世邦魏理仕集團 (CBRE) 2004 Q1 法說會逐字稿

Welcome to Trammell Crow Company’s First Quarter financial results conference call. All participants will be able to listen only until the Question and Answer section of the conference. This conference is being recorded. If you have any objections you may disconnect at this time.

I would like to introduce Miss Barbara Bower of Trammell Crow Company. Miss Bower, you may begin.

Good morning and thank you for joining us for Trammell Crow Company’s first quarter 2004 earnings release conference call.

This morning we issued a press release announcing our results. If anyone 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 May 6.

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 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 10K as filed with the Securities & Exchange Commission. With that I’ll turn things over to Bob Sulentic, our Chairman and CEO.

Thank you Barbara and thanks to everybody on the phones for joining us today. With us here from management are Derek McClain, our Chief Financial Officer, Owen Gafner [ph], our Chief Accounting Officer, Michael Lafitte, President of our global services business, John Stirek, President of our Development & Investement business, Western Operations, Chris Roth, President of our Development & Investment business, Eastern Operations and Jim Groch, our Chief Investment Officer.

Derek, do you want to walk us through the financial results?

Sure, Bob. Diluted earnings per share for the quarter was 6 cents versus 3 cents for last year’s first quarter. The increase was driven primarily by sales of real estate in unconsolidated subsidiaries.

Consolidated revenues were down slightly, less than 1%, but that excludes income from investments in unconsolidated subsidiaries, which is up significantly from about $50,000 in the first quarter of ’03 to about $6m in the first quarter of ’04 and those numbers are net of tax.

Looking first at the individual revenue line items, facilities management corporate advisory services were basically flat. Corporate project management was up about $3.5m, an increase of about 24% and that was driven by new customer business added during 2003 and increases in activity with other existing customers.

Property management was down about $2.9m, associated with some loss in square footage and the impact of declining rents on management fees.

Institutional brokerage was up over $4.6m, almost 27%. Recall that institutional brokerage captures both project leasing and investment sales commissions. The quarter-to-quarter increase was driven by an increase in investment sales volumes.

Development fees were down slightly. Gain on the sale of real estate was down significantly from the first quarter of ’03 but that decline was more than offset by sales of real estate and unconsolidated subsidiaries, which flows through our income statement further down. It is not a component of revenue.

The development and investment segments income from investments and unconsolidated subsidiaries increased on a pre-tax basis from $1.3m to $9.1m.

On the expense side, salaries, wages and benefits were up significantly. This was expected and is consistent with our budget upon which we predicated our earnings guidance.

The single largest factor behind the increase, is an increase in reimbursed salaries, wages and benefits associated mainly with the corporate project management business. Other factors behind the increase include, the impact of year-end raises, compensation expense for key functional and geographic leadership added to our global services platform during 2003. Leaders were counting on to deliver increased revenues later in 2004 and in future years and also increased incentive compensation associated with the increased profits on sales of real estate.

Looking at the segment performance, it was pretty much consistent with our expectations. With the Development and Investment segment carrying the load in the first quarter.

From the balance sheet perspective, we had cash and cash equivalents of $67.6m at quarter-end, down from the year-end balance consistent with our seasonal pattern due to the fact that we made significant pact and bonus payments in the first quarter of each year on account of the prior year’s performance.

As noted in the release, our cash balance at March 31, ’03, a comparable seasonal point, was $69.9m but during the intervening 12 months, we made net repayments on our line of credit totaling $15m, reducing our March 31, 2004, line of credit balance to zero and we bought back over $10m of our stock.

We believe the strength of our balance sheet and the flexibility it will afford us going forward is a tremendous asset of our company.

With the year-to-date unfolding more or less as planned, we are still targeting earnings per share growth of 10 to 20% for the year.

Looking at forecasted activity for the second quarter, we are targeting earnings per share for the second quarter, to be roughly in line with the first, but for the segments, relative contributions to have a distinctively more global services flavor. Bob.

Thanks Derek. Like Derek, I am very satisfied with the way the quarter played out in terms of our financial results but also in terms of our operating results.

And our new business momentum, financially we exceeded budget - - but as Derek noted that was mostly timing. Otherwise, the quarter pretty much played out as we expected. Our Global Services revenue were up marginally and I expect that trend to accelerate throughout the course this year. Again as Derek mentioned Global Services expenses were up, but, those were up as we expected and we are still very focused on cost control so nobody should read anything into that in terms of us becoming more lax in that regard. That was playing out as planned.

Development and Investment was ahead of plan and that was a timing thing at this point but it does take some of the risk out of that business for the rest of the year, the fact that those earnings came in early. Operationally we had strong progress with our stated initiatives. I spent a good deal of time in the field in the first 90 days of this year with our local offices and I can tell you that the morale of our employees is very strong and the commitment to customer service and the results in the customer service area which is our top initiative as you all know is very, very strong.

We had good momentum in our health care business and I’m going to comment on that again in a minute. We’ve continued to attract strong talent, Mike’s going to give you some details on our brokerage recruiting but we’ve also attracted some very strong people and talented senior people in other functional areas of our business.

At year end we talked about the new capital programs that have been put in place or were about to be put in place for our development and investment business and in fact, our goal this year was to start to place that capital. My view is that the progress in that area is better than I thought it would be at this point and John’s going to give you some details on that.

On the new business front there are really three things I’d comment on. We had the strongest in sometime in landing new services business and on the development side our starts in our otherwise, our new business activity were up nicely and you’ll get more detail from Mike and John in those two areas and in the one initiative that we’ve continued to spike out separately over the last year or so is the health care side of our business. We had new wins on the health care front both in the services business and the development business and our pipeline in that area is very, very strong. So on balance, I feel great about where we are through the first quarter of the year and I remain very confident in our prospects for hitting the targets we’ve established for this year. Mike.

Thanks Bob. My comments this morning will be aimed really around four areas. First I’ll do a quick review of results both revenue and expense for Global Services, second I’m going to talk about the customer wins that Bob has just mentioned, third I’m going to talk about some people wins for us for the quarter and I’ll wrap finally with a few highlights on some of our key priorities for 2004.

Looking at Global Services results, for the first quarter the results for services showed overall revenue increases yet expenses increased as expected and I will discuss the expenses in further detail later.

The Global Services segment is positioned for growth and we believe that the user side of our business will grow at a more rapid rate than our investor side for the coming years. Market factors remain strong in the outsourcing world as we see opportunities to serve new customers, particularly on the user side of the business.

Our presence throughout our geographic coverage put Trammel Crow Company in a great position to continue to serve our investor customers which are extremely important customers to us and are also the side of our business that have most connected to our Development and Investment segment. We have continued to focus on customer service, completing our global infrastructure, attracting new people and winning new customers.

Looking at the revenues for the quarter overall, the user business revenues for the first quarter were up by 3%. We saw significant gains in the project management business which were up 24% compared to the previous year’s first quarter while facilities management and brokerage were slightly down to flat. Revenues for our investor segment also increased by about 2 ½ % from quarter to quarter. We saw significant increase in our brokerage business which was up 26% for this side of our business which was fueled primarily by the investment services side of our business, as the capital markets and investment activity remain strong.

The decline in property management revenues along with project revenue in the investment sector was influenced by continued pressure on occupancies and rental rates. On the expense side just to back up and kind of support the comments that have been made by both Derek and Bob, expenses for global services were up for the quarter. We have great deliberate investments in particular parts of our segment in these expenses are in line with our expectations. We have built our infrastructure in the areas of pursuit resources, our functional leadership, our local business and our international region. The establishment of focus teams pursuing all of our lines of business has an impact on our cost and we believe strongly that the additions to our infrastructure are prudent and calculated in a drive to grow the Trammell Crow Company going forward.

The foundation that we have built is organized around customer teams, functional expertise and geographical leadership. We do not see significant adds to our cooperate infrastructure from here but we’ll continue to add people in the specific areas that we have targeted for growth. Additional cost were up due to various factors including the selling increases that Derek mentioned earlier as well as higher commission payoffs tied directly to higher commission revenues for the quarter. Cost controls have become part of our culture and we will continue to keep tight reins on our cost as we grow.

On the wins side the first quarter was active in the area of customer wins, expansions in the rules as well as new business. On the user side of our business we renewed and or expanded our services with the following customers; (indiscernible) Melody and Company, PeopleSoft, Cisco Systems, Sovereign Bancorp and Sprint Corporation along with other brokerage winnings including the significant expansion of our work for the fortune 50 semi-conductor firm for transaction services. We signed new business with Kaplan Incorporated for project management services and Cooper Industries for transactions work along with lease administration and project management services during the first quarter.

For the investor segment, our investment services wins include completed transactions for our Orcon (ph), LaSalle Investment Management, (indiscernible) Real Estate Investors, TIA, Crepe(ph) and Westbrook. Other wins in our investor business for new management leasing business include CalEast, and Crow Holdings and many others on the local markets. On the people side we continued to attract strong talent to our company. Most recently we announced the additional Trevor Foster at our own Trammell Crow Company as global director of our building services group. Our building services group includes both our property management business as well as our facilities management business. Trevor came to us from outside of the company and has extensive global experience in technical facilities along with a diverse background internationally. Diane Paddison was named to the executive committee of the Trammell Crow Company in the first quarter. Diane serves two roles, our global services operations a lead to our national accounts and our team’s focus on our delivery to our customers.

And finally we announced in the first quarter our logistic services group led by Atlanta based logistics team which is led by Tony Capano [ph] a seasoned Trammell Crow Company producer. This expertise was evidence of the type of focus we had announced specific customer needs and expertise needed to execute on our behalf. As far as 2004 and the priorities that we have set around customer satisfaction, operational excellence, out source in growth and brokerage growth and I have comment particularly on the out source and the brokerage business. First on out sourcing I mentioned the various rooms previously and can say that our team is very busy and now with opportunities in front of us are good. We continue to believe that we should see growth in all three lines of service to our user customers, facilities, brokerage and product management. Our focus on customer satisfaction continues to drive our operations and is resulting in earnings and expansions that I described earlier which for us is the best evidence that our commitment to customer service is like strategy.

On the brokerage front, our head count for the quarter increased to 533 producers within (inaudible) up from 526 at year end. We are actively recruiting the most markets across the country and our continued focus around New York and Chicago remains the top priority. Our brokerage strategy fully supports both of our customers sets, the users and the investors. We are recruiting in all three lines of our business CAS, investments services and project leasing but their service pipeline was attracted not only to our customers but also to producers in the marketplace to agree with our strategy to be truly full service in our offering and view our deep resources and all of our lines of service that would benefit to helping them serve their customers better. Our strategy also in brokerages is aimed at being the best not necessarily the biggest in the area of brokerage although we will be bigger. We want complete market coverage with strong, high producing teams, that value our customer service ethic along with our team environment.

In conclusion, we stated that we are in the global services segment of our business is positioned for growth. We believe the priorities that we have set aim us appropriately where the growth opportunities are for Trammell Crow Company. We remain dedicated to serving our customers and our shareholders as well as continuing to make Trammell Crow Company a great working environment for our employees. John do you want to take us through development and investment?

Sure, thanks Bob. As Bob mentioned we are pleased to have significantly improved our quarter to quarter pre-tax profits and or development investment operations and make a contribution early in the year. I will say I don’t have the same vocabulary of unconsolidated subs and discontinued operations as my college CFO has, but what I will say primarily from some timely sales pretty smart we made in value at opportunities, which is fundamentally just kind of the core of what we do in our development investment business. The reality is, we’ll have good quarters and we’ll have some thin quarters, so the thing to keep in mind is that this really is not a quarter to quarter business segment but really a cycle to cycle business, and that overall long term we really like direction and the positioning that we have going forward. So, on this call I’m going to specifically comment on two areas, first kind of the trends we’re seeing with activity levels and second the progress we are making with our capital markets programs. First off with the trends, and I mentioned I like the direction, and to put that into context, last year in 03 we started 24 new projects and about 400 - - to the tune of about $419 million dollars in total starts. In the first quarter of ’04, so the first quarter compared to all of last year, we did 10 starts, so about 40% of the starts of what we did throughout the whole year and we’re nearly matched that activity level at $415 million of overall starts in the first quarter.

Now I will say that our in process activity has dropped $204 million in line with expectations but overall our pipeline is up about $148 million, even with the $415 million of new starts exiting the pipeline and going into - - converting into the start status. So there is a lot going on in changes and deal size and everything with these various deals but what - - I’ll go out on kind of a strong limb here and predict that our four - - 04 starts will be up overall from 03 and really confirm the most important thing probably just the economic recovery has clearly translated into increased development and activity - - investment activity levels for us. Now I’ll always caution that it takes - - there’s a lag in the DNI business and it takes 24 to 36 months to see most of this increased activity level translate into meaningful profitability increase, but we think it clearly marks kind of a turning point of the activity cycle over all and so we think that’s very much a positive thing we’re seeing.

Regarding our capital programs activity, first off last quarter we mentioned the formation of the $500 million industrial fund with our partner Clarions Lion Industrial Trust, at this point we have approved and closed on three deals for a plan of 1.3 million square feet of industrial space totaling a little over $43 million in activity, even better we currently have about 11 deals in the pipeline, so we are well on our way and out of the gates strong form our perspective in executing our game plan there. Second, this quarter we’re pleased to announce that we have closed another round of our investment opportunity program, our Fun Five, which provides us with over $50 million of discretionary equity and about $150 million dollars of purchasing power, subsequent to that closing we approved five deals and committed nearly a quarter of this equity in deals totaling about $180 million. And so, again the pace of this compares favorably to the reality- - of in front four for the prior two years, we were unable to place and find quality deals to place the $40 million of equity we had in that version of the fund. So we like the direction that’s headed there.

And lastly, on our - - we’ve previously mentioned our efforts to provide a fund for our healthcare initiative, while we can’t announce anything definitive at this point, we are very pleased with our progress here and additionally we really like the pipeline of activity we continue to see in that area.

So in summary I would just say its very nice to have a good quarter, development investment will continue to contribute overall to our profitability this year, and we are cautiously optimistic we can grow our profitability, but again due to the time lag of the DNI business, we’re not changing our guidance at this time, I think we will look at 04 as the turning point for the increase in activity over prior years and long term we definitely like the trends and the foundation we got going forward here. So that’s kind of the outlook from the DNI perspective and I’ll pass it back to you Bob.

Thanks John let’s go ahead and open it up for questions.

Thank you at this time we are ready to begin the questions and answers session of the conference. If you would like to ask a question please press star one your touch tone phone, you will be announced by name and company prior to asking your questions. To withdraw your questions please press star two, again to ask your question press star one.

Our first question comes from Matt Ostrower with Morgan Stanley.

Morning could you just talk a little bit about obviously you’re spending more money a little bit more quickly on development side of the equation. Can you talk about how this will affect your overall capital needs as the year progresses? And also maybe comment if you didn’t---I didn’t see you touch on this specifically, it’s sounds to me like development is ramping up a little more quickly in this cycle than in last cycle. Is that your perception and what’s driving that?

Matt this is Bob I’ll give you a quick answer and then I’ll turn it over to John and Chris for more detail. One thing to keep in mind about our development model we have put these programs in place and funded these programs, with an upfront capital allocation that allows us to undertake a lot of this activity. So for instance on the industrial side we announced the ING program, that’s the program we’ll use to do the majority of our industrial development so that really won’t change our capital requirement as the business ramps up. Some of the one offs will be funded by the Sun Pride that John talked about, so that won’t change our capital requirement once we have our investments in that fund which we do.

But there’ll be other opportunities that we’ll invest in that are independent of those initiatives and the health care initiatives that John talked about. So just as a general rule I would want people to know that we can ramp up activity pretty well with the programs we’ve announced and with other programs we had in place with some time with Capital Partners like Kennedy Associates. And Pro-Holdings we’ve done a lot of business them and there won’t be a big capital requirement from us to execute that business. But John and Chris do you want to talk more about that?

The one thing I’ll mention Matt is if you look at the overall percentage of deals that we put into programs back in ’96, ’97 it was a very small percentage, less than 10%. As we established these various development program that went up (indiscernible) to nearly half and with the kind of the next evolution of these programs the industrial funds, the fund for and hopefully the health care fund in the future. When you add in the fee business that we do that are not capital commitments on our part, 80% plus of our deals will fall into the overall volumes with these capital programs and then that 20% plus or minus will be smart one off yields where we’ll be a minority co-investor in there. So I think the programs that you seeing established here and the capital commitment that we’re making on the front end, we’ll fund the bulk of those and then the latter 20% will incrementally be investments that we make that makes that makes sense on a one off basis.

In terms of the overall pace of activity I agree this quarter I think jumped out a little bit faster and you could come to that conclusion, we did have some significantly side deals. And we’re starting to see some larger deals that have been kind of on the table, on the drawing board for some time kind of come to fruition. It seems like a lot of the pen up indecisions are part of the economic recovery was kind of released in the first quarter so we’re seeing that.

You got a greater pace than what we saw in the last economic recovery, I’m not prepared to say that at this point if you look between ’97 and 2000 that was a pretty good ride. And one thing we’re trying to do is keep the overall pace of that general economic recovery, so we just think directionally there is an economic recovery is it faster, I’m not in a position to say that is but directionally we think there definitely is a recovery going on there.

Matt I’d also add I think if you look at two issues, the last cycle I think the industry was in tougher shape and if you look at our balance sheet or strategy in the inner (indiscernible) time I think we’re in a just a much, much different place to invest at this point than the beginning of the cycle. I think also what you’re seeing is the improvement in our strategy with the initiative based developments that I think Bob mention and John mentioned where you’re seeing some traction and a lot of the starts that you’re seeing are involved with heath care. They’re involved with higher ed, they’re involved with the less cyclical parts of our development business, so we think this is really a reflection not only is the economy improving but of our initiatives really grabbing hold.

Yeah, by the way, that was Chris Roth that just made that comment, Derek do you want to add to that.

Yes I want to pile on here just for a second just maybe as a point of clarification on the capital requirements associated with programs we’ve been talking about.

The first and just because of where we are in just getting started with those programs, our ultimate capital requirements are only a small part funded to date, but for example in ING Clarion, I think we’ve spoken that we are targeting doing up to $500m worth of industrial development through that program. And I think on our last conference call we indicated that we thought our portion of the equity required for that program could get as high as $25m. And again a small portion of that funded to date. And then on front 5 you know our piece of the equity we’re about $10m and again just a small portion of that funded to date. Go ahead --.

On that Derek do think it’s worth knowing small portion funded to date but the capacity that we need is identified.

Oh yes that’s number one.

And number two if you put that in the context of our balance sheet and our (indiscernible) capacity we’re in pretty good shape. John and Chris any thing else on that?

No. I just would add that we’re able to move forward on the health care fund that it would be similarly structured.

Okay and then just as a follow up can you just wrap up over all I would assume the development is the bulk of your capital needs in any given year. But can you just talk about what you see as being overall sort of cap-ex, if you want to describe it that way, this year as a change since the last couple of quarters?

Yes I say a modest capital requirements out side of the – our development and investment business and you know may be 4 to $5m this year.

Okay thank you.

Thanks Matt.

Our next question comes from William Marks with JMP Securities.

Hi thank you good morning every one. I wanted to ask you, first question, just a couple of lines on the income statement and you may have commented and I missed the early part of the call. But on the G&A I noticed that the numbers -- it’s probably low for the quarter, I’m just wondering should we look at that as sort of a run rate for the year?

Yes I think it’s probably representative of what you can expect.

Okay on the depreciation amortization line how should we look at that in terms of looking ahead?

Again I think what you’re seeing for the first quarter there it probably representative of you know what you can expect for the year. I think depreciation will stay fairly constant. I think maybe towards the end of the year we might have a little tick down in amortization expense with a couple of hundred grand, something like that per quarter. But that’s a pretty good indicator you’re looking at there.

And just the last question and then you did touch on this in the call a little bit, I just want a general understanding of how brokerage as a business is doing right now? It seems that on average at least my study shows that in ’01 average broker made about 20% less than in 2000, the same thing in the following year and then it sort of stabilize last year. What are we expecting this year?

This is Mike Lafitte, I would say that we’re definitely seeing some increases in brokerage production. And a couple of things that I would comment on. I think number one activity (indiscernible) have been declining, there’s certain pressure on the fundamental side of the office sector nationally which causes lower commissions to ripple through the system. But we are seeing activity and decisions made as John kind of indicated you know companies and decisions are getting made. And activity and absorption on a lot of market is not real net positive. We’re seeing some pretty good transaction turn going on.

I would also suggest that the brokerage recruiting efforts that we are still actively doing with the ads as well as you know lower producers you know due to exit in our firm or getting the production up we’re seeing our averages go up. We’re attracting higher producing brokers. So for us we certainly see that trend going up not only in head count numbers but also in average – you know the other mix there is the differences between projects CAS and investments services. Traditionally investment services averages can be significantly higher than potentially the other two. Although in some markets the CAS averages per broker can be significant especially the major markets. So I think for us we see it trending up. I don’t think it’s a dramatic spike. But we certainly see a trending up.

Great that’s all. Thanks very much.

Michael Lafitte. Thanks Will.

Once again to ask a question please press star one. At this time we have no further questions.

Okay well if that’s all the questions we’ll wrap up. Thank you all for being with us and we’ll talk to you again at the end of the second quarter.

Today’s conference call has concluded. Thank you for joining.