世邦魏理仕集團 (CBRE) 2006 Q2 法說會逐字稿

Welcome to Trammell Crow Company second quarter and first-half 2006 financial results conference call. All participants will be able to listen only until the question-and-answer session of the call. This call is being recorded. If you have any objections you may disconnected at this time. I would like to introduce Miss Barbara Bower of Trammell Crow Company. Ms. Bower, you may begin.

Good morning and thank you for joining us for Trammell Crow Company second quarter and first-half 2006 earnings release conference call. This morning we issued a press release announcing our results. The release is posted on our website at TrammellCrow.com or you may call 214-863-3350 for a faxed copy. This call is being webcast live. It will be archived and available through August 3. The replay may be accessed from the Investor Relations section of our website.

In just a moment, the Company's management will provide commentary on its earnings and then we will open up the line for Q&A. First I would like to remind you that comments made during this call may include certain forward-looking statements. Actual results and the timing of certain events could differ materially from those projected and/or contemplated by the forward-looking statements due to a number of factors including those set forth in the Company's Form 10-K as filed with the Securities and Exchange Commission. With that, I'll turn things over to Bob Sulentic, our Chairman and CEO.

Thanks, Barbara, and thanks, everyone, for joining us here today. With me from the management team are Derek McClain, our CFO; Arlin Gaffner, our Chief Accounting Officer; Mike Lafitte, President of our Global Services segment; and John Stirek, President of Development and Investment, Western Operations. As usual, we'll start by having Derek take us through the financials.

Thanks, Bob. This morning's release illustrates both the continued momentum in our Global Services business and our continued confidence and enthusiasm regarding our full year prospects for our Development and Investment business on the strength of increasing activity levels and the traction we are getting with our funds and initiatives.

As we routinely note, the key to understanding our performance lies in our segment results. Looking first at Global Services performance, segment revenue growth was 13% for the quarter with pretax income up 22% to $20.4 million.

For the year-to-date Global Services pretax income is up 39% to $31.1 million. The big contributors to this quarter's revenue growth were the brokerage lines. Corporate Advisory Services was up 29% and investor brokerage was up 21%.

Brokerage in total, the two lines combined, was up 25% and for year-to-date brokerage in total was up 34%. Facilities management posted another double-digit growth quarter with revenues up over 11%. Revenues from user project management were up 5.7%.

As we noted in our release, the second quarter of 2005 was a particularly difficult comp for us, as that quarter was up over 60% from the second quarter of 2004. We remain very optimistic regarding the long-term growth profile for this business.

Revenues from property management for investor customers were down over 4% as we continue to experience churn in the portfolio with ownership changes.

Looking next at the Development and Investment segment, that segment's NIBET loss for the quarter was $5.9 million versus $3.9 million for the second quarter of 2005. Expenses are up significantly associated with our increased activity levels.

Our harvesting of profits in this business is again expected to be heavily weighted to the fourth quarter. Of course there is always timing risk associated with the closing of deals, but it is our expectation that this business will produce strong profit growth for the year.

Our activity level continues to escalate as evidenced by our mounting in process inventory. At June 30 the in process inventory reached $4.8 billion, up sharply from the $3.6 billion at year-end and the $4 billion in process at the end of the first quarter. That inventory is now double its six-year low posted just 24 months ago.

On a consolidated basis, the increased earnings contribution from Global Services was partially offset by the increased quarterly loss from Development and Investment with the result that net income was up 6%.

Second quarter earnings per share were $0.24 compared with second quarter 2005 EPS of $0.23. One comment I would like to make on the expense side. Regarding health care costs, they are a component of salaries, wages, and benefits and a factor that we mentioned explicitly as adversely impacting our first quarter 2006 versus first quarter 2005 performance. The cost here for the second quarter have come back much more in line with our expectations in the prior year.

Looking out at the full year, as noted in our release, our expectations are unchanged. We still expect the post earnings per share growth approaching 20% for the year.

In closing, just a couple of words on our balance sheet. We ended the quarter with borrowings under our line of credit more or less unchanged from the end of the first quarter. Borrowings under the $175 million line were $87.5 million at June 30 this year versus $87 million at the end of the first quarter.

And it is notable that those borrowings are essentially flat, despite our having made during the quarter significant additional investments in real estate in support of our DNI business and having spent over $21 million during the quarter completing our previously announced $50 million stock repurchase program which was completed at an average cost of $33.61 per share. With that, I'll turn things back over to Bob.

Thanks, Derek. I'll make just a few comments on our year-to-date results and where I think we stand, and then I'll turn it over to Mike and John for more detail.

First, our Global Services business has really performed extremely well year-to-date with both quarter and year-to-date profits well ahead of our 20% growth target.

Looking at our Development and Investment business we simply haven't harvested many projects year-to-date and we really didn't expect to harvest many year-to-date. However, I will say that the business is well positioned to provide strong growth and profits this year, as Derek mentioned, based on identified projects that we expect to harvest later in the year.

The underlying strategic initiatives that we think will drive the growth in our business over the intermediate and longer-term are in very good shape. We are adding outsourcing accounts and our pipeline in that area is extremely strong. We are showing significant growth in our base of brokers and project managers, and we expect that to continue. We've materially expanded our ability to serve international customers and we are continuing to work to grow that capability further.

As Derek mentioned, our Development and Investment inventories are up to record levels, and we have added significant talent in the Development and Investment area to execute those opportunities and to continue to harvest more opportunities.

And we have expanded the base of capital funds and programs that serve our Development and Investment business. So we feel very positive about where the business stands today and where this year will come out and our ability to grow the business for the longer-term. Mike, I'll turn it over you.

Thank you, Bob. I am pleased report of the performance of Global Services, the segment of Trammell Crow Company for the second quarter and the first half of 2006. Beyond our top priority of customer satisfaction, we continue to focus on three specific areas of growth.

Number one, increased outsourcing business; secondly our brokerage growth; and, third, international expansion. Our financial results show the benefit of this focus.

Looking at our year-to-date results, Global Services revenue was up 17% year-to-date compared against 2005. Net income before tax, up 39% to $31.1 million for the year-to-date comparison and our Global Service EBITDA number were up 36% to $36.5 million year-to-date.

Our NIBIT margins increased from 6% in the first half of 2005 to 7.1% in the first-half of this year. Long-term, our NIBIT margin, as we previously stated, is targeted to be between 8% and 10%, which remains our goal.

With only one exception, that being our property management line of business, we have experienced double-digit growth across all of our line of business this year. As expected, the user revenues grew at a higher rate of 24% year-to-date while our investor revenues grew by 7% for the year-to-date comparisons.

For the quarter Global Services revenue was up 13%, led by strong brokerage growth of 25%. Net income before tax up 22% to $20.4 million and Global Services EBITDA numbers up 21% to $23.3 million.

NIBIT margins improved slightly from 8.3% to 8.9% for the second quarter. On the user side of our business revenue was up 24% year-to-date and as we have suggested previously, we feel the user business will continue to grow at a faster rate than our investor business, given a strong demand for outsourcing services.

The user revenues were led by Corporate Advisory Services up 51% on a year-to-date basis. During this past quarter we completed significant CAS assignments, representing King and Spalding, Snapper Inc., and Concentra, along with many others.

Our facilities management business was up 15% and our corporate project management revenues were up 11% on a year-to-date basis. This quarter we announced a renewal with Bayer for facilities management for an additional five years and a renewal with Sprint for project management services.

We also announced a multiyear 1.9 million square foot facilities management and project management contract with JDS Uniphase. Additionally we were awarded two new assignments providing lease administration and transaction management for two Fortune 500 firms with substantial portfolios.

The corporate project management business has grown by 11% year-to-date and we expect this business to continue to show strong growth. Our pipeline of new opportunities is good and we are confident that this business, which has grown dramatically for us over the past three years, will continue to produce new opportunities for Trammell Crow Company.

We continue to focus on platform enhancements. This quarter we implemented a facilities management operational excellence team which impacts approximately 3000 employees in this area. And our CRM continues to be rolled out further.

Our pipeline of business on the user side remains very strong. Our outsourcing business should see more wins this year as we are actively pursuing new clients and are experiencing strong retention and growth with our existing clients.

Two key metrics are continuing to show growth year-to-date, our square footage under management in leasing and our brokerage head count. Our corporate project management business also continues to be a major differentiator for our suite of services, now boasting over 900 project managers in our network.

On the investor side, revenue was up 7% overall a year-to-date basis. Revenue growth was led by brokerage revenues up 16% which includes both capital markets and project leasing revenues.

I would note that we also had growth in our capital markets activity that is reported on the user side as well. Our capital markets group completed significant transactions, including the sale of the CalTIA portfolio, a 9.6 million square foot portfolio of bulk and distribution light industrial and service center properties, and a sale of 3.7 million square foot portfolio of net leased office and industrial properties located across the U.S. to JFR Global Investments.

As to other lines of business within our investor side, the institutional project management business showed growth of 16% year-to-date. Property management revenues were down 3% on a year-to-date basis, as this line of business has been relatively flat for us for the past few quarters.

We have one new leasing and management assignment with some of our largest investor clients, including 1.2 million square foot office tower in Chicago and a 650,000 square foot office project in Atlanta, with Barringer Harvard, as well as other assignments from TIAA-CREF, Morgan Stanley, and Dividend Capital.

We continue to see strong demand from the capital markets, and most markets are experiencing improvement in the fundamentals, driving vacancies down and rental rates up. This improvement in fundamentals should be a favorable trend for our investor services business.

Geographically we continue to focus on growing in key markets specifically New York, San Francisco to Chicago, and Northern California, and we have added in other markets based on specific opportunities, such as Cleveland and Phoenix.

On the international front, revenues outside the U.S. are growing and our presence in key global markets is getting deeper. Our ability to organize around clients and deliver with strategic relationships around the globe is proving to be a successful model. In closing, we remain positive on our outlook for the balance of this year for Global Services. John, I will now turn it over to you.

Thanks, Mike. It's great to see the continued strong growth in profitability in the Global Services segment. Regarding the D&I business as Bob and Derek mentioned, our results were consistent with our expectations and we remain confident that we will contribute meaningful profitability based on the deals that will harvest between now and year-end.

As I have said many times previously on these calls, the D&I business is just not a quarter-to-quarter business, so despite not making a profit contribution year-to-date, we remain confident for our full year prospects. In fact, if we look at a couple of fundamental metrics we believe we're just starting to enter the sweet spot of our business segment, and to further this, consider a couple of different highlights.

First off, in the second quarter we had 20 new starts that added up to a very substantial $938 million. This compares to 14 starts in the second quarter of last year of $312 million. So over three times as many dollar starts this year second quarter as compared to last year second quarter. That is very meaningful.

For our year-to-date '06 our starts total $1.15 billion. That is already in excess of last year's full-year totaled about $1.13 billion. So again our pacing is well ahead of schedule and continuing to grow. Embedded in these starts are initiatives that targeted industry and product areas, including the healthcare acquisitions, airports, and mixed-use residential. We continue to pace at over 50% of our starts year-to-date and we continue to suggest that there are strong growth and success in each of these areas that we're focusing on.

And then regarding our funds and our programs, these continue to make steady progress with the balance of our new starts falling into the ING, LIT Industrial Fund, the PFG Office Development Program and our Fund 5 and Fund 6 Acquisition Fund.

So to put this previously mentioned buildup of in process activity in perspective, just now the first assets of approximately one-half billion dollars of the ING, Lion Industrial Trust Fund, those will sell between now and year-end and just now start to contribute to profitability.

So when you look at in total, our in process activity is at $4.8 billion and, as Derek mentioned, that is two times where we were just two years ago and our pipeline remains strong at $2.5 billion. When you combine those two, both our in process and pipeline activity, we are now near an all-time high of $7.3 billion.

So what these metrics mean is we are really adding meaningfully and continue to add to our store of future profitability. Since these projects have [a lag] from the start to making a profit contribution and it generally takes two to three years from start to close, this doubled in process statistic, you can see is just starting to bear fruit and you're going to see that between now and year-end.

In summary, for the D&I segment, we are right where we expected to be year-to-date and we expect much more momentum between now and year-end. We are going to generate meaningful profitability and we anticipate it to be in excess of 20% growth over last year's contribution. While we haven't contributed profitability year-to-date, our activity levels, the timing in our pipeline make our outlook very informed and confident for this year and well into the future. Back to you, Bob.

Thank you, John. Let's go ahead and open it up for question and answers at this point.

(OPERATOR INSTRUCTIONS). David Gold, Sidoti.

I guess, John, first question for you. I wanted to see if you could talk a little bit more on Development and Investment, particularly, the higher cost year-to-year. A couple of things maybe that you could hit on for us. One is, you know the ramp up in cost, would you attribute that to more project starts or would you attribute that to projects that are sort of down the pipe and you guys are finishing up with a high degree of confidence for the fourth quarter?

Well, I think that as we buildup that pipeline and it has doubled, in reality, our projects are front-end loaded, and so you have to incur that expense on the front end in order to execute those. And as I mentioned, you've got a two to three-year lag between when you start those projects and when they actually harvest to meaningful profitability.

So I think our costs do predate that contribution of profitability to it and as I mentioned with the ING Lion Industrial Trust Fund, we are just starting to see the harvest of some of those assets, so the buildup of an expense is -- does predate the real meaningful profit contribution that we see. So that is the ramp up in expense in servicing overall that in process activity. And I think we get a lot of operating leverage on the backend. I think we are at the very beginning of starting to see the harvest of those profits from all those deals.

And you said two to three years. In the past, I guess, we were of the impression -- I think you talked about it being more perhaps some of these projects 18 to 24 months. Has there been a shift there, or has it always kind of been two to three year?

Some still could out in 18 to 24 months. I would say in general it is two to three years when you just look at them in the aggregate. So I don't think it has been a shift. We have deals that will move quicker. We have one that will extend all the way out to three years. If you had to take an average, it's probably in the two-year range but some of them will go a little bit quicker; some will go a little bit slower.

This is a Derek. Some of those can even be, you know, shorter than the 18 to 24 months deal. It's -- I don't think there has been any big fundamental shift there.

And then can you talk a little bit presumably on the pricing risks on those projects towards the end -- the projects that are starting now that may be two years out or two and a half years out? Do we at the start of some of these have agreed upon prices at the end, or is it sort of whatever the market bears when we get there and there may be some risk in there?

Well I would say a couple of things. As we exit, we always try to exit and harvest at the period in time that we think is optimal. And so there are certain exits that we will do that will be more of a presale type of nature that if we anticipate that we won't get any better pricing and/or you know there is pricing risk well into the future, we may sell that a little bit sooner in order to harvest that and that might be part of that deal structure.

On other deals we may wait to the very end, aggregate some other assets and for example put together a portfolio of them because we believe we're going to get a portfolio premium overall in the marketplace. So it overall will very.

One thing I will say, David, that I think is important is we are in the value creation business and so when we -- and if you just look at that segment, if we were just buying assets and holding onto them and then hoping for cap rate impression or hoping for economic recovery or other elements, you are really more susceptible to what the economy is doing than what we believe we are.

We try to add value in the form of development, operating expertise, and lease up, and taking assets that are undervalued and creating them to full value. And in the process there is an arbitrage relative to market and that is really our buffer. So when we talk about the profitability of these deals, when we focus on the value creation component, we are not relying on cap rate compression for that overall profitability.

We are relying on our operating expertise in order to create that profitability. Now the end exit, yes, it is going to fluctuate. Everybody is susceptible to that, so if cap rates go up, we will make less profitability. If cap rate go down, we will make more profitability. So we remain confident that with our model, focus on value creation, we will continue to be profitable and make meaningful contributions on each one of these deals. It is just going to fluctuate ultimately when you exit on some of those.

And if I could just add to John's comments by saying, one thing that has shifted in our strategy and relative to the way we developed previously is this aggregation of assets in funds like the Lion Industrial Fund, it does a couple of things. First of all as you aggregate those portfolios, you do shift back in shift the timing of the exit. Historically what we would have more likely done is have developed and exited those assets one off. We are not doing that now.

We are aggregating them -- and that is good in a couple of ways. Number one, you tend to get better pricing when you aggregate and, number two, you tend to have a greater ability to target the timing of the exit to match up when there is capital in the market that really wants those types of pools of assets. So while we're paying a little bit of a price in terms of delaying the harvest, I think we are gaining benefit in terms of getting aggregation premiums on the portfolios and we are also having more control over the timing. And we think that is a very good thing in the long run.

Thanks. That's helpful. I will get back in queue.

Jennifer Pinnick, Morgan Stanley.

Another question on the D&I. Can you discuss if these expenses were higher than budget for the year or if it was just a timing difference, and if these expenses are placing any pressure on the margin?

I think the expenses are in line with our expectations overall and so when we are able to harvest the ultimate deals, I don't think they will have an impact overall on our margins. I think we're still well within budget of our expectations out there.

Part of, as Bob mentioned, part of our shift in strategy to funds and programs impact a little bit the timing of when we exit these, so it may elongate that a little. It also has somewhat of impact for our increased ownership percentage within there, in that you are not able to fully recognize some of those fees. So compared to last cycle there is a little bit of that, and we have 100% of the expenses on the front-end, but we aren't able to have all of the same revenue stream on the front-end. So that timing gets loaded up a little bit more, but again when you ultimately exit these, it is all the same, and we still feel fully expect our margins to be in line with our expectations.

Let me dive in there for just a second, John, and just say, first of all, Jennifer, the year in the Development segment is unfolding in accordance with our expectations and as it relates to those costs and budget etc.

And then I would also say with regard to -- I guess the back half of your question was on margins. As we have mentioned before, we are not as focused, nearly as focused on the development side of the business on margins as we are on just absolute levels of profitability and the guidance we are giving today and the message we are trying to send is that we feel good about that absolute level of profitability coming out of the business for this year.

And I guess then just finally as it relates to the deferral of certain fees, which would be revenues offsetting those expenses. As we have a substantial interest in some of these funds and programs, we are not recognized currently or we're not permitted currently to recognize our share of those fees that are inuring to us from those funds and programs. So those will ultimately just be recognized when there is an exit on the assets.

Sure. A question then on the Global Services. With your guidance for the year at nearly 20% and the year-to-date performance around 25%, are you expecting a slowdown in the rate of growth in the second half?

Not really. What I would say, the way to sync up all that guidance, make it all fit together for you, is, first of all, realize that in order to deliver that EPS growth approaching 20%, we are working with a tax rate differential from 2006, or excuse me, 2005 to 2006 that will require those segments to deliver pretax earnings growth north of that and then also we have got an increased share count that is impacting that EPS even net of our buyback activity.

And of course that is in part due to option exercises, in part due to the fact that there are more common stock equivalents in that denominator with a dramatic increase in the share price from a second quarter of last year to second quarter this year. So that all syncs up and we're definitely not trying to send a message that we are expecting Global Services to slow down. But, remember, the proportion of the Company and Global Service's profit that is in the bag year-to-date is but a small part of what we expect to deliver.

And are you expecting margins to be up year-over-year in Global Services?

Mike, do you want to address the margin question or do you want me?

We can both hit it. As I have stated kind of in my prepared comments, we clearly have set that goal for our margins to continue to improve. We are absorbing certain investments as we go, whether it is expanding in new markets, adding brokerage staff, our technology platform, all those things that obviously impact our margins, we are extremely focused on that. We clearly still have the goal for increasing our margins year-over-year. That is a very, very high-priority for Global Services segment. So I would expect that we would continue to the do that. Yes. Derek, you can add to that.

Sure. We make investments to support growth in the business and some of those investments we make obviously in anticipation of the growth. And those investments will then put pressure on margins, but we have spoken a lot about margins the last several years and the growth in them and I would just tell you that increasing that margin is definitely a goal of ours.

Jennifer, this is Bob. If I could just cycle back a little bit to one of your earlier questions and I have a feeling that it is still not clear. And that is, this timing on the booking of development fees. When we do development -- investor development projects, we generally have two basic kinds of revenue stream that come from those ongoing fees, development fees, that are usually in proportion to the budget dollars as they are incurred. And then we have incentive earn-outs of various types at the end of a project.

In the format that we historically pursued a lot of that development where we had a third party owner that we developed for, as we -- as the project unfolded and fees were generated, we were able to book those fees real-time.

In the format we have now, particularly like this Lion Industrial Fund, where we have been able to while we only take a very small exposure on the equity side, because they provide the debt support, we have significant ownership in that project. The portion of the fees that is in proportion to our ownership, we are not allowed to book as fees as that project unfolds.

So not only do we move in a direction where we are more inclined to aggregate portfolios and less inclined to harvest projects one off, we are also, as we are aggregating those portfolios, not allowed to book a significant portion of those ongoing fees. And of course those fees all get booked when the project harvests, and that is an accounting rule, a GAAP accounting regulation that we have to follow. So there are some things embedded in this format that we are pursuing that cause that business to be a little bit more back-end loaded, some technical things and that is what we were commenting on.

Thank you very much.

Will Marks, JMP Securities.

Good morning, Bob and Derek and Mike and everyone else. Let's see here. On the Development Investment again, can you just give me -- I guess I am a little bit naive here, but how much of that business is acquiring land and developing it into assets versus actually acquiring income-producing property?

This is John. I would say that the majority of those starts that we talk about are development investment type starts that fall into our different programs, the ING program, the PFG Office Development program. A growing part of our business is the acquisitions and in the past we have had funds one through five, which have been smaller funds, kind of in the range of $50 to $60 million of equity within there.

As we stated previously, we are in the process of raising a larger Fund 6 and that we anticipate that being larger, somewhere between $100 million to $300 million of equity raised within there. And so as we focus on acquisitions, that will be a larger portion of our overall activity and our hope and strategy is that, if you look at our starts, which historically have been a plus or minus a billion dollars per year, and this year is much higher than that. In fact, $938 million of starts just in the second quarter. The disproportionate share of that has been development starts.

As we focus more and more on our acquisition program and our Fund 6 and future funds, that will be an increasing percentage within there, and so we see that as a good area of growth.

One thing I do want to differentiate again, we are focused on the value add segment, so when we talk about acquisitions, we are not out there bidding on the six cap type portfolios with prepackages on the street. We are trying to find assets that need operating expertise where we can add value add and get superior returns in that process. So they tend to be broken. They tend to have timing issues. They tend to have partnership issues, other things associated with that. But right now I would say, our acquisition business is less than 20% overall of those starts. We anticipate that growing in the future.

Thank you, John, and just a quick follow-up on that. I noticed I think in the book value of your real estate, current and long-term assets, the changed upwards was about $62 million. So you clearly have been in buying or spending money on something. Can you just give us maybe two examples of property that you've bought during the past quarter?

Yes. We generally don't like to talk about specific deals within specific markets, but I will give you generically a couple different examples. A good example, in the past, has been one of these opportunity funds is winding up the last parts of their overall fund, and they get down to the final three assets. They don't quite know what to do with them and there is a change in partnership heart.

We will come in, offer to buy all three of them. We are buying them more cents per pound and we will close on it quick. So we will buy those vacant -- market that we believe is recovering. They will be -- in this example, office assets that we might buy at $45, $50 per square foot, run the pro forma and in the process of that, in buying, an asset in three different markets, we can solve their problem and kind of meet the overall economics of our type of returns that we are trying to get, which are generally in excess of 20% on a leveraged IRR type bases. So buying opportunistically from somebody that has timing issues is one of them. And in that case, empty assets that need a renovation and a full lease up where we can deploy a lot of our different skill sets in our full-service line. So that is a type of deal we're looking for, Will.

Let me add to that just one thing. When you see an increase in our -- the real estate on our balance sheet, you shouldn't -- you wouldn't want to assume that that is necessarily acquisition activity. But the standard traditional roundup development business that we have been engaged in for years, as we acquire land, as we expend cost to construct the improvement, etc., the amount on our balance sheet increases and all of those projects that are under development are having more amounts expended on them quarter-after-quarter and book value increasing.

Great. And, Derek, while we have you, just related to this guidance and what happened during the quarter. I think you guys have been very clear that you hit your own internal expectations. And on the development side everything seems to be going as planned from your standpoint.

Obviously I don't think I was alone in projecting a higher number than you reported, and you didn't give any guidance and that is definitely your -- you can do what you want in that regard, and I don't know what the right thing to do is. But one of things I just want to ask you if you would consider getting out quarter, just a following quarter guidance in the future and also if you can tell us for the second half so we don't make the same mistake in the third quarter, if you can help us wait the second half third and fourth quarter at all because I can see the same thing happening again.

Will, we were clearly trying to send the signal with the words in our press release today that we are expecting the harvest and the development and investment business to be concentrated this year in the fourth quarter.

And so I would say that. I mean as to whether or not we are going to give explicit, precise guidance third quarter, fourth quarter, I will have to take that under advisement, but clearly we haven't embedded anything like that in our release today. I do expect the Development and Investment business to in fact contribute positive NIBIT in the third quarter. Whether or not it is a race to year-to-date loss, you know, remains to be seen, but we are expecting a very strong fourth quarter.

And Will if I could just say something else that is not directly an answer to your question, but I think it is important to know about our business. One of the things that we don't want to put too much pressure on our Development and Investment people to do is to move around the timing of harvest of projects. In other words, of course we try to apply some level of discipline and some sense of urgency as to when projects close. And that is part of our job and there is a bunch of reasons do that, not the least of which is if you have a project with a lot of pent-up profit and you let it hang out there, you might lose some of that profit.

But, largely what we want to do is allow these things to pursue their normal, natural course and harvest when the harvest is maximum from a profitability point of view. Said differently, if we have got to race to get something into the second quarter and leave several hundred thousand dollars on the table and we can let it lay out there for three or four more months and find a better buyer or get it a little more leased up, we want to be able to do that.

And the other thing we want to be able to do is we want to be able to aggregate and we want to be able to aggregate and get a 25 or 50 basis point premium on the sale of a portfolio, knowing that it is going to delay the harvest rather than to sell the things one off at a lower price.

So it is -- Development Investment is a big part of our business and it has got these characteristics and that is why you've heard us talk a lot over the last couple of years about look at how much money this business has made for the Company over time; look at the fact that it is always made money, even at the bottom of the cycle. But it is a lumpy business and we don't want to give so much insight into what might happen quarter-to-quarter that it causes pressure on us to harvest things at the wrong time.

Bob, thanks. That makes a lot of sense. I appreciate it.

David Gold, Sidoti.

Mike, just wanted to circle back for a second on some of your margin comments. Presumably things are going well on the service side and you mentioned pretty good progress there. I'm curious what it kind of takes to get us to the next step that say target 8% to 10%, to kind of push us there?

Will, if you look at our quarter and year-to-date numbers, our NIBIT margins were 8.9 for the quarter 7.1 for the year. The operating margins were 6.3 and 4.6, respectively. We clearly scale. We have always said as we continue to get bigger, we can benefit from scale. That is number one.

Secondly, discipline around pricing new business. We have a lot of momentum in all of our line of business. Our brokerage business is continuing to really obviously show great numbers. Our headcount is up; our production per broker is up. So there is clearly lift, as those brokerage revenues will continue. So I think as we continue to see our ability to expand that brokerage network from market to market, whether it is New York or Chicago, some of those are great brokerage markets for us. So there is future lift there.

The project management business continues to -- it's grown over 30% for the last three years previous to this year. We still see that as a fastball for us. With over 900 project managers, that business just continues to see opportunities. And it is our highest margin business of the three lines of the business that we do.

And the facilities side is steady, and we continue to add. We have added over 50 million square feet in the last 18 months to our portfolio under management so I think the combination of discipline around cost controls we clearly are absorbing a lot of the things that we're doing to invest in our business, but we are winning new accounts. We're keeping our existing customers, this focus around our customer and client SAT is very, very high and our reference ability today is as strong as it has ever been. So I think when you put all those things together clearly we can be bigger with the infrastructure that we have in place and that can fuel this growth so the bets that we have made, whether it is around pursuit teams or infrastructure, all of those things are leverageable from here. So getting the last couple of points out of the margin we believe that is where it will come from; a combination of all those things.

I'm not sure if I saw a number for brokerage headcount. Would you happen to --?

We moved away from that. And the reason we did we were up 16 net for the quarter, we will continue to comment on the headcount. The only thing that -- a couple of things are going on with that. As our alliance partners grow and as our joint ventures grow we have not, we are not, we haven't captured those numbers of brokers or professionals in our previous number and it starts to get a little complicated to try to explain what is a full-time Trammel Crow employee and what is in for instance Trammell Crow Meghraj, is over 100 brokers in India. Those numbers have never shown up in our headcount. The same is true in St. Louis where we have done an alliance or actually a joint venture with the Krombach Partners. So we, the pure numbers quarter-to-quarter we were up 16 from which is almost 3%, from the previous quarter, but the reality is our network is growing at a faster rate than that when you consider our relationship with J.J. Barnicke our relationship with Savills as well as the joint ventures that we will be in where we are not a wholly-owned entity.

Is that up 16 from the first quarter?

Yes, sequentially.

And then just one minor -- Derek, John. I think it was Derek, you talked with a high degree of confidence in booking development profits being a fourth quarter event. And historically that has been true, but sort of just curious these days if you can lend us or give us some insight into some of that confidence maybe; help us to see a little better why you're so confident there.

Well I will make some initial comments and then let Derek comment. I do this, you know when you look at our overall pipeline that we have out there, David, you know you can look at specific projects that are at a point where they are leased up. They might already be out for market, they might already be under contract and so if you look at the multitude of different deals that can and will close during that timeframe we believe we got enough transaction coverage overall there to get the meaningful profitability contribution that we have. And if you compare that to prior years just the volume of those starting to harvest and the overall outlook of those all closing, that is the reason we remain confident for that outlook.

David, let me walk you through a little bit of what we do internally as well to kind of capture the maximum visibility that we can, as to how that is going to harvest in the year. And as we said there is always uncertainty associated with doing deals; but we will on a monthly basis walk through a several page list of key bets. Some of which have contributions less than 100 grand, but we will get that granular look deal by deal. And we have a massive conference call with area directors of our development business, walk through each and every one of those deals, the expected profit, the expected timing, the things that could impact either of those. And then we have a follow-up conference call with just the four Presidents of the development business to review what we have heard, handicap the various deals etc. and so that is a process gone through with great rigor every month. And then of course even with greater rigor every quarter as we prepare for one of these releases. So it is a very granular deal by deal review process on as many as 150 deals.

Is it more a function of when the deals are going to be completed or more a function of say sales in place that you think close fourth quarter?

It is a host of things. It is a deal where there is an incentive fee that may be earned upon the tenant who has already signed the lease taking occupancy. When is that scheduled to occur and is it -- is the physical construction on track such that that can take place and we can then recognize our incentive fee. How are we looking at development fees on projects in process? Are other deals going to be ripe to harvest the gain? We look deal by deal and of course, the structure of the deal, the revenue recognition, prerequisites may vary deal to deal but those are -- that is part of what we are drilling down on.

Got you. Fair enough. I will follow-up with you.

And David, the only thing I would just add is our compensation system within the D&I program, the reason I don't like asset quarter-to-quarter forecasts is we don't pay by quarter. We pay by year-end and our various development people are on an incentive based system much like the other brokers to have these deals close by year-end. And so that timing is kind of a natural break to kind of get those deals done and that incentive is very real.

Fair. Thanks.

David [Chamberlain], PIMCO.

Just I guess a couple of questions. First what was the in a period management square feet that you guys for managing? You said you added 50 million in the last six months?

That was in the last 18 months. It is over 550 million square feet today or at the end of the quarter total. That is property management, facilities management, and leasing assignments. That 50 plus million was over the 18 months. That was the time frame not the last six months.

And, what, was that this quarter?

The quarter, square footage, increase was about 10 million feet.

And just is there any sense in getting in terms of you took the $4.8 billion in the pipeline -- I'm sorry in inventory. Is there any kind of sensibly we can get in terms of what the average age of how long it has been there for, like, if just to get a sense on how much of that spend developed?

We really don't stagger it by or tracked by the overall time because again some of these projects will go quicker than the 18 months that Derek had previously mentioned. Others will last beyond the 36 months. But on average, you've got kind of a plus or minus two-year time frame within there.

If you look kind of quarter-to-quarter you can look at the starts, which this quarter were 900 million, and then you look at the overall development in process, it didn't go up 900 million, so we complete projects and we add projects. I will tell you right now we are still continuing to add projects at an accelerating rate over projects going off the completed list and out of the end process. And that is why we are bullish overall on our outlook.

Is there any sense at all like this 4.8 billion, do you have any sense at all what part of that may like for your best understanding get completed this year? Is there any sense you can give us there or no?

Not really. We -- again similar to David Gold's question, the reason we are confident in our year-end outlook is we just have a lot of different transactions and coverage and, as Derek mentioned with the key bets, we track a lot of different assets that can harvest during that time frame. Some will harvest this year. Some will harvest in the first quarter, so we are confident because of that coverage, but we really don't think it is prudent to put a specific percentage or specific deals that absolutely will close because the timing is variable on these things.

That's fine. I guess just further as a comment more than a question. I know one of the previous persons of the call had requested potentially thinking about quarterly guidance, and I would say I would vote for not doing that. I think the way you guys are running the business is the right way to do it and if people want to try to guess one quarter over another I think it is somewhat foolhardy. So keep up the good work.

Thank you. That's music to my ears.

Will Marks JMP Securities.

Just a quick follow-up. On the property management area, can you just comment a little bit? I imagine that you are getting out of lower margin business and that is why we're seeing this decline. Maybe comment on where you are in square footage and also seeing -- are we seeing same-store increases? I imagine we are as cash flows of property are going up?

This is Mike. Clearly, there has been so much activity with our portfolio, you know, this square footage that we -- our FM of that 555 million square feet, close to that number total, about 250 million of that is FM, so 340 million square feet is property management and/or leasing. We have seen considerable churn over the last three or four years. We made a very concerted effort as we were really focused on our margins several years ago to exit. Business was just not profitable.

There was a combination of things going on. Going back three or four years where our portfolio got smaller, we got out of some business. We chose to get out of some business, but we have seen a tremendous -- we continue to win a lot of new business.

Our focus around large investor customers whether they're life companies, advisory firms, is where we are focused. We have talked a lot about wanting to shift the portfolio to more office buildings. Those buildings that I mentioned in my prepared remarks from Barringer Harbor are great examples of that, high rise CBD Chicago buildings. Those are the kinds of things that we are seeing we are winning, which is typically a higher margin business for us than the industrial or the retail business is. And clearly as rents go up, our fees are a percentage of the rental income in that business line. So it clearly -- as you see the vacancy rates in the U.S. have gone from close to 16%, today sitting around 13%, we're seeing significant spike in a lot of the really healthy markets around the country. And that certainly bodes well for the future. As those rents go up, our management fees go up.

Good activity obviously also on the leasing side. A lot of our brokerage hiring also brings relationships and market knowledge as well so we are able to pick up new assignments from new relationships that we have. So we feel good about the going forward. We are also seeing larger portfolios kind of trading, as well as being priced out in the marketplace. Today we are sitting chasing several large, large transactions and I think you'll continue to see us announced wins that are bigger portfolios where some of these large investors want to reduce the number of providers that they're using and that certainly also benefits our platform very, very well.

Should we see that business on a quarter-over-quarter basis turn positive? I know -- once again we don't like to look at thing short-term, but in projecting that business.

Will, I think that we have said -- we said the user business overall is going to grow. Our expectations is that it will continue to grow long-term at a slower rate than -- the investor side growing slower than the user side. The property management line of business, I would certainly hope and expect that it will start to grow again. The amount of churn in our portfolio is going to continue with the healthy markets, but hopefully we'll start winning more than we're losing in terms of our square footage.

So for the year I would still expect it to be flat relative to our '05 performance, but I think longer-term looking into the next two or three years, I would see it -- just the property management piece of that starting to grow. The leasing side obviously is already showing. It is kind of a leading indicator for that business, and it's already -- the project leasing revenues this year for the first time in the last two or three years are really starting to show nice increases.

Great. Thanks, Mike.

[Rob Layton] of Schneider Capital.

I don't know if you would have this number or maybe you can talk in general terms, but do you know -- you have given us starts pretty consistently, but for '05, do you know how much was completed that generated the earnings from last year?

I don't have the stat. In other words, John, if the net increase in 2005 was from 2.6 billion in process to 3.6 billion in the process at the end of the year, yet we also managed to harvest $25 million in NIBIT during that period -- I mean there are obviously deals, whether they are C deals, incentive feed deals, consolidated deals, whatever, that we are wrapping up through the year. So that billion dollar increase is net of things going in and things coming out. And I think Rob is just asking for a stat about how much was wrapped up and worked its way out of the in process inventory. And I'm sorry, I don't have that stat.

Last year we had $1.128 billion in starts, so that added into the in process throughout there and, as Derek just mentioned, you can just subtract out that difference. So there was a couple hundred million --

That would imply a pretty minimal amount of completions then because your in process went up by about one billion, right?

Right.

I'm just wondering if I'm doing the math right on it because it seems like that is a pretty low number of completions to generate the amount of earnings that you had last year.

And again you would really have to dissect it because in one particular quarter, we could have a large office deal come up there and that may be a large contributor of profit. And then we may move some industrial or land deal out of there, and it doesn't have the same impact on profit. So it is not so much just metric of the dollar start but just the profit contribution of those individual deals. So it is not as simple, but I think you are right. It is a relatively low percentage going off, relative to what is coming in at this point.

Okay. And then the direction I was going, just tell me if the logic makes sense here. You have got $4.8 billion in process now and you have said two to three years is kind of an average build time. So you didn't want to say how much is going to finish in '06, but in general you ought to be moving towards somewhere north of $2 billion a year in completions, assuming you are at 4.8 in process and growing. Does that make sense?

I will tell you the high water mark of our starts in the prior cycle was a little over $1.8 billion, and this year year-to-date, as I mentioned, we're $1.15 billion, so it is tough to say exactly -- I mean we can look forward but similar to when deals will harvest, when actually deals meet the criteria for when we count them as in process starts, that could vary a little between the third quarter and the fourth quarter, but second quarter year-to-date, we are well into -- over $1 billion within there.

I don't know -- I can't really extrapolate to say it will be two billion, I guarantee you it will be more than one billion.

Maybe I can follow up with you offline a little on that. My only other question was you completed the last repurchase program. You haven't put anything else in place yet, is that correct, or did you renew that?

That is correct. We haven't put anything else in place. I mean when we put that in place in February of this year, we were obviously -- we did so in light of our capital requirements looking out and tried to size it appropriately and, obviously, we were very aggressive about getting it done. That is something that we look at from time to time but always in light of other opportunities we have for our capital and, as you can tell, we are having a lot of opportunities at the moment around our development investment.

Okay. Thanks a lot.

At this time there are no further questions.

If that's all the questions, I want to thank everybody for being with us and for the questions you asked. We look forward to speaking with you again at the end of the third quarter.

You may disconnect at this time. Your call is concluded. Thank you.