世邦魏理仕集團 (CBRE) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CB Richard Ellis Group, Inc. second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS.] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Ms. Shelley Young. Please go ahead.

Thank you, and good morning, everyone. Welcome to CB Richard Ellis' second quarter 2005 conference call. Last night, we issued a press release announcing our second quarter earnings, which you should have received by now. If not, it's available on our website at www.cbre.com. This conference call is being Webcast live and is available on the Investor Relations section of our website. As in prior quarters, we are providing slides of the presentation that you can use to follow along with the commentary. The PDF version of the presentation is available in the link marked Supporting Material. An archive of the Webcast as well as a transcript of the call will be available on the Investor Relations section of the website for three months.

We have several members of our senior management team here today to discuss our results with you. These include Brett White, our President and Chief Executive Officer; Ken Kay, our Senior Executive President and Chief Financial Officer; and Mike Strong, President of Europe, Middle East, and Africa.

Before we begin, I'd like to remind you that our presentation today contains statements that are forward-looking, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements should be considered as estimates only, and actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, CB Richard Ellis Group, Inc. undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our annual report on Form 10-K and our quarterly reports on Form 10-Q, which are filed with the SEC and available at the SEC's website, at www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

We may make certain statements during the course of this presentation which include references to non-GAAP financial measures, as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly-comparable GAAP measures, which are in the Appendix of today's presentation.

With that, let me turn the call over to Brett White, our President and CEO.

Thank you, Shelley, and good morning, everyone. We will start on Page 3 of the slide deck. During the second quarter of 2005, the firm continued to meet our dual objectives of strengthening our market-leading position through strategic investments, while at the same time, delivering strong top- and bottom-line results to our investors. Our strategy of being the leading provider of advice to clients on a global basis continues to further distance our position vis-a-vis our competitors. And today we believe we are the top firm in at least 23 of the top 25 major metropolitan markets worldwide. Margin improvement continues within each of our businesses, and we continue to lead the industry in profit and are margin growth.

Now, please turn to Page 4. We achieved 22% top-line revenue growth for the second quarter of 2005, marking the 11th straight quarter of double-digit year-over-year organic revenue gains. Net income for the second quarter of 2005 was 53.5 million, as compared to 22.4 million for the same quarter last year. EPS was $0.70. This constitutes an increase of $0.38, or 119%, as compared to the prior-year net income of $0.32 per share.

Page 5. Operating income was $83.3 million, which was $27 million, or 48%, better than last year. EBITDA of $108.9 million increased $39.9 million, or 58% for the quarter. As you recall, these earnings metrics exclude one-time items, which represent non-recurring costs associated with the Insignia acquisition, the 2004 IPO, and the repurchase of debt. These items have been eliminated to provide a better comparison of our financial results on a normalized basis.

Now I'll ask Ken to take us through the financials in a bit more detail. Ken?

Thanks, Brett. Please turn to Slide Number 6. This slide reflects the Company's operating results for the second quarter, as compared to the prior year. As you can, see revenue increased $121.3 million, or 22%, from last year. A steadily-improving leasing market, combined with continued strength in investment sales globally, has primarily fueled our double-digit revenue growth. Further, increased property management fees and higher appraisal and mortgage brokerage fees, resulting from the strong CMBS market have also contributed to the revenue growth.

Cost of services, as a percentage of revenue, increased only slightly, from 49.5% for the second quarter of 2004 to 50.4% for the current-year quarter. This was primarily driven by increased producer and producer-support headcount and higher producer bonus expense in the U.K., as a result of increased revenues in the current year. On a normalized basis, the increase in operating and administrative expense is primarily due to higher bonus accruals and business promotion costs, resulting from improved performance. The year-over-year overall increase in reported operating expenses was partially masked by the absence of Insignia-related costs and one-time IPO-related compensation expense, both of which significantly impacted second quarter 2004 results. Excluding one-time costs, on a percentage of revenue basis, operating expenses have been reduced to 36%, versus 39% in the same quarter last year, due to the operating leverage inherent in our business structure.

Equity income has increased by $12 million, or 434%, due primarily to fees earned and gains realized on the disposition of assets maintained in our investment management portfolios. The merger-related costs in 2004 represent costs associated with the Insignia acquisition. We incurred our final merger-related costs associated with the Insignia acquisition in the third quarter of 2004. Excluding one-time costs, EBITDA for the quarter improved by $39.9 million, or 58%. This improvement reflects the positive impact of our increased revenue, coupled with expense controls.

Please turn to Slide Number 7. This slide reflects the Company's operating results on a year-to-date basis. As you can see, revenue increased by $218.5 million, or 22%, from last year. All revenue categories have improved, with the most significant increase being generated from strong investment property sales, as well as improved leasing activity globally. Increased mortgage banking, appraisal, and property management fees in the Americas have also contributed to the growth in revenues.

Cost of services has increased by 22%, which is essentially consistent with the increase in revenue. Cost of services, as a percentage of revenue, totaled 50.1% for both 2005 and 2004. As with our quarter results, the increase in operating and administrative expense for the year is primarily due to higher bonus accruals and business promotion costs, both resulting from improved performance. Excluding one-time costs, on a percentage of revenue basis, operating expenses have been reduced to 38.4%, from 41.5% in the first half of the prior year. Equity income has increased by $12.7 million, or 240%, due to the aforementioned reasons for the second quarter results.

The merger-related costs in 2004 represent costs associated with the Insignia acquisition. There are no residual merger-related costs in 2005. Excluding one-time costs, EBITDA for the year-to-date improved by $67.2 million, or 71%. This improvement reflects the positive impact of our increased revenue, combined with the operating leverage in the Company's business model.

Please turn to Slide Number 8. For the second quarter of 2005, our sales and leasing activity represented approximately 77% of our total revenue. Property and facilities management accounted for 8%, while appraisal and valuation comprised 7%. Commercial mortgage brokerage accounted for 4%, and investment management contributed 2%. Sales transaction revenue increased by $79.8 million, or 44%, for the quarter. This was largely the result of continued strength in investment property sales globally. Leasing revenue increased $25.2 million, or 11%, resulting from the steady recovery of the leasing market, while property and facilities management increased $6.1 million, or 14%, for the quarter, mostly due to new accounts added in the last nine months.

Appraisal and valuation increased by $7.3 million, or 18%, for the quarter. Our mortgage brokerage revenues were up $2.6 million, or 10%, from last year. And investment management was lower by $3.6 million, or 18%, for the quarter, primarily due to acquisition and disposition fee revenue earned in the U.S. in the prior-year quarter that did not recur, as well as the timing of revenues realized in Japan.

Please turn to Slide Number 9. Our trailing 12-month EBITDA margin improved significantly in the second quarter of 2005. Excluding one-time charges related to the Insignia acquisition and IPO-related compensation expense, EBITDA margin for the last 12 months was 14.2%, as compared to 11.1% for the comparable trailing 12-month period ending June 30th, 2004. This is a 28% improvement, which is primarily due to increased revenue, management's continued focus on cost containment, and operating efficiencies.

Please turn to Slide Number 10. Our second quarter 2005 GAAP, or reported earnings per share, of $0.66 includes one-time charges related to the Insignia acquisition and repurchase of debt. This slide provides a bridge to get from the reported earnings per share to an adjusted earnings per share of $0.70. These one-time charges include -- integration costs of $2.4 million, or $0.02 per share; loss on extinguishment of debt related to our purchases of the 11.25% senior subordinated notes in the open market of $1.8 million, or $0.02 per share. Excluding these one-time charges, our adjusted EPS is $0.70 per share for the second quarter of 2005. We've also provided the comparable bridge for the second quarter of 2004 to provide the visual framework for how strong our second quarter of 2005 really was.

Please turn to Slide Number 11. The cash balance at June 30th, 2005, of $192.2 million, was $64.7 million lower than at December 31st, 2004. This decrease reflects the expected seasonal balance of cash, as the majority of our 2004 bonuses were paid in the first half of 2005. The decrease in net receivables is reflective of the fact that transaction-based revenue is seasonally lower in the first half of the year when compared to our peak revenue production that occurs in the fourth quarter of each year.

The warehouse receivable represents loans held for resale by our mortgage brokerage business. The balance will fluctuate in tandem with the line of credit liability reflected on the next slide, based on the number of loans held at any point in time. Property and equipment, net, was lower by approximately $4 million. This decrease was primarily due to normal depreciation expense, partially offset by capital expenditures. The increase in deferred compensation assets is due to an additional $20 million funding of the deferred compensation plan, coupled with participant contributions during the quarter. The increase in other assets is primarily attributable to an increase in our co-investment activities in Europe and investment in a specialty finance company by our mortgage brokerage business.

Please turn to Slide Number 12. Current liabilities, excluding debt, decreased by approximately $113.3 million. This decline was due to the payment of 2004 bonuses and the reduction in commissions payable to producers during the first half of 2005, consistent with seasonally lower transaction revenue. The decrease in the senior secured term loan tranche B reflects the $3 million required quarter amortization. The 11.25% senior subordinated notes balance reflects the $38 million of open market purchases for the first half of 2005. The increase in other debt is primarily due to non-recourse debt related to a co-investment in Europe. The reduction in other long-term liabilities is mainly due to the net decrease in office lease reserves in the U.S. and Europe. Stockholders' equity rose, primarily, as a result of the additional net income from the current year.

Please turn to Slide Number 13. As you can see, total debt has declined by approximately $46 million during the first half of 2005, for the reasons we discussed previously. Our net debt to EBITDA multiple at June 30th, 2005, 1.14 times, as compared to 1.33 times at the end of December 31st, 2004. The decrease was due to the repayment of the 11.25% senior subordinated notes and higher trailing 12-month EBITDA at June 30th, 2005. At June 30th, 2004, the net debt to EBITDA multiple was 2.34 times. So you can see we've come a long way since then.

Our trailing 12-month interest coverage ratio was 7.4 times. Our weighted average cost of debt was approximately 7.95%, at June 30th, 2005. On May 25th of this year Standard & Poor's raised our debt ratings. Our senior secured bank credit facility and our senior unsecured debt were raised from B plus to double B minus, and our senior subordinated debt rating was raised from B minus to B.

Please turn to Slide Number 14. Internal cash flow is defined as normalized net income, adjusted for depreciation, amortization, and capital expenditures. The trailing 12-month internal cash flow was $183 million as of the second quarter of 2005. There is a close correlation between net income and internal cash flow, because of the limited capital expenditures and working capital needed for the Company on an annual basis. Capital expenditures, net, were $30 million for the 12-month period ending June 30th, 2005. And we expect our capital expenditures in calendar 2005 to be approximately $30 million as well.

One of our stated objectives is to use our operating cash flow to reduce debt by $50 million annually. To-date, during 2005, we have already paid down our debt by approximately $44 million, which will generate approximately $4.5 million in annualized interest expense savings. The balance of the debt reduction for 2005 will come from the remaining scheduled amortization of our term loan. Additionally, as we've noted on previous occasions, we anticipate using a portion of our operating cash flow for co-investment activities and in-fill acquisitions that may arise.

Please turn to Slide Number 15. The strong second quarter financial performance was due to the broad-based improvement in results from across virtually all of our lines of business and geographies. The performance for the remainder of the year will depend on sustainable, favorable economic conditions, although we feel confident that the increases seen in the first half of 2005 will be additive to our full-year results. Consequently, we are increasing our full-year 2005 guidance to reflect the following -- We anticipate our full-year 2005 revenues to be approximately $2.7 billion. Net income, as suggested, is expected to be in the range of $183 million to $191 million. We also expect diluted earnings per share, as adjusted for the year, to be in the range of $2.40 to $2.50 per share, excluding the residual one-time integration costs related to Insignia acquisition and charges associated with the debt buyback program of approximately $14 million pre-tax.

I'd now like to turn the call over to Mike Strong, President of EMEA to run through the operations.

Thank you, Ken, and good morning. In the Americas, second quarter revenue increased 27%, to $489.9 million, compared with $384.5 million for the same period in 2004. Higher revenue was principally the result of broad-based improvement in revenue production from virtually all of the Company's service lines. Excluding the impact of one-time items, EBITDA was $81.6 million for the second quarter, an increase of $32.1 million, or 65%, higher than the second quarter last year. Higher EBITDA was primarily the result of the improvement in bottom-line performance from those businesses.

While our investment activity is strong across the board, CBRE has made market share gains that outstrip the pace of the market as a whole. Overall, U.S. investment sales rose 46% in the first quarter six months of the year, to $112 billion, according to Real Capital Analytics. CBRE investment sales climbed 72%, to eighty-two point -- sorry, $18.2 billion over the same period, indicating that we are taking greater market share. CBRE once again held the number one market share, at 16.3%, up from 13.8% for the first half of 2004. We grew investment volume across all property types and made notable inroads in industrial sales, a segment targeted for growth a year ago.

Our industrial investment sales activity rose 122% over the past year, versus 88% market-wide growth, according to Real Capital Analytics data. Additionally, our corporate services group continues to achieve consistent growth in its portfolio services, fueled by the growing outsourcing trend. Transaction management accounts increased about 10% over the first six months of the year, to more than 1.5 billion square feet. During the same time, facilities management accounts increased more than 6%, to approximately 161 million square feet.

New corporate accounts were established during the second quarter, with companies such as DHL, Bank of Nova Scotia, Fujitsu North America, and Hughes Supply. We also added new contracts with existing clients such as Avaya and Royal Bank of Canada. At the same time, the Company's mortgage broking -- brokerage subsidiary, L.J. Melody, continued to capitalize on investors' healthy appetite for debt financing. For the first six months of 2005, mortgage originations increased 42% from a year earlier, to seven point two billion dollars -- $7.4 billion. Also during the quarter CB Richard Ellis established a new specialty finance company, which raised $300 million to invest in debt instruments and to originate new loans and preferred equity investments. CB Richard Ellis holds an equity stake of approximately 5% in this specialty finance company.

In EMEA, revenue increased 14%, to $123.1 million for the second quarter of 2005, compared with $108.3 million for the same quarter last year. EBITDA, excluding one-time charges, was $13.6 million, which represents an increase of $4.6 million, or 51%, compared to the second quarter last year. The investment market in Europe remains strong, with activity on pace to surpass even the record performance of 2004. In Central London, for example, office investments totaled approximately £5 billion during the first half of 2005. This is on track, therefore, to surpass the £9 billion transacted for the whole of 2004.

The U.K. is the bellwether for the European investment market, accounting for approximately 50% of total annual European transaction activity. So strong performance in the U.K. is a good indicator of the performance for all of Europe. Capital flows into European investment markets remain high, driven by low borrowing costs and attractive total returns, relative to alternative investments. Capital values have grown strongly, and are forecast to grow further for the balance of this year. However, cash yields -- yields have narrowed across office retail and industrial sectors, due to the amount of capital pursuing opportunities. In leasing markets, occupied demand has increased slightly over 2004. However, there are now clear indications of the strengthening in office demand in major markets such as London, Paris, and Madrid, which we see leading a more general recovery in 2006.

Moving to Asia Pacific, revenue totaled $43.3 million for the second quarter of 2005, an increase of 15%, from $37.7 million for the second quarter 2004. EBITDA was $7.6 million, which represents an increase of $1.9 million, or 33%, as compared to the second quarter of last year. For the first half of 2005, revenues have increased 22%, and EBITDA has improved by 56%, compared to the first six months of the prior year. Office leasing markets remained active in the second quarter, and growing demand and declining space availability acted to boost rental growth.

Tokyo is emblematic of this trend. Prime office rents continued to edge upward, amid declining supply of new Class A office space. In Hong Kong, diminishing availability and high rental rates in prime locations has spurred tenant demand in secondary markets. Australia and New Zealand, leasing activity continued at a moderate pace. Investment activity continued at high levels, fueled by overseas institutional investors, REITs, and related funds. In particular, JREITs continued to make aggressive purchases.

Investors remain keen to purchase commercial property in Australia and New Zealand. After a slow start to the year, which is typical of the Pacific region, investment sales turn over increased in the second quarter, with enough in the pipeline to suggest a strong third quarter. Investment demand for Australia and New Zealand is coming from all levels in all countries, however, the residential sector has eased somewhat. Low interest rates and attractive relative yields have been the primary catalysts driving the investment market in Asia. There has been some compression of going-in yields due to the amount of investment capital pursuing high quality assets. While high interest rates are expected to rise in some countries, any increase is expected to be moderate. Some countries, like Japan, Korea, and China, are expected to maintain low interest rates, which should sustain economic growth. Investors in Australia and New Zealand have already been adjusting to higher borrowing rates.

In our global investment management business, this also continues to show strong growth. It was not reflective in the revenue line, because of acquisition and disposition fee revenue earned in the U.S. in the prior-year quarter that did not recur, as well as the timing of revenues realized in Japan. Revenue totaled $15.9 million for the second quarter of 2005, compared with $20.4 million in the second quarter of 2004. However, the revenue short fall was more than made up for with the increased equity income of $11 million for the second quarter, an increase of $9.5 million, or 647%, from the same quarter last year. EBITDA was $6.1 million for the quarter, compared to $4.8 million for the same period last year.

As we have commented before about this business, gains to be recognized from the disposition of selected assets within our fund portfolios are generally reflected as equity income rather than as revenues. Thus, the more important metric to measure the performance of global investment management is its EBITDA. As you can see, this is exactly what occurred in the second quarter of 2005.

Please, could turn to Slide 17. Listed here are some of our major achievements during the second quarter relating to business wins. The Americas, CBRE represented MetLife in the sale of One Madison Avenue in Manhattan. The property was sold for $918 million to SL Green, which plans to convert one or two office towers to residential condos. We advised the Canadian Pension Plan on a $852 million investment in an 11-property portfolio. CPP purchased a 50% interest from Oxford Properties. DHL retained CBRE to provide transaction management and lease administration services for a 22-million-square-feet portfolio in the U.S., Canada, and Mexico. CBRE entered into a new contract with the Royal Bank of Canada to provide project management, portfolio management, and transaction management for the bank's 14.9-million-square-foot Canadian portfolio. CBRE also provides these services in the U.S. The Bank of Nova Scotia appointed CBRE to provide facility management services for its 3.2-million-square-foot portfolio in Canada, including the flagship Scotia Plaza complex in Toronto.

Moving to EMEA. We arranged the sale of the Knightsbridge Estate for more than $870 million, the highest price ever paid for a single lot in London's West End market. The estate comprises 520,000 square feet of offices, retail, residential, and hotel accommodations, and is located between the two legendary department stores Harrods and Harvey Nichols. We have negotiated the sale of one of the most prestigious trophy properties in Italy, Gruppo Statuto, a private Italian property company, has contracted to purchase Piazza San Babila for more than $277 million. The seller is a joint venture between Morgan Stanley and Pirelli Real Estate. The landmark property comprises 323,000 square feet of prime office, retail, and residential space within central Milan adjacent to luxury retail locations. We advised the buyer of the Atrium in Sandyford, a 340,000-square-foot suburban office building outside of Dublin. The property houses the European headquarters of Microsoft. It was purchased by a syndicate of 10 Irish individuals for $123.4 million.

Asia-Pacific. We pre-leased over 80% of the new AIG tower, which is under construction in Hong Kong's central business district. Two leading financial institutions, Bank of Tokyo-Mitsubishi and the Royal Bank of Scotland, have committed to occupancy at the 366,000-square-foot office tower. They join AIG as anchor tenants. Finally, we also represented Macquarie Goodman Property Trust in two transactions in the Pacific region -- the purchase of St. Leonards Corporate Center, a 380,000-square-feet complex in Sydney, for $77 million; and the sale of the 106,000-square-feet Air New Zealand building in Auckland, to Trans Tasman Properties for $51.7 million.

Thank you, Mike. As many of you may recall, Mike succeeded Alan Froggatt as leader of our European business earlier this year. Mike, thanks for taking time out of your busy schedule to join us this morning. Also, callers, Mike will stay on in case there are any questions particularly suitable for him on Europe in the Q&A section. Turning now to Page -- I'm sorry, Slide 18, let's talk about the investment market. U.S. investment market continues to attract high levels of both debt and equity capital, and demand for all property tax remains robust. Investor sentiment remained strong during the second quarter, as concerns earlier this year about potentially higher borrowing rates gave way to the reality of 10-year Treasuries settling in the 4 to 4.5% range. Investor confidence has been further enhanced by improving leasing market fundamentals and the prospect of future rental rates and cash flow increases.

Moving to the leasing market. U.S. leasing market is staging a steady recovery. The market cycle has reached an inflection point nationally, with virtually all local markets seeing measured increases in absorption, lower vacancies, and modest rental gains. With employment growth continuing, leasing fundamentals are continuing to improve. CBRE's global leasing revenue increased 11% for the second quarter of 2005. This improvement is indicative of a typical recovery seen in prior leasing cycles. Nationally, the office vacancy rate declined 0.4 of a percentage point, to 14.6%, according to Torto Wheaton Research, our econometric forecasting subsidiary.

National office rental rates are improving, according to Torto Wheaton. Following a 0.4% year-over-year growth in the first quarter, Torto Wheaton estimates rents appreciated 2% from a year ago during the second quarter. Measured rental gains are a hallmark of early-stage recoveries once a leasing market has reached an inflection point. Torto Wheaton is forecasting a slightly higher pace of rent appreciation in the second half of 2005. Industrial real estate markets are also exhibiting signs of a recovery, national vacancy rates have hovered around 10%, and are edging downward. National industrial rents have generally stabilized, and Torto Wheaton is forecasting an upturn later in the year.

So, in summary, we had a terrific second quarter. Strong revenue, EBITDA, net income, and earnings per share, supported, really, by improvements in all of our businesses globally, with favorable dynamics supporting these businesses going forward as well. We'd like the macro trends, feel good about the full year, and, therefore, have raised our guidance.

And with that, Operator, we'd like to turn the call over to Q&A.

Thank you. [OPERATOR INSTRUCTIONS.] And our first question will go to the line of Josh Rosen Please go ahead.

Yes, thanks. Just a couple of quick questions. First, just in terms of near-term business trends, would be curious in terms of what you've seen most recently on the -- in terms of voucher trends within your business?

Yes, Josh, the voucher trend, and the related leasing and sales revenue trends have been favorable compared to prior-year period. For 2005, the sale voucher trend is up approximately 9%, lease vouchers are up similar, about 9%. As you heard us mention on the call, the revenues from these two revenue streams are up a bit more than the voucher trends. And as you also know from all of our calls and our conferences, this is an expected trend in an improving market.

That's helpful. Secondly, just would be curious as to how you've balanced employee growth with the obvious, strong organic revenue growth that you've put up. And so one piece to this question is what type of employee headcount growth have you experienced? Yes, I know did you some rationalization post the integration of -- or during the integration of Insignia. But as you looked at year-to-date for instance, how much of a -- how much growth have you seen on the employee side? And, then, how do you manage that equation going forward?

Sure. Well, Josh, one of the, I think, great dynamics that supports our type of business is that to a great extent, we can layer on additional revenues. And in cases like the last three years, significant additional revenues, without the addition of any meaningful numbers of headcount in our production staff. So on the production side, our increases in headcount have been nominal. We're certainly making strategic additions to brokers in our goal of geographies. But it's really at the rounding error level.

Where we are making some strategic investments in staff would be at the support level behind the producers. But again, we really don't need to add a lot of staff to support these additional revenues. In the outsourcing business, either property management, or our global outsourcing corporate services business, we do, of course, bring on a significant staff when we win new accounts. Many times these are employees of the company that are conducting the outsourcing, but for the most part those employees are fully reimbursed. So, general answer to your question, Josh, is really haven't been much addition to staff for the last year.

All right. Thanks very much. It has been very helpful, as is all the disclosure. Thanks, guys.

Thanks, Josh.

Thank you. We have a question from the line of Pat Burton. Please go ahead.

Hi, congratulations on the quarter, as well. My question relates to the capital structure and potential acquisitions as you guys continue to generate huge amounts of free cash. Could you address the average cost of debt maybe coming down and what you're looking at in the acquisition pipeline? Thanks.

Well, sure. From the debt standpoint, I think our -- certainly our average cost of debt will continue to drop as we take out the high coupon bond issuances. So for instance, as we talked about before, our plan would be to pay off, through operating cash flow, the balance of the 11.25 senior subordinated note when the call window opens up in June of 2006. So that will take out all the debt at the 11.25% range. And then the call window on the 9.75 senior notes opens up in May of 2007. So we would be taking those out through operating cash flow as well. So, in essence, about 300 to $310 million of utilizing operating cash flow to pay off debt. So that will have an appreciable improvement with regard to our interest expense and, certainly, our cost of debt, which would be done at that point in time, predominantly just floating interest.

And on the acquisition front, Pat, as you know we are in a strong cash flow position, and we have mentioned on prior calls, and I will just reiterate today, that we can accommodate the majority of our in-fill acquisition activity through cash that we have without any additional financing. If we decided to pursue a more strategic or larger transaction, of course, we would look to the financing markets for some additional debt. But at the moment, our activities are focused on the in-fill acquisitions, and these will be accommodated through existing cash reserves.

Thank you.

Thank you. We have a question from the line of Jennifer Pinnet. Please go ahead.

Good morning. I noticed in Q2 your investment sales revenues are greater than your leasing revenues. I understand that this is fairly anomalous. Should I expect to see this going forward?

Jennifer, it is a situation with our firm that year-to-year, you're going to find leasing and investment sales revenues move back and forth. With the acquisition of Insignia, we did wake up a bit in leasing. But I think it's fair -- I think your comment is exactly right, Jennifer, in that any given quarter and any given year, you're going to see the absolute revenues from leasing and sales bounce back and forth.

Thanks.

Thank you. We have a question from the line of Jeff Kessler. Please go ahead.

Hi, this is Manus for Jeff. Good job on the quarter, guys. Two quick questions. First one, on the industrial market side, could you give us, I guess, some indication on the trends in occupancy and rental rates and, sort of, at what point in time, is it early '06, mid '06, do you see this sort of playing out into an inflection point like the commercial market is now?

Sure. Well, I'll tell you right now, as we look at the industrial market, and I'll use Torto Wheaton statistics, vacancy rates in the industrial market are projected to decrease a bit this year, and a bit more in 2006. These are nominal moves. The industrial markets, as we mentioned, have gained about 10%. And we're forecasting to be about that or a little bit below in 2006. However, Torto Wheaton is predicting that for 2005 full year, industrial rental rates will improve 1.7%, 2005 over 2004. And, by the way, that is a revised upward forecast for them. Torto Wheaton had it at 0.7% appreciation at the end of last year, but that's what they're calling for '05, to be 0.7% up. Now they're calling for '05 to be 1.7% up. That's good. And 2006 is expected to be better than that. So I think, the way I would describe the industrial market is, it is certainly lagging a bit behind the office market. Remember, we called the inflection point in office, now, almost a year ago, and the industrial market, I think we're about there right now.

Okay. And I guess one more quick question in terms of, sort of, the broad growth in the future. In terms of Asia, I mean, I know you just said, you don't really need to add on too many employees, sort of, for growth in your existing markets. But to sort of bulk up on Asia, how do you -- how do you look at the investment and sort of the sales force or whatever it is, in that region?

Sure. Well, it's a good -- it's a very good question. Asia Pacific has been, for the last year, is one of our fastest-growing businesses. And we've been growing that business, really, more through market share gain than additional staff. Now the exception to that is mainland China, where we have been adding staff for that region fairly roughly in the -- and getting to Josh's question, when you look at that number of staff over a broad employee base of 14,000, it's nominal -- but we are adding staff aggressively in mainland China. We believe we're well positioned throughout the Asia marketplace for future growth. Again -- and tying into Josh's original question -- we can accommodate pretty significant increases in revenue in all of our geographies, including Asia, without large additions -- additional producers.

And as you we've been in business in Asia, for a very long time -- Korea, Singapore, Hong Kong, Japan, Taiwan, and mainland China -- for many, many years. So we're there. We're positioned well for growth. We've got a number of offices in India as well. But I do expect, on a relative basis, that we'll be adding more staff in the Asia region than, likely, Europe or the Americas. It is important in Asia, though, to add staff with revenue. And one of the things we likely won't be doing is making a lot of deep investments ahead of revenues which deteriorate our margins or our profit.

All right. Thanks a lot, guys.

Thank you. We have a question from the line of Carey Callaghan. Please go ahead.

Morning. Ken, the investment management fee that you booked in the second quarter, obviously, a big number. Are there more such gains that are kind of outside that we should expect in the second half of the year?

Well, we should probably just talk a little bit about the investment management business in general. What we booked in the second quarter was really mostly as a result of disposition of assets through funds in which we had an investment, and that's why it came through in the equity line. The -- I think there will be more of those in the future, as funds continue to liquidate assets. What has not been reflected yet, obviously, is the carried interest that we talked about, which is really our preferred return of -- our return above a preferred return to the investor. And so as we talked about before, those could start to roll in maybe at the end of this year, but likely starting in 2006 and 2007.

The one thing that kind of drags that business down that we'll certainly get the benefit for in the future when we start to recognize that, those income streams, is the fact that we're booking compensation expense now for which we have no revenue to offset it. And, so, you can see that, despite the fact that we booked about, I'd say, it's $10 million worth of compensation expense in the first half of 2005, there are no revenues to offset that. But, yet, the business still is producing exceptionally well, despite that fact. So when we do start to recognize the carried interest portion of it in 2006 and beyond, the comp expense that will go against that will be significantly less because we'll have already recognized a lot of that now.

And, so, with respect to the dispositions, which, I guess, triggered the income recognition this quarter, it doesn't sound like have you any significant dispositions currently planned for the second half?

No I think that the business can be a little bit lumpy, as we talked about in the past. I think those dispositions will occur over time. It's really a -- I would say it's a consistent stream that sometimes comes in on a lumpy basis, because as the funds liquidate, or as assets are disposed of within the funds, we will continue to recognize equity income gains, such as this. And, so, I can't predict whether they'll be in the third quarter or fourth quarter or specifically which quarter, because it's really a function of when those assets are specifically sold. But we do have a stream of those that we will be benefiting from in the future, as well as the carried interest, as I mentioned before.

Okay. Thanks, Ken. Just one other question, if I could. I think I heard Mike say that your investment sales activity was up something like, not quite double the market, but almost that in the U.S., therefore, you gained market share. Do you think that you'll have similar year-over-year comparisons in the back half of the year in the investment sales business?

This is Brett. It's hard to say. I would say this, though. We certainly, at this point in the year, feel that the condition of the investment property market remains quite robust. Our market share position, which we're currently enjoying through the first half, is something that we would, obviously, hope to maintain. And I expect we probably will, or something close to it. But it's difficult to tell. It's all going to be about this which large assets trade in the third and fourth quarter and who brokered them.

But I think the bigger point here, Carey, is that our investment sales business as a whole is in quite good shape. And as we've talked about on previous calls, this marketplace is really benefiting, more than from anything else, from this structural move of capital, we believe, from the equity and bond markets into commercial real estate, which is a pretty sticky transfer. And that transfer of allocations, we are hearing from our customers and our brokerage sales force, is something that, at least in the foreseeable future, they remain in place. So whether we remain at exactly this market share, I don't know. But I think we feel pretty good telling you that through the balance of the year, that business is in good shape.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS.] And we will go to the line of Will Marks. Please go ahead.

Hi, good morning. A couple of questions. And I'm not sure if you quite answered this, on sales versus leasing, halfway through the year, you're equal in revenues. Where do you expect to end up -- end up at the end of the year in terms of a break down between those two?

Will, I don't know. As I mentioned earlier, if you went back 10 years in our revenue history, what you're going to find is that in any given year, sales and leasing will bump around in the band of 45 to 55% of transaction revenue each. And I really can't predict, for the year, where either one will end up specifically. I think we have a pretty good sense in the aggregate, but I don't know. It will remain to be seen. As you know, third and fourth quarter are the big story for our business. And we'll have to see where it comes out.

Okay. A couple of other things. On the leasing side, on a revenue per broker basis, where do you think you are versus peak levels?

Where do we think we are versus peak levels? I don't know, Will, I will tell you that -- I'll do some rough math in my head. We have certainly not added the level of staff, on a percentage basis, that we have layered on additional revenues. I suspect that our revenues per broker are at historic highs or close to them. But, again, I'm not sure it is a relatively point, in that, the way we think about the business, and the way that our managers manage the business, we fully expect that revenues per producer, are going to continue to increase, and we think significantly, in the mid-term. Because we don't intend -- and let's just take the U.S. as an example, Will -- we don't intend to add a meaningful amount of new brokers to our business. But you've heard us talk to the market before about the fact that we expect to add considerable additional new profits to the business in the coming years. Really, the point, Will, being that -- and we're asked this question a lot -- we believe that the brokers have a significant amount of capacity in them to take on additional revenues and additional work, and I would fully expect that, as we're on this call next year or the year after, we'll find that revenue per broker is a higher number than it is this year.

Great. Okay. And one final question. On -- I realize you haven't given EBITDA guidance. Any sense -- and this is kind of asking you the same question, but in terms of EBITDA margin, where you would expect the year to end up, versus last year, I mean, even if it's just some improvement? Can you give me any indication?

Sure. Happy to. I will let Ken tackle that.

Yes, I mean, based upon the guidance that we just issued, we'll probably be at an EBITDA margin in the -- I would say 14.5 to 14.7% range.

And just to remind the callers, which is -- it's a great number -- and to remind all of you, we added the target, on a run rate basis, to hit 14% next year. So we're well ahead of our target and feel very good about that number.

Actually, one final question, sorry. On free cash flow, after all CapEx, where do you -- where do you think you'll be for the year based on your EPS guidance?

I'll let Ken hit that as well.

Well, I mean, right now, on the trailing 12-month basis, we're showing internal cash flow of, I don't know, $183 million. Obviously, we should be doing better than that. I would say, probably, on a comparable figure, would be probably around the 200 million range.

Great. That's very helpful. Thanks, Brett and Ken.

Yes, thanks, Will, and welcome back to the call.

I appreciate it.

Thank you. And at this time there are no questions in queue. Please continue.

Great. Well thank you, everyone, for joining our call this morning. We'll talk to you again in third quarter.

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