世邦魏理仕集團 (CBRE) 2003 Q1 法說會逐字稿

Good morning and thank you for joining Trammell Crow Company's First Quarter Financial Results Conference Call. All participants will be able to listen-only until the question and answer session of the conference. This conference is being recorded. If anyone has any objection, please disconnect at this time. I would like to introduce Ms. Barbara Bower, Principal, Trammell Crow Company. Miss Bower you may begin.

Good morning and thank you for joining us for Trammell Crow Company's first quarter 2003 earnings release conference call. This morning we faxed each of you the Company's press release announcing its quarter results. If there is anyone on the line, who needs the copy of that release, please call 214-863-3350 and we will fax you one immediately. This call is being webcast live. It will be archived and available through May 8. The call may be accessed from the Investor Relations section of TCC's website at www.trammellcrow.com. In just a moment Trammell Crow Company's management will provide commentary on its earnings and then we will open up the line for Q&A. First I would like to remind you that the comments made during this call may include certain forward-looking statements. Actual results and the timing of certain events could 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 as 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 from the management team today are Derek McClain, our CFO; Arlin Gaffner, our Chief Accounting Officer; Will Concannon, President of our Global Services segment; John Stirek, President of Western Development Operations; and Chris Roth, President of Eastern Development Operations. Derek, why don't you go ahead us the financial overview and the rest of us will come back and comment on operations.

Okay. I am going to focus consistent with our quarterly pattern on three things; first of all, our financial results, then some comments on our balance sheet and then I will circle around and talk about the outlook. With regard to financial results, first focusing on the bottom-line, we finished the first quarter with earnings per share of 3 cents and that compares favorably to our prior guidance and last year's first quarter earnings per share of a penny. Our consolidated net-income was up from approximately $200,000 in the first quarter of last year to 1.1m in this year's first quarter. Our consolidated EBITDA was up from 7.5m to 8.7m. Five segments which we monitor and report by their pre-tax income or loss, Global Services went from a pre-tax loss of approximately $500,000 in last year's first quarter to pre-tax income of $2.3m in this year's first quarter.

Global Service's EBITDA improved dramatically from $4.3m in last year's first quarter to $6.8m this year. On the development and investment side, we went from pre-tax income of $800,000 in last year's first quarter to a pre-tax loss of $300,000 this year. We achieved these improved results on diminished revenue. Facility's management revenues were down $7m, property management revenue was down $2.7m and institutional brokered revenue is down $2.6m. In total, revenues were down about a $11.5m. The decline in institutional brokerage is of course a function of the continued tough market environment. The decline in facility's management revenue was not unexpected. It's in large part driven by the elimination of problem contracts in 2002 that we previously discussed.

The net-positive associated with the elimination of these contracts is seen in the Global Services improved bottom-line. The property management revenue losses are more than explained by our sale of the phasing business in 2002. There were other property management wins that offset a portion of the lost revenues from phase. Our costs remained under control. G&A expenses were down $3m quarter-to-quarter, salaries, wages and benefits are down more than $10m. The income statement impact of FAS 144 unfortunately makes it a little hard to make sense of our income statement. As we noted at year-end, discontinued operations accounting for real estate sales makes it hard to read through to the bottomline.

Of our 3 cents EPS, 2 cents is technically due to discontinued operations as it is from real estate, we won't have a continuing involvement with those sale. It is very important to note that not only will income from discontinued operations be a continuing significant part of our development and investment earnings going forward. But also that it will most likely increase in significance, as going forward the number of transactions eligible for grandfather treatment, as continuing operations will decline. The sale of real estate projects is obviously a key part of our development and investment business.

Turning next to our balance sheet; as noted in our press release we are extremely pleased with our cash position and the level of our borrowings and available capacity under our line of credit. We had $15m borrowed under the line of March 31st and that was down $4m from year-end and down almost $55m from where we were a year ago. Our available credit under the line is over a $115m as of quarter end. Our cash is down $8m from year-end but still very strong at $70m particularly in light of the fact that the first quarter is historically our toughest from the cash flow perspective, and our cash is up over $40m from where we were a year ago.

With regards to the outlook, we continue to target earnings per share for 2003 that is 10-20% in excess of our 2002 earnings per share. Some portion of our better than expected first quarter earnings is due to transactions closing earlier than expected. We don't believe the positive variance here is incremental to our full year targeted performance. As noted in the release, the heavy influence of transaction timing and individual quarter's, results makes it extremely difficult to project results with any degree of precision by quarter. Accordingly, the only guidance we will be providing by quarter is to note that the anticipated timing of identified transactions, and the fact that at least a portion of our first quarter earnings variance is timing related makes it unlikely that our second quarter earnings will match those of last year's second quarter. Bob, I'll turn it back to you.

Okay, thanks Derek. I'll make a couple of general comments on our performance and my view of our prospects an then I'll let Bill, talk more specifically about the global services side of things and John, talk about the development and investment side. In general the year is unfolding for us about as we had expected. The market remains difficult I think everyone knows that. Our global service performance is up pretty significantly from a year ago. We had hoped and expected that that would be the case; we think operations have been improved materially, customer service is better, obviously resolved a lot of problems last year that are reflecting positively this year on a relative basis.

And then we have a continued and very strong focus on cost and margins so, that is all going is expected in the positive direction. On the development and investment side also as expected results are a little bit diminished from a year ago, or later in the cycle. And as if we've talked about for some time now the last part of our business to kind of go through this down cycle is our development and investment business. Because of a long lead time on projects our pipeline of course has diminished each year over the last two or three years and so we are harvesting less right now. And what we harvest is generally smaller because of all the circumstances that come into play in exiting these assets and receiving on us and so forth. But I will say this on the very good news side on our development investment business Chris, and John -- Chris, Roth, and John Stirek that is along with Tom [Magnery] in our capital markets group, in my view, are doing an extraordinary job in focusing on risk management, and they are also doing an extraordinary job in the use and deployment of our cash and resources. And so I feel very, very good about what that part of our business is right now.

Looking at the balance of this year we are going to continue to be extremely focused on the plan that we laid out. And talked about at year-end and of course then described in detail in our annual report that just recently came out if you read the letter to shareholders. We explicitly commented on what our priorities would be and those are as follows; in general we are going to focus on adding people to our business, you know, that is different than the last couple of years. In the last couple of years we have downsized but we have an explicit focus on adding people, producers and managers, this year. That's underway and we are confident that by year-end and as the year-end falls in fact we will be able to report a significant gains in that regard.

Specifically, on the global services side, we are going to continue to focus on customer service, Diane Paddison and her team are pushing that agenda very aggressively and our quality operations. And we think also there will be some independently verifiable results in that regard from the surveys we do through third parties. We are also going to continue to build our platform and I want to be a little more careful here than I was, I guess last time we talked about it. When we talk about building our global services platform, adding people, growing our offices our global services platform that we are going to be building as the domestic component of that platform. Cities throughout the United States that's were the focus will be. That's underway and we expect to have significant adds in that regard this year.

On the development and the investment side; our objective in addition to the things we have been focusing on, which is to move towards the healthcare and higher education, less cyclical developments, to mitigate risks. So on and so forth, we have talked a lot about those things but we are also going to try to add two or three new programs or funds this year on the development side consistent with the types of funds and programs we have done historically. The focus is going to be healthcare and industrial. We hope to add some kind of funded program on both of those areas during the course of this year. We think healthcare is a great part of our future and there is lots of evidence that we are growing that part of our business, engaging in more projects. On the industrial side, we just think it's at that point in the cycle where it's time to go out and secure properties and start to think about development for the future. Obviously there is gestation period of a couple of years on that and product wouldn't be brought to the market for sometime. But we are going to begin to focus on that this year. So look for us to do something on the fund and program side in both of those areas at some point during 2003.

A couple of final comments as we have talked about before, both Derek and I, our cash position and balance sheet are very strong. We are going to use that balance sheet and that cash position to invest to drive the initiatives that I described above. However, we are going to be very, very careful with those investments and we don't feel at all compelled to get that money out the door till we see very good opportunities. Secondly and specifically with regard to our stock, we think it's a good buy. So we are going to use some of our capital to invest in shares of Trammell Crow Company because we think the future value of those shares is significantly better than the current price associated with those shares. So with that I am going to turn it over to Bill Concannon.

Okay, thanks Bob and good morning everyone. I'd just like to add some brief comments for you about the areas of focus this quarter and throughout the year on the global services segment. And just kind of start by echoing Bob and Derek's comments about our optimism in light of the first quarter results and the moves we have made across our platform in global services. And I guess the first comment I'd make is that we are very, very focused on profitable growth in the global services business. And we have been working hard to extend this into every aspect of our business model across our geographic business units, across our key service lines, and of course in how we interface with our clients.

And there is really three key factors to this; first is we have established and continue to work around achieving target margins that we have set in each parts of our business. And secondly, delivering these enhanced tools and processes to improve customer service and service delivery, and a good example of that is service express, which is our web-enabled work order management system. Another exemplar, is our playbook rollout, our goal 11 different playbooks built around the processes that in Diane's group that we are delivering through enhanced processes to improve these customer service. And then thirdly, is really positioning ourselves for long-term customer relationships again through the Diane's team and what Michael Lafitte is doing as our CFO.

Just a brief comment on the square footage reductions you see and Derek mentioned this, these square footage reductions are really driven by a decision in a large part to exit what we referred to as our call center business. This is a centralized operation we have run to process FM related work. There were work orders for a number of clients and candidly the delivery model that we believe could not be profitable for both us and our clients. So we have taken mutual steps to exit that operation. All those reductions were attributable to business we exited last year. And, we have already moved to a different model that delivers we believe significantly better service to our clients who adopt this approach. Its' also a highly leveraged operation in that. In this environment we can support both our user and investor clients. So that's the bottom line there and really in terms of facilities management, I expect these actions to ensure greater FM profits in 2003 and in the longer term. So that's the update on that.

In terms of what I see in the market growing -- kind of growing customer needs. First on the corporate side, real continued focus on improving portfolio efficiency and cost reduction among our clients and prospects. Not surprisingly, in the corporate sector, there is tremendous focus on real estate operating expenses as a percent of SG&A. And really there is two things that are being driven from that and the first is an increase in the use of outsourcing as a real estate cost management tool. So, we are out in the market engaged in many discussions with prospects to advise them on the potential scope of services and savings available to them through outsourcing and this really includes all of our service areas in the corporate side.

And today in our pipeline report, we -- when you compare it to this point last year, we are basically double where we were at the same quarter of '02. So we think that's very favorable. We also see high demand for disposition services and focus on space utilization and space efficiency. I would say it's not an overstatement to say that every one of our corporate clients is more spaced than they need right now. And our customers and our prospects need an increased level of transaction management services coupled with our project management capability as they try to downsize there space and need as result to reconfigure the space that remains in their portfolio. So that creates an opportunity for us but a real challenge for our clients. So we are focused on that.

Briefly some recent wins and client expansions; Sprint Communications a 3-year contract to provide project management services for 22m square feet across the United States. McGraw-Hill national transaction management and lease administration contract again for over 8m square feet and sharing (inaudible) awarded us the opportunity to provide portfolio and transaction management services for over 25m square feet. And we have continued to focus on significant existing customer expansions. So we have expanded our relationship with their Bayer Healthcare system, with HCA and E-Trade and others. So that's all very positive. I would just make one follow on comment to Bob's reference to adding talented professionals. We see an opportunity to add specifically to our national platform of talented brokerage professionals. Our corporate advisory service business is focused area of growth for us as you know and we are beating the drum hard out in the market to find the best talent out there to join and build their career with Trammell Crow Company. And I would be disappointed this year if we did not add by the end of year, at least 50 brokers to our network.

So, on the investor segment, I would say we have great focus on tenant retention and leasing activity because our owners are particularly focused on this really soft market that we are in. And, we've had significant gains in our office leasing and management portfolio assignments this quarter. And those include new assignments with CIGNA and AEW Capital Partners, JP Morgan, Fleming, and markets like Atlanta and Houston and Washington DC and Detroit. In each case assignments in excess of over 1m square feet. So those are all very positive. So in that business, we are executing on a very focused plan to grow our base of office property management and leasing. So all in all, in this difficult market we are optimistic about our position and our prospects. We've got a solid pipeline, some good momentum and I think we're very excited about the value we offered to our investor and user clients. So that's it. I guess, I'll turn it to John.

Thanks, Bill. I'll make the comments this morning on the development in investment segment and I'll apologize in advance for the nasal tone of my comments. I'm fighting a cold but I do think it's quite symbolic to the outlook that would not. If the economy gets a cold I do think real estate gets pneumonia and development investment just dies and...

Don't die down.

In fact. Yeah I won't die. But I do think our development investment business is not dead but I do think there is no real change in the fundamental demand that may warrant a change in that outlook. You know as stated previously, we think our development investment business will be down this year relative to last year and we are maintaining that outlook at this time. The D&I business does lag the overall economic slowdown so we kind of previously called this outlook and we think it is kind of inline with expectations.

On the negative side of what we are seeing out there as I mentioned there is still no real fundamental demand to drive any new [inaudible] at this point. We had one in the fourth -- in the first quarter but I think it is a fairly unique situation and more airport related which ties into our initiatives. Where we really seeing activity at this time is two fold. First of all this corporations making moves for efficiency sake consolidations where they are vacating number of different spaces in consolidating in the one and it will be more efficient in the whole process.

And secondarily in fact good news just continue traction and penetration in our healthcare higher aid in our corporate build to suit initiatives where its becoming an increasing part of overall starts in this down environment. What we are seeing within our existing properties where we have vacancies is that it is -- it's taking longer and more TI dollars to get the stabilized occupancy. Consequently getting those assets to a stabilize point and available point is tougher in this market and is taking a little bit longer.

On the positive side of that the low interest rates continue to buy everyone including ourselves time to get those assets stabilized and to bring those to market. Liquidity remains abnormally high for this point in the cycle. Since this really just still few attractive alternatives for investors to put cash in early yield therefore once we are able to bring those stabilizes assets to the market we've been -- we really been pleasantly rewarded with the aggressive pricing on those assets.

In addition, we are seeing some user sales and opportunities for users to take advantages of the low interest rates and the own versus lease and that's also contributing towards our exit on some of these. So, overall we will take this positive aspect of where we are at in a cycle and we really remain focused on aggressively repatriating our invested capital as we did this quarter. On the out -- '03 outlook an extended as I said it's more kind of status pro as we call it around here until the economy improves. I have a friend at AMB that kind of describe it that well at least it's not as bad as fast and I think that somewhat kind of what is happening. I do will -- I will reiterate Bob's comment that we are on offense in the capital market's arena with new funds and programs with our customers. And with the liquidity that is out there we feel really strong that we are going to make good progress in that area and really prime ourselves for the future. Where we are at -- at this point we are realistic -- really optimistic for the inevitable recovery that will come so I am looking forward to it.

Okay thanks John. Why don't we go ahead and open it up for question now.

Thank you at this time we are ready to begin the question and answer session. If you would like to ask a question please "*" "1". You will be announced prior to asking your question. To withdraw your question press "*" "2". Once again to ask a question please press "*" "1". One moment please. Our first question comes from Matt Ostrower with Morgan Stanley. Sir, you may ask your question.

Thanks, good morning just a couple of question to begin with on fundamental. I guess two questions on fundamentals. One we have seen some of the larger -- the larger commercial reads like Equity Office and Boston Properties, couple of others have sort of shown some, I guess, some concern-- some increased concern in their portfolios. There has been more leasing activity in their portfolios and it sounds from your comment that you haven't really seen any of that and I am wondering you just sort of thing that's sort of an anomaly and not representative of the market. Are you seeing any improvement in transactional volume at all?

Yes if it has it has been very recent -- you have just look at the quarter in the aggregate clearly it started out our very dead in January, February and you can tie it to the war, you know, number of different factors, but what we are hearing from the street level from a number of our different people is, you know, the impact has been more psychological and people are now talking about it and starting to talk about making decisions. So that activity is a positive. We haven't seen that reflected yet in the net brokerage numbers of closed transactions through the first quarter, but I would say the attitude is clearly positive.

In your sense, is it possible to reach a more aggressive in their, sort of, you know, transactional strategy than the average landlord out there?

My feeling is that the [inaudible] looks at their economic vacancies that they have in some of that space the ones that want to -- that are being watched pretty closely, want to have any type of income associated with that so we have seen them be more aggressive on some of those ramps and in NTI dollars to get some income string with that, and I think that is a fair conclusion if you compare them to more on the private sector, that's looking at it from a pure debt standpoint in a longer-term value creations standpoint.

Matt, the other thing is I think you mentioned Boston properties and equity office, those are large sophisticated landlords. And I think they -- at this point in cycle one of the conclusion that they have come to is a conclusion that owners often come to at this point in cycle. It is a whole lot cheaper to get aggressive and with new tenants that it is to hold out, let tenants leave and then go into the open market and try to attract new tenants. So I am not sure exactly what underlying numbers you are seeing, but it wouldn't surprise me if part of its being driven by aggressive efforts to renew existing tenants?

Right and their activity, may not totally representative of the overall market as well for example. I think?

Well at a minimum it may not reflective of the brokerage market because the relationship between new deals and existing deals isn't one for one as it relates to the brokerage market.

Right, and then Bill, you had mentioned that almost all your corporate clients have more space than they need right now. I mean, just thinking back your experience in the last cycle, how meaningful is that statement? How quickly could they decide that -- how quickly could it be that what is excess today, you know, if all of sudden their revenues start to grow a little bit, will they all suddenly say, "yeah, its little bit extra moving, I'll hold on to it". Give us a sense of how quickly that can change?

Well, I think it can change quickly first of all Matt, but when I say vacancy, I mean there is three pieces to vacancy the way we think about it. The first is, you know, the first piece is truly what's excess. The second piece is what I call shadow vacancy that is very hard to get at this space. It is just encumbered by kind of this Swiss cheese effect where you can't really get at it to get rid of it in the first place. And the third piece is really that space that you are referring to what I call the extension space build into the portfolio.

So that when the market cycles back those are blocks of space that you really don't want to -- it may be excess today, but you really going to be going back into that in the first order of any growth. I think the second and third piece; you are not going to see any -- which doesn't really fall into that fundamentals struck-full vacancy piece. The first piece is still 7%, 8%, 9% in a lot of cases. And when you get to portfolios of 20m square feet, 2m square feet of, you know, completely under utilized space sitting out there. That's a meaningful economic hit. So that's our job, we've got to help them go out in the market and get aggressive to try to get those completely off the rolls.

Got you. And then just a couple of technical questions. You've spend some time talking about property management margins or property management operations improving. You have gotten rid of some less profitable accounts there, can you comment -- I don't know how specifically you are willing to comment, but can you give me a sense for sort of what were property management margins before? What are they now? Or at least just sort of a degree of change?

Well, I think we are really aiming those comments that's were around the facility's management, the reduction of the facility's management accounts that were purely cost -- what I would call in a large case the call center related accounts.

Right.

And those were negative drags. Where our approach on the FM business is a what I call a consulting led FM business. And you know there is pieces to the FM business where certain players are in certain slices of that. They are in the call centers slice or they are in the technical O&M slice. We are in the whole FM business, that's the place where we want to generate the margins that we think are attractive there.

And do you have a sense for how much your margins have shifted as a result of these changes?

Well, I mean, we had some issues last year that we've gotten beyond, so those -- that margin swing will be dramatic but on an overall basis, I think our margin in that business should be 5 or 6%.

Okay. Great. And then Bob, I think, both you and Bill talked about adding people, can you just talk a little bit about the cost impact of that and how that fits into your guidance for the year. I think your guidance, you have been pretty clear, doesn't really depend on much of the revenue turnaround here, so what kind of the squeeze on margins that's hiring? How many people you talked about hiring and what's the margin impact there?

Well, Matt, Bill gave a number that is kind of our minimum target on the broker's side and that's to go by 50 brokers or 10% over the course of this year. I would hope we would go about more than that. And on numbers that you guys have and that we have talked about, you guys been (inaudible) committed in our own management forecast fully contemplate all the expenditures necessary to bring those books on. But in addition to that we also expect to bring on new leaders in a number of areas. And we've done that on the west coast in San Francisco; we have done it in Portland, we have done it in Florida, on the east coast, and we are pursuing in a number of other areas; broker, leaders that can help us grow the business. And we don't expect that to have the drag on the numbers, this year either it is contemplated in our forecast.

Okay. Great. Sorry to take so much time.

Not at all.

Once again, to ask a question, please press "*" "1". Mr. Will Marks with JMP Securities. You may ask your question.

Thank you. Good morning everyone.

Good morning, Will.

I had a couple questions. One on the gain, were pretty large during the quarter and I am just wondering, how -- is that what you referred it in the press release transaction levels? When you referred the transaction levels being particularly stronger in the quarter and maybe some of it was not expected in the quarter, is that what -- is that the line you are referring to?

Well, generally in the press release when we're talking about, you know, kind of, generically transaction levels. We are talking about brokerage and development.

Okay.

And I don't think we said that transactions were strong, but I do think that we said that kind of the, you know, are better than expected. First quarter earnings were in part results of some transactions that we were looking too for the year, you know, closing earlier than expected.

Could that be reflected in gain on the disposition of real estate line at all or--?

Yes.

Okay. And, I mean it is safe to say that the number from the first quarter would not be a recurring number throughout each quarter of the year or is it possible that?

It's so lumpy, and erratic, I think, and just driven by -- that's part of my comments about how difficult it can be to forecast quarters with precision due to the lumpiness of these transactions and this significance to their profit contributions. And it's kind of where they may happen to fall on either side of the quarter end. So -- yes, I think it's tough to take any one-quarter and then kind of project the pattern, I mean the best we can do kind of in terms of guidance for that business -- is kind of what we have stated. And what John stated that we expect it be down this year, but we expect the amount of the decline in profitability from the development business to be more than made up by improved profitability on Global Services side.

Okay. You also mentioned that -- I miss this -- your pipeline is doubled. Were you referring to that in the corporate services?

Yes, that was Bill talking about the outsourcing business and kind of the state of kind of our pipeline activity there; it's not the development and investment business.

Right. Okay. The only other question I have just ties into what Matt was asking and taking this facility to management, question is stepped further. It's just -- it's hard to understand I guess for me, how the square footage dropped from 254 to 178 quarter-to-quarter or from fourth quarter to first quarter. And on papers it looks like you lost 30% of your clients or something like that. And I just wanted to make sure I understand what exactly happened here is this -- are these huge properties that you just were making money on and you have cancelled your contracts or maybe if you could simplify it?

Well, let me give you on example. One client was 40m square foot portfolio, and all we did was take and make calls, and that wasn't profitable. And, we basically, kind of, mutually came to terms on that, it has a huge impact towards square footage. It has no impact, its positive hit to our earnings, and so, there isn't a corollary necessarily to square footage and profits in the FMPs. If what we were talking about was just the call centerpiece of that and that is where I was trying to -- that slice of the FM business is not attractive business.

It is very low margin business.

I'm going--.

Okay.

Yes, and in total that is one customer but in total there is 50m square feet that has that claim to it.

Okay, I guess one final question on the brokerage corporate advisory side. Would you say that on average brokers will take home more money this year than last?

I hope so, I hope so. Our numbers show slight revenue increases in all parts of brokerage, investment sales, corporate advisory. So, I hope so. We definitely want to be adding the most productive, talented brokers out there to our network so--.

And then again that average production per broker would be kind of a same-store notion, right because we are going to be adding brokers during the year.

Right.

There is going to be a production lag and a sales impact of the numbers negatively, certainly in the short run. But as Bob indicated earlier, when we were going through our budgeting process for this year, we budgeted for the fact that we would have some of that production lag associated with new hirers where we get the expense but not the revenues.

And on the property management side, is that really hard due to the lag there and the turnover of higher rents going to lower rents, it that harder to show growth on a same-store basis in the current year?

Probably so, although as we have indicated something else worked there as market share, right, in terms of how that business line performs and we did indicate the loss in property management revenues quarter-to-quarter versus last year is more than explained by the sale of the phasen business in 2002. So aside from that we are continuing to have wins and make progress.

Yes and I think notable there, Will -- it will take a while for this play out, but the place that we are increasing are, and focused on increasing our market share in property management is with office properties, specifically and very definitely with office properties because that is more profitable business.

Great okay thanks a lot guys.

Once again to ask a question, please press "*" "1". At this time, we have no further questions.

Okay, thank you everyone and we will talk to you in three months.