世邦魏理仕集團 (CBRE) 2004 Q2 法說會逐字稿

Welcome to Trammell Crow Company second-quarter 2004 financial results conference call. All participants will be able to listen only until the question-and-answer session of the call. This conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce Ms. Barbara Bower of Trammell Crow Company. Ms. Bower, you may begin.

Good morning and Thank you for joining us for Trammell Crow Company's second-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 will fax you one immediately. This call is being webcast live and it will be archived and available through August 10th. The call may be accessed from the industrial relations section of our 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 10-K as filed with the Securities and Exchange Commission.

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

Thank you Barbara, and thanks to all of you for joining us today. With us here on the phone from management are Derek McClain, our Chief Financial Officer; Arlin Gaffner, our Chief Accounting Officer; Chris Roth, President of Development Investment in the Eastern United States; Michael Lafitte, President of our Global Services Business. Another name I want to mention who you will hear on the phone in the future from time to time is Matt Khourie. Matt just joined the Company's Executive Committee and became President of Development and Investment Operations in the Central U.S. He will join Chris Roth who I just introduced, continues as President of Development Investment in the Eastern U.S. and John Stewart who continues in that capacity in the Western U.S.

Matt is a 25-year veteran of our Company who has generated tremendous results through all market cycles and given his performance along with the significant ptickup in the activity we have in our development business, which Chris will detail for you today. Matt will be joining Chris and John to help them run that business.

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

Sure, Bob. We are pleased to report second-quarter results that exceeded expectations. Diluted earnings per share were 9 cents, and on a year-to-date basis that brings our EPS to 14 cents, up from 11 cents in the first half of 2003.

Consolidated revenues were up 8 percent for the quarter. Growth in athe brokerage lines and corporate project management fueled the revenue increases.

Brokerage revenues from investor and user customers combined showing up on our income statement under the caption “bBrokerage”, the investor piece, and corporate advisory services, the user piece, were up 17 percent for the quarter and 15 percent year-to-date. Corporate project management was up 24 percent for both of the quarter and year-to-date. And while facilities management revenues were down quarter to quarter, we see that trend reversing in future quarters fueled by new wins, some of which are captured in our press release.

Our growth in net income for the year-to-date is a function of the revenue increases and increased margins from global services. Mikechael Lafitte will comment on the margins, I'm sure.

The development in investment segment is just above breakeven on a year-to-date basis, just as it was last year at this time. Nonetheless, our confidence is growing that 2003 was the trough year in that business and that the development and investment segment should post full-year pretax income exceeding the $8.2 million it posted last year.

Our balance sheet and cash flow remains strong. At June 30 our cash was up to 78.6 million from 67.5 million at the end of the first quarter. As was the case at March 31, we had nothing borrowed under our line of credit at June 30.

For comparison purposes, our cash balance stood at 59.2 million a year ago at June 30, '03, and we had $10 million borrowed under our line of credit at that point. At June 30, 2004, we had unused borrowing capacity under our line exceeding $100 million. It is great to have these financial resources at our disposal. We think our balance sheet is a competitive advantage for us, and we intend to be patient and thoughtful in how we put it to work.

One thing I want to be careful to note, and Mike will probably speak to this as well, is that we weare not managing the business to maximize short-term profitability. I'm quite confident we could be producing more in the way of profit short-term if we were not investing in people to fuel revenue and profit growth downstream. Those investments in people are current period expense that we expect to benefit future periods.

Finally, with regard to the outlook I would note that we are not changing our guidance for the full year. As is typically the case, we have a lot to deliver in the year's second half, but with the increase in year-to-date results our confidence in achieving our target is increasing.

For the third quarter, we are targeting earnings per share up slightly from the 9 cents we reported in the second quarter. Earnings per share consistent with that target would significantly exceed last year's third-quarter EPS of 5 cents, which as we noted at the time was adversely impacted by the slippage of transactions from the third to the fourth quarter.

With that, I will turn it over to Bob.

Thank you, Derek. I'll be brief because both Chris and Mike are going to give you significant detail on their respective areas of the business they are responsible for. Just generally speaking, I would say that both financially and in terms of the initiatives that we laid out for this year, we are running at or ahead of where we expected to be at this point in the year, so we are very encouraged with our operations, and we're very encouraged with our financial results.

A couple of things in particular, our health care business, as you all know, we have talked about that pretty regularly. And spiked that out as a key initiative in our annual report. We've had both development and global services wins in that area, and you’ll get we will give more detail on those in a minute.

Our development programs -- the 2 new ones that are in place and the one that we are very close to having in place have already generated significant opportunities for us. Chris will give you more detail on that, but more opportunity than we would have expected this early on.

We had an excellent quarter. In fact our best quarter in a few years in terms of our outsourcing business. The level of activity that is behind the business we just won is strong and the new business we won is very strong. I think that bodes extremely well for the future. Mike will spell some of that out for you. It was also as all of you saw detailed in our press release.

Our top focus of course is our customer service. And as we reported pretty regularly, every year we do detailed customer surveys that culminate in a report to our Board of Directors in September. That's all underway. I will tell you anecdotally I've spent a lot of time with our large customers and the feedback we're getting about the quality of our service is a very strong, and definitely improving. So I feel great about that.

And then just to close before I turn it over to Mike, I would reiterate that while we are not prepared to change anything about our growth earnings growth forecast for the year, which as you remember was 10 to 20 percent, our level of confidence in that forecast is definitely growing. Mike?

Thank you, Bob. We are pleased with the results for the quarter for global services. I will comment kind of on 3 main areas. One, just a broad overview of global services and the results. Second, an update on our corporate and our user customer business; and third, a brokerage update.

First of all, just overall as Derek mentioned, revenues and income before taxes for global services were up for both the quarter and for the year-to-date numbers.

We previously described our focus on margin improvement and evidence of these efforts starts to show up in the margins on income before taxes line of our income statement. The year-to-date comparison of that margin has gone from 2.4 percent in '03 to 2.9 percent for global services for the year-to-date numbers.

For the quarter, that margin has gone from 3.1 to 5.6 percent comparing '03 to '04 numbers. I would say this margin is tied to really 2 primary initiatives. One is discipline around our new business pricing. And secondly is the leverage that we see in our brokerage business. When those revenues start to tick up, we really do see improvements in bottom line in the areas of brokerage.

A couple of comments just by segment of our business lines within global services. On the user side, the increase in user revenues were clearly tied to gains in brokerage and project management as a both Bob and Derek had mentioned. Our facilities revenue is down for the year and for the quarter but our square footage in the facilities area is starting to show significant growth. We began the year with 153 million square feet of FM (ph) in our portfolio. At the end of the second quarter, that number is sitting at 172 million square feet. So we've grown by about 18.6 million square feet. And that really acts as a leading indicator for the FM line of our business. Wins today in that area will result in downstream revenues and profits.

On the investor side of the business, that segment revenue increase was due solely to our gains in our investment services business. The investment services gains were tied to both market conditions being extremely favorable in terms of cap rates and activity, as well as our expansion in our investment services team and our professionals across the network.

Property management as expected is slightly down again due to several factors; market conditions, which include lowering rents and vacancies, turnover in property to self-managed owners, and our exiting of low margin accounts. We are winning new business with major investor customers across our network and retaining and growing market share in various key markets for us.

While this segment has lagged on the investor side with the exception of investment services, we do see recovery as the markets rebound and start to improve. While this side of our business has been flat or down, we don't think it is flat and down forever.

On the operational side, we continue to be focused on our disciplined pricing and contracting for new business. We continue to be focus focused on operational efficiencies, technology applications and deeper solutions for our customers. A good example of that is our customer communications tool that are now in place, our client dashboard and our client portals which we have rolled out to our largest and most significant clients to be in communications with.

And as Derek mentioned, we are seeing these results while we are absorbing costs associated with the additions to our platform in the areas of pursuit teams, additions to functional leadership, our international expansion and our brokerage hiring. These calculated additions have been put in place over the last 2 years and would help drive and our future growth.

We also remain committed to cost controls overall throughout our business.

I'll make a few comments on our outsourcing in our corporate business. The first point is we're winning business. Year-to-date we have numerous contracts for renewals, expansions and new wins and new customers for the Trammell Crow Company. We mentioned in our press release several of the names, and I will just reiterate those; Bank of America was the most significant win for us this quarter, significant portfolio add, which was the previous Fleet suite bank portfolio in the Northeast. Cooper Industries, Hughes Supply, First Tennessee, Riverside Health Systems, again evidence of our health care initiatives and Cisco Systems.

As to our lines of business on the user side, I mentioned earlier the increase in our square footage in FM should translate into increased revenue going forward. This is a leading indicator.

Project management business as Derek mentioned also again is up 24 percent year-to-date and for the quarter, and we were recently were awarded a project management win with Morgan Stanley in the Northeast. I will comment a little bit more on brokerage in just a moment.

Finally on the corporate side and user side, as Bob mentioned our number 1 priority remains customer satisfaction and operations. Our pipeline is strong on both of the corporate and the healthcare side of our business. Our retention rate of existing customers remains high. We are expanding our services to our existing customers, and we're highly organized around our pursuit around our transition, and as well as our execution for our accounts.

In the area of brokerage, again a strong quarter for brokerage overall. Fueled primarily by our investment services line and our CAS (ph) line. We've continued to attract great talent to the Trammell Crow platform in all 3 areas of brokerage.

Our headcount year-to-date is up from 526 at the beginning of the year in production for the U.S. transaction team to 541 percent, about a 3 percent increase in headcount. Average production for broker is up approximately 10 percent year-to-date, evidence of improving market conditions as well as hiring higher producing brokers. There is also a lag effect in these brokerage hires, very much like wins on the FM side translating into revenue and profits next year. The same is true with brokerage hires.

And Derek mentioned our overall numbers of 15 percent and 17 percent for the year and the quarter, respectively.

In conclusion, we do remain committed to our customer satisfaction and delivering solutions for our clients. We're showing growth in our business and were we’re winning new customers. We are tracking great people, and we remain optimistic. Chris?

As Bob and Derek noted, we are pleased with our first-quarter development investment results, but more importantly with the direction and momentum we see emerging in our business. While our 6 months earnings were essentially flat, as you noted from 2003, we are pleased because they are consistent with our previous statements that 2003 would hopefully represent the trough in our D&I (ph) business. You will recall that we said that our business typically lags general economic activity by 18 to 24 months while corporations and users initially absorb underutilized space as they expand, then absorb sublease space before requiring net new space.

We do now believe that 2003 was the trough in our D&I business because we are now seeing the tangible evidence of economic expansion and job growth impacting our markets. Most notably in our project starts as Bob mentioned, which are up 50 percent in our first half over our entire 2003 starts. To give you a sense of this, our starts in 2003 totaled approximately 419 million for the entire year while for 6 months ofin 2004 starts totaled 640 million. And we still have as I will get into a very strong pipeline beyond that.

This pickup in development volume is especially gratifying, and it is geographically dispersed and contains many projects related to our user driven initiative efforts in healthcare, higher education, airport distribution and urban mixed use. As further evidence of our recovery, our pipeline of likely deals, which are deals with a greater than 50 percent probability of occurring, has increased by 22 percent over December of 2003 to almost 1.9 billion in prospective activity. Certainly the largest increase in our pipeline activity that we've seen in 4 years.

Additionally, this activity reflects the capital programs that we told you we we're going to put in place last year and this year, specifically our Trammell Crow Company Fund 5 through which the Company has acquired 4 redevelopment assets this year and our industrial fund with ING Clarion through which we've begun 3 projects to date this year and have 1 more that has recently been approved but not in the second quarter.

We are currently working on significant additional transactions with both funds, which have been a large part of why we've experienced the 22 percent increase in our pipeline inventory over 2003. As Bob mentioned, we are also under a letter of intent with a large institutional investor to form a venture to acquire and develop medical office buildings which hopefully we'll be able to give you more information on on our next call.

Notable user initiative related development activity has started this year with Baylor Healthcare and also with United Surgical Partners with whom we're doing 3 projects totaling approximately 100,000 square feet in Texas and Nashville. We've also expanded our relationship this year with Group Health Cooperative for whom we're providing 3pre development services for Eastside Specialty Center, a 100 million ambulatory care center located in Bellevue, Washington. We've also acquired land and commenced development under our ING Clarion Industrial venture on projects in Florida, Georgia and Texas, and we have 2 more in the pipeline for approval. So I think good momentum in the industrial sector, as well.

As we have mentioned, this improvement in activity will bear fruit more in late 2005 and 2006 than for 2004 but we are pleased to see that our focus in investment and user driven initiatives and new development personnel is paying off. We continue to focus on adding development talent in specific markets while adding additional personnel in our healthcare and urban mixed use initiatives.

We previously discussed how differently positioned we are coming out of the last recession than in previous cycles. Unlike past downtrends, we have a strong balance sheet, capital to invest, no workout issues and a strong foundation of experienced development personnel in our system.

Overall, we are very pleased with our results so far this year and believe we are beginning to experience the cyclical increase in economic momentum that will allow our investments and initiatives, capital programs and people to pay off over the next 5 years. Bob?

Thank you, Chris. With that, let's go ahead and open the floor for questions.

(OPERATOR INSTRUCTIONS) David Gold with Sidoti & Co.

Good morning. Mike, this one is actually directed to you. On the transactional side and the brokerage side of the business, competitor saw a similar strength coming through the quarter had pointed to some transactions closing a little bit sooner than expected. Things started to be pulled forward so to speak on some of the confidence out there and I was curious if you attribute any of your upside to a similar trend with transactions closing faster than expected? Do you think anything was pulled through and it sounds to me like if that's the case, the momentum certainly is continuing? But I’ll throw that to you.

I would make a couple of comments. On the investment side of the business, clearly the market has just remained extremely favorable in terms of the activity overall. We still are bullish on the year in terms of what that line of business is doing for us in terms of growth, not only because of market conditions but also because we're making significant hires. Jack Minter, who you have heard on previous calls is our new leader for investment sales is making very material hires in major markets throughout the U.S. So our reach is getting deeper.

We also have seen increased activity come from not just our traditional investor side of the business, but also from the corporate side of our business as corporations are looking at their balance sheet and they're looking at their holdings and seeing interesting opportunities in the marketplace. So I don't really see it as pull through as much as just increased activity.

The other thing I would note is just the diversity in our business with investment services, project leasing and CAS (ph), we feel good about while 1 is up the other 1 is down or 2 are up in and 1 is down today, project leasing being the 1 down -- as those market conditions move around, the leader can change from year to year.

And also on the facilities management side of the business, can you speak just for a second on the pricing trends that you are expecting as things ramp back up? What you're seeing out there?

Well, pricing is -- I don't see any trends that are any different than where we have had to compete in the last 3 or 4 years. There are -- the fact is there are just a handful of us that are equipped globally to handle large facilities contracts around the world. And so we -- it is not extremely high margin business for us, yet saying no and walking away from opportunities that where we can't make money, there's enough opportunities out there. We're going to focus on those where we can make a difference, where we can add value, where we can drive savings for the customer and where we can make money at the same time.

Okay, all right. Fair. Thank you.

(OPERATOR INSTRUCTIONS) William Marks with JMP Securities.

Good morning everyone. I have a few questions. One on your notes payables went up although your net debt -- let's say from first quarter to second quarter only went up a little bit. What was the shifting on the balance sheet, and actually why did net debt go up because of some investments?

Net debt -- you're talking about project debt?

I'm just looking at my model, and it looks like if you take all the different lines of debt -- less cash went up a little bit from first quarter to second quarter. It's not really that significant.

Let me just tell you about it. As you will note, investment in real estate is up year-to-date and is in fact up for the quarter. And some of that real estate that we've added to the balance sheet is, of course, financed. So that's the increase in the debt. Then when we're thinking about net debt and the cash debt balance we're kind of putting that project debt aside, if you will and thinking about our corporate line and our cash balance. But I think your comment is just directed at the total amount of real estate debt, in essence, and it is up as is the investment in real estate for the year-to-date.

Okay, and then why -- the notes payable line on real estate, and that is up from the first quarter significantly. What was the reason for that? Is that project debt?

Yes, it is, and (indiscernible), why don't you speak to that?

Well, it's actually a slight increase but a shifting around in and where it’s classified on the balance sheet. And we have 1 pretty significant residential project in mid-Atlantic that the asset was classified in real estate under development current at the end of the year and in the first quarter as we had not made the determination whether we were going to flip out of that project or develop it long- term. That decision was made to develop that project in the second quarter, so the asset moves down to real estate under development, noncurrent and the related debt associated with that moves into the noncurrent notes payable on real estate. Again, it’s just a shifting of where it was on a balance sheet based on our decision to develop that asset as opposed to sell our position today.

That makes sense. A couple other unrelated questions. The -- you mentioned I think you gave some third-quarter guidance that was a little bit different in the press release. Can you just repeat what you said? I think it was Derek. Did you say up slightly from the 9 cents in the second quarter?

Yes, exactly. That should link sync up with the press release.

Okay. Can you talk a little bit about brokerage splits and where you guys are, where your brokers are and if that -- do you feel that is competitive? Is that allowing you to hire more brokers or do you feel that it doesn't allow you to? Any kind of comments on that?

I would say in general that the markets are pretty efficient. If you were to benchmark the largest 5 brokerage firms globally, that the brokerage splits would be all very, very close. So we don't lead with necessarily the biggest incentive packages or the biggest splits. But the largest -- if you look at the large brokerage shops, I think you could throw a hat around all of us. They are pretty close. They are very competitive. And we haven't seen those really changing. Obviously there's incentives based on higher producers getting above certain thresholds.

And it will also vary market to market.

It will vary somewhat to market --

(multiple speakers) market and it is a little bit of an anomaly.

And there clearly are boutiques or smaller brokerage firms and local markets that don't have the reach, and don't have the presence they can offer and often times do offer higher splits but they don't have a platform which is why in today's market and in tomorrow's market the consolidation of the larger corporations looking for a provider as they consolidate and as they need that global reach, the smaller shops have a tougher time competing for that kind of business.

Okay, that makes sense. And one final question on the value of the real estate on your books looking at your balance sheet. Can you give any indication of let's say based on recent sales and gains what -- where you are versus the value on your balance sheet, or what do you think that real estate is worth?

Will, we really don't give any sort of indication there. Of course, we have to go through on a quarterly basis and determine for any of them if we think there has been an indicator of an impairment, we will do an impairment analysis. And if in fact it is impaired, we will write it down. So we feel good about the values on the balance sheet, but itn terms of potential upside or anything that might be locked in there, we can't really speak to that. And in any event, there is a large number of deals that make up what you see on the balance sheet.

I think, and my stats are a little outdated here, but I will go back to the prior quarter ended March 31. I think the real estate that you see on our balance sheet was I think 40 different deals. And of course there's investments in unconsolidated subs, and I think that was another 50 deals. And they have -- they are in all different markets and different product types and have different characteristics. So it would just be tough to generalize.

How about -- and you may have the same answer to this, but I guess I'm just trying to figure out where to pull it out of you. But does the 4.4 million of gains from the 6 months ending June, any idea what the book value of the real estate was? Or you just don't want to give that number? (multiple speakers) tell what we are trying to figure out.

I don't have it and I don't know that you should really consider it indicative if I did have it.

Okay. Good enough.

Bill Baldwin with Baldwin Securities.

Good morning Barbara and gentlemen. A couple of questions for Mike. Mike, can you kind of give us some color as far as how you would benchmark a couple of your initiatives as far as increasing your presence and profile in the Chicago in New York markets this year? What kind of progress do you think you're making there?

I would say year-to-date we are ahead in Chicago relative to where we are in New York City. We are very active I would tell you in recruiting in both places. We don't view it as just a 2004 initiative. To build these cities to where we want them to be will be a 3 to 5 year game plan. We are proud of what is going on in New York and Northern New Jersey when you look at where we are today. We've probably got close to 35 to 40 brokerage professionals in those combined markets that didn't reach also into our Philadelphia operations. And where we are revenue-wise in brokerage in that market is significantly higher than where we were 3 or 4 years ago.

Chicago in particular I’ve mentioned I think in previous calls a gentlemen named George Kohl that we recruited as our Area Director, City Leader there late last year. We've made significant name hires in that city and continue to have a lot of recruiting going on there as well. So I think you will continue to see us active in both places. There's other places around the map that we are also making significant gains in. Southern California, Atlanta, lots of places where we're making good gains.

And secondly, Mike, can you update or refresh me on what your focus is as far as your pursuit of individuals in the international arena? Does that have to do with your global – your outsourcing facilities management business? Is that what that is focused around primarily?

It is kind of a matrix of things going on. Number one1, it has been revolved around primarily customers where we have U.S.-based customers that are needing services across the globe, and we are organizing around those customers. On the brokerage front, you have seen us put together a network solution that involves J.J. Barnicke to cover Canada and our relationship to with Savills to cover Europe and Asia. You will probably see us doing more of that kind of alliances in network with a very small handful of partners across the globe. Some places we ourselves are self performing. Some places we will perform with a the network partner. We are making infrastructure in adding Trammell Crow Company employees in hubs around the world. Today you will see us in Singapore and in Toronto and then London would be the 3 largest places somewhere between 350 and 400 of our employees today reside outside of the United States.

So it is a combination of partnerships, alliances and customers in terms of what is being built there. Alex Darragh was appointed last year as our regional director overseeing all of our operations out of the United States. Extremely active. We are winning new business, and we're executing well.

Well you've got your own people in Singapore, Toronto and London -- is that primarily focused around customer service?

For the most part it is, but it is also in certain areas it is – it also may be focused at transaction managers to deal with our global network of transactions as we manage transactions for instance where we'll have transaction managers sitting in London or sitting in Singapore that will manage the transaction business with the network provider. So it can be focused either around a specific customer or around a specific line of business for us.

So from a transaction standpoint, for example, like investment sales -- that type of thing?

It's primarily CAS. What we would call tenant (multiple speakers) investment reference sales. For the most part it is CAS business.

Okay.

Project management is the other area I would mention pretty specifically where it’s managing that type of work and the facilities where we've get scale and where we've geot presence and you will see us self-performing in those areas.

So you are generating revenues right now then in CAS and project management outside the United States?

Yes.

And lastly, I guess for Arlin or Derek, I noticed minority interest this quarter was on the negative side normally it is on the positive side. Is there any easy explanation for that or is it a myriad of situations?

Preferably it would be on the negative side because if we sell a consolidated project for a gain where we have some outside ownership, then the negative or the expense is to reflect the outside interest in that gain. In the second -quarter, first half last year we had some losses in one of our consolidated investment funds that caused the minority interest to flip the other way. But there were some sales of consolidated assets with the minority interest at a profits, and a minority interest expense is would really what we would -- what you would prefer to see there.

Okay I will touch base with you on that later then.

William Marks with JMP Securities.

Just a follow-up. On your earnings for the year, the guidance you had given if we were to say that – I know you’re not saying this but if let’s say EBITDA were to grow by the same amount, would we see the same type of breakdown as we did last year between global services and development investment EBITDA? I guess what I'm asking is what percent of your '04 EBITDA do you think is going to come from each of the 2 segments.

Hang on a second. We're looking at something here. If we finish consistent with our guidance, and of course if the mix from development and services pans out as we sit here today and think it might, I would tell you that maybe it has -- the EBITDA has a little bit more of a development flavor to it.

As a percentage than it did last year?

Yes.

I think last year it looks like the 73 percent was global services. So you are saying that the slight reduction from global services maybe as a percentage?

On a percentage basis, yes.

And the other question somewhat related is just to understand that development investment EBITDA, how much of that comes from development fees, and how much of it comes from gains, or is it -- I guess it varies year-to-year, and maybe the margins on the 2?

Well, it's coming from gains on sale of real estate. It's coming from income from unconsolidated subs where we have gains embedded in those unconsolidated subs. It is coming from development and construction fees. It is coming from incentive development fees. And we just, we think of the expenses in that business as supporting all of that activity and don't make an attempt to parse it out across the gains and development fees, etc. But obviously we know from time to time we have nice profit pops on individual development fees.

I'd certainly add to what Derek said that with the fee business there really is a wider array of revenue stream that you see there. With the fee business, typically we're looking at 20 to 30 percent margins. With some of the principal oriented business, we're typically looking at 30 to 40 percent margins. But I don't think there is an easy way to predict for you which will be which this year.

I would say on those margins, Chris is talking to you about a gross margin which is before an overhead load. What’s the overhead load we said’s (inaudible) in the development business these days?And Aabout 10 percent? About 10 percent. So that's what you would have to apply to those percentages to get down to a pretax income mark. 10 percent of revenues.

That's it. Thank you very much.

(OPERATOR INSTRUCTIONS) I'm showing no further questions at this time. I would like to turn the conference back over to you for any closing remarks.

Thank you very much for joining us. And if there are no more questions, we will wrap up and talk to you again at the end of the third quarter.

Thank you for participating in today's conference call, and have a great day.