世邦魏理仕集團 (CBRE) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and Welcome to the Trammell Crow Company's fourth-quarter and full-year 2004 financial results conference call. (OPERATOR INSTRUCTIONS) This conference is being recorded. If you have any objections, you may now disconnect at this time. I would now like to introduce Ms. Barbara Bower of Trammell Crow Company. Ms. Bower, please proceed.

Good morning, and thank you for joining us for Trammell Crow Company's fourth-quarter and full-year 2004 earnings release conference call. This morning we issued a press release announcing our results. If there is anyone on the line who needs a copy of that release, please call 214-863-3350 and we will fax you one immediately.

This call is being webcast live. It will be archived and available through March 8th. The call may be accessed from the Investor Relations section of TCC's website at TrammellCrow.com.

In just a moment, Trammell Crow'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 over to Bob Sulentic, our Chairman and CEO.

With me here today from management are Derek McClain, our Chief Financial Officer; Arlin Gaffner, our Chief Accounting Officer; Mike Lafitte, President of our Global Services Business; John Stirek, President of our Development Investment Business, Western Operations; and Chris Roth, President of our Development and Investment Business, Eastern Operations. As usual, we will start by having Derek give us a financial overview.

We're pleased to report very strong results for both the fourth quarter and the full year. Both of our segments, Global Services and Development and Investment, finished the year very strong. We had visibility to a number of development deals that had the possibility to close in 2004 and make significant contributions to our results, and we were successful in closing a high percentage of them. But our Global Services business also contributed significantly to our better-than-expected results. Our Brokerage and Project Management businesses posted very strong revenue increases. I will note just a few of the highlights for the quarter before diving into the full-year results.

Consolidated revenues for the quarter were up 19 percent. Most significantly, facilities management revenues grew 6 percent. Corporate advisory services revenues, predominantly commissions from (indiscernible) actions, grew 32 percent for the quarter on top of a strong fourth quarter last year. Institutional brokerage, investment sales and project leasing on behalf of landlords, was up 11 percent. Combined with corporate advisory services, our other brokerage line, all brokerage was up 22 percent for the quarter. Corporate project management was up greater than 60 percent. Finally, if you will look at the segment table, you'll see that development and investment segment revenues were up 27 percent.

Diluted earnings per share for the quarter of the 77 cents were up 88 percent from the fourth quarter of 2003 when we posted EPS of 41 cents. Global Services income before income taxes was up 44 percent for the quarter, while Development and Investment income before tax was up over 125 percent.

Jumping now to the full year, consolidated revenues were up 10 percent. But this measure fails to take into account income from subsidiaries and the income from discontinued operations, both pretax. I will talk more about that later. Taking into account those items, the expanded measure -- revenues, plus income from subs, plus income from discontinued operations -- was up 14 percent.

Looking at the key revenue lines, facilities management was up 1 percent. As we noted in our third-quarter release, we expect positive quarter-to-quarter comparisons to begin to drive nice growth in this line item for the foreseeable future. Corporate advisory services revenues were up 16 percent for the year. Corporate project management revenues were up 40. As we have said consistently for some time we see this as a high-growth line for us. Property management revenues were down 5 percent for the year. Institutional brokerage revenues were up 20 percent. Combined with corporate advisory services, our two brokerage line items were up 18 percent for the year. For the Development and Investment segment I again refer you to the segment table, where you can see that segment revenues were up 21 percent. But the expanded measure of revenues that I mentioned a moment ago -- revenues, plus income from unconsolidated subs and income from discontinued operations, both pretax -- was up 54 percent, as noted in our release.

A couple of things about the income from subs and income from discontinued operations. As we have noted many times before, GAAP requires we account for sales of projects in which we will have no downstream involvement as income from discontinued operations. Selling those projects is the essence of the development business. Accordingly, we regard income from discontinued operations as a regular recurring part of that business. What we have not often pointed out is that there are substantial indirect costs -- for example, business unit salaries and bonuses based on overall business unit profitability -- that are associated with the production of income from subsidiaries and income from discontinued operations, but are included in segment expenses. So we believe the thoughtful analysis of segment profitability must include income from subsidiaries and income from discontinued operations as if they were gain on sale revenues. Subtle differences in deal structure or related facts, such as if we will manage a project after we sell it, can determine if the results of sale flow through gain on sale, income from subs or income from discontinued operations.

A word or two about our largest expenses. Salaries, wages and benefits were up 9 percent for the year. This was driven in part by higher incentive compensation payouts. Commission expense was up 22 percent. You would expect it to be up with all the growth in brokerage revenues.

G&A expenses were up 10 percent, but a large portion of the G&A expense increased was reimbursed. Un-reimbursed G&A grew a little over 2 percent.

The tax rate increased to around 38 percent as some actions we took in 2003 to lessen state taxes provided even more benefit than we had forecast, and also Savills, in which we have an equity investment of 10 percent; in equity account for their earnings, Savills had a better year than forecast.

Earnings per share was up 84 percent for the year to $1.05. EBITDA was up 33 percent for the year to $79.5 million. Looking briefly at the segments, Global Services, income before income taxes was up 41 percent for the year to 38.3 million and Development and Investment income before income taxes more than tripled to $24.8 million.

Just a word or two to put the segment performance in perspective for you. The earnings contribution from our two businesses in 2004 was about 61 percent Global Services and 39 percent Development and Investment. In our peak earnings year, 2000, those contributions were roughly 60-40, just as they are today, and they both recovered about equally toward their peak levels. In fact, Global Services may have recovered just a small amount better.

A word or two about the balance sheet. We ended the year with $164 million of cash despite spending almost $38 million to buy back stock in the fourth quarter, obviously a very strong cash position.

The gross amount of real estate on the balance sheet including investment in real estate subs was up from December 31 of last year, but that's a little misleading as our equity in real estate has actually come down. And you can track that as real estate, plus investment in real estate subs, less real estate debt, less minority interests.

We of course sold a lot of projects in the fourth quarter, and we've got more minority interest in the deals we're doing in funds. While we are required to consolidate the activity of Trammell Crow Investment Fund 5, we have only a 20 percent interest in the fund, so 80 percent gets backed out through minority interest. That was just a word or two of explanation about why the gross amount of real estate on the balance sheet is up. But in fact what's happened is our equity in real estate has come down.

The real estate debt consolidated on our balance sheet was about $150 million at year end. Our recourse exposure on that debt is limited to around $28 million. Of course at year end we have nothing borrowed under our line.

Turning to guidance, as we noted in our release with favorable conditions returning to the sector we're targeting organic long-term earnings growth from 2004 forward averaging in the 20 percent range. Given our 80 percent plus earnings growth from '03 to '04, it may be appropriate to expect our earnings from '04 to '05 to be less than what we're targeting as our long-term average. From 2004 to 2005, we will be looking for continued strong profit growth in our Global Services segment, but given the tripling of Development and Investment profit from 03 to '04, a flat year-to-year performance for that segment would be commendable.

We're very encouraged by activity levels in both of our business segments and by our ability to support the growth of those businesses with our financial and people resources. We have targeted a group of initiatives, including several focused on client service, that we're confident will drive strong growth.

Finally, before I turn it back over to Bob, I'll note that we also announced this morning in the press release a $20 million stock repurchase program that's intended to offset dilution from employee benefit plans.

Thank you Derek. Mike and John will provide more detailed commentary on our two segments respectively in just a minute, but first I will make some summary observations.

Obviously I'm very pleased with our financial performance, but I'm equally pleased with our operating performance. As Derek noted, both our Development and Investment and our Global Services business showed strong growth this year. And that's really important because we're a very diversified commercial real estate company. Probably even more important than the growth in '04 though is that we ended the year very well positioned for continued growth long-term.

Operationally we talked about a number of initiatives throughout the year, and we performed well relative to those initiatives. Starting with client service, in general our clients consider the service we provide them with to be a competitive advantage for Trammell Crow Company. And providing great customer service will continue to be our top priority again in 2005.

We had an outstanding year selling new outsourcing contracts, the best we've had in several years. We landed many new accounts with prominent customers. And while we were selling this new business, we did a great job of renewing existing accounts and expanding existing accounts.

Trammell Crow Healthcare Services performed better than expected. This is the service we provide t hospital systems, surgi-care centers and so forth. It now makes up nearly 6 percent of our revenues and contributes disproportionately to profitability. And it is central to our strategy to become less cyclical.

Our Development and Investment business had an exceptional year in terms of new starts, more than doubling the level from the previous year. John will talk to you in more detail about the buildup in our pipeline, but the new starts and the buildup in our pipeline of course impact future earnings, not current earnings. And we were particularly pleased with the activity in our new programs and funds, and again John will give you some detail on that.

We worked throughout the year and invested significant current income to grow our brokerage business, and this met with considerable success. Mike will give you the details on that initiative. We also made good progress in building our network of field offices in major US markets, particularly New York and Chicago.

So while we're excited about how '04 turned out, we are even more excited about the future. We're well positioned for long-term growth, both top line and bottom line, and operationally we are extremely well positioned to provide our clients with great service.

I am pleased to report on the performance of Global Services for 2004. We completed a year of real focus on our key objectives, and as Derek has shared, our results were strong.

As to the financial results for Global Services, overall revenue again was up for the full year 18 percent -- no, 18 percent for the quarter and 9 percent for the full year. NIBIT for Global Services up 44 percent for the quarter and 41 percent for the year.

In evaluating our two reported customer groups, the user grew faster with revenues up 24 percent for the quarter and 12 percent for the year. The investor group grew revenues at a slower pace of 5 percent for the quarter and for the year. We expected our user customer revenues to grow more rapidly in 2004, as reported, and would project the same relative trend for 2005. We do believe improving fundamentals, along with operational improvements and cost controls, should benefit the investor segment going forward.

Other 2004 full-year financial highlights include our total brokerage revenue, again up by 18 percent, led by nice gains in both our corporate advisory services business and our investment sales or capital markets group. Total project management revenues up 35 percent with revenues now in excess of $100 million for this line of business, again tremendous growth for our project management business for 2004.

Our NIBIT margin, as stated in our release, increased to 5.4 percent from 4.2 for the full year. Again, we're very focused on our year-over-year NIBIT margin improvement. And going back to 2003 we've made significant gains in that area.

Regarding our Global Services priorities, as we enter 2004, in addition to striving to meet our financial goals we have set out other key priorities -- first, was drive growth in our corporate outsourcing business; secondly, continue to grow our brokerage business; and third, further develop our platform. We accomplished these goals in 2004 in our Global Services division and are pleased with our results.

Regarding our corporate outsourcing business, during 2004, as Bob stated, we signed a significant number of new contracts in this business line. Our customer retention and growth with existing customers also made 2004 an outstanding year for Trammell Crow Company. We believe we have built significant momentum in the marketplace for corporate solutions and are viewed as a true full-service provider with strong delivery capabilities.

Significant wins during the year that we announced just include a few names that I will rattle off here. Aeon (ph) -- we won project management work for the eastern part of the United States. We just recently announced a significant full-service win with Chubb, which will include all facilities management transaction work and project management globally. We announced a new piece of business with Insurance Corporation of British Columbia, a Canadian assignment for facilities management and project management work. We announced GSA work, transaction work. We were one of four firms selected nationally to do work for the GSA. And again, recently we announced a global mandate with Eli Lilly for transaction work.

As to our brokerage segment, brokerage headcount has continued to climb as our efforts to recruit and retain great brokerage talent was a key initiative in 2004. We will continue these efforts into 2005. Overall we grew our brokerage workforce by 9 percent for the year. Our financial results show the fruits of our labor with revenue up 18 percent overall for brokerage.

We targeted two cities for specific growth, Chicago and New York, as Bob mentioned. We made significant gains in Chicago throughout the year under new leadership of George Cole (ph), who is deep in Chicago experience. In New York City we hired Richard Bernstein in December, another strong producer and leader. And we expect our business to continue to grow there in 2005.

Our alliances with Savills and JJ Barnicke for transaction work are both doing very well. These strategic relationships have expanded our reach globally as we build our own infrastructure internationally around our customers.

As to the Global Services platform overall, we continue to invest in that platform. We've made strategic additions to our Global Services team and our consulting practices group, our best practices team driving operational excellence initiatives, our brokerage leadership team, our billing management team and procurement group, our international operations, our corporate services pursuit team, and our technology platform. All of these investments have been absorbed by Global Services within our normal operations. We do not view these as onetime events, but ongoing investments in our operations. We believe we can leverage our existing organizational structure to accommodate significant growth ahead.

I will make just a few broad market observations and then conclude. First, fundamentals are starting to show improvement in the US. The impact for us should be improved conditions in property management business and increase production further in our brokerage performance. Secondly, capital flows into real estate remain at very high levels. We believe 2005 will remain strong for our investment sales and capital market mortgage group. Finally, strong interest continues among our corporate clients for our solutions. Real estate outsourcing is alive and well; the model works and we're driving savings for our customers along with great execution.

In conclusion, we feel very good about our results in 2004. Our priorities for 2005 will continue to include customer service, process improvement, brokerage growth, outsourcing growth, and focus on our people.

John, I will pass it to you.

As Bob stated, we're very pleased with the growth and performance of our Development Investment segment with an overall tripling -- a little bit more of our NIBIT from '03 to '04. But even more importantly, I think we're very pleased with our overall progress on a number of fronts that I will comment on.

First and foremost, I would just say our people. We are in a recovering cycle with our development investment network intact. That's the first time Chris and I can really say that without doing workouts and having a great run on our people and having to rebuild our network throughout there. I can also say it is a heck of a lot more fun going through an up cycle than it is through a downcycle just here a couple of years ago. We continue to hire strategically and opportunistically and to add great people to source and execute field opportunities out there. You can see that our operating expenses are up because we continue to invest in our network of great deal makers. Overall, their outlook is up and their morale is up. That's very important in our segment of the business because it is a momentum business and a high-energy part of the business. And I can't say that I've seen our morale higher than at any point right now. Things are up and things are looking good from that standpoint, and that's important.

In terms of programs, previously we've established with you kind of what our strategy is, and I am pleased to report that our strategy is well established and gaining further traction. To give you an idea of progress on our programs, our ING Industrial program now has 14 deals with over 4.47 million square feet and $185 million in process and under control, and even more in the pipeline right now. Our Fund 5 Opportunistic Fund both controls -- or has started 9 deals with approximately $265 million of total private cost, and again more in process coming. Even while not formally yet announced, our Medical Office Building Fund has over $120 million in new acquisition deals under control that will help seed its formation in the future.

So if you kind of look at these three programs and what we're trying to do, that's over $0.5 billion of in-process and under control that we have started. And that's clearly the direction we're trying to go -- more and more of our starts being programmatically processed and doing that efficiently with our program partners. So very good progress in '04 on that front.

A second major thing we have tried to do is really focus on our initiatives. Our initiatives, as we have told you previously, are really targeted growth industry segments where we've assigned functional experts to work with our field and generate opportunities out there. For '04, we experienced continued growth in our initiative areas with $392 million, or approximately 40 percent of our starts, being initiative-based in areas of healthcare, acquisitions, mixed-use residential and higher education.

When you add between the programs and then the initiatives, we've got nearly $1 billion in new starts out there. And it's important because within our network we could talk about asset valuations and everything else, but our network is what really sources those opportunities. It's not just find to have money in this type of market; you have to be able to source and execute the value creation opportunities. And that's exactly what our network is doing, and then it's funneling into our programs and initiatives. And we see that as a great competitive advantage not just in terms of our results for '04, but really going forward.

To put it into context, our overall starts in terms of development investment, last year we started 24 deals with $419 million in value. For '04, those development investments increased to 43 with an overall value of 1.089 billion. So '03 was clearly the bottom of the cycle in our segment and these new starts bode very well for increased levels of activity going forward.

Lastly, and probably most telling, is our pipeline of deals. A pipeline deal is a deal that we have under contract with a 50 percent chance or greater of moving forward, but one or more things has to occur prior to closing. And overall our pipeline of deals has increased to 85 deals that we're tracking with just under 2.5 billion -- 2.491 billion -- of future business. And I think the most telling thing of this statistic is this is the largest pipeline number we have recorded since we began tracking this statistic.

So I think if you just look at our D&I results overall, it's pretty clear that we're benefiting from the economic recovery and really the focused execution of our strategy. And as Derek mentioned, kind of given the tripling of our D&I profit from '03 to '04, we do believe that a flat year from performance of '05 would be commendable, but we've got to process the increased starts and pipeline activity over a 24 to 36 month period. Beyond '05 we remain very bullish on our position in the marketplace and our prospects for continued growth as the markets continue to recover. And we're looking forward to that because it is fun again.

Bob I will send it back to you.

Why don't we go ahead and open up for questions?

(OPERATOR INSTRUCTIONS) David Gold, Sidoti & Co.

Derek, you made a comment in there that the fourth quarter presumably didn't see all of the deals close I think you said that potentially could have, that it wasn't sort of everything. How should we interpret that? Does that probably make them first-quarter events? And where the ones that didn't close pretty significant?

First, at any given point in time, we have a whole cluster of projects, if you will, that are approaching closing. And of course, the year end is kind of a natural hard back end to try to get those deals closed.

What I would tell you with regard to our experience is at the year end really very little rolled -- of the stuff that was fourth-quarter/first-quarter type activity, very little about rolled over into the first quarter. And in fact, looking at our -- we gave guidance for the full-year at the tail end of our earnings release and nothing by quarters.

But what I would tell you is if you were to look back at last year's first quarter you will see that it was really -- the profits in the first quarter were entirely Development and Investment. And I think in this year's first quarter we think that we did enough to drain the cupboard at the end of the year in development that that probably won't be the case this first quarter; development probably will report very little in the way of first quarter profit.

As we look at things I guess a quarter ago when you put out some guidance for the year, say, or for the fourth quarter, clearly fourth quarter had a significantly better showing than even the high side of the ranges. Would that be to say, then -- basically am I correct in interpreting that as you continue to see deal closure accelerating faster than you thought three months ago?

As I indicated I think at the outset of my comments, we had visibility to a lot of potential kind of upside to our original guidance in the form of development deals. And that turned out maybe a little better than we had anticipated, but our Global Service also helped drive that upside surprise. Brokerage and project management businesses, also incentive fees process of facilities management business, all had very strong fourth quarters. And as I indicated when I was talking about brokerage, very strong fourth quarter even comparing against the prior year's fourth quarter, which was very strong. So in terms of exceeding the high-end of the guidance, it was a little bit driven by development, but also driven by that surprising Global Services performance.

If possible, is it impossible to give the split in the fourth quarter between on the brokerage side sales versus leasing?

Of our total brokerage revenues, which again is corporate advisory services and that brokerage that is under the investor services there on the face of the income statement, of that total number, about 30 percent of it was investment sales. The rest would have been a combination of tenant rep and product leasing. Almost all of that investment sales is work that's done for investor customers and accordingly is reflected in that brokerage line. There's a little bit of the investment sales work flowing through the corporate advisory services line where those sales are done on behalf of those corporate user customers.

So just I guess to reiterate that, of our services revenues, brokerage accounts for about 36 percent for the full year '04. And then of that 36 percent, about 30 percent of it, or about 10.5 percent of our total revenues, or total services revenues, came from investment sales.

The 30 percent number you're giving is an '04 number or fourth quarter?

It's '04, sorry (multiple speakers) full-year.

I was actually interested, if you could, in the breakdown on fourth quarter.

We can get it (multiple speakers)

For what shows up in that investor line, of the investment services, it's about 50-50 between project leasing and investment sales that's flowing through the investor side of brokerage. Again, there is some investment sales business that flows through the user side because we do execute capital markets transactions for our corporate group as well, but it's a smaller percentage of what shows up in that line, much smaller.

So about half of the brokerage line?

Yes, on the investor side, right.

(multiple speakers) about half the brokerage line on the investor side, but that's only what percentage of our total brokerage business. Counting the corporate advisory services, that's the other portion of our --

Yes, corporate advisory services is a much larger number than investor brokerage, and the total amount of investment sales business that was embedded in the corporate advisory services line for the quarter was --

Could be 20-ish (multiple speakers)

(multiple speakers) 15 percent of the total.

Thanks a lot.

Matthew Ostrower, Morgan Stanley.

Just a follow-up on the last questions about the breakdown between sales and leasing brokerage. You're talking about this year's numbers. On the last call you guys did what I thought was a good job just characterizing the nature of the growth in the Global Services business. So can you give us a sense -- I don't know if you can quantify it, but can you give us a sense for what the numbers were in general? Are these breakdowns of brokerage numbers? Are they different this year than they were last year, particularly in the fourth quarter?

I'll give you the full-year view and try to put it in perspective. Obviously when you look at what we call the corporate side versus the investor side, the corporate side grew 16 percent and the investor side grew 20 percent for the full-year. Year-over-year, when you blend that it's 18 percent growth for the year in total brokerage.

Since we do have some of the investment sales business in that user side, if you want to analyze what we would call tenant rep or the CAS business relative to the investment sales business, clearly the investment sales business showed stronger growth through the year; probably something like 33 percent for the year. And the pure tenant rep or CAS business was up about 17 percent for the year. And project leasing was up slightly 4 or 5 percent for the year. So relative to that mix of business and what was growing fastest, the investment sales business was the fastest growing business for us for '04 compared to '03. The tenant rep, or corporate advisory services business as we call it, was pretty close to our overall average at 17 percent.

Let me just follow on there for a second. In thinking about this as sales versus leasing, I think Mike captured for you there on the investor services brokerage line that in essence most of the growth in that line came from growth in investment sales. But on the other line, corporate advisory services, which is again predominantly tenant rep brokerage or leasing transactions, you can see there a very strong growth in corporate advisory services from '03 to '04. So that's a predominately line. It is leasing representing tenants as opposed to representing landlords. But you can see that had strong growth.

I would add one or two other thoughts. First of all, we like the mix of business that we've got in the brokerage business. It's very well diversified.

As we are adding headcount, we're also seeing our average production go up for broker. So we are adding stronger talent. All the recruiting that we've done over the last two years is starting to pay off. Again, we've got embedded in these numbers in terms of our P&L any transition costs or infrastructure costs to support adding those brokers. So we like where we --

I assume on the corporate -- on the user services (technical difficulty) advisory services, you talked a lot, and not so much last quarter, but over the last couple of years about building what you call the backlog. Are you seeing a fair number of transactions from these -- from a lot of these users who were previously just paying you for limited things like facilities management? In terms of characterizing that growth, is a lot of this coming from users that were only buying much more limited services before and are now expanding the menu of things they are purchasing from you?

I would say yes to that question. Clearly in '04 we saw corporate America certainly starting to make decisions and make moves, not just here but in other parts of the world in terms of transactions getting done.

So decisions are being made. We are seeing slight absorption gains across the US; vacancy rates starting to come down. So the fundamentals certainly support that idea that absorption is slowly starting to improve. Some markets are performing certainly better than others.

But yes, we're definitely seeing transaction activity and volume pick up, not only from our day-to-day brokerage business, but also good activity within our corporate services business.

I guess my question was driving more at you had taken on client that might have been using less profitable services before -- not unprofitable, but less profitable. And the expectation was that, part of the business plan I assume, was that capturing them with those services was going to provide much more profitable services later on. I guess my question is in general is that strategy proving to be what you expected.

Yes it is. When you think about the upside and the variable nature of our business, when brokerage revenues and transaction picks up, we've been very careful as we get into a new facilities management assignment or project management assignment to make sure that our base business is profitable to begin with. Oftentimes upside will be in incentive fees and will be in transactions. As those transactions heat up, clearly it will impact our bottom line.

Finally, on the development side, can you talk about -- a lot of this of course the profitability is driven by these gains on sale, so the different lines that flow through on. I assume that these gains are being exaggerated -- not, but expanded by promoted interests in some of these sales. Is that a safe statement?

John, do you want to address that one?

Any of the deals that we do are basically a structure where we generally have a promoted interest within there. So when a deal transacts, that upside is part of the overall valuation process, and our incentive is aligned with our partners in there to maximize the sale value. So to the extent there are higher valuations, yes, overall we get those.

But in terms of what we do, none of the transactions that we did in '04 or any of the volumes that we did would we consider anomalous to what we've done in prior years. It is just we constantly have, as Derek mentioned, 5 to 10 meaningful transactions in any one year that may close at different times. And the things that's important in terms of the D&I business is it is really not a quarter-to-quarter business, and it's not even really a year-to-year business, but it is a cycle to cycle business. So as we process these transactions, we are the beneficiary of that.

But for where we are at relative to the peak of the cycle before, our earnings are at about 60 percent of where we were at from the prior peak. And the statistics that I gave you in terms of new starts and the new activity out there, those are at about 50 percent of where we were at at the peak. So yes, we benefit from the incentive sales throughout there, but I don't think it's anything anomalous from kind of what we do year in and year out throughout the cycle.

Is it safe to say that the volume of transactions that you're seeing there that are generating these gains, is that being stimulated by owners saying, "hey look, it's a robust property market out there; let me take advantage of that and capture my IRR?"

A lot of what we do, the majority of our transactions are not so much we buy core assets and then people are overpaying for those core assets above the basis that we just bought for them; our transactions tend to be very value-add transactions. We source deals that take a lot of operational expertise in order to capture that value. So once it is to a point of stabilization, that's when we can harvest and our partners aren't saying, "let's push everything forward now, because people are willing to overpay". A lot of what we're doing is we're processing value-added transactions that are in our pipeline and in process. And as they get stabilized, we're taking them to market. And right now the asset valuations are strong. But I don't think we're inordinately pushing, or our partners are inordinately pushing to say, "let's get out of these deals now while the going is hot". It's really more (technical difficulty) deals they're more stabilized and then they are available for sale.

Just to add to John's comments, a big chunk of what we're doing now is things like healthcare that really don't look in terms of the motivations of buyers and sellers a lot like our traditional investor business when we did office buildings and warehouses. We still do office buildings and warehouses and retail centers. But office building demand and supply is different -- or industrial demand and supply is different than healthcare demand and supply. We don't think it cycles the same way, and so on and so forth. And that's an increasing component of what we're doing on the development investment side. We've also got some residential projects we're being very careful with the volumes we do there because of some of the risks in the marketplace. But we've got a mix there that's not completely consistent with what you have seen traditionally. But as John said, the volumes aren't anomalous at all, and the nature of the business we're doing is not anomalous at all.

Could you reconcile, John, you said that your starts are half of where they were at the peak, but it sounded like to me in your prepared remarks that you said they were never as large as they were?

Yes, the pipeline. Differentiate between new starts --

Okay, I got you.

This year was 1.089 billion? Back in '99 we broke the $2 billion mark in terms of new starts. And in the pipeline, kind of going forward in the future that one at just under 2.5 billion is higher than what we have seen. So that bodes well for the opportunities that we're seeing out there.

Thank you.

Bill Baldwin, Baldwin Anthony Securities.

Mike, can you give us any color as to where you think your overall margins could be in the Global Services area as you go out over the next several years? Do you have any objectives that you think that business can achieve for you?

If you look historically at where those kind of go back to our peak years in margins in the services business, we dropped something like 9 to 10 percent in terms of margin, and we're certainly aimed there. You have seen our NIBIT margins now over 5, and there were at 2 back in 2003 -- a little over 2.

So we're extremely focused on our margins, I would tell you. Even with the investments we've made in our infrastructure, the idea that we can grow from where we are with our existing infrastructure without further gains, without further significant gains in that infrastructure is very real. Our pipeline of new business is extremely strong. We really feel good about the prospects of where we sit in the marketplace today.

There are places where you look for upside in that margin. Number one, the earlier question about transactions and the lift, as we get higher production per broker, it can make a significant impact. The property management business is very core to what we do. With occupancies and rents where they are and starting to climb back again, those can make pretty quick gains in terms of margin improvement for us. So the project management line of business where we historically have had very good margins, and that business continues -- you have seen the growth rate that has happened in that side of the business. So we're certainly aiming at those kinds of levels.

Bob in his comments, Mike, made the comments that I believe healthcare services approximate 6 percent of revenues and a somewhat larger percent of profits. Was he referring to healthcare services being generated in the Global Services division?

Well, it's both. It cuts across both sides of our business. We do manage a significant number of healthcare systems, medical office buildings. That business is (technical difficulty) 2004. And there is obviously significant activity on the development side as well. So it really cuts across both lines.

Is that going to continue to be a major initiative, Mike, to focus on bringing more outsourcing into that (multiple speakers)?

Yes, absolutely.

While it's small, can you just give me a definition as to what would be discontinued operations in your division? You had a small amount -- I think one-hundred-some-odd-thousand there in the quarter. (multiple speakers) as discontinued operations?

Essentially the discontinued operations component within Global Services would represent the brokerage contributions on those projects that were sold in the development segment and reflected discontinued operations. And it may be a project leasing component or an investment sale component. To the extent that services participates on those assignments, we put some of that proportion of the income is reflected in the Global Services segment.

One final question. Based upon the strong growth you're seeing here in the starts on the development side, when would we expect to start seeing year-over-year growth in development fee income in the income statement?

I think you'll start to see development fee income continue to increase in '05 and even beyond. A lot of those new starts that we see there, they have kind of a transaction period of between 24 and 36 months. So we like what we see for -- it will start in '05, but really start to gain momentum in '06 and '07 and beyond. And as we continue to add new starts --

One other thing about that line item development and construction fees on the face of the income statement, because Bill just noting from '03 to '04 that single line is down. One thing I would tell you is that embedded in that line item can be incentive fees that we earn based on value creation, on-time, on-budget completion, etc., that are going to have that line item performing a little erratically as well, as opposed to just kind of steady-eddy development fees that you might think from increasing activity levels.

(technical difficulty) any one quarter or any one period going to be fairly significant?

Right.

I will talk to you later about that then. Thank you much, and excellent quarter.

Will Marks, JMP Securities.

I just had a question, and I actually missed all of your prepared comments, so just shut me up and I will talk afterward if you have discussed this more than in the press release. But I'm asking about your guidance. And you did mention obviously on the development side what you expect there, so most of the growth coming from Global Services. Can you take that a step further and maybe talk about a few different areas where you see the growth?

With regard to the guidance, in terms of the prepared remarks, if you missed that part you didn't miss anything that wasn't in the release. And we did give guidance about development. So just focusing on services, I think we indicated that we expect strong, continued profit growth from the services segment.

What I would tell you is that the things that Mike had outlined at the tail end of his prepared remarks, which are the brokerage business, outsourcing business, project management business -- and when I say it outsourcing, I want to be careful there. A lot of times people equate outsourcing with facilities management, and I think you ought to think about outsourcing as kind of all the user revenue lines.

But anyway, facilities management, corporate advisory services, project management for users, we would expect all of those to grow and then brokerage on the investors side as well. Property management, we're not expecting much -- in this environment much in the way of growth on that line item.

Looking at that growth, and then I guess what I'd like to figure out is you should have a lot of financial leverage given the improvement in your balance sheet, so how much EBITDA growth can we get from the Global Services business if you're expecting 20 percent growth overall and it's flat -- you're expecting flat from development? What can we expect from there, Global Services? I realize (indiscernible) and so it may be less on the EBITDA side.

Just to look at the EBITDA growth from '03 to '04, you would see that it's in large part a development contribution. But one thing that this gives us the opportunity to point out is that I think EBITDA from Global Services is up about 10 percent year-to-year. And that's EBITDA growth that's being produced in an environment when we're investing heavily in that business. And we can sit here and go through a list of things that are incremental expense '03 to '04; increased the size of our corporate sales team; increased our brokerage national leadership; and a list of those kind of national initiative type flavored things on the services side that if we weren't making those investments -- and we're investing part of our NIBIT our and EBITDA to do that. If we weren't making those investment we'd see EBITDA growth in services last year that would have been two to three times what it was.

So you're expensing those costs?

Yes, and unfortunately in our business investments come in the form of people. You invest in those people in advance of their production of revenues, and that's what happens. Those are not capitalized expense; they are a drain on current period income.

So through everything you said, I would assume there would be an acceleration of growth in '05 except if you continue to make those investments.

Right. And what Mike said I guess was as he talked about the infrastructure, the leadership infrastructure serving the services business, we think that's a highly leveragable leadership structure. And accordingly, those incremental investments in the form of year-over-year increase and expense should slow with (multiple speakers)

I agree with that. I would expect that the EBITDA contributions and the growth potential out of Global Services going forward certainly can pick up the pace. The investments that we'll continue to make in infrastructure around brokerage hiring would continue. But for the most part the platform investments that I made in my prepared remarks are in place, and we're pretty well done with that.

The other place that we will be continuing to invest and expand is just internationally. Whether it's Singapore, or it's the UK, or it's various markets around the globe, we're adding people. As we're winning business we will continue to invest there. But again, I would expect that we can pick up the pace of contributions from services.

One final quick question in CapEx. I don't know if you mentioned it, but any CapEx guidance for '05?

We didn't give any guidance. The amount of CapEx that you'll see in our cash statement that gets published is about $6 million, a little less than that. And we don't have anything (multiple speakers)

(multiple speakers) for the full year of '04?

Yes. And again, let me make sure that we understand that. That's things being capitalized, and it's not incremental investment in development but true kind of non-development CapEx, about $6 million last year. And that's kind of a maintenance level. We wouldn't expect -- at this point there's not on the drawing board for 2005 things that would add significantly to that.

Thanks very much.

Rob Maiten (ph), Schneider Capital.

A couple of questions on the development side. I don't know if you guys look at it this way, and I know on deals where you have an equity investment you're getting returns on your equity, as well as promotes and fees, but is there a way to quantify for deals where you had an equity participation what your profit was as a percentage of your investment, like your return on gross book value I guess?

What we do in a lot of our programs is we have a co-investment with our program partner, and that capital that we put it in is just the same as their capital so it performs para pa su (ph) relative to the overall project returns. On top of that we generally get a -- we get market fees. And then after we hit certain yield thresholds we get an incentive promote above and beyond that.

So if you look at our co-investment, which is typically between 5 and maybe up to 10 overall in our overall program funds, those will perform exactly as our partners perform. And we're trying to get yields that are in the mid-teens to high-teens overall as a return on equity on those. When you add in our overall performance from our incentive throughout there our returns are exceptional, because you get a lot of leverage without additional equity putting in there. So that's the way we kind of segment it overall. Does that answer your question?

What I'm trying to get to is you've got -- I didn't add up all the categories, but you've gross real estate investment on the books of 200 and something million. I am just trying to get a sense of as those projects close what the likely profit would be. And I thought maybe looking at it as a percentage of book value it would be useful based on what you've done historically.

There's a lot going on with those categories. I will let Derek and Arlin kind of comment on those.

I would say that's true. There's a lot going on in those categories. To be honest with you, that's not a measure that we have tracked. And also, just even the gross amount of real estate on the balance sheet considering the large minority interest in some pieces of it is actually not a very good measure or an overinflated measure of our exposure to real estate. But to be honest with you, that's not a measure that we have tracked or something that we can give you in the form of guidance that's going to help you model something based on looking at our balance sheet.

Arlin, do you have anything more to say to that?

No.

Okay. And then another one on the development area. Again, I'm just trying to reconcile. You're sitting here with record levels of inventory, but I look at kind of economic data, non-residential construction is still pretty depressed. I know you have kind of gravitated towards some less cyclical segments, but going forward maybe what inning do you think we're in in the cycle here? And do you think your inventory level or business there would continue to grow at least as much overall non-residential construction or not?

I think you're accurately depicting it. We've got investments in a number of diversified areas. We do office, industrial, retail. We will buy the appropriate land opportunities. We do the residential. We do healthcare. So it is not dominated by any one segment. And I agree with you -- there are segments that get more heated than others. So I think that's one of the benefits of our platform, is just the overall diversification and flexibility for our deal-makers to kind of go where we see the market going as opposed to where it's been.

If we look at the inventory that we have in there, it is very balanced. Not one statistic jumps at you that says we're over-weighted in this area or the other. So again, that's a positive.

As I look going forward, as I mentioned before, we're at 60 percent in our overall earnings in the D&I group of where we were at at the peak back in 2000, and the overall starts at about 50 percent of where we were at. So we see a very good recovery underway. We see it coming. There are segments that will slow down. There are other segments that will heat up.

And in particular, 1.5 years ago we made investments in industrial. That is starting to pay off with the numbers that I gave you in our overall ING Industrial Program, because we've seen evaluations increase there and the opportunities increase. So we hope to continue to do that.

We think the office sector will be the notch next one to come back. And we are focused on trying to have a programmatic approach to the overall office market.

So our approach is to be as flexible as we can and at the same time step back and look strategically and try to go to where the puck is going. And that's where you're seeing a lot of our strategic focus on these funds, is in the direction of where we see the market happening and trying to beat it a little bit.

So we're more excited going forward with the opportunities that are out there. Again, we have both capital to go invest and we've got a network that can source. And that is a huge differentiator. If you are on the sidelines just hoping for somebody to bring you a deal and you've got lots of money, there's a lot of people that are playing that game. But I think we can kind of shift our game plan midstream.

So where are we at in the cycle? It feels a lot like kind of '95, '96. And we had a good run from that point forward. So we feel there's still a lot of good upside.

Part of your answer really is that we are derivative of the economy. And if you look at the GNP numbers that just came out, obviously we're in probably the second to third year of the recovery. And our business typically has about an 18 to 24 months lag as corporations -- Mike said earlier, corporations are starting to make decisions. So that is really where we see opportunity for new inventory to be built to deal with their needs and with the needs of the institutions who take care of them. That's what we see. I won't ask for the inning either, other than to say you saw our Global Services business start to get stronger two years ago. I think now you're seeing not only great growth on the services side, but you're starting to see accelerated growth on the development side.

Than just one last one. I know you've got incentive comp pay outs in the first quarter, but you're sitting at a very high cash level there. I am just curious if you have any comment on intended uses of that going forward?

First of all, as you noted there in your question, we do have significant pay outs in the first quarter, in the quarter which is usually the trough in our business because we've kind of drained the well dry at the end of the year. It's our quarter of peak cash usage. We will expect incentive compensation pay outs in the next two weeks of over $40 million. We've got taxes due of 18 million or so. So that's a significant hit to that cash balance. But you're right, it's still strong.

In terms of other uses of the cash, we see one of them in the earnings release today, which is looking to buy back stick in the amount of $20 million. And then otherwise, we're just kind of not feeling compelled to invest that cash just because we happen to have it. And John talked about the pipeline inventory in the development business being at an all-time high. I'm sure there will be opportunities for us to deploy some of that capital in some of those deals and put it to good use for our shareholders.

Thanks a lot.

This concludes our question-and-answer session. I will turn it back to Mr. Sulentic for closing remarks.

We appreciate everybody being with us. We will talk to you again when we release our first-quarter results. Thanks.

We thank you for joining us in our presentation. This concludes the presentation. You may now disconnect. Have a good day.