世邦魏理仕集團 (CBRE) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CB Richard Ellis third quarter 2005 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded. I would now like to turn the conference over to Shelley Young, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to CB Richard Ellis third quarter 2005 conference call.

Last night we issued a press release announcing our third 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 have provided 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 materials. An archive of the webcast will be available on the Investor Relations section of the website for three months. A transcript of the call will also be made available on our website. 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 Vice President and Chief Financial Officer; and Rob Blain, President of the Asia Pacific region.

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 materially differ from these estimates. These forward-looking statements speak only as of the date of this conference call and 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. For more a detailed discussion of these forward-looking statements and a discussion of the factors that could cause results to differ materially from the discussion today, please refer to the discussion of forward-looking statements on our earnings press release dated November 1st, 2005, and filed on Form 8-K. The risk factors discussion under the heading factors affecting our future performance and forward-looking statements in our annual report on Form 10-K for the year ended December 31st, 2004, and the discussion under the heading forward-looking statements in our most recent quarterly reports on Form 10-Q, all of which are filed with the SEC and available at the SEC web site at www.sec.gov.

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.

Well, the third quarter saw a continuation of the trend that's been in place all year -- robust investment activity fueled by strong debt and equity capital flows into real estate and of course leasing markets that are steadily improving in step with the economy. We continue to lead the industry in terms of both absolute margin and margin growth. As you know, we are very focused on margin and we're quite pleased with our results in this area. In this favorable market environment, the breadth and depth of our global platform has enabled to us capture increased market share and to cross-sell more services to existing clients. We achieved 29% top-line revenue growth for the third quarter of 2005, marking the 12th straight quarter of double-digit year-over-year organic revenue gains. Excluding one-time items, net income for the third quarter of 2005 was $57.5 million as compared to $29.7 million for the same quarter last year. EPS was $0.75. This constitutes an increase of $0.35, or 88% as compared to the prior year earnings of $0.40 per share. Operating income was $97.3 million, which was $43.1 million, or 79% better than last year. EBITDA of $112.6 million increased $43.7 million, or 63% from the same quarter last year. So all in all, a very acceptable quarter.

Now let me turn the call over to Ken Kay who is going to take us through our financial deck. Ken?

Thanks, Brett.

Please turn to slide number 6. This slide reflects the Company's operating results for the third quarter as compared to the prior year. As you can see revenue increased by $169.2 million, or 29% from last year. A steadily improving leasing market combined with increased appraisal activities and continued investment sales strength globally fueled the double-digit growth. Cost of services as a percentage of revenue decreased slightly from 52.3% for the third quarter of 2004 to 51.2% for the current year quarter. This was primarily driven by growth in our noncommissionable revenue including fees earned by global investment management. The increase in operating and administrative expense is primarily due to higher bonus accruals and marketing costs resulting from improved performance. Additionally, incentive compensation expense associated with future carried interest revenue also contributed to the increase. On a percentage of revenue basis, operating expenses have been reduced to 34.4% versus 37.1% in the same quarter last year due to the operating leverage inherent in our business. Excluding carried interest compensation expense, this ratio would have dropped even further to 33%. Equity income has decreased by $1.2 million, or 25%, due primarily to a one-time fee received from an investment fund in the third quarter of 2004. Excluding one-time costs, EBITDA for the quarter improved by $43.7 million, or 63%. 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 $387.7 million, or 25% from last year. All revenue categories have improved with the most significant increase being generated from strong investment property sales as well as from improved leasing activity globally. Increased mortgage banking, appraisal and investment management fees have also contributed to the growth in revenues. Cost of services has increased by 24%, which is commensurate with the increase in revenue. Cost of services as a percentage of revenue was relatively flat between the periods at 50.5% for 2005 as compared to 50.9% for 2004. As with our quarter results, the increase in operating and administrative expense for the year is primarily due to higher bonus accruals, carried interest compensation expense, and marketing costs for the reasons mentioned previously for the third quarter. Excluding one-time costs on a percentage of revenue basis, operating expenses have been reduced to 36.9% from 39.8% for the first nine months of the prior year. Excluding the year-to-date carried interest accrual, the 2005 operating expense ratio would be even lower at 35.8%. Equity income has increased by $11.6 million, or 115%, primarily due to fees earned and gains realized in the second quarter of 2005 from the disposition of assets maintained in our investment portfolios. 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 $110.8 million or 68%. 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 third quarter of 2005, our sales and leasing activity represented approximately 75% of our total revenue. Property and facilities management and appraisal and valuation each accounted for 7%. Commercial mortgage brokerage and investment management contributed 5% each. Sales transaction revenue increased by $82.5 million, or 41% for the quarter. This was largely the result of continued strength in investment property sales globally. Leasing revenue increased $36.3 million, or 15%, resulting from the continued recovery of the leasing markets. While property and facilities management increased $4 million or 9% for the quarter, mostly due to new accounts added in the last nine months. Appraisal and valuation increased $19.1 million, or 54% for the quarter. Our mortgage brokerage revenues were up $6 million, or 20% from last year, and investment management increased by $18.2 million, or 114% for the quarter.

Please turn to slide number 9. Our trailing 12 months EBITDA margin improved significantly in the third 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 14.9% as compared to 11.6% for the comparable trailing 12-month period ending September 30th, 2004. This is a 28% increase which is primarily due to the strong improvement in gross margin coupled with modest increases in operating expenses.

Please turn to slide number 10. Our third quarter 2005 GAAP or reported EPS of $0.74 includes one-time charges related to the Insignia acquisition. Excluding these one-time charges, our adjusted EPS is $0.75 per share for the third quarter of 2005. We've also provided the comparable bridge for the third quarter of 2004 to provide the visual framework for how strong our third quarter of 2005 really was.

Please turn to slide number 11. The cash balance at September 30th, 2005, of $284.6 million was $27.7 million higher than at December 31st, 2004. This increase reflects the strong performance of our operations. The decrease in net receivables is reflective of the fact that transaction based revenue is seasonally lower in the third quarter 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 $4.3 million. This decrease was primarily due to normal depreciation expense partially offset by capital expenditures. Goodwill and other intangibles increased primarily due to the result of infill acquisitions. The increase in deferred compensation assets is due to an additional $20 million funding of the deferred compensation plan earlier in the year, coupled with the funding of current participant deferrals in 2005. 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 or a mortgage brokerage business.

Please turn to slide number 12. Current liabilities, excluding debt, decreased by approximately $15.1 million. This fluctuation is mostly due to a seasonal net decrease in accrued bonus and profit sharing. The decrease in the senior secured term loan tranche B reflects the $3 million required quarterly amortization. The 11.25% senior subordinated notes balance reflects the $42 million of open market purchases in the first nine months 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 the office lease reserves in the United States and Europe. And stockholders equity rose by $142.9 million, primarily as a result of the additional net income from the current year.

Please turn to slide 13. As you can see, total debt has declined by approximately $54 million during the first nine months of 2005 for the reasons we discussed previously. Our net debt to EBITDA multiple at September 2005 was 0.80 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 September 30th, 2005. At September 30th, 2004, the net debt to EBITDA multiple was 1.99 times, so you can see our leverage ratio has reduced by more than 50%. Our trailing 12-month interest coverage ratio was 8.4 times. Our weighted average cost of debt was approximately 8.15% at September 30th, 2005. As we look forward to 2006, our plans include the pay-down of the balance of the 11.25% senior subordinated notes when the call window opens up in June 2006. This will enable further annualized interest expense savings of $18 million and lower our weighted average cost of debt.

Please turn to slide 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 $209 million as of the third quarter of 2005. There is a close correlation between net income and internal cash flow because of the limited capital expenditure and working capital needs of the Company on an annual basis. Capital expenditures net were $34 million for the 12-month period ending September 2005, and we expect our capital expenditures in calendar 2005 to be approximately $35 million. This is slightly higher than our prior projection due to technology enhancements and the acceleration of facility relocations as a result of the expansion of business activities. One of our stated objectives for 2005 was 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 $53.6 million, which will generate approximately $5.3 million in annualized interest expense savings. Further debt reduction for 2005 will come from the remaining scheduled amortization of our term loan in the fourth quarter. Additionally, as we've noted on previous occasions, we plan to use a portion of our operating cash flow for infill acquisitions that may arise. In the next slide we have listed our acquisitions to date.

Please turn to slide 15. In 2005 we have completed the following infill acquisitions for approximately $80 million. We purchased the remaining outstanding shares of our 10% owned affiliate in Ireland, CB Richard Ellis Gunne. The acquisition gives us a leading position in the rapidly growing real estate market in Ireland. Headquartered in Dublin, CBRE Gunne is one of Ireland's leading full service commercial real estate services companies. It employs 105 professionals in Dublin and Belfast and provides a full range of real estate advisory services. We acquired Columbus Commercial Realty, one of central Ohio's leading full-service commercial real estate firms. CBRE already holds the number one position in brokerage and property management activities in the Columbus area. Columbus commercial has 45 employees including 16 sales professionals. This acquisition enhances our local market position and compliments our platform. We also purchased most of the remaining outstanding interest in our joint venture, CB Richard Ellis Charlotte, LLC. CBRE Charlotte has 47 employees including 25 brokers. As the financial center of the southeastern United States, Charlotte holds strong potential for additional growth, particularly as the regional market there has been recovering steadily. Being more closely aligned with and integrated into the CBRE platform will enable the Charlotte office to better serve its clients' needs across the country. In France, we purchased the remaining outstanding shares of our 10% owned affiliate Easyburo. Easyburo is a leader in the space fit-out and relocation services market. It exhibited strong and steady growth over the past three years. This acquisition provides an important addition to our French business and our building consultancy network across EMEA. We also acquired Dalgleish & Co. Ltd, the leading retail real estate services specialist in the United Kingdom. Dalgleish employs 93 people in central London and provides tenant representation, agency leasing, and investment advisory services throughout the U.K. The acquisition gives us the leading position in the U.K. retail real estate sector and marks a further important step in the Company's plan to expand its retail capabilities across Europe.

Please turn to slide 16. The strong year-to-date financial performance was due to broad-based improvement in results from across the majority 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 nine months 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 $2.8 billion. Net income as adjusted is expected to be in the range of $207 million to $210 million. We also expect dilutive earnings per share as adjusted for the year to be in the range of $2.70 to $2.75 per share, excluding the residual one-time integration costs related to the Insignia acquisition and charges associated with the debt buyback program of approximately $14 million pretax, as well as any additional one-time expense associated with the repatriation of offshore income under the American Jobs Creation Act of 2004 should we elect to do so. Looking forward to 2006, we expect results to be consistent with the growth objectives that we have previously disclosed. Consequently, revenue growth should be in the range of 7 to 9%, resulting EBITDA improvement will be in the range of 12 to 14%, and earnings per share growth will be approximately 20% excluding one-time items. As we get closer to year end, we'll be updating our 2006 guidance.

I'd now like to turn the call over to Rob Blain, President of Asia Pacific.

Good morning, ladies and gentlemen.

Just on the Americas, for the third quarter revenue increased 24% to 516.7 million, compared with 416.1 million for the same period in 2004. This increase is mainly attributable to the improved leasing activity, continued high volume of investment sales, increased appraisal and valuation activities, and the higher property and facilities management fees. Excluding the impact of the one-time items, EBITDA was 76.3 million for the third quarter. An increase of 23.3 million, or 44%, as compared to the third quarter last year. Our EBITDA was primary the result of the improvement in the bottom line performance in these businesses. CBRE continues to command the dominant position in the investment transactions on a national basis. According to Real Capital Analytics, through the first nine months of 2005, CBRE had sales transactions of some $30.4 billion, representing 16.2% of the total market activity. This market share was double the volume of our nearest competitor which had a 7.4% share. Significantly, CBRE investment activity jumped some 69% from a year ago versus an increase of 61% for the market as a whole. CBRE also held the number one position across all property types.

The Company's mortgage brokerage subsidiaries, CBRE Melody, continued to capitalize on investors' healthy appetite for debt financing. For the first nine months of 2005, mortgage originations increased 39% from a year earlier to 12.4 billion. Reflecting a continuing outsourcing trend, the Company also started several institutional accounts to its asset services portfolio during the third quarter. Including AMB Property Corporation with some 32 million square feet now under management, Dividend Capital with some 7 million square feet now under management, and Discovery Real Estate Services with some 4 million square feet now under management.

Moving on to the EMEA, in EMEA the revenue increased 43% to 149.6 million for the third quarter of 2005. This compares with 104.8 million for the same quarter last year. EBITDA excluding one-time charges was 29.1 million, which represents an increase of 22.4 million, or 334% as compared to the third quarter last year. These improvements were primarily driven by a continued strong investment sales environment as well as an improved leasing and appraisal activities. Investment markets across Europe remain robust with investor demand outpacing the supply of commercial properties available for sale. The imbalance between the supply and demand has led to the higher capital values and a corresponding drop in initial yields. The capital to finance acquisitions is plentiful, borrowing rates remain low. In this environment, Investors have focused more intently on the quality of assets that offer the opportunity for rising income streams over time. Investor demand has been particularly strong in the United Kingdom. The next move, active markets of Sweden and France, fueled by a strong demand from private investors, institutional buyers, and newly created collective investment vehicles.

We expect 2005 investment activity to exceed the level of 2004. This mainly due to the developing international nature of the real estate markets. Cross-boarder investors account for some 30% of investment activity throughout Europe led by the USA, Germany, and Ireland. International investors represent up to 60% of the investment activity in France, 40% in Sweden, and 20% in the United Kingdom and Germany. We expect the strong level of demand to extend into 2006.

Leasing markets in Europe continue a steady recovery. The demand for office space has picked up in the major business centers, such as London and Madrid. With low levels of new development, we expect to see a slow but steady improvement in occupied demand which should lead to a broad-based strengthening of the leasing markets in 2006. This, in turn, will lead to increased rent levels and lower vacancy rates. In Asia Pacific, revenue totaled 44.1 million for the third quarter in 2005, an increase of 18% from 37.3 million for the third quarter in 2004. EBITDA was 6.4 million, which represents an increase of 1 million or 19% as compared to the third quarter last year. The investment market throughout most of Asia continued to be characterized by healthy investor appetite, rising capital values, and lower yields. In Hong Kong, tight supply, strong office space absorption has led to the continued capital appreciation. Singapore investment market was active as a result of low interest rate environment and further relaxation of controls in the residential sector. Japan saw a rising level of activity in the third quarter reflecting improved macroeconomic indicators, attractive property yields, and the growth of the highly acquisitive publicly listed JREITs.

The already active investment market in China received a further boost in July with Beijing's decision to partially float the currency. The resulting appreciation of yuan against foreign currencies stimulated the increased institutional interest in acquiring quality income producing properties across the region. Investors also remained keen to purchase commercial property in Australia and New Zealand with nearly some 10 billion of investment sales activity through the first nine months of the year. Leasing markets across most of Asia continued to exhibit strength as it reflected an occupier expansion on rental growth. These trends were particularly noticeable in Tokyo, Hong Kong, and Singapore. In Shanghai, office rental growth accelerated driven by the robust demand and the limited availability of stock. In Australia and New Zealand leasing activity continued at a fairly strong pace especially in the office and the industrial sectors.

Global investment management business also continued to show strong growth. Revenue totaled some 39.9 million for the third quarter in 2005, compared with the 16.7 million in the third quarter of 2004. This increase was mainly due to the higher incentive fee revenue earned in France and in the U.S. EBITDA was 8 million -- sorry, 0.8 million for the quarter compared to 3.8 million for the same period last year. This decrease was primarily attributable to the higher incentive compensation expense for dedicated fund team leaders and executives associated with the carried interest revenue to be recognized over the next few years. Ken will be walking us through this issue in greater detail in a few moments.

Please turn to the next slide. Here are some of the major achievements during the third quarter related to the business wins. In the Americas, CBRE represented Duke Realty Corporation in the sale of 14.3 million square feet of industrial property portfolio for 1 billion. The buyer's a joint venture company between First Industrial Trust and the California State Teachers Retirement System. CBRE Investor advised the California State Teachers Retirement System in this acquisition. CBRE has expanded its relationship with IBM. We have been awarded 4.5 square feet transaction management portfolio in Latin America, and now represent IBM for some 34.5 million square feet in the U.S., Latin America, and Europe. AMB Property Corporation awarded CBRE an additional 2 million square feet of industrial portfolio. We now manage 32 million square feet for AMB. We also represented at Sterling Equities in the sale of 575 Fifth Avenue, a 530,000 square feet office building to MetLife for 385 million. In EMEA, CBRE has been advising the London Development Agency in connection with its bid for the -- for 2012 Summer Olympics. With London's selection as the host for the games we are advising the government agency on east London's sites for the Olympic venues, land assemblage and redevelopment activities. We've also been retained to sell 46 Marriott Hotels located through the United Kingdom. The portfolio is estimated to be worth in the excess of $1.7 billion. CBRE completed the largest property portfolio sale in U.K. history. We advised Abbey National, PLC, a major financing holding company in the disposition of 128 property portfolio valued at approximately 2.2 billion. ING Real Estate was the buyer. In Asia Pacific, CBRE have been appointed the lead marketing and leasing agent for Taipei 101 in Taiwan, a 1.9 million square feet development that is the tallest office tower in the world with a spire topping out at 1666 feet. The Taipei and the Hong Kong offices collaborated in winning this prestige and regional assignment. We also represented Deutsche Bank at 170,000 square feet office lease in [inaudible] in Singapore. We're also now formulating a strategy for the bank's back-office facilities in Singapore.

Thank you. And I'll now turn you back to Ken.

Thanks, Rob.

Please turn to slide number 19. CBRE Investors, as general partner of several real estate investment funds, has the opportunity to earn an additional share of profits referred to as carried interest, once the performance of the funds meet certain financial hurdles. Dedicated fund team leaders and executives have been granted a right to participate in the carried interest with participation rights vesting over time. As a result of the incentive compensation program associated with such revenue, the Company must accrue for this projected expense in anticipation of future payouts. Fortunately, in the initial phases of the program, incentive compensation expenses precede revenue recognition. In 2005 this is what has caused our reported results for this business to be lower than the prior year. We have accrued carried interest incentive compensation expense of $10.3 million for the third quarter of 2005 and $20.3 million year-to-date toward the future payment to these employees with no related revenue recognized. Excluding this incentive compensation expense, EBITDA for the third quarter of 2005 would have been $11.1 million, and improvement of $7.3 million over the same quarter last year. For the nine months ending September 30th, 2005, EBITDA would have been $29.6 million, an increase of $19.2 million. We expect fourth quarter carried interest revenue to offset the cumulative and compensation expense recognized to date.

Let me turn the call back over to Brett.

Thank you, Ken, and I want to thank Rob.

As all of you know, we have a practice of inviting various members of our global leadership team to participate in these calls. That gives them an opportunity to talk to all of you, and Rob will be here to answer questions when we get to Q and A. Now, that, of course, is the good news for them. The bad news is for many of these people, the time difference between L.A. and their office is quite different. I think Rob has called in at 1:00 in the morning from Sydney, so Rob is staying awake. And we'll probably have some questions for you in a few moments.

If everyone would turn to page 20 we're going to wrap up here with our summary slide. And let me just cover the capital and leasing markets one more time, and then we'll hit Q and A. On the capital markets side, investment in global commercial real estate remains strong. Equity flows into real estate continue at a high level and financing remains plentiful. We continue to see more equity capital enter the U.S. marketplace from well funded offshore sources, notably Australia, Ireland, and the Middle East. And the steadily improving leasing market has underpinned investor confidence. On the leasing market side, the steady recovery of most global office leasing markets continued in the third quarter of 2005. Demand for space has risen in line with growing employment levels with small and mid-size companies feeling much of the activity in the prior quarter. U.S. absorption totaled approximately 20 million square feet according to Torto Wheaton Research, our econometric forecasting subsidiary. This marks the 10th straight quarter of positive net absorption in the United States.

New office construction remains subdued, less than 9 million square feet was delivered in the U.S. in the third quarter, and this, coupled with stronger demand, caused the national vacancy rate to drop 0.4 of a percentage point to 14.1%. In the U.S., rental rate growth continued, following year-over-year increases of 3.9% and 4.5% in the first two quarters of 2005, respectively, average office rents continued that healthy pace of growth through the third quarter based on Torto Wheaton's preliminary estimates. Torto Wheaton expects measured rental growth to continue into 2006 as market fundamentals improve steadily. Industrial markets, which had been recovering more slowly than the office sector, showed distinct improvement in the third quarter. National vacancy dropped 0.4 of a percentage point ending the quarter at 10% even. Industrial rental rates appear to have passed an inflection point, climbing 2.2% compared with a year ago. Again, according to Torto Wheaton's preliminary estimate. While not all of the world's major markets showed the strength of leasing recovery experienced in the States, we continue to believe that improvement in economic fundamentals worldwide will support improving demand and therefore the leasing environment globally.

With that, operator, I'd like to turn the call over to question and answer.

[OPERATOR INSTRUCTIONS]. Josh Rosen, CSFB.

Thanks. Just wanted to follow up on the margin front, more than anywhere else. You all even going back to when you were coming public talked about generating EBITDA margins in the 15% range, and you've gotten there a lot faster than I think anybody expected. Just curious as you look at '06, you guys have given us a first take on the guidance for '06 that includes the historical 7 to 9% top-line growth and a little bit more margin expansion, and so when we think about where there's still room for margins in your business, if you could just qualitatively walk us through that a little bit, that would be helpful.

Sure. Why don't I give you the qualitative answer and then I'd like to Ken to step in some of the quantitative. The on the qualitative side, Josh, there -- we don't know where the upper limit on EBITDA margins might lie. We've talked before that incremental margin on -- I'm sorry, margin on incremental revenues to the Company run something in the low 20% range. So certainly the Company at some point could generate EBITDA margins that are in the very high teens, low 20s, but that I think, would be some ways out. While we expect margins to accrete, as revenues increase, we are, of course, taking the opportunity this year, last year, and next year, to make strategic investments in the business. So they probably won't see those kinds of numbers for some time, although we do expect them to accrete. But, Ken, let me ask you to step in and talk a bit more specifically about margin expectations for 2006 and going forward.

Sure. No problem. Josh, I think it really is kind of what we talked about in the past, which is really the operating leverage that we see in the business. When you look at the cost pool, right, you divide it up, about 35% of our total costs are fixed, the balance is variable. And what happens is that fixed cost portion as a percentage of revenues continues to shrink over time. So obvious with 7 to 9% revenue growth we'll obviously have done better than that this year. Fixed costs, and I think we quoted some numbers when we were running through the script, continued to come down, and what that differential is, is really dropping through to the bottom line. And the way to think about it going forward is fixed costs, probably increase in the 4 to 5 to 6% range on an annual basis, and when you compare that to revenue increases in the 7 to 9% range, you can see that that's really what's adding to the EBITDA margin. So yes, I think we've done better than what we thought we were going to do. And as Brett mentioned, we think as a result of the incremental EBITDA margin that we get on each added dollar of revenue, we would expect those margins to continue to ratchet up over time, and so what that number's going to be, I don't know if we can really predict that at this point in time, but we do see additional room for margin improvement as a result of that leverage in the business.

Okay. Thanks, Brett and Ken, and I think the second question I had, and then I'm -- I will turn the call over, is you'd -- '06 -- we're a little closer to '06 now obviously than we were last quarter, and you're talking about the historic 7 to 9% top-line growth. Would just be curious at this preliminary stage how you think about that growth relative to particularly the two main business lines that you have, leasing and investment sales, with leasing now generating 15% growth this last quarter, investment sales still at the -- significantly higher levels than that. Is this situation where we're -- we're thinking investment sales is coming back down, and leasing is really going to carry the torch in 2006? I mean, just some context around that would be helpful.

Sure, Josh. I think your premise is correct. Now, I'll remind you and the callers that that was our premise going into 2005, and we were wrong. Where we got it wrong in 2005 was we expected levels of capital market activities to approximate 2004 levels, maybe be a bit up, in fact they were quite a bit up. Leasing actually is coming in right on where we thought it would be for the year. As we look at 2006, the macroeconomic indicators we view to think about performance in following quarters remain quite favorable. That having been said, I suspect that when we get near the end of the year we'll be talking about revenue top-line expectations in 2006 much more closely approximating our historical and long-term model, which is the 7 to 9% range. We want to -- we've said this before. We like our investors to think about this Company as a 7 to 9% top-line model company, that will generate in any given year very strong EPS growth in the high teens to low 20s, and that is the model that we are working from and the model we expect we'll begin to approximate in coming years. Ken, any further comments on that?

No, I think that's right. I mean, Josh, we -- as we get closer to the end of the year and we get through our budgeting process, I think we'll have a better view on that, and so the best that we could provide right now is what our historical model percentages are, which we are very confident in, and when we get through that budgeting process, if we have a different view we certainly would update you at that time.

All right. Thanks, guys.

Thanks, Josh.

Pat Burton, Citigroup.

Hi. Congratulations on the great quarter. Two-part question. First part deals with the acquisitions and is for Ken. Ken, if you strip those out, what would the organic growth rate have been, and roughly what are these acquisitions growing at, or are they an aggregate so small they don't make a lot of difference?

Well, the impact on the quarter was pretty much nil from the acquisition. And so I would say that the entire growth for the quarter would have been organic. As we get out into 2006 where we have a full run rate impact on the businesses, it might add incrementally a relatively small amount in terms of revenue percentage growth, but I think when we're talking about our numbers for next year, the revenue increasing by 7 to 9%, we're anticipating that net should really be organic growth, and with these acquisitions contributing maybe a modest -- a very modest amount of that.

And the follow-up is either for yourself or Brett, and that is as you guys look at perhaps bigger acquisition, given the success of Insignia and the tremendous cash flow capabilities your business model possesses, could you maybe take us through the criteria there in terms of the impact on return on invested capital, accretive, things like that? Thanks.

Pat, this is Brett. Let me give you a bit broader answer than getting down to the granular metric and just answer the question this way. We have believed for some time that our industry is one that would benefit from further consolidation. We have taken the role in the industry since 1996 of being, we believe, the most aggressive acquirer of firms in our business. We think we're good at it. We're a firm that knows how to integrate businesses well. That having been said, one of the reasons we do believe we're good at it is we're very, very careful in acquisitions, and we only acquire companies we think have first and foremost a very tight cultural fit and second, that of course derives a good integration outcome. We're interested in companies of all sizes. The acquisitions that Ken took us through a moment ago are really infill, smaller acquisitions, but really fit quite nicely with existing operations. But getting to your question, we certainly keep a close eye on our larger competitors and have an interest, if they're interested in talking about bigger things, when and if those times might be right. In our industry, those opportunities are few and far between.

And why do we like big acquisitions? We like them for two reasons. Strategically, we believe that our customers are better served by having a more robust platform, both in terms of business lines and geographic footprint; economically, because of the type of companies that we all are, which are service firms, there tends to be some pretty interesting synergy -- expense synergy opportunities with these acquisitions. And as you saw in the Insignia acquisition, we're able to, in many cases, manufacture levels of EBITDA that in some cases actually approximate or eclipse the EBITDA being reported by the acquired business before the acquisition. So for lots of reasons, Pat, we're interested in them. I don't think on this call we want to get into ROICs or other granular metric. We may do that on a further call, but I will turn to the Ken. Ken, any of those metrics you might want to talk about for Pat would be great.

No, I mean, I think your broad summarization is kind of the way we would look at it. Obviously in the first year of acquisition, typically there's some deal costs that kind of mitigate the impact of the business, but certainly by the middle of the first year to the second year, we look to those transactions to be accretive in nature, and those numbers get rolled into our guidance on an overall basis, and so when we look -- I think when you look at the business, look at it on a consolidated basis with those acquisitions just augmenting the historical business that we've reported on.

And I would add this to support Ken's comment, Pat. We -- if you look at normalized results, or how we think about acquisitions, normalized results for acquisitions, we would not make any meaningful acquisition if it wasn't accretive from the onset of the acquisition. That, of course, excludes the one-time deal costs that Ken mentioned, but we're not in the business of making non-accretive transactions.

Great. And again, congratulations on the quarter. Thanks.

Thank you, Pat.

Michael Fox, J.P. Morgan.

Good morning, guys, and congratulations on the strong quarter.

Thanks, Michael.

Can you talk about the trends you're seeing in the sales and leasing markets in the fourth quarter relative to the first nine months of the year, whether it's continuing to be strong, accelerating, or decelerating?

Yes, Mike, let me answer the question this way, which is that the trends that we have spoken to throughout the year and in this earnings call for Q3 remain in place as we sit on the call today. So there have been no significant or material changes in our views on the business since we closed the quarter to today.

Okay. And then one quick housekeeping. What's the appropriate tax rate to use going forward?

Well, historically it's been around the 39% range. As a result of kind of mix, if will you, this year, our rate looks like it's going to be closer to the 37% range. So I would say going forward, probably the best thing to do would be somewhere in the middle of that, so I would say probably around a 38%. We're working diligently with regard to some planning to get that rate down over the next couple of years, but I would say for next year's rate I would probably approximate it around 38%.

Okay. Thanks a lot, and congratulations.

Jeff Kessler, Lehman Brothers.

Hi, this is Mona for Jeff. One quick question on the -- I guess your strategic investments. Is that -- taking a look at your revenue -- I mean the different segments you have, is there any priority that you have in terms of the acquisitions you make, such as maybe you want to focus at first just on properties and [inaudible] management or is it just across the board whatever comes your way?

I think the way I'd like to answer that question is that we -- let me refer to an earlier answer, we tend to look at acquisitions as a routinized component of our business plan. So given our size and our scale, M&A activity is just something we do every day in every geography. Now, that having been said, certainly we prioritize where we want to place an invested dollar each year, and we tend to look at, if we have to make choices, we tend to look at acquisitions that are the easiest to integrate, where we'll have the lowest amount of revenue loss and the highest amount of expense synergy, but that having been said, all those geographies globally have interesting M&A activity underway or completed, and at this point in time we're able, because of the amount of cash flow we're generating, to pursue virtually all of the M&A activity that's being sourced by our terrific local market people. On the large acquisition front, there's really nothing there to talk to because these opportunities are so few and far between, when one arises, we tend to take a very serious look at it regardless of their geographic or business line concentration.

And I guess in just sticking with the M&A activity, I guess there's talk that Wells Fargo is looking to acquire or buy out Secured Capital. I was just wondering is there any effect if at all on that synergy to maybe your business or in general sort of the competitive environment that you might see if that goes through?

Yes, they -- there's actually a press release this morning announcing that that deal has -- is going through or has concluded, and we think that's terrific. It consolidates two of our stronger competitors in the investment property world globally, Secured Capital and Eastdil, so it has -- it had eliminated one of our competitors. It brings a very savvy financial investor deeper into our business, which is Wells Fargo. We -- they've been in our business for sometime with their acquisition of Eastdil now some years ago. We welcomed them then. We're eager to see them increase their participation in our industry. We think that can only bode well for the industry, because they're a very sophisticated and aggressive investor owner. We like that. In terms of benefits to us, as I mentioned, I think it's a good player in the industry. It removes a competitor. Will there be fallout on their side? Probably not much. I think both Secured and Eastdil are terrific firms. They're very well managed. And I suspect that they'll turn out to be a formidable competitor of ours and one we are eager to compete with.

All right. And I guess just one final quick question. Just in terms of, I guess, looking just maybe at the New York market, vacancy rates are in the 7 to 8% now. How do you the guys see this playing forward? I mean, does it stay there? Is there room for it to go lower? Does it start creeping back up?

Well, the New York market, of course, is a collection of lots of markets, and I'm going to assume that your question is directed toward midtown. Is that correct?

Yes.

So just for the callers' benefit, remember that just on the Island we've got midtown, we've got downtown, which are both very large markets. There is plenty of space available in the New York marketplace, and, of course, large mid-town users, when they're -- anytime we're working with a large occupier in midtown Manhattan on the relocation, they, by definition, will look at, as an opportunity, look at downtown, and look at New Jersey, and other burroughs as potential opportunities to find lower rent than what they might pay in midtown. The mid-town market remains what I would phrase healthy. It is -- it saw quite strong activity in the fourth quarter of 2004 with some big financial services firms making some moves. The activity this year's been characterized more by mid-size and smaller companies making moves with a few big players in the market. Long-term, now getting to your question, long-term, I think you can expect that the mid-town market over the long term will be the market that is improving. It is benefiting from the same macroeconomic dynamics that are underpinning the recovery in the broader U.S. and global market.

All right. Thanks a lot, guys, and great quarter.

Thank you.

Carey Callaghan, Goldman Sachs.

-- million dollar cash balance with respect to year end payout of bonuses. What do you think on the other side of paying out bonuses your cash will be?

I'm sorry, Carey, the beginning part of your question was cut off. Can I ask you to repeat that?

On your $285 million cash balance, how should we think about what that level will be after you pay bonuses at year end?

The -- well, that's a third quarter balance, obviously. Typically what will happen is we'll build some additional cash in the fourth quarter to get to the high water mark, if you will, in terms of cash balances we do every year at the end of the year. I think probably the way to think about that is when we're done paying off bonuses in the -- kind of the March, April -- February, March, April time frame, we should probably be left with, I would say, about 175 to $200 million of cash at that point in time, and obviously the big portion of that would be earmarked for the repayment of the 11.25 senior subordinated notes in the middle of next year.

Okay. Great. Thanks, Ken. And, Brett, you mentioned during the quarter that you bought in some interest in the Columbus operation, the Charlotte operation. Can you just remind us, how big is the size of your, what I'll call, franchise network? What's the opportunity there? How do the economics work, and do you intend to do more of that?

Sure, Carey, and that's a good question. We have really three types of interest globally. We have wholly owned operations, we have a very small number, two or three joint ventures, and we have what we call affiliate or CBRE partner operations. The affiliate or CBRE partner operations are non-equity investments typically where we participate in the gross revenue line, much like a franchise model. These businesses, however, almost all of them have held our brand and been supported by our back-office systems for decades. And one of the things we're most proud of is that if you and I were to tour around the world and drop in on any of these, probably half the employees in that office don't know they're not wholly owned by us, and certainly you and I would not be able to tell by any measure that they're not part of our system.

We have undertaken a strategy in the last few years to use some of our terrific free cash flow to actually buy in or roll up the equity interest in these operations. These are really very smart investments, we think, because there is no -- there is zero integration rents [ph]. They're already trading under our brand, they already, of course, see the benefit of being part of the CBRE family, and so it becomes a financial transaction with almost no integration risk at all. We also believe we can generate small levels of synergies, not big, but small levels of expense synergies by helping them support their financial accounting and other back-office systems through our own infrastructure and backbone here at corporate. We have around the world probably a bit less than 50 of these operations in various forms, either joint venture or these affiliates, and some are fairly significant in size. Our Boston operation, which is a joint venture, would fit that category. Many of these are, at least in terms of the global numbers we report, quite insignificant in size. The deal that Ken referenced earlier, we referenced just for interest's sake. I think you can see from the numbers that they are immaterial. You should expect to see us continue this program, and from time to time, we will have a material transaction result from these deals, but those will almost always be where we have a joint venture and we purchase remaining interest in that joint venture. As I mention, there's only a few of those globally. Does that answer your question?

It does. Yes, thank you. And then just lastly, on the -- I think the Duke transaction, it sounded like you were on both sides of that deal. How common is it for you to be on both sides and what are the concerns with respect to clients on conflicts?

Taking the role of advising sellers and buyers or landlords and occupiers is in our business quite common. It has been a model in the business since we started the Company almost 100 years ago. Customers don't have, at least none that I'm aware of, have an issue with it in most cases. And we have a very robust set of procedures and processes in place to make certain that both customers and both sides of the transaction are well served. Of course, the single biggest governor in all that, Carey, is reputational. Having done hundreds of thousands of these transactions over the life -- probably millions of these transactions over the life of our Company, if we do one wrong, if we have a customer that feels they were ill served because we were on the other side of the transaction, that would damage our reputation, and that would would be a problem, and we don't have that problem.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Misha Miggins [ph], Basswood Partners.

Hi. Just a question on the investment sales business. Is there a backlog of deals that gives you visibility into '06, so basically revenue to some extent that's already locked up? And then the second question is just given the growth rates in investment sales, do you think that maybe it's not '06 but maybe '07 that that business may have to contract before it continues on the 7 to 9% growth?

Sure. Two good questions. On the first question, yes, we do have fairly good pipeline reporting systems in place for our capital markets businesses, because these transactions are typically fairly significant, and because of the work involved to bring a property portfolio to market and then get it closed, those pipeline reports are, I think, quite good. Those pipeline reports give us visibility into the revenues. We've mentioned this before on calls, anywhere, I would say, three to nine months out. Now, of course, I want to remind you and the other callers that a dislocation in the capital market, were there to be a force majeure event or a major capital market dislocation globally, those pipeline reports become irrelevant because transaction will freeze, but notwithstanding that, those pipeline reports indicate to us today that the capital markets business remain very healthy, and as healthy as they've been at any time over the last four years. In terms of long-term projections in that business, really, who knows. Certainly we're at strong levels in that business today and levels that have increased each year for the last three years, but there are dynamics underpinning that business which we believe are -- look a lot like structural dynamics, at least structural in the sense that longer term trends. And those dynamics are simply that there has been, we believe, a structural reallocation of investment capital away from some investments, such as equities and bonds, into hard assets, and in particular commercial real estate. Cash on cash yield in commercial real estate stock today are still attractive compared to equities and bonds, and in addition to that you're buying what is generally believed to be over the long term an appreciating asset. So that structural trend, which is this movement of liquidity towards the commercial real estate as an asset class, we believe is highly supportive of this business for awhile, and how long that while is really can't say.

Thank you.

At this time, there are no further questions in queue.

Terrific. Well, thank you, everyone, for your participation on this quarter's call. We look forward to talking to you at the end of the fourth quarter.

Ladies and gentlemen, this conference will be available for replay after 11:00 a.m. Pacific Time today through midnight Pacific Time on Friday, November 11th. You may access the AT&T Executive Replay Service at any time by dialing 1-800-475-6701, and entering access code 800534. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701, and 320-365-3844, access code 800534. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.