世邦魏理仕集團 (CBRE) 2003 Q2 法說會逐字稿

Thank you for joining Trammell Crow Company's second quarter financial results conference call. All participants be able to listen only until the question and answer session of the call. This conference is being recorded. If anyone has any objections you may disconnect that the time. I'd like to introduce miss Barbara Bower, Principal, Trammell Crow Company. Ms. Bower You may begin.

Good morning and thank you for joining us for Trammell Crow Company's second quarter 2003 earnings release conference call. This morning, we faxed each of you the company's press release announcing its quarter results. If there's anyone on the line who needs a copy of that release please call 214-863-3350. And we'll fax you one immediately.

This call is being web cast live. It will be archived and available through August 12th. 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 that you 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 Robert Sulentic, our Chairman and CEO.

Thanks Barbara and good morning, everyone. With me from our management team here today are Derek McClain, our CFO, Arlen Gaffner our chief accounting officer, Chris Roth, President of our eastern development operations and Michael Lafitte, President of our Global Services business. As I think most of you probably know, Mike moved into this position recently, when Bill Concannon assumed the Vice Chairman role for the company. Bill is going to focus on several Things including strategic issues, particularly in the area of outsourcing and he is going to be working extensively with our large customers. We'll go to Derek for a financial overview and then Chris, Mike and I will make some comments on operations. Derek?

Thanks, Bob. I'll give a summary of our quarter and year-to-date results address a couple balance sheet items and then turn it back over to Bob, and Bob will include in his remarks a word or two about the outlook for the remainder of the year. First looking at bottom line measures, our earnings per share for the second quarter of 2003 were eight cents versus ten cents in the second quarter of last year. Together, with the three cents that we reported in the first quarter this year, that brings our year-to-date earnings per share to 11 cents, equal to last year's first half. Our net income for the second quarter was 3.1 million, compared with 3.7 million dollars for the second quarter of 2002.

Again, together with the amount reported in the first quarter of 2003, we posted year-to-date net income of 4.2 million dollars, and that's up slightly from net income of $3.9 million for the first half of 2002. Given the visibility we had with regard to transactions as we headed into the quarter, we'd expected to be somewhat behind last year at the half-way point. As Bob noted in the release, we're pleased to have basically matched last year's earnings through six months.

Our EBITDA for the second quarter was $12.5 million dollars, down from $14.1 million dollars in the second quarter of '02, and for the six months ended June 30, EBITDA was $21.2 million dollars, down slightly from $21.5 million for the first half of '02. Looking now at revenues, our consolidated revenues for the second quarter were $169.1 million dollars, versus $178.7 in the second quarter last year. For the first half, consolidated revenues were $329.7 million, down from $50.7 million in the first half of '02. By segment, Global Services revenues were essentially flat. We posted revenues for the second quarter of $161.4 million versus $161.6 million in the second quarter last year. Global Services revenues fort first half still trailed those from last year's first half. They were $308.6 million in this year's first half, down about 3.5% from last year. Given the pieces that of business we exited last year which we talked about at length last year, we're pleased with the year-to-date Global Services revenue picture in this environment. Worthy of note here is the increase in corporate advisory services revenues, in the second quarter of '03 versus the second quarter of '02.

This increase was due to large commissions earned from significant transactions force a couple of our larger corporate customers. Development and investment revenues were down substantially consistent with expectations. For the second quarter of the year we posted development investment revenues of $7.7 million dollars, down from $17.2 million dollars in the second quarter last year. Year-to-date the segment revenues were $21 million dollars, down from $31.1 million dollars for the first half last year. Now, development investment revenues do not include income from investments and owned consolidated subs and that's generally significant. For the second quarter this year income, income from unson some dated subs was $5.9 million dollars, compared with $4.1 million dollars in the second quarter last year. For the first half, income from unconsolidated subs was $6 million dollars, down from $7.2 million dollars last year.

Looking at segment profitability year-to-date our profits have been carried by Global Services. Again, as expected. Year-to-date income before income taxes for Global Services was $7.4 million dollars, up more than 100% from the $3.5 million dollars we posted in last year's first half.

Global Services EBITDA was $17 Million dollars for the first half, versus EBITDA of 13.5 million in the first half last year. Development and investment year-to-date income before income taxes is down, on the other hand, from $3.5 million dollars last year to just over breakeven in this year's first half. Development and investment year-to-date EBITDA was $4.2 million dollars versus $8.1 million for the first half last year. Now, a word or two on the balance sheet. As you all know, we've been closely tracking our cash and line of credit borrowings over time. Cash was down $10.7 million dollars this quarter from the balance of March 31. Of course, there are a host of things that affect the cash balance that will be captured in our cash flow statement, but it's worthy of note that during the second quarter, we spent more than $10 million dollars on the repurchase of shares.

We reduced our line of credit balance by $5 million dollars, down to a balance of ten and we increased our equity in real estate by almost another $5 million dollars. With that, I'll turn it back over to Bob and look forward to taking your questions and remarks.

Thanks, Derek. I want to start by noting that I am very encouraged by the way this year is going so far. The market remains difficult, just as we expected it would, but our numbers are a little better than I thought they'd be at this point in the year, not materially, but somewhat better. More importantly, in the business planning process leading into this year, and in our previous calls with all of you this year and toward the end of last year, and even in our annual report, we clearly identified several initiatives we wanted to pursue and accomplish this year to give you examples of a few of them -- we wanted to bring a significant number of new producers and leaders into our company, either geographic leaders or product line leaders, which is a clear departure from where we've been the last couple of years when we've been reducing headcount and people throughout the system under the pressure of a declining market. We wanted to grow those ranks this year.

We wanted to make material improvements in our customer service, and we wanted to independently measure and verify those improvements. On the Global Services side of our business, we wanted to improve margins on the development investment side of the business we wanted to add at least a couple of capital programs and maintain our network of professionals in that business, and across our business, we wanted to grow our health care and higher education offerings.

At the midpoint of the year, can I tell you all of these initiatives are very much on track, and we remain committed to each of them. Chris and Mike are going to give you more information on our progress with the specific initiatives in their areas and also on our new business pursuits. We continue to target EPS growth for this year in the 10% to 20% range, and this is particularly encouraging to me, given the fact that we have a very substantial development business which is important to our company, and the effects that the end of the cycle has had on had business.

So we remain focused on that 10% to 20% growth or nor year. Overall, my confidence is growing that this will be a year of major advancement for our company. With that, Chris, why don't you go ahead and give us the development investment update and then Mike can hit Global Services.

Great, thanks, Bob. As Bob mentioned, the results of our development investment business continue to reflect the fundamental weakness of the late cycle economy. As we previously shared with you we continue to project lower year-to-year results in our development business, and currently see nothing really to change that perspective. While there are indications of a general economic recovery, our DNI business tends to lag recovery as corporations first expand into currently underutilized space prior to making* commitments for new space requirements. Accordingly, new buildings are still leasing slowly, and earn outs* and fees are therefore either delayed, reduced or eliminated. While we continue to experience slower year over year DNI revenue as we previously predicted, we believe there's also good news.

First we believe our DNI business will remain profitable through a very difficult recession which we think will be a significant achievement. This will occur as a result of the efforts we took over the last two years to reduce our cost structure, while focusing on harvesting transactions where possible, reparticipate rating capital and mitigating risks on new transactions.

Also as Bob mentioned, we see building momentum in our health care, higher education, builder suit and residential initiatives which represent over 35% of our new business starts and reflect an opportunity to work with sectors experiencing demographic shifts, which really should lead to a less cyclical business model. We continue to invest in attractive opportunities, but are not trying to force transactions. Accordingly, if you examine our operating stats that were submitted today, you'll see that our pipeline of new transactions which we believe have more than a 50% probability of occurring has dropped.

This is what we'd expect at this point in the cycle as attractive risk mitigated opportunities are more difficult to find, given market fundamentals and reduced end-user demand.

We previously stated that as a result of our strong financial condition, we believe that we've positioned ourselves well to benefit from the opportunities that should arise if the general economy improves and corporate expansion occurs.

We believe we're seeing the early signs of that activity in our service business, which should translate into improving DNI opportunities.

Importantly, if we compare our business at the bottom of the last recession, roughly ten years ago, to our circumstances today, we see a dramatically different set of facts.

First, ten years ago, we were focusing on very few new transactions as we, like all major real estate companies, were focused on working out problems.

We had very little liquidity, had record levels of debt, and we had experienced the loss of many employees as market opportunities were diminished. The economy provided virtually no demand for new construction at this point in time. Contrasting that period just ten years ago with today, as we're hopefully coming out of this recession, we have a huge volume of in process development, a still strong, if somewhat reduced pipeline, a vastly improved capital structure, which provides debt capacity to pursue opportunistic new business, and experienced personnel who are not distracted with workouts.

We also have strong relationships with our capital partners and are poised not only to expand existing relationships but to add new one in anticipation of the growth and demand we see occurring over the next five years and I think you'll see us complete hopefully two additional capital programs, as Bob mentioned, by year-end. So all in all, while our earnings for 2003 and 2004 will be relatively flat on the DNI side, we believe the actions we've taken positioned us to perform strongly as the economy improves. Mike might take over.

Mike Lafitte Thanks, Chris. To begin, I'd like to just first say that I'm pleased and honored to now be serving as the President of Global Services division of the Trammell Crow Company.

I am so proud of our senior leadership team within the services group, and believe that our business is perfectly positioned for growth going forward from where we sit today. This morning, my comments are going to be really around four main things.

First our operations and priorities, secondly, our brokerage business, third our margins, and finally, I'll wrap up talking about growth. First of all, as to our Global Services operations and priorities, we continue to add great leaders from the industry to fill key roles of leadership and production, specifically this past quarter or this year, we've added new area leaders such as Don CartWright in southern Florida, Craig Hinick in Phoenix, and Karen Daley in Philadelphia. All of these are season real estate Veterans with great reputations in the market place. Basically our ads that you have seen and will see us ad are around area leaders around brokers and around growing our project management expertise. We have consolidated our entire northeast region in one formal region under Joe Callahan's leadership in the past 30 days. Joe's region spans from northern Virginia to New England.

We are focused on growing all of our lines of business in this region and have gone from a handful of brokers in New York and New Jersey a few years ago to approximately 40 producers today. Our brokerage presence in these markets will continue to grow a long with project management business and other outsourcing services. Recent wins that we've announced with sherg plow and McGraw-Hill are both examples of our focus in this region. Our theme of customer service has remained our number one priority and the initiatives led by Diane Patison will center around the new customer dashboard which is basically an online communications tool that allows TCC's senior management to be live with our customers to measure our performance. Our best practices team has implemented significant improvements in our consistency around the delivery of service and the use of our best practices playbooks allows our entire internal team to have complete access to our latest tools via our intranet. Today our suite of technology applications that are offered by Trammell Crow Company through our internal resource group is a full set of offerings of proven applications for each of our functional areas.

We have recently successfully completed a shutdown of our call center operation as we had previously described as of June 30th, and transitioned all of this business to a better internal solution for service. Not only do we believe we have a better model in place now for this service, we also have a negative financial impact behind us. We have additionally invested in resources around procurement with the strategic sources division within Global Services, which is charged to mandated with driving savings for our customers and leveraging our scale of managed assets. Next, regarding our brokerage operations and division, we have stated that our intention very clearly is to take advantage of this down market in production to grow our brokerage ranks. We began the year with. 500 producers in our system and stated we'd like to see 10% growth in headcount this calendar year.

Through the midpoint we are almost exactly half way to this goal and our current headcount is 524 producers.

Additionally, we have 50 what we call transaction managers within our system, which are basically those who are dedicated to one corporate account.

Our goal is to on it push for higher producers and have a network that is robust in all major markets with appropriate coverage and secondary markets where we exist today.

Most of the growth in our brokerage sector will be around corporate advisory services group, or tenant representation. Our approach it s to add strategic hires that fit our culture and are committed to customer service. Highlights of the first half of the year certainly include southern California and Phoenix, where we've added a significant number of producers.

As mentioned earlier by Derek, Our CAS revenue is up both for the second quarter as well as year-to-date numbers and we're certainly pleased with that.

Regarding our margins, you know, the most important thing I would say is that we are completely focused on earnings, and margins for all of our lines of business.

Every line of business within Global Services is tagged with a targeted margin, and every business unit leader is held responsible for reaching these targets.

Our internal controls are in place, and our pricing for all new business goes through a standard pricing model to ensure consistency in our business approach from market to market. We are beginning to see improvement in the bottom line for Global Services. This is a result of really two things, very targeted cost cutting that we have done in 2001 and 2002.

This is the first full year when we will see the full benefit of the cost cutting done over the last two years, even though revenue, slightly down for the six months and relatively flat for the quarter. The improved bottom line is also the result of our disciplines put in place over the last year regarding our pricing and contracting policies and we feel good about the way we're pricing new business today.

As to growth in our outsourcing business, as I said earlier, we are completely focused on serving our existing customers well and growing all of our lines of business, building operations, brokerage and project management within Global Services.

We clearly see the outsource of real estate services as the primary driver ever our growth going forward. We're organized around the pursuit of corporate, institutional, health care and higher education. For the quarter our facilities management base grew by approximately. 8 million square foot. FM continues to be a growing business for us, as corporate America looks to outsource to lower cost and enable them to focus on their operations.

Our pipeline of new business pursuits is extremely healthy. Recent wins on the corporate side include significant transactions as Derek mentioned on the corporate side in the second quarter with Bank of America, Tyco and Unisys Corporation. This is the evidence that our business can translate into significant transaction business for our brokerage network. On a higher education side, we are doing more work with institutions, such as George Washington University and Boston University.

Our work ranges across both services as well as development for both higher education, as well as our health care business. On the institutional side, we continue to grow and have won business in this past quarter with TIA, CIGNA and Wells Real estate.

While the general markets conditions remain tough, particularly the office sector, we have continued to perform well for our investor customers.

In conclusion, I would say that the overall state of our Global Services business is solid. We are positioned for growth, and our financial condition allows us to be focused on serving our customers.

The diversity of all of our product offerings makes us truly full service in all of the areas of real estate. This has served us well in the down cycle and I believe will benefit us and our customers going forward. Bob, I'll turn it back to you.

Thanks, Mike and Chris, for those summaries. Let's go ahead now and take questions. Hello? Operator? Hello? Wow!. Operator? If there's anybody out there listening in, please bear with us. We're going to try to contact the operator on a separate line. We're still waiting to get the operator back on here. I apologize to keep you all holding.

We're trying to get her offline. Have we -- operator? We're still pursuing the operator here, so please hang on if you have questions. We are still in pursuit of the operator, so please hang on. I apologize for the delay here.

Excuse me, my name is Kelly. I'll be the operator taking over for you today. Are you wanting to begin questions at that this time?

Yes., Kelly we are.

Ok, I would like to remind the parties, if they do like to ask a question, please press star one on their touchtone phone. If you do have questions, please press star one on your touchtone phone. I have a question from Matt Ostrower. Your line is open, sir.

Good afternoon. Just a couple of quick questions. Bob, could you comment on your sort of appetite for a buyback going forward? Are you done with that?

Is this Matt?

Yes.

Matt, I'm sorry, Matt, we couldn't hear the first few things you said there.

No problem. Just a couple of questions. First on bite back, do you have a appetite going forward?

Well, here's how we look at that and I'll let Derek comment on it also. We repurchased $10 million dollars worth of our stock because we thought it was a great buy. What we don't want to do is use up too much of our financial capacity buying back stock. It's a financially smart move, but it's not something that strategically improves the company.

It doesn't improve our capacity to service our customers or land new business, etc., , Matt, so we'll continue to machine monitor that and at times we think are appropriate, consider repurchasing shares, but what we're really trying to do, as we've said over and over for the last year, we're trying to "keep our powder dry," so that we can make investments to strategically improve our company. Derek, I don't know if you want to add to that.

Derek McClain I don't have much to say. We will evaluate it from time to time and what we did before was, you know, in May, we completed the previously announced buyback from 2001, and were able to actually complete that faster than we expected. We were able to buy $10 million plus worth of stock in the month of May, but we'll just have to balance the desire to do that with the desire to keep our powder dry, as Bob mentioned.

Okay, and then you spent more time on this call talking about new hires and you've obviously made some progress in that area. Can you just give us a sense, can you give us a little bit of guidance for what expense levels should look like going forward as it relates particularly because Bob, you've articulated there's a lag between hiring those people and getting revenues in.

For modeling purposes, what should we be looking at going forward?

Derek?

Yes, well, Matt, you know, as you know, the salaries, wages and benefits line item for us includes, you know, un reimbursed and reimbursed headcount, and for the year-to-date, our un reimbursed salaries, wages and benefits is down substantially. In fact, it's down by $16.8 Million dollars. So we continue to be attentive to those costs. You know, it will, you know, salaries, wages and benefits, the rate will pick up here a little bit, but I wouldn't expect it to pick up substantially.

I mean, we have added broker headcount, as Mike mentioned but total headcount year-to-date is still down. About all I can tell you is, these new hires and their impact on profitability that's noted in the release is, in fact, something that we've taken into account in our guidance.

I mean, there is that kind of negative profitability impact associated with the ramp up of new producers, but we expect to absorb that in this year's operating results.

Is it safe to say that this would translate into sort of a flattening of that line item, particularly as it relates to unreimbursed as opposed to seeing it increase significantly from here?

I'm not sure I follow you mean?

Just again, for the purposes of looking at our financial model on you guys and trying to figure out the right way of getting to your eps estimate. Just in terms of that, the salaries, wages and benefits line item, do you have a sense of what direction that's going in?

Yes, I think in terms of the quarter-over-quarter savings that you're seeing 2003 versus 2002, I think the amount of that decreased expense, if you will, will decrease over the remainder of the year.

Okay.

Does that make sense to you?

Yeah, I think I understand.

Matt, just a couple of things that aren't empirically tied to the actual cost in that line item but give you a flavor for the direction of the changes we're making.

Mike walked through with you the fact that we're well on our way to achieving our 10% headcount and brokerage objective for the year.

But at the same time, when you look at our whole company, we've gone from a little over almost 6200 employees at the beginning of the year to a little over 6100 employees mid-year, which means that the mix of employees we have is shifting.

We've gotten rid of some staff positions and other positions over time that were less productive for the company and replaced those positions with producers. Secondly, on the development investment side of our business, our headcount for the year in that side of our business is down by two people.

So essentially flat. So while you're seeing some savings in that line item, our production capacity hasn't declined at all, and in fact, is going up. So I think the way Derek characterized it is accurate. You should see that, maybe your words, you should see that decline flattening out going forward, but it doesn't reflect the fact that our productive capacity is improved.

I'd add just a couple of comments. You know, we are being very prudent in the way we're doing this. I mean, this isn't runaway hiring going, you know, back the other direction.

We're very much watching all of our overhead for all of our lines of business. You know, we're making investments.

We're making investments in places like Phoenix, New York and Chicago, the major markets, where it really fits strategically where we want to beef up our leadership, and you know, what follows people is revenue, and building our lines of business. So it's very targeted, very specific markets where we've grown our business.

Great, and then just finally, you know, Bob, you referred to keeping your powder dry and you've talked in the past about looking at selective opportunities to expand.

Now, when you think about that now, is that purely in your mind still just a hiring phenomenon or are you actually thinking about, you know, still thinking about potential acquisitions out there, and if so, what's the likelihood something would happen this year?

Well, we're looking at both, but so far, what we found to be prudent is to do new hires with the associated cost, and not do acquisitions.

We've looked at a number of acquisitions, Matt, and again, as we've said in a number of places a number of times, what we're not going to do is acquisitions, where, for instance, in a service business, several of the key producers involved in the entity we're acquiring are enriched to the point where they don't need the job anymore, so to speak, and it's hard to make that happen in this industry.

And so we've looked at a number of situations, and we're avoiding situations that have that flavor, and we're also avoiding situations where we think that the cost of integration kind of overwhelms the benefits of the scale that we get through the acquisition. So I would say it's not at all inconceivable that you'll see some carefully thought out acquisitions by us before year-end because we continue to look at them, but the probability isn't high. It's much more likely we'll achieve our growth objectives through adding people one offer, or a couple at a time in some targeted markets.

Great, thank you very much.

Thank you, and the next question comes from Ian Lappy. Your line is open.

Good morning.

Hi.

Can you talk about any trends in market share, I guess among each of your businesses first, and then just secondly, are you seeing any pricing pressure, and sort of what the environment is like there?

I'll make a real broad comment, and then I'll let Mike and Chris comment on that specifically. First of all, starting with development and investment, which is an important part of our business, more so than it is any of our peers in the real estate services sector.

There was a Merrill Lynch report that recently came out that suggests the pipeline of activity in the business overall is off something like 70%. So when you look at our development and investment activity, you have to measure it in the context of an overall market decline that's enormous.

I would suggest to you that I think we're making nice gains in market share in the areas we've targeted, health care, higher education, and so forth, but I'll let Chris comment on that more specifically.

Mike, if you want to comment on the Global Services side and your view of where we stand in terms of our pursuit of market share on the institutional side with the investor customers and the corporate side respectively, because I think you have a pretty strong view in that regard. Why don't you go first.

Mike Lafitte I'll make a couple of comments. Number one. We still very much see a consolidation of providers. We -- institutional customers are wanting to deal with fewer service providers. That is the theme. Our large customers, our top 20 customers on the institutional that we track and our large customers on the corporate side, I would say both, you know, on both sides of the business, we clearly see people wanting fewer providers.

I think the fact that we are truly full service, that brokerage as a percentage of our revenues, of our gross revenues is roughly a third. You add the fact we do FM and project management in a significant way plays into our favor very, very well, particularly on the corporate side as we have such a broad offering.

So the players obviously are consolidating in our business, and we think that that bodes very well for us in terms of continuing to get more market share.

You know, national and global players today, can you almost count on one hand, and we see that those national and global players are getting more and more business. So we feel good about it.

Ian, this is Chris Roth. I might respond. I think in terms of market share your first question, I think we certainly, if you look at the statistics for national real estate development, we still lead the pack. So in terms of market share, I think we're still maintaining a strong market share in what I'd characterize as a diminishing market. Hopefully we're at or near the bottom. Mike's comments about consolidation and reduction in headcount certainly do apply to our business.

We see many of our competitors dropping down headcount significantly, although certainly for the older, the more typical spec business, which has historically been a large part of our business, we still see local, small entities who compete in that business. We've never considered that we had a dominant market share in that business, although on a national basis, we certainly were the dominant player. In terms of your comment about the attendant pricing to the consolidation, I think certainly in our fee business, any RFP business we're working on, we see tremendous pressure on pricing, and certainly experienced, you've watched our numbers, we've experienced some diminishment in margin which is why we focused so strongly on trying to tap into the business lines where we have the strength of our service side, really correlating with the development that we provide to some of the people who are clients on the service side, notably in the corporate area, the higher ed area, and the health care area. So we find that if we can avoid some of the more typical RFP development services business that we have a better margin, although there's certainly still pressure because there's no shortage of newspaper articles concerning the weakness in the development business.

So we still -- I think the good part that we see is that for the year, we will be profitable. We will be less profitable than in '02, but we will still be significantly profitable, and really believe that that will continue in '04, and then significantly improve in '05.

Mike, how does, that how is that you were comparing earlier to ten years ago. How is the pricing pressure for RFPs compare to what you were seeing ten years ago? Is it sort of comparable?

Sorry, Mike, I think, Ian were you talking about the ten years ago for the development business?

Yes.

Yes, let me answer that. I think that the one comment that I didn't quantify was the true lack of development business we were working on ten years ago.

If you look back at that time period, I think the recession was probably deeper, and around our system within Trammell Crow, we were working on very little new business.

There was fairly significant builder suit business occurring in the northeast, and I would say the vast majority of the rest of the company was dealing with workouts.

If you look at the pricing back then, it's almost saying what was the pricing on deals that didn't exist.

Right.

I think in the builder suit market, where we had expertise that was really, I think, in the northeast, I think that the pricing at that point in time was such there were so fewer developers at that point, that I think our pricing probably had a little less pressure than it has today, all know Bob Sulentic can speak to that.

He was on track for the northeast, and certainly the margins they achieved were very good but I'm not sure how the competition worked at that point in time for you.

Ian, just to elaborate on what Chris is saying, the business, for all practical purposes, was shut down at this point in the last cycle.

There were a few builder suits in areas of the countries where there was a lot of corporate concentration, like the northeast, and a couple other places.

The pricing was just fee pricing. There was very little incentive, and you were able to get, you know, solid market fees, but there was no incentive activity of any material nature going on. So the miss was much slower then from our perspective, from Trammell Crows. Although we had come from being a bigger development business in the '80s, we were really shut down.

Now, one interesting fact I'll give you, though, we were in that kind of dormant state at this point in the last cycle, but when the cycle got revved up toward the middle of the '90s, from that point through the end of the cycle, we developed almost $6 billion dollars worth of product.

We were almost out of the development business ten years ago, but yet, when it came back, we developed almost $6 billion dollars worth of product.

That's just the nature of this business. I would say to you to thank our network at this point is more active and more engaged in the development business than it was in the last cycle.

Whether it will come roaring back the way it did last time, it's hard to know. I will tell you, though, the predictions in the last cycle and anybody that followed our industry knows these are the kind of things you were hearing, ten years ago, what you were hearing was there wasn't going to be another office building built until the year 2020, and so on and so forth.

Things tend to be very dire in this business at the bottom of the cycle, and then they tend to be very exuberant at the top of the cycle.

I don't think our activity level and the bottom of the cycle looks nearly as dire as it did last time.

I hope it is that when we come out of it, it will have a flavor that is at least somewhat parallel to what it had when we came out of it last time.

Ian, one additional thought for you in terms of pricing models, is that I think this market, as a result of low interest rates, has resulted in more developers surviving than in fact occurred in the last cycle.

Certainly, we're seeing some movement in interest rates now, but I think the competition at this point, is probably still -- while we've seen a huge amount of reduction in the headcount within our competitors, I think the competitors still exist on a diminished scale.

So I think you'll continue to see for the RFP-style business, I think a very active, competitive market.

Okay, and what about pricing, for instance, in the corporate advisory services? You had a pretty nice gain in revenue. Is that pricing comparable to what you were getting last year or has there been pressure there?

I would say, as I think about the lines of business on the services side of our business, you know, first of all, on the facilities management, the property management business, that business has always been price sensitive and always been competitive and it's really no different today than it was this time last year certainly. We are not the low cost provider.

We don't hold ourselves out to be that.

We really focus on driving value and strategic solutions as it relates to those areas and looking for cost savings that we can deliver to customers. So it's not always about price on those services.

As it relates to brokerage and transaction business, the drivers of that are a lot more absorption, rents, and really real estate dynamics and fundamentals that drive our revenues in that sector much more so than fee pricing. Again, depending on the deal and market, from market to market, corporate fees, these will be different. Structured differently in New York City than in Dallas and Different then they are in Phoenix.

From market to market, it's not completely consistent, and certainly internationally it's not completely consistent, but I wouldn't say there's a lot of pricing pressure on brokerage fees and transactions and project management, also, I don't think is that competitive, I mean is not an environment where it's so cutthroat that we see a lot of pricing pressure or anything changing in terms of a trend as it relates to fees.

Mike, if I could add one thing, you started commenting on the FM business and the outsourcing business and the fact it's always been competitive, and continues to be so. Ian, one thing -- this is Bob. The one thing I would say is, while that's exactly the case, I think you will see us as a company being materially less inclined to get down in the mud for the deals where the pricing just doesn't make sense.

Absolutely.

We had to correct for some of that last year. We're not going to do that going forward, which means there will be some business we won't land. On the other hand, I suspect that we aren't going to be the only ones in our sector that start to look at that time that way and ultimately, that could have a positive impact on pricing for this business.

Okay, great, thank you very much.

Thank you. The next question comes from Ashish Pant.

Good morning. Just a couple of questions. Bob, in the last quarter, you mentioned that because certain transactions had sort of closed early in the year, I guess, so you were expecting some revenues to be taken into the first quarter.

You guys came and, you know, slightly better than what you thought at that stage, as you said.

Is that simply, again, a timing issue, shifting of revenues from later part of the year, or has there been, you know, areas where you've seen better trends than you would have thought?

Well, I'll give you a comment and then I'll let Derek, who is even closer to it than I to give comment.

We're assuming it's just timing, and you know, good fortune through six months of the year. We haven't changed our perspective on where we are going* to come out for the year, although we're confident in our perspective that I reiterated, that 10% to 20% growth.

But our assumption right now is in looking at it, we think that the relatively small good news that we've had year-to-date compared to where we thought we'd be is timing driven. Derek, I don't know if you want to --

I think that's fair. There are always things that move in and out of the full year forecast, and so we have had some things materialize that we hadn't counted on, not just from the timing perspective, but you know, there will be things that fall in and things that fall out.

I guess, so net maybe looks to us like it's timing related. While we have had some upside surprises, we're certainly not building that into, you know, an increase in, you know, our guidance for the year.

Sure.

Derek, can you give me the CAPEX targets for this year?

Well, I can tell you what we've done so far. We're about $3.5 million dollars through the first half of the year, and it might pick up a little bit from that rate in the second half. We've got some replacements of some I.T. equipment and software purchases we're looking at.

Okay, you know, I wouldn't call it restructuring but the relocating of the facilities management business to improve the profitability seems to be paying.

In terms of, you know, there's increasing entry of sort of non-real estate services companies and do you guys, are you seeing I increasing competition from people like MCore, et cetera, in that part of the business, or are they just in a different niche, different segment?

I would classify that as really, you know, as it relates to facilities, I think there is clearly two kinds of providers, more of a technical provider of FM services that may go deeper in terms of downstream in terms of delivery of services, whether they provide janitorial services in addition to engineering services, and that's kind of one group of providers of FM, and then there's groups of providers of FM that really goes upstream, where it gets nor strategic, and I think we certainly fall in that group of providers for facilities management services, and you know, the benefit of that for us, that's where we play.

That's where we spend on staying in terms of going up the chain. We think the benefit is the synergies that happen between providing and delivering FM, and then crossing selling into project management and cross selling?

Brokerage transactions and being more of an adviser is the space where we play.

Clearly there are other providers that are approaching it more from the delivery of services, be it janitorial or more technical facilities and we certainly have capabilities in all of those areas as it relates to whether it's critical facilities, call center solution and you know, whatever those, whatever FM is, and depending on the user or the buyer of FM, we are definitely seeing the buyers of FM services approaching it differently.

Great. So effectively, both the entities are offering similar functionality, but it depends on what the buyer's looking for?

Yes.

Okay. In terms of, just a point you made about drying to get more transaction business or project development business at your FM clients. Is there anything you can share with us that sort of demonstrates the success of that strategy Because, of course, that's a critical underpinning of the whole FM platform, I guess.

Well, I think we've got, you know, close to, we used to track one of the metrics we tracked was the number of outsourcing customers.

I mean, there's a lot of very specific customers, whether it's Bank of America or Baylor or others, where we may have started with a small portfolio and it grew not only in size, but also in terms of products or offerings that we deliver to those customers, and those -- you know, Bank of America is a great example of that.

We started with 2 million square feet years ago and today we manage almost 40 million square feet for the bank.

Right, and what is the sort of logic of the strategy was that, once you're doing FM or pretty much outsourcing the real estate department for these large enterprises, you would end up, you know, sort of not having to compete, as you had in the past for the transaction business, and hence, the selling costs would be lower as well as business cost developments would be lower.

Are you experiencing that, or are your customers at the FM level still holding RFPs for transaction business?

I think it really depends customer by customer. Our strategy is to, you know, approach each customer and if they only want to talk about f M or if they want to talk about a full range of offering, we'll talk about a full range of offering, but FM, we don't view FM as a Trojan horse to get in to do other services.

That's not our approach at all. We're only going to do FM if it's profitable and if the scale and scope and in a location where we can make money and deliver great service. So I would say that every -- you know the customer ultimately decides how they're going to buy.

We have a lot of examples where we've expanded our service offerings with a lot of our key and largest customers, but they're going to drive that. Obviously, we've got a lot of case studies and a lot of evidence that says, you know, what we've done our American Express and what we have done for Bank of America, or -- you know, the list goes on the value proposition becomes very real.

One thing that I'd add to that, Ashish, is that when we were walking through the results earlier, I indicated that, for example, tenant rep. revenues were up substantially second quarter to second quarter and the big thing fueling that increase is work that we've done for larger corporate customers with whom we have outsourcing relationships, and so I mean, to me, that's a little bit of a testament to the success of our ability to expand with those customers, and get work other than just FM from them.

Yes, but Ashish, the thing, one thing that's very notable right now, is even these very good, very big customers that we have aren't doing very much right now.

Ashish Pant Right.

Most of them have more space than they need. Most of them aren't materially , if at all expanding their base of employees. That's what drives this incremental transactional business we do for them, whether it's tenant rep. work or development work.

So the fact of the matter is, we're seeing some of that now and it's impacting our business nicely.

Where we really expect to see that is where the market picks back up and every we work for needs additional facilities to have rent or develop for their own use.

The one common theme that's prevalent in every single situation, certainly on the corporate side is, how can we save money, whether it's we're delivering the FM service, project services or tracings, how can we dispose of space. How can Trammell Crow Company a provider of real estate drive down occupancy cost? That's what it's ultimately all about.

In pitching for these FM contracts, are you seeing increased involvement in any way of external consulting firms that might mediate these contracts?

Yes. It's very broad-based. It's from consulting firms to smaller boutique kind of outsourcing firms.

The whole business process, outsourcing space, you know, you see technologies oftentimes attached to looking at solutions around real estate. So I think the answer to that is yes.

There's definitely consulting in there, you know, companies and individuals and expertise around now, outsourcing real estate.

Thank you very much.

Thank you.

Thanks for sticking with us through the delay, too.

No problem.

Other questions? Operator?

I think that's it.

No further questions at this time.

Okay. Well if that's it for the questions, first of all, I want to thank everybody for hanging with us through that dead period there, and we now have received an explanation for what happened proving that timing is everything.

We had a circumstance where our long distance carrier that organized this call had a fire at their facility and actually had to vacate for a short period of time in the middle of our call.

They reconvened and got our folks back on track. I appreciate our carrier getting this thing going before it was aborted all together, and I appreciate all of you hanging in and thanks for your questions and time you've taken and we'll talk to you again in three months.