area which makes me feel much better about our business than a year ago.

And then finally, I'm very, very encouraged by the business plan and objectives we set up for 2003. It will place more emphasis on operations and customer service. We'll have improved profitability this year, I believe, as a result of this business plan. What will our focus in 2003 be? First of all, in all parts of our business we're going to aggressively work to bring new people into the company. We think that where we're at in the market cycle right now gives us a great opportunity to attract producers and managers, senior experienced people in the industry. It also gives us a great opportunity to attract young new people coming out of school for the future.

And so, whereas for the last couple of years that hasn't been a real focus for our company, we will definitely be out on the offensive bringing new people into Trammell Crow Company in 2003. On the global services side of the business, Bill Concannon and his Chief Operating Officer Mike Lafitte are going to be extremely focused on improving margins. All of our investors have been looking for this and I'm going to forecast for you that you should see substantial improvements to our global services market-- margins in 2003.

Our focus on customer service is going to continue this year. We have a number of initiatives that have been undertaken in that area last year that will continue through this year. Very hopeful about what those initiatives will bring to bear.

On the development and investment side of the business, we're going to be very, very obsessively focused on this user driven development, particularly users that are less cyclical than where we've been traditionally in the business. Higher education and healthcare, you'll hear a lot about from us this year on the development side of our business.

And then of course given that we're still at the down end of the market, we're going to be very focused on keeping risk under control and keeping our development team intact and hopefully making some selected additions to that team.

The other thing that you should expect to see us do in 2003 is you should expect to see us very carefully make some investments to grow our business. Given the state of our balance sheet, the amount of cash we have, the limited debt we have, we're in a very strong position to invest. We're not going to be investing just because we have that capacity, but where we see opportunities we'll invest and I would expect to see several things. First of all, we will invest to grow our global services platform. We'll bring on people, and we may acquire companies. I'll tell you, though, if we acquire companies, it will only be under one of two circumstances.

First of all, it will be cases where we're totally convinced that the franchise we're acquiring is strong enough and significant enough to survive the departure of some key individuals who might leave in the wake of an acquisition. That's been a very typical circumstance in our industry and in service industries in general where there's been acquisitions. So we'll be careful we don't make acquisitions where the franchise can't withstand that kind of circumstance.

Or secondly, we'll make acquisitions where we believe we'll put a structure in place that has very, very strong incentives to keep the-- key producers and leaders on board long term. And of course that would be a structure which was much more heavily weighted toward earn outs and incentives as opposed to up front payment. So we'll be looking for those types of opportunities. And when we find them, we'll execute on them this year.

On the development and investment side, our plan is to make small co-investments in a couple funds or programs where we think these small investments will facilitate a substantial number of development opportunities. We also think that we might be getting back into that portion of the cycle where there is some opportunistic buys available. We don't want to get early on that because if you go too early you run the risk of buying before things bottom out and making bad buys. But we've got a very strong network of developers and experienced real estate investors out there and when those opportunities surface, we'll find some of them and we'll be ready to make some of those investments.

Frankly, Trammell Crow Company was president in that position in the last cycle. That's one of the many things we think positions us better coming out of this cycle than we were coming out of the last cycle. So I expect to see some of that type of opportunity on the horizon for us this year.

Again, though, I want to reiterate, just because we're in a very strong position to invest doesn't mean that we're in a hurry to invest. We're going to be patient. In a cyclical industry like this, there is absolutely no doubt, no doubt at all, that there will be great investment opportunities for those who are patient.

Now, I was inclined to make some proactive comments on some of the recent M and A activity in our sector, but I think I'll wait to see if there is any questions on that and try to respond to the questions rather than to layout any specific response to what we've seen in the marketplace there.

So with that I'm going turn it over to Bill Concannon for some comments on our global services operations.

Thank you, Bob. I'm going to focus my brief remarks this morning on the discipline, the discipline that we're continuing to bring to the global service business. And specifically, the discipline of our process and the way we sell, the way we deliver and the way we measure and grow our business.

So, first, in the area of sales, we've further expanded Diane Patterson's role around client service to now include client sales, making her responsible ultimately for our go to market strategy and bringing an even greater level of focus to our pursuit of large corporate outsourcing and investor customer service contract business. This is two areas where we see buying behavior changing and demand is up. So, Diane will head that entire go to market responsibility.

We've also implemented a disciplined pipeline tracking process in which a national committee convenes regularly to review our largest opportunities, to make sure we remain focused, only on those outsourcing opportunities and other contract opportunities that represent good business for Trammell Crow Company. And this is a committee that Diane and I co-chair.

On that note I'd like to say that our current pipeline for corporations is the strongest it's been in a long time. With several major corporate outsourcing opportunities currently in play. And just looking at only the largest among those, we're currently in the process of bidding on somewhere over 70m square feet for some very prominent companies.

In the institutional segment of our business, we continue to focus on providing investment services, property management, and healthcare and leasing for large institutional investors with a focus on sales and office. Office assets and office portfolios is the focus there. And in healthcare sales, which is a vertical market, you know we focused on, our leader in that business, Kevin O’Neill has reported that the business pipeline is basically two times the volume that it was at this point last year. So, on our next call I fully expect us to be able to discuss a progress report on these healthcare initiatives.

In the area of service delivery, under the responsibility of Mike Lafitte, our Chief Operating Officer, we're going to continue to focus on operating excellence through initiatives that will enhance our service delivery for our customers. A few highlights include first of all greater accountability for account level employees in terms of their compensation. We're tying explicit compensation metrics to quantitative customer satisfaction metrics. Each of our account managers have committed to a balanced score card in building client service delivery. So, we're going to measure our performance against the defined value proposition in each of these situations and link that back to the compensation of our account leaders.

Secondly, investments in our national functional leadership team, specifically our building operations and strategic sourcing. These investments represent our commitment to the continuous improvement of our service delivery model [INAUDIBLE] scale and technology.

And finally, another example of delivery, with our top clients we have focused on what we call our set meetings or programmatic strategy meetings with our top customers two to four times a year to monitor overall performance, reset goals and increase alignment and deepen the relationship with these clients.

In the area of measurement, both with our clients and internally, Mike Lafitte again has produced new business controls in every area of our business to improve process and ultimate accountability.

A few examples of internal control mechanisms we now have in place include-- we have specific margin goals for each of our service lines and by geography and by customer, as Bob mentioned. We have number two, an internal pricing committee comprised of T.C.C. internal executives, senior executives and business analysts which reviews proposed pricing in terms for every deal over a certain size.

We have added an in-house contract specialist accountable for all contract review, client audits, tracking client renewals and have established strict guidelines as a result of this.

On the client side, some of our performance measurement disciplines include annual customer surveys. These are completed by an independent third-party which will drive further accountability through our organization. Where our focus is customer satisfaction is number one.

The roll out of a client satisfaction dashboard, this is the final area of measurement. And this is a web based tool that when fully implemented will enable selected clients to provide feedback for account teams and our executives with real time feedback. So this is another example of how we're adding discipline to our measurement system.

And then finally in the area of growth, last quarter I announced to you that we were focused, very focused on expanding long term contracts and leveraging our entire client base as the source of new growth. This is not a new strategy, but a strategy that we have intensified. A key component of growth is to continuously renew as well as expand our long term contracts. We want to increase the percent of spend we oversee for our corporate clients. So this is a key growth component of our growth model.

On the corporate side, a few highlights for 2002 include significant wins with [McKessin], [Shellaqueeba], McGraw-Hill, [Shearing Plow] and E Trade. We also signed a 7 year contract extension with Travelers Insurance Company for comprehensive outsourcing services. Additional contract renewals with Cardinal Healthcare, Baxter Healthcare, Perrier, [Homerica], [Solutia] and others. So we've been very focused on that element of our growth.

We have also achieved expansions with clients such as [McKessin], and are poised for similar success with other clients in 2003.

We're also committed in the way of growth to follow vertical markets that really drive off outsourcing. And health care, financial services, pharmaceutical, automotive, are examples of those vertical markets.

We also like workplace environments where there is a lot of churn, because churn represents fees to us. And the high technology sector is an example of that.

So, more and more of these agreements for us when we're working with these clients represent a chance not only to manage the building and facilities operation, but to bring our expertise to manage the client's workplace.

With the news of the CB/Insignia merger, I would just say to you that the world gets smaller on those companies that provide full service outsourcing services, and we expect to lead in that part of our business.

So we have set aggressive growth goals this year because we know the service delivery, the operations and the measurement system can handle it. And in closing I'll just make a quick comment about our people as well.

I think it's very clear our people take pride and care deeply about the outcomes we create for our customers. And I am very proud of them for that. And with that I'll turn it over to Chris Roth to talk about development.

Thanks, Bill. As we have stated in our financial results, while we experienced a decline in year-over-year revenues on the development investment business, we were able to improve our year over year pretax profits and EBITDA. As you can guess we're very pleased with this performance given the continued deterioration in real estate market conditions. These results are attributable to a number of actions we've taken over the last 18 months.

First, our efforts to reduce our cost structure have resulted in improved profitability. I think as many of you know from the previous calls it's been a very aggressive strategy on our part.

Second, we were able to harvest transactions we had projected in the fourth quarter in spite of deteriorating market conditions.

Third and probably most importantly, our national initiatives are paying off as Bob mentioned in an environment of reduced project starts, our health care and higher education initiatives contributed over 35% of our starts through 2002. These transactions provide more secure revenue streams with less attendant risks and can hopefully with ongoing continuing business with the organizations we work with rather than just a one-time development opportunity.

Finally, and perhaps most importantly, our focus on risk mitigation and repatriation of capital has been successful. As Bob said we’ve reduced our real estate held for sale by nearly $57m and reduced our real estate debt by over $44m. We continue to invest in attractive opportunities but are not trying to force transactions with the result that our volume of deals in our pipeline has appropriately declined, reflecting the difficulty of market fundamentals and the reduction in attractive risk mitigated deals. There simply aren't as many opportunities without taking a huge amount of additional risk at this point in the cycle.

However, while we believe that we are at or near the bottom of this cycle and anticipate a difficult year in 2003 for the entire industry, we believe that we are well positioned to benefit from not only the opportunities which always present themselves at this point in the cycle given our strong financial position, but that we'll also be well poised to participate strongly in the up side as the economic cycle swings back to a growth mode.

In closing, we believe that after a strong performance in a very difficult environment in 2002 and outstanding performance for our development investment group in 2003 may well result in a decline in year over year net income as mentioned previously given the reality of the economy. However as a result of our people, the work we've done on our cost structure, our balance sheet and our strategies, we believe we're well positioned for future significant profitability as economic growth returns. Bob?

Thanks, Chris. With that why don't we open it up for any questions that the listeners might have.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star 1 on your phone now. You will be announced prior to asking your question. To withdraw your question, please press star 2. Once again to ask a question, please press star 1. One moment, please. Your first question comes from Matt Ostrower from Morgan Stanley.

You as much as asked for a question on the Insignia [inaudible] thing, so I’ll throw one out there. Love to get your take on how you A. do you have a sense for what motivated that, how it's going to work and then B. more importantly, how does it affect you guys from a strategic standpoint?

Okay. Thanks for asking that question, Matt.

No problem.

I knew we were going to get that question. First of all, I would say that our mindset here is that the outcomes related to that acquisition are unclear. First of all, you start with two real large, real good brokerage firms. I mean that's something to note. They each had their own issues, I'm sure, but they're very good companies. And they're big companies, and they had an opportunity-- in my view, they saw an opportunity to do something that was kind of unique to them and they saw themselves being able to combine to form the largest brokerage company in the world. That's their strategy. That's what they want to do.

If they pull off the integration, and we all know that integration is in our sector are brutal-- I mean everybody in this sector has experienced that, including both of them-- I think they’d quickly admit that, but they may pull it off. They may have a smooth integration. And if they do, their place in the world will be they'll be-- they'll have the biggest brokerage platform in the world, and I think that will serve them well with some of the customers they pursue.

I also think that there will be some real opportunities as a result of that merger for others of us. For instance, there will be one less competitor out there, number one. Number two, they're undoubtedly be some very good people looking for a new home and you know, who knows where those people will land. We'll certainly want to provide opportunities for some of them if they're out there.

As it relates specifically to Trammell Crow Company, even though we're in the same sector as CBN and insignia, CLL, Cushman Wakefield, we have a little different profile than the others.

First of all, our outsourcing business and our fully integrated services business including not only transactions, but including project management, including building management, including development services is a more prominent part of our business, a higher percentage component of our business than it is for others.

We think that opportunity doesn't change at all because of this merger. And in fact, we think it may get bigger because of the fact there is one less competitor out there.

Secondly, our development business in general separates us significantly from the rest of the industry and our development business should be totally un-impacted by this merger regardless of whether it goes well or whether it goes poorly. So that part of our business we think is un-impacted.

When we look at this circumstance and ask ourselves the question, gee, will Trammell Crow Company end up or should Trammell Crow Company end up participating in this kind of M and A activity, where we come out, Matt, is the following. I think it's real unclear sitting here today whether that's going to be good or bad strategy, whether it's going to be-- result in positive outcomes downstream or negative outcomes.

As a result, we don't think it's in our best interest to aggressively pursue that type of activity. In fact, we think we're a whole lot better off doing the following, working to improve the things we do for our customers, continuing to improve our margins, improve our operations, improve our balance sheet, make our company more profitable, grow the base of customers we have, all of which are very, very do-able in the environment that we are in, so a year from now, two years from now, three years from now, we're significantly better, more profitable company, more financially powerful company than we are today.

So whatever direction, as things get clarified, whatever the strategic direction appears to be as things on the horizon become more clear, we'll be in a better position to take advantage of that. If we're a buyer, we'll be in a much stronger position to buy. If there's fall out. If others want to make offers to buy us, we'll be a very, very valuable company and our shareholders will come out very well in that scenario, too. So that's kind of our response to this circumstance.

Okay. A few other questions here. Derek, you talked about this E IT F.O. 1-14 and it will cause you to sort of change how you-- you can have higher revenues and higher expenses as a result. You had also talked in previous quarters about how some of the expense savings you had been experiencing that were significant were sort of hidden by the reimbursable component. So I have two questions.

One, does this eliminate the sort of veiling of expense savings on your financial statements that we've seen in the past? And if not, can you tell us what the impact was this quarter?

I think Arlin has the quantification of the decline and reimburse salary wages and benefits which is a thing that is kind of veiled by virtue of its inclusion in that, you know, that line item that also includes the reimbursed payroll cost. But I'll let Arlin--

That remains an issue, Derek.

Yeah, it's still lumped together with the reimbursed, salaries, wages and benefits. But we've got the stats for you.

In the fourth quarter our un-reimbursed salaries, wages and benefits increased a little over $7m from the same-- from the fourth quarter of ' 01 which brings that full year number to about 29m.

Decrease of $29m?

Right, full year 2002.

And Arlin why don't you also comment on the run rate from the time we started cutting costs to the-- into last year.

Okay. I'll do that. The run rate of those costs from the first quarter of '01 when we started to kind of tackle our cost reduction efforts to the fourth quarter of '02, I mean it's more than $50m run rate savings.

Okay. When you think about your 10% to 20% growth rate for '03, it sounded like, based on your cautious view of the fundamentals, part of your growth at least is coming from ongoing expense savings as opposed to rate increases. Can you better define some assumptions there?

Excuse me. I don't know if it's so much from expense savings. At least these kinds that we're thinking about that are due to head count reduction, as it is just kind of operational improvements. You know, we mentioned that we, you know, incurred some significant costs in 2002 exiting business or shutting down, you know, internal operations that we thought didn't have the right risk reward profile. That was an expensive proposition impacted 2002 results we don't expect to incur anywhere near those kind of costs for those things in 2003.

Would I be able to get to a 10% to 20% growth without significantly growing your top line? On your revenue number, however you want to look at it?

Yes.

It seems to be that's what you're basing your own assumptions on?

Correct.

And then I guess my last question here, gains, the number – the gain came in significantly higher than what we put in our model and certainly higher from what I can tell than historical levels at least in the fourth quarter and last quarter as well, so fourth quarter ' 01 and 3Q ’02 is much higher gain number. A., was that in your original projections you-- sounds like you were expecting that. And two, can you give me a sense for what you expect from gains for 2003?

Well, I think the gains on the disposition of real estate recorded in the fourth quarter was generally what we had anticipated when we gave our guidance really at the end of the second quarter and at the end of the third quarter.

Okay.

And most the scheduled sales of real estate did happen in the fourth quarter, particularly December. I would anticipate that I think we do see a little bit of less activity in 2003 as a result of the decline in the-- in process activities.

Right.

We'd expect those gains to be less.

Okay. All right. I'll work with that. Thanks very much, guys.

Thanks, Matt.

Once again, to ask a question, please press star 1. Our next question comes from Bill Baldwin of Baldwin Anthony Securities. You may ask your yes question.

Good morning.

Good morning, Bill.

Derek, can you give us some color, you think, on the business you kind of, you know, took out of the picture as a result of lack of attractiveness to your company? Can you talk a little bit about maybe how much the top line was impacted there and what business category and how much expenses, perhaps, you incurred in extracting yourself from these unattractive business situations?

I would say that the business that we exited mostly hit the facilities management line. I don't know if I can quantify that for you on a top line basis, but I would tell you that when we sit around here and try to figure out kind of the total amount of costs that we incurred in connection with exiting those businesses or kind of focusing on cleaning up problem operations, we can get to 15 cents pretty quick.

So, you know, right there, you know, creates an opportunity for us in 2003.

Right.

The kind of operational improvements I was talking about.

Does your guidance for 2003 pretty much assume no improvement and no further deterioration in what we call your transaction type businesses?

Exactly. We're not assuming it gets any better. We're hoping it doesn't get any worse.

Bill, this is Bob Sulentic. One comment on our transaction businesses. When we talk about those, we generally think in terms of our brokerage business and our development business. And I would say that while we don't expect the environment to deteriorate or get materially better, it's important to know one aspect of our development business.

What we harvest today in our development business was generally put in process two to three years ago, okay. As you know, the last two years-- the last two years have been years in which there's been a disinclination on the part of users and investors in the marketplace to start new development business. And so our new activity or new starts over the last two years has been down. As a result we expect the amount of business we harvest in '03 to be down.

Right.

It's not to suggest that '03 is any worse than ' 02 or any better than ' 02. It's the fact that we e when we were loading the pipeline for ' 02 in the year '99 and 2000, it was definitely better than the subsequent years that loaded the pipeline for '03. And so, you should very definitely expect-- and I think Chris and John both very definitely expect that the amount of harvest in our development business will be down this year.

Right. I kind of-- you know, when I use the word transaction, Bob, I guess I was more referring to your brokerage and tenant rep business in terms of looking at ' 02-'03. Looking on that basis would you pretty much say your guidance assumes no deterioration, no improvement, just pretty much--

Absolutely, yes.

To the degree you're successful, then, in bringing on additional high qualified, high quality people, which was one of your strategic focuses, I guess as the year works on and you bring those people on, that could result in some improvement in that business, at least the latter part of the year.

Yes.

It's because you're bringing on, you know, more people that have experience in that area.

Yeah. Bill, you might want to comment on that. I think that it positions us for the future to bring them on, bill, but the reality of it is you generally don't bring them on and immediately start enjoying the benefit of increased revenue.

Okay.

There's a ramp up.

There is a lag, you know, coming from other companies, professionals in the industry and there is a lag in terms of production that flows into kind of the new company. So in that regard, we've kind of baselined the '03 around kind of a flat over '02 growth.

Okay, okay. Thank you.

Thanks, Bill.

Once again, to ask a question, please press star 1. One moment, please.

Once again, to ask a question, please press star 1.

And at this time there are no further questions.

Okay. Well, thank you all for joining us, and we will speak with you again when we report our first quarter results for 2003.

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