世邦魏理仕集團 (CBRE) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome CB Richard Ellis Year End 2006 Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session with instructions being given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. I would like to now turn the conference over to your host, Ms. Shelley Young, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Welcome to CB Richard Ellis year end 2006 earnings conference call.

Last night we issued a press release announcing our financial results for the fourth quarter and full year of 2006. This release is available on the home page of our website at www.cbre.com. This conference call is being webcast live and is available on the investor relations section of our website.

Also available on our website is an earnings presentation deck which you can use to follow along with our prepared remarks. A PDF version of the presentation will be available in the link marked supporting materials after the call ends. 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 available on the website.

In a minute I will turn the call over to our senior management team. This includes Brett White our President and Chief Executive Officer and Ken Kay our Senior Executive Vice President and Chief Financial Officer. We have a new member of our senior management team on the call today who will be available during the Q&A segment of the call. I am happy to introduce Bob ^ responsible for the Middle East and Africa and Asia Pacific region and development services segment.

First, I have been asked 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 including statements regarding our growth momentum in 2007, future operations, the impact of acquisitions and future financial performance. These statements should be considered as estimates only and actual results may ultimately 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, CR Richard Ellis undertakes no obligation to update or publically revise any of the forward-looking that we may make here today. For a more detailed discussion of these forward-looking statements and the risk and other factors that could cause results to differ, please refer to our fourth-quarter earnings release press release dated February 6, 2007, and filed on Form 8-K our most recent quarterly report on Form 10-Q and our current annual report on Form 10-K, all of which are filed with the SEC and available at the SEC website at www.SEC.gov.

We may make certain statements during the course of this presentation which include reference to say 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. Good morning, everybody. I am going to start on page 3 of the slide deck. Our fourth quarter results continue to reflect strong performance across virtually all business lines and geographies as well as contributions from acquisitions.

This growth was fueled by strong leasing activity in most major markets, continued strength in investment sales, especially overseas, as well as increased revenue in the appraisal valuation, mortgage brokerage, and property and facilities management operations. In addition, global investment management operations showed robust revenue growth.

On December 20, 2006, we completed the Trammell Crow Company acquisition. This acquisition expands CB Richard Ellis's global leadership and strengthens our ability to provide integrated account management and comprehensive real estate services for our clients. We financed the Trammell Crow acquisition with term loans and tendered for remaining high yield bonds during the quarter which Ken will talk about in greater detail later on in the presentation.

Please now turn to Slide 4. Our fourth quarter 2006 results including contributions from the Trammell Crow Company operations for the period December 20, 2006, to December 31, 2006. Excluding one-time items, a contribution to EBITDA from the Trammell Crow Company was approximately $1 million. We achieved 37% revenue growth for the fourth quarter of 2006 marking the 17th straight quarter of double-digit year-over-year organic revenue gains. Excluding one-time items, net income for the fourth quarter of 2006 was $134.2 million as compared to $99.9 million for the same quarter last year. Adjusted earnings per share was $0.57. This constitutes an increase of $0.14 or 33% as compared to the prior year earnings of $0.43 per share. Operating income was $223.8 million which was $64.9 million for 41% better than last year. Finally EBITDA was $260.4 million which increased $74.2 million or 40% from the same quarter last year. With that I would like to turn the deck over to Ken Kay. Ken.

Thanks, Brett. Please turn to Slide No. 5. This slide reflect the Company's operating results for the fourth quarter as compared to the prior year. As you can see, revenue increased by $376.6 million or 37% from last year. Strong leasing activity in most major markets continued strength in investment sales, especially overseas, higher investment management fees and carrying interest revenue combined with increased property management and appraisal valuation fees have fueled our double-digit revenue growth. Of the 37% total increase in revenue nearly three fourths was due to organic growth with the balance driven by acquisitions.

During the fourth quarter of 2006 we reclassified certain reimbursements, primarily salary and is related costs related to the facilities and property management operations from cost of services to revenue. We concluded that these expenses are more appropriately accounted for on a grossed up basis versus a net expense basis. The Company reclassified $72.8 million and $76.7 million for the three months ended December 31, 2006 and 2005 respectively. This reclassification had no impact on operating income, EBITDA, net income or earnings per share.

Cost of services as a percentage of revenue decreased from 54.1% for the fourth quarter of 2005 to 49.5% for the current year quarter, primarily attributable to the mix of revenues with a higher composition of revenue being non-commissionable. The increase in operating and administrative expense is primarily due to increased costs related to the Trammell Crow acquisition, higher carried interest incentive compensation accruals as well as higher bonus accruals resulting from improved performance.

Equity income decreased by $7.7 million or 51% primarily due to higher dispositions within selected funds in our global investment management segment in 2005. Minority interest expense has increased $4.5 million primarily due to IKOMA, which now has a 49% minority shareholder. Other income represents mark-to-market adjustment of the investment in Savills for December 20, 2006 to December 31, 2006. Excluding one-time costs related to acquisitions and mark-to-market income related to our investment in Savills, EBITDA for the quarter improved by $66.9 million or 36%. This improvement reflects the positive impact of increased revenue.

Please turn to Slide No. 6. This slide reflects the Company's operating results for the full year 2006. As you can see, revenue increased by $838 million or 26% from last year. All revenue categories have improved with the most significant increases being generated from strong leasing activities, increased investment property sales, appraisal, property management and investment management fees as well as acquisitions have also contributed to the growth in revenue. Of the 26% total increase in revenue, approximately 70% of the improvement was due to organic growth with the balance coming from acquisitions.

Costs of services as a percentage of revenue decreased from 54.9% for 2005 to 52.3% for 2006 for the same reasons mentioned previously. The increase in operating and administrative expense is primarily due to the same factors mentioned for the fourth quarter. On a percentage of revenue basis operating expenses were essentially flat at 32.3% for 2006 versus 32% for 2005.

Equity income decreased by $5.1 million or 13% primarily due to higher dispositions within selected funds in the global investment management segment in 2005 previously mentioned. Offset by higher equity income in or EMEA and America segments. Minority interest expenses increased by $4 million primarily due to IKOMA's minority share holding. Other income represents the mark-to-market adjustment in the investment in Savills for the same period mentioned for the fourth quarter.

Excluding one-time costs, EBITDA for the year improved by $191.2 million or 41%. The normalized EBITDA margin increased from 14.4% in 2005 to 16.2% in 2006.

Please turn to Slide No. 7. For the fourth quarter of 2006 leasing revenue increased by $145.1 million or 39%, approximately two-thirds of which was organic as a result of accelerated global activity and one third of which was attributable to recent acquisitions. Sales transaction revenue increased by $79 million or 23% for the quarter due primarily to organic growth. We experienced robust growth overseas coupled with moderate growth in the United States. Property and facilities management increased $35.5 million or 26% for the quarter with the majority of the growth derived from acquisitions.

Investment management increased by $73.8 million or 131% for the quarter substantially all organic and primarily due to carried interest revenue as well as higher asset management fees in the U.S. and the United Kingdom. Appraisal and valuation increased by $34.9 million or 59% for the quarter resulting from increased worldwide activities, and it was mostly organic. Our mortgage brokerage revenues increased $5.6 million or 13% for the quarter which was all organic growth.

Development fees are related to the development services activities as acquired as part of the Trammell Crow Company. The revenue from the acquisition date through December 31, 2006, was $6.4 million. We'll talk more about this segment in detail later on in the presentation.

Please turn to Slide No. 8. Excluding integration charges related to acquisitions and mark-to-market income related to the investment in Savills, EBITDA margin for full year 2006 was 16.2% as compared to 14.4% for 2005 representing a 13% increase which is primarily due to our strong revenue growth coupled with operating expense controls. This slide also shows the significant growth in EBITDA margins over time both before and after the reclassification of reimbursables to revenue. Although the reclassification impacts the EBITDA margin percentage, it has no impact on absolute EBITDA. We still see the opportunity to achieve a 20% EBITDA margin on a consolidated basis in the near-term. However, that is by no means a ceiling for the Company's margin objectives.

Please turn to Slide No. 9. Our cash balance at December 31, 2006, of $244.5 million was $204.8 million lower than at December 31, 2005. The decrease was due to the full redemption of the 11.25 senior subordinated notes of $164.7 million in June 2006, and our tendor offer and consent solicitation for all of the outstanding 9.75% senior notes in November 2006. A total of $126.7 million in aggregate principle amount of notes or approximately 97.5% of the outstanding principle amount of the 9.75 senior notes were tendered. We plan to redeem the remaining $3.3 million outstanding balance during the First Call date in May of 2007.

We financed the Trammell Crow acquisition with two new senior secured term loan facilities for an aggregate principle amount of up to $2.2 billion allocated between a five-year $1.2 billion tranche A term loan facility and a seven-year $1.0 billion tranche B loan facility. As of December 31, 2006, the outstanding balances for the tranche A and tranche B term loans were $973 million and $1.1 billion respectively. Both Moody's investor services and Standard & Poor's have affirmed our senior debt ratings with a stable outlook in reference to the new term loans.

Similar to the investment management business, the development services business finances its projects with third party financing sources. The majority of these real estate loans are recoursed to the development projects but non-recoursed to the Company. As of December 31, 2006, the outstanding balance of the real estate loans was approximately $336.1 million of which only $17.4 million of these loans was recoursed to the Company. Excluding the warehouse facility, and the non-recourse real estate loans, the total debt was approximately $2.1 billion at December 31, 2006, with a weighted average cost of debt of approximately 6.9% compared to 8.4% at December 31, 2005.

In January 2007 we completed the sale of approximately 19% ownership interest in Savills, a real estate services company based in the United Kingdom, held by the Trammell Crow Company. The disposition was effected through the sale of approximately 25.9 million shares of Savills' common stock by weigh of a book build offering. The netted pre-tax proceeds from the sale totaled approximately $311 million and will be used primarily to reduce debt.

Please turn to Slide No. 10. Internal cash flow is defined as normalized net income adjusted for depreciation, amortization and capital expenditures. The 2006 internal cash flow was $355 million, $112 million or 46% improved from the prior year. There is a close correlation between net income and internal cash flow because of the limited capital expenditures and working capital needs of the Company on an annual basis. Capital expenditures net were $45 million for 2006 which included approximately $4 million for acquisitions.

For 2007 we anticipate capital expenditures to approximate $60 million excluding one-time expenditures attributable to the integration of Trammell Crow Company. Additionally, as we noted on previous occasions, we have used a portion of our operating cash flow for in-fill acquisitions. In the next slide we have listed our acquisitions consummated in 2006.

Please turn to Slide No. 11. In 2006 in addition to the Trammell Crow acquisition, we have completed 23 in-fill acquisitions for approximately $155 million. The associated annual revenue related to these acquisitions is estimated to be approximately $223 million which includes consolidation of revenue resulting from the majority-owned IKOMA. The EBITDA margins are expected to be consistent with CBRE margins upon full integration of the acquired businesses.

Please turn to Slide No. 12. In the Americas the fourth quarter revenue increased 18% to $791 million compared with $670.3 million for the same period in 2005. Approximately two-thirds of the improvement was due to organic growth while acquisitions completed during 2006 drove the remainder of the revenue increase. This organic growth was mainly attributable to the continued improving leasing trend, higher mortgage brokerage, appraisal valuation, and property and facilities management fees as well as slightly increased sales activity. Excluding the impact of one-time items, EBITDA was $108 million for the fourth quarter, an increase of $18.6 million or 21% as compared to the fourth quarter last year. Higher EBITDA was primarily the result of the improvement in revenue.

The U.S. office market tightened during the fourth quarter with vacancy falling by 30 basis points from the third quarter and 100 basis points from year ago levels. Vacancy at year end stood at 12.6% fueled by strong financial markets and facing little new construction downtown markets are consistently out performing suburban markets around the country. Overall, rent growth is estimated at 4.7% year-over-year and is expected to rise at an accelerating pace in the year ahead due to strong market fundamentals. Total investment in U.S. commercial real estate reached a new record in 2006, $310.9 billion according to real capital analytics. The 2006 total represents an increase of approximately 5% from the level achieved in 2005. U.S. capital markets activity increased 9% during 2006 to $71.2 billion. This growth was achieved despite the expected slowdown in the rate of growth for investment sales activity. Total investment sales activity rose approximately 6% to $50.5 billion. 2006 loan originations increased 16% to $20.7 billion.

Higher loan volumes reflected continued strong demand for debt and equity financing fueled by improving real estate market fundamentals. The Company continued to grow its corporate outsourcing business through major account wins and the expansion of existing relationships, most notably Censure, CIGNA, Fortune brands and Kodak. Valuation services continued to reflect good momentum for full year 2006 the number of new valuation assignments under contract was 38% higher than a year ago. Several factors are fueling this momentum including increased REIT M&A activity as well as the Company's ability to service multi-market portfolio assignments and to cultivate new business in specialty property segments.

In the EMEA revenue increased significantly by 46% to $362.5 million for the fourth quarter of 2006 compared with $247.6 million for the same quarter last year. The revenue increase was largely organic and primarily driven by strong performance in the United Kingdom, France, Germany, Ireland and Belgium attributable to significantly increased transaction revenue as well as higher appraisal valuation activities. EBITDA including one-time -- excluding one-time charges was $96 million which represents an increase of $35.7 million or 59% as compared to the fourth quarter last year. These improvements were primarily driven by the aforementioned revenue growth.

The European economic recovery drove a healthy increase in leasing activity in the regions major office markets in 2006. Most major office markets have seen a recovery in occupier demand which is translated into rental growth. London, Madrid, Dublin and Paris all posted double-digit rent increases in 2006. The European investment market continued to see very high levels of demand from investors. Overall transaction activity in 2006 increased more than 40% from 2005 reaching yet another record level at approximately $288 billion. Among the major economies, Germany posted the strongest year-over-year increase at more than 150%. Investment levels increased 120% in Madrid and 85% in Paris.

Strong demand has been evident from all types of investors. However, there has been a notable shift in sentiments towards office properties. Significant amounts of local and global capital continue to target European property. Germany, France, central and eastern Europe were all particularly active investment markets.

In Asia Pacific, revenue totalled $117.7 million for the fourth quarter of 2006, an increase of 102% from $58.4 million for the fourth quarter of 2005. The increase in revenue was primarily driven by higher sales, leasing and appraisal activities in Australia and an increase of our investment in IKOMA to 51% in early January, 2006, which led to the consolidation of IKOMA's results.

EBITDA excluding one-time charges was $20.9 million which represents an increase of $9.7 million or 87% as compared to the fourth quarter last year. I will discuss the global investment management segment a little bit later on in the presentation.

Please turn to Slide No. 13. This self explanatory slide reflects some of our major successes during the fourth quarter 2006 which are a testament to the global reach and strength of our platform. I will only highlight several of them although each one in their own right is note worthy. HSBC, Europe's second largest bank based on market capitalization has retained CBRE to sell its corporate headquarters building in London's Canary Ward. HSBC intends to lease back the 45-story 1.1 million square foot office building following the sale. CBRE's international platform collaborated to conclude the largest office portfolio sale ever in the Netherlands. CBRE represents MPC, a German investment fund in the sale of more than 100 properties. ReVast and AIG purchased the portfolio for $1.3 billion. CBRE professional from Amsterdam, Sydney and London worked together to win this assignment and transact the sale. A CBRE professional in New York assisted in securing the financing, and CBRE teams provided valuation and due diligence prior to the sale. This is an excellent example of harnessing the power of CBRE's multi-faceted platform.

Please turn to Slide No.14. The global investment management business also continues to show strong growth. Revenue totaled $129.3 million for the fourth quarter of 2006, an increase of 129% compared with $56.4 million in the fourth quarter of 2005. This increase was mainly due to carried interest revenue earned as a result of the liquidation of certain funds and higher asset management fees. Assets under management grew to $28.6 billion at year end 2006, up $11.3 billion or 65% from year end 2005. The majority of the increase reflects $8 billion of asset acquisitions and $2.7 billion of portfolio take over during the year.

Please turn to Slide No. 15. For 2006 the Company recognized $101.7 million of carried interest revenue and recorded $91.1 million of carried interest incentive compensation expense part of which pertained to the above mentioned $101.7 million of revenue with the remainder $50.2 million pertaining to future periods revenues. Excluding the incentive compensation expense pertain to the future period, EBITDA for 2006 would have been $102.9 million as compared to $54.8 million for 2005 equating to an EBITDA margin of 45%. The timing of this expense recognition significantly impacted EBITDA margin for this segment for the fourth quarter of 2006.

However, we expect to recognize carried interest revenue from fund liquidation in 2007 that will largely offset the $50.2 million additional incentive compensation expense accrued during 2006. As of December 31, 2006, the Company maintained accumulative remaining accrual of such compensation expense of approximately $57 million which pertains to anticipated future carried interest revenue.

Please turn to Slide No. 16. We retained the Trammell Crow Company name for the development services business as it is a well established brand in the industry. This business provides property development services and pursues opportunistic but risk mitigated development and investment in commercial real estate across a wide spectrum of property types. It acts as the General Manager and provides services that are vital in all stages of the development process. It may pursue development and investment activity on behalf of its user and investor clients in partnership with its clients through co-investment or for its own account. Development services revenue includes fees primarily from development and construction services, incentive fees, and gains on disposition of real estate. The chart on this slide reflects the historical EBITDA performance for development services for 2003 through 2005 when it was part of Trammell Crow Company, and the 2006 pro forma EBITDA for the business assuming no change in ownership structure resulting from the acquisition.

As you can see, the 2006 pro forma EBITDA was flat when compared to 2005 as certain projects expected to close late in 2006 were delayed to 2007. We expect that 2007 will be a more profitable year for this business as a result of the carry over of project completions and the build-up of in-process projects. As a result of purchased accounting, and the fact that CBRE only included 11 days of activity for this business in its 2006 consolidated results, the impact of CBRE's earnings was negligible. Excluding the impact of purchase accounting CBRE's earnings would have been positively impacted by approximately $12 million of net gains on real estate sold in those last 11 days of 2006. However, it should be noted that CBRE did benefit from the cash received from these sales. In future quarters we will provide additional disclosure for this business to assist in understanding its performance by illustrating the impact of purchase accounting as well as discontinued operations accounting which did not impact CBRE in the 11 days.

Please turn to Slide No.17. Development services activity remained strong in the fourth quarter of 2006 evidenced by our project starts and inventory of in-process and pipeline projects. In the fourth quarter of 2006 we started 18 new projects with total budgeted costs of $370 million, up just over 50% from the fourth quarter of 2005 when we started nine projects with aggregate total project costs of $242 million.

Full year 2006 project starts were up 68% in terms of total budgeted project costs to approximately $1.9 billion. At December 31, 2006, our inventory of in-process projects totaled $5.4 billion, up 50% from $3.6 billion at December 31, 2005. Our inventory at pipeline deals, those projects we are pursuing which we believe have a greater than 50% chance of closing or where land has been acquired stands at $3.3 billion at year end 2006. The combined total of $8.4 billion of in-process and pipeline activity is at an all-time high for development services.

In 2006 we continued to see significant activity in our funds, programs and initiatives which accounted for approximately 55% of project starts. We believe these accomplishments coupled with added talent, the significant inventory levels mentioned above, and a healthy market environment bode well for the success of the development services segment in the coming years.

Please turn to Slide No. 18. Global markets remained very healthy. Vacancy rates in most major cities continue to decline and in many cases to levels not seen since the late 1990's. Capital flows to real estate continue at historical levels, and valuations for prime commercial stock continue to climb. CBRE continues to accrete share in virtually every geography and line of business and the marketing advantage of being the clear global leader continues to be evident in our ability to convert clients who previously worked with competitors and our ability to recruit key talent.

Based on these data points, we believe full year 2007 diluted earnings per share excluding one-time items will be approximately 25% to 30% above our very strong 2006 performance. Built into this is the assumption that we will achieve our previously disclosed net synergy savings number of $65 million from the Trammell Crow Company acquisition. As we get further into the year we will update you on our progress in achieving the synergy savings and the extent to which we can exceed that number.

Although early in the process, the integration work on the Trammell Crow Company is going well. The management organization of the combined company has been established, and now the current primary focus is on merging the shared services and field office activities. We are on track from both timing and cost perspectives consistent with our underwriting of the transaction.

As you would expect, because of the size of this acquisition and the timing of its closing in late December, the majority of the synergy savings will begin to be realized in mid-to late 2007 and should be fully realized in 2008. Therefore because we'll be accommodating the full burden of interest expense from our new term loan borrowings from the beginning of the year while not realizing the benefit of more meaningful synergy savings until later in the year, we expect the distribution of quarterly earnings per share to be different than in prior years. Consequential on this slide we have provided our current thinking on how earnings per share will be distributed on a quarterly basis over the course of 2007. We would expect the quarterly distribution of earnings per share to return to more historical patterns in 2008 and beyond and thus would not envision providing the quarterly earnings guidance in future years. Let me turn the call back over to Brett.

Thank you, Ken. As we have now heard from Ken, we are confident in our ability to deliver meaningful earnings growth in 2007 over 2006 levels. We are ideally and uniquely positioned to take advantage of macro trends in the marketplace due to our global footprint, broad service offerings, collaborative culture and well regarded brand name.

CB Richard Ellis Group continues to create value for our clients by providing all the services they need in every major market in the world. The exceptional talent, resources, and relationships we have added with our new Trammell Crow Company operations have added materially to the depth and breadth of our service offerings. We enter 2007 a stronger company poised for continued growth. Operator, I would like now to turn the call over to questions from our callers.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from the line of Mike Fox of JPMorgan.

Good morning, guys, and congratulations on strong quarter and another strong year. I have a few questions. The first one, looks like your year-over-year organic revenue growth sequentially third quarter versus fourth quarter about doubled. I was wondering how much of that is due to market share gains and how much of that is due to the overall strength in the market?

Mike, that's a good question, and I cannot give you an explicit answer for that, but I would tell you that our revenue gains throughout the year were I think greatly dependent upon market share gains across all of our businesses in all of our geographies. The one business or actually the two business line that is are obviously benefiting from great gains in market lift are commercial leasing which is I think stronger across all geography and is all firms benefited from that. Our Capital Markets gains out stripped the market lift in some geographies significantly, but in almost all geographies we out stripped market lift in the Capital Markets as well, so really it is a combination of both, Mike. You're right to point to those two dynamics. I can't break is out significantly because I don't have the figures, but I think it is fair to say we enjoyed revenue growth from both continuing capture of market share as well as good market lift in commercial leasing.

Okay. Great. Then with regard to your guidance for '07, can you talk about the accretion or synergies that you imply with Trammell Crow?

Ken.

Well, included or embedded in the guidance number is kind of the build-up of synergies over the course of the year. We talked about a $65 million number which would be a full-year benefit. We don't have that number in your 2007 number, but we really not at this point in time getting into the details with regard to how that builds over the course of the year. Certainly as we progress with each quarter what we'll do is give you additional information in terms of how we're tracking against the full $65 million number, but we do have a healthy portion of that built into 2007.

Okay. Then with regard to your tax rate versus our estimate, it was definitely a little bit higher. Can you talk about what caused the tax rate to creep up and what we should expect tore '07?

Yes. We had some discreet items that impacted us in the fourth quarter, and obviously impacted the full year rate as well. Going forward, we would expect actually a lower tax rate in 2007 and so I would expect for your modeling purposes you can probable anticipate a couple percentage points dropped in the tax provision rate for 2007.

Okay. And then with regard to the investment management business and the compensation expense that you had to recognize in the fourth quarter, can you give us an idea of kind of what a normalized EBITDA margin would have been in the fourth quarter like you did for the full year?

Yes. I mean it is probably fairly close to that. With regard to kind of the carry program or carried interest program, kind of the margin that you would anticipate should be in kind of the 40% plus range, our EBITDA margin should be in the 40% plus range in 2006 particularly in the fourth quarter because the liquidation of funds we had to recognize more compensation expense in anticipation of that fund terminating in its entirety, and so obviously that impacted the margins negatively in 2006. However, we expect a pick up in margin in 2007 so if you added both of yours together, you would approximate that EBITDA margin from the carried interest program in the 40% to 45% range.

Okay. Then just one final question. The leasing markets obviously continue to be very strong, and it seems like in some of the very large metropolitan markets the vacancy rates are much below the national averages. Are you guys concerned at all that the available space is becoming pretty short supply or do you think that it is just that the rates will be up enough to offset the limited supply that's out there?

Michael, we're not concerned about that, but that's based on history. If you recall, in the late 1990s, particularly 1997, '98 and '99 and early 2000, we saw extremely low vacancy rates in many major markets if you looked at New York, London, the San Francisco Bay Area, lots of markets around the world were reporting vacancy rates at the lowest recorded level ever, and what we found was that if an occupant needs space, they're going to find it. In many cases in markets where you're seeing vacancy rates now dip below the 6% or 5% level, what does that do? It leads to conversions of what had been B-market buildings or C-market buildings into A-market buildings or B-market buildings. All that activity is great for a services firm, so lower the vacancy rate gets, history would say the better for on you business. Of course rates are going to reflect that, and rental rates in these low vacancy markets are going to continue to move upward quite smartly in response to lack of space. The good news here is we don't have to guess about this. We can look back ten, nine years ago and see a market place that was behaving quite a bit like this one and saw that our leasing revenues propelled nicely during that period of time.

Okay. Great. Thanks a lot, and congratulations again.

Thank you. Our next question will be from the line of Brandon Dobell of Credit Suisse.

Ken, kind of an an accounting question for you. The forward impact of the amortization hits you're taking on some of the deferred or purchased revenue, how should we think about -- I know it is not a big number, but how should we think about that impacting '07?

It will, similar to what we experienced in the Insignia acquisition, we're able to recognize the revenue in EBITDA from purchase backlog, but it needs to be eliminated if you will through the amortization line before getting down into pretax or net income. What we'll do obviously to kind of normalize the effect to that is to provide you normalized numbers so that you will see a GAAP basis which would have the amortization expense included and then thus a lower kind of earnings number but then also provide you kind of what the normalized numbers are that backs out the impact of amortization such that you'll see the true benefit of that revenue in the bottom line.

From a forward guidance perspective, what kind of assumptions have you made around carried interest out of investment management and are we going to get an update on forward quarter basis about what to expect from fund liquidation now that you're becoming a bigger part of the business.

We haven't provided specific guidance number says relative to carried interest. What we expect in terms of benefit of revenue and income and obviously a higher margin as I mentioned before in response to Mike's question in 2007. That's all built into our overall guidance number on a consolidated basis, and so rather than trying to get into specifics of kind of which quarter would impact us and the magnitude of that, it will certainly provide that information as we report our numbers on the quarterly basis, but what we expect in terms of improved profitability from the carry program in 2007 is already built in the guidance number. That's just factored in there.

What kind of impacted can we expect in Q1 other than obviously net proceeds from Savills. Anything else we should take into account and is there going to be some income hits on you a charge taken in Q1 related to that sale?

Well, with regard to Savillss, you you saw on the face of our P&L we had to recognizes about $8.6 million of mark-to-market income associated with Savills investment for holding it for the last 11 days of the year and that's primarily driven off the increase in the Savills stock price between the time we consummated the Trammell Crow acquisition and the end of the year. Actually in the beginning of January the stock price actually moved the other way to the point where we sold it for a lesser number than what the price of the stock was at the end of the year. We will we'll have a mark-to-market loss in the first quarter that in essence mitigates the $8.6 million. Both of those are non-cash in nature, and what we've done because they're not part of really our ongoing operation, we've kind of normalize the obviously the mark-to-market gain in the fourth quarter of 2006 out of our numbers, and then we'll do the same thing with regard to the anticipated mark-to-market loss in the first quarter of 2007.

Final question kind of a broader question maybe for both you guys. As you look at the process of integrating the two businesses, maybe some kind of milestones we should think about over a longer-term and also near-term. How do you feel now that -- owned Trammell for a whopping month-and-a-half year. How do you think it is progressing? Your happy with what your found, from a personnel perspective, asset perspective, those kinds of things?

I think that I would characterize the progress in integration as terrific. It has gone exceptionally well greatly in this acquisition from the fact these two companies had very similar corporate cultures and had management teams that saw the world very much the same way, and of course as you know we retained the majority of the senior management team from Trammell Crow, and if you might imagine they have been extremely helpful in the integration process both in the retention of key clients and the retention of our key revenue producers. I would tell you that from the client perspective at least to date and knock on wood I have yet to have a conversation with either a former CBRE or Trammell Crow client that has not been very positive. I would say it is fair to say that the Trammell Crow former clients feel that this that this Trammell Crow former clients feel that this platform has greatly enhanced their ability to get service. I would tell you the CBRE clients frankly feel the same, so the client meetings I have had and the customer interactions that I have been a part of have been very, very positive and very favorable to our ability to retain these key clients, and frankly I believe that we're seeing now a number of clients who aren't currently doing business with this company now more interested in perhaps making a change.

On the cost side we are well along in that work, and as Ken mentioned, we have now I would say firstly completed the work of identifying the expense synergies. We know exactly where they are. He know exactly how they will come through the P&L, and we've talked to you in very explicit terms with this quarterly sense of guidance about how we expect those synergies to come through and believe me, we would not have given you this type of explicit information if we weren't extremely confident in our ability to deliver those synergies and as Ken mentioned before frankly our ability to beat them by some measures. All in all it has gone exceptionally well. We've hit a mile stones, we passed really two of them, the first being the day of the announcement where you were going to get surprised by large clients or key people, that didn't happen. We passed and are passing through the milestone of completing the fiscal year, so people have been paid and that's now getting behind us. I would say what's left really is now the more long-term milestones which is how much more share can we capture in the marketplace based on this enhanced platform and those are the kind of metrics we'll be looking at later this year and early 2008.

Great. Thanks a lot.

Next we'll go to the line of Jennifer Pinnick of Morgan Stanley.

Good morning.

Good morning, Jennifer.

For the sales and leasing businesses can you break out the growth between the increase in velocity of transactions and increase in pricing?

Ken, could you get that, please?

For the fourth quarter it was I would say predominantly pricing for both.

The organic growth in the U.S. appears to be slower than the international growth. Can you discuss that differential?

Sure it the way, Jennifer, we consider to be good news. First of course you have the situation that the U.S. business is significantly larger than our European or Asian operations, so you got the large numbers actually working against you here in the state. If you look at the absolute revenue growth, the actual dollars in revenue growth, they were very impressive, but we have businesses now in Europe and Asia which are really coming into their own, and if you look at the contributions of revenue and EBITDA pre-tax and net income post tax, these Asian and European businesses, what we're seeing here are two platforms that now are the dominant players in their respective market places, terrific brand recognition in Europe and Asia, and they're really excelling their growth off of the back of those dynamics and others, and so I expect going forward that by may very well see for some time higher relative rates of growth in Europe and Asia. We hope we see that. Certainly our goal is to see a more even distribution of top line and bottom line from U.S. and non-U.S. operations, and frankly we're very pleased with the progress we made on that initiative in 2006.

Within your guidance of 25% to 30%, can you address what type of revenue growth you're looking for?

Mr. Kay.

The revenue growth would be kind of consistent with what we talk about in terms of our financial model in the past on a consolidated basis, so we've historically talked about kind of 7% to 9% revenue growth and so that would be kind of the basis on which we provided the guidance number.

Okay. And one last question. You said Bob was on the line?

Yes.

May I ask him a question?

Absolutely.

I see your slide for the pipeline in in-process inventory for the Q4 over Q4, but it appears those numbers flip flat from Q3. Is there any moderation in the outlook there?

Jennifer, no, there isn't. The combination of pipeline and in-process are at a all time high, and as you know that, that is not a business that comes in kind of ratable basis over the course of the year. Projects tend to come in kind of on a lumpy basis. We think there is no sign at all in the marketplace this momentum is slowing down in any way, and we think our ability to harvest the in-process portfolio and convert the pipeline portfolio to in-process are very strong.

One thing I might point out to you that's a little different about the character of that inventory than we've seen historically, because we're now financing our projects more in an aggregate basis with funds and programs, particularly like the industrial -- the industrial program, we now have a half a billion dollars of industrial product that's in process much of which could be harvested, and we decided to aggregate it and sell it at a later time when we think we will get premium pricing. You will see a little different character in that inventory than you've seen historically, and our ability to aggregate with those programs and choose the timing of an exit will allow us to, in our view generate greater profits than we would have been able to generate on one off exits. It also will impact of course the size of the portfolios.

Anything further?

Thank you very much.

Thank you. Next we'll go to the line of Jeff Kessler of Lehman Brothers.

Thank you. Can you talk a little bit to the development business at Trammell Crow, the inventory is up significantly, and I am just wondering if you can commented on what you believe the margin base of that remaining inventory is, if it is indeed up 50% year-over-year. Could this be some upside to the types of numbers that you've given out in your guidance?

Before I turn it to Bob and Ken, I certainly our guidance anticipates all the dynamics under pin our business right now. None of our businesses I would characterize providing outside what we're giving you. The numbers we're giving are are what we're giving you with that, Ken and Bob, would you like to take a shot at that question, please.

I think from my standpoint I agree with you, Brett. I think the anticipation of the development business profitability improving in 2007 is already built into the guidance numbers, and we talked about that actually in the prepared remarks for the conference call, and I think probably the question to Bob would be from a relative project standpoint do you see any margin differential from maybe historical patterns or is the profitability consistent on a project to project basis with kind of what we -- what you've experienced in the past?

I think the profitability isn't going to change materially from '06 to '07. The cap rates were very strong in '06. Rental rates are going up somewhat, so that will help. I really think the thing that might change the level of profitability as we harvest these things is our ability to aggregate, package and sell bigger portfolios in great favor in the Capital Markets.

Okay.

Jeff, did that answer your question?

Yes. Another question on margins in Europe and in Asia. They're quite high, higher than the competition, but the question is really how high can they go. Are you looking at a point at which revenue can drive margin only so much higher or are there examples of other smaller competitors out there who are able to generate 25% to 30% margins say in the EMEA and/or let's say low 20's in Asia at this point?

I would tell that you as far as I know and we look at literally hundreds of companies every year on an acquisition basis. There isn't a company in the business in any size driving margins near where ours are at, but I don't consider that to be a limiting factor to our ability to drive margin. As you know, prior quarter and is prior years we talked about an objective to get to 18% EBITDA margin, and then we talked about in the third quarter the fact that EMEA was down bursting through 20%, our ability to do better than that. We don't believe that we've yet tested the upper limits of EBITDA margin in the business, and we believe that there is room to grow margins in all of our businesses.

It is really as you well know, driving margin is a test of management to operate a business as efficiently as possible with good revenues, and we think we are continuing to perfect our ability to drive expense synergies through the business, and I would also tell you what I think you already know which is any time you make an acquisition like the Trammell Crow acquisition, that provides you some good lift in your ability to raise margins once again because that combination of business gives you an opportunity to reduce costs in a way that you really have a much harder time doing organically, so, no, we are quite confident that there is room to go on the margins, and we intend to continue to test that room.

Okay. One final question on margin. That is it is a larger picture, obviously your guidance is what your guidance is for this coming year, but as we move from a transactional market over to more of a leasing and perhaps in some ways a maintenance market, can you basically describe in general terms how the profitability of that may shift or what that does to shift profitability?

Well, I think in the long-term basis what you're really seeing in our company is -- I would describe the long-term shifts more this way. Our money management business is continuing to grow at an extremely rapid rate. That business happens to have the highest margins in the Company by quite some measure, so if you were to assume that that business were to continue to grow at a good rate and we're certainly making that assumption, that will be very helpful to margins going forward.

In addition, we have or Asia business which is operating at a good margin now but we think has lots of room left there. The differences between leasing and sales, those businesses, in terms of margin are not that significant. The sales business margins have been very strong of late but frankly as leasing continues to improve, I expect the margins in leasing to continue to appreciate well. I would say really longer-term trends for us is a continuing remix of the business and the revenue flows and favor of the businesses such as investment management but Ken any comments on that question?

No, Brett, I completely agree. I think the one thing I would add it to that is the development services business similar to the investment management business is a very high margin associated with it, and I think adding that into the mix will obviously provide kind of opportunities for lifting up the consolidated margins as well.

Great point.

Okay. Thank you very much.

Thank you. Our next we'll go to the lane of Jay Habermann of Goldman Sachs.

Good morning. Thanks for the details on the call this morning. Can you comment on the investment sales business specifically with the Americas, and obviously we've soon the growth rate slow but can you talk about the pipeline and the outlook for the next six to nine months.

Sure. I will say probably confirm what you already know. The Capital Marketing in the states and for that matter globally remain extremely healthy. There is a tremendous amount of liquidity in the marketplace. If we all go back six quarters ago, the fundamental concern about the real estate services industry was what was going to happen to these businesses as interest rates begun to move and valuations were added at that time would seem it be all-time highs. We had said back then what we are seeing today which is the amount of liquidity in the marketplace tends to be looking through those issues, and there is just a very, very significant amount of money globally that wants to be placed in commercial real estate. As long as that remains true, the businesses will continue to grow.

In the states the pace of growth is then exactly what we said it would do. It is now moderated back to a range that is in the historical main. By the way, I think that we think that's healthy and a very good thing. The European markets in particular had very strong growth in the capital markets in 2006, frankly they feel quite bullish about 2007 as well. I will tell you that in the states in Europe, in Asia Pacific, we don't have a view that any of those three markets are going to see demission in revenues from the capital markets businesses from what they saw in 2006. These markets continue to perform well. There is a good amount of liquidity in the marketplace, and I think when you look at assist we all watch the EOP Black Stone Bornado situation and opportunity come together, if there is one lesson there, it is that the appetite for office stock and industrial stock is almost insatiable at this point.

Certainly the topping bids that we're seeing go back and forth are certainly in part a result of the fact that the bidders are receiving offers for pieces of those portfolio numbers that I imagine are probably at or higher than they thought they might exit them in awhile. That's allowing them to do the things they're doing in that particular situation. Lots of good signs out there and pipelines look good.

Are you seeing pressure on fees for some of these large transactions?

Not unusual pressure. In the capital markets businesses we've always had a fee structure that moves inversely proportional to the size of the transaction, so unlike leasing transactions where your fee is basically set at a certain percentage of total consideration, in the Capital Market side it has worked at the larger the transaction, the lower percentage fee, and that remains the case today. Ken, talked about two sales that we -- one we completed last year and one we're working on in Europe which are over a 1 billion dollars, if you can get and we do commonly get 50, 75 basis points on a 1.3 billion transaction, that's just compensation and we're quite pleased.

Okay. Just talking-- switching gears to development, roughly $8.5 billion total pipeline included in the shadow pipeline, what are your specific costs? How much do you invest in this development pool and what's your interest here?

Ken, do you want to hit that?

Yes. You have to kind of look at it on a net basis because you obviously get in-flows of capital and outflows of capital through the course year. We think to support this business in a similar fashion to the way Trammell Crow did it is probably between about a-- on a net basis between $40 and $50 million a year of cash outflow.

Ken, while I have you, can you comment in terms of the balance sheet, where you see debt at year end?

Yes. If you look in the cap table actually in the presentation, it is in there. Hold on one second.

Sorry. Year end '07.

Okay. Year end '07.

End of this year. Sorry about that.

I hate to make projections on that. Obviously the Company generates a tremendous amount of free cash flow or internal cash flow and our focus is predominantly on paying down debt. Obviously we're going to continue to support the development services business and co-invest in our global investment management business, but I don't want to make a prediction on what the debt would be at the end of the year but certainly we'll do our best to pay down a significant amount of debt in 2007, mostly in the back half of the year when the cash flow builds for the Company.

One more question for you, Ken, in terms of cost of services you're roughly 49% for the fourth quarter '06 versus 54% the prior year and for the full year it was roughly 52 versus 54. What's a good number do you think for this year?

I think on a percentage basis in the fourth quarter because of the significant revenue we earned in the investment management business which was in essence non-commissionable in nature, it drove the cost of services percentage down. I would think to use a number that's closer to the full year 2006 percentage as the basis for 2007 would probably be a better number for you.

Okay. Thanks, guys.

Thank you.

Thank you. Next we'll go to the line of Richard Wilson of Thread Needle.

Hi, guys, good afternoon. Congratulations again.

Hi, Richard.

Hi. Very well, thanks. Just a couple of questions firstly on revenue growth. I think it was Jennifer that someone asked a previous question about revenue growth, and I think, Ken, you said 7% to 9%. I presume that's CB Richard Ellis because obviously your earnings guidance of 25% to 30% is for the combined entity, is that correct, and if so, what would be your estimation of Trammell Crow top line growth this year?

Well, I think the 7 %to 9% of the really the basis on which tould be assumed that CB and Trammell were added together. That would be the growth in essence on the-- over the pro forma 2006 numbers so take CB stand alone Trammell Crow stand alone and then apply that in essence of 7% to 9% growth on top of that. Obviously if you're just comparing what the 2007 results would be as compared to CB stand alone, it is a much higher growth percentage. I think really we're to focus in on starting with the pro form of the two companies together as if they had been combined in 2006 and then applying that 7% to 9% revenue growth on top of that.

Okay. Thanks. Then secondly, just on margins in EMEA, again coming off the previous question, sales and leasing, and is it predominately pricing or velocity over loss of sales and what's driving that margin in the European markets? The increase is I think 240 basis point margin expansive which is very impressive, and the revenue growth is equally impressive. There must be something. Is it share gain, it it pricing, is it cost control, what is it?

At the risk of flattering our EMEA management team, they don't need my nor flattering at the moment, I will tell you they are doing an absolutely terrific job at managing the business as well. They are benefits from the fact that we have very, very little attrition in our key fee earners in Europe so they are not having to spend lots of money to retain people. They are benefiting from the fact that in Europe and Richard of course your there the CB Richard Ellis brand has really become a dominate brand across Europe and certainly in the U.K., and what comes from that is strength across the business.

Our European team is very, very good, extremely adept at driving revenue while at the same time keeping a very wear eyes on the OpEx line, and you've seen them do that now ever since we made the Insignia acquisition. We've been blowing through our margin targets each and every year, and really they are a terrific management team that gets the job done and focuses intensely on making smart moves in the marketplace while keeping an eye at all-time on the OpEx line.

As you have seen in Europe, they have made a number of what I would call in-fill acquisitions but highly strategic acquisitions, the Holly Blake, Dog Leash, Gunn in Ireland and so on, and a number of acquisitions in France. These acquisitions have all been very well placed in our business and all of them which I am very proud of, all of those acquisitions once they've come into you're business well over perform from levels they were doing when they were apart from the business, and that's the result of the fact that if you take a Dog Leash or Holly Blake as an example, when they get into the CBRE platform in Europe, they're able to sell through product and services throughout that platform. At the same time we have this established very large client base in Europe who is able to then buy into some of the product and is services of these firms sell. Really it is a story of smart acquisitions, it is a story of very good European management and a storey of keeping a very, very closes eye on OpEx.

So I guess last question or comment from me given what you've just said, Brett, is that really as the base of cross border investment flows begins to increase, really someone like CBRE or like ourselves or James Lang, you guys presumably just continue to mop up increasing share from local vendors to outside of the CBRE or the James Lang network if you will are very pushed to over big global corporate the kind of services that you guys can't offer. Is that a fair comment.

I think it is a very fair comment. Richard, I said this many times and I think the properties services business is very quickly evolving into two truly global players, ourselves and Jones Lank, and a collection of extremely capable niche players at the local market or regional level and the rest in between are going to I believe continue to have a difficult time trying to be partially global or partially full service. We compete against some extremely capable fierce competition at the local level, firm that is too one thing in one market, put we compete less and less against I would call the quasi global or quasi full service. John Lang is right there with us with the competitor, and we look forward to the continuing evolution of services business in that direction.

Yes. Thank you very much, and congratulations, guys.

Thanks again, Richard.

Thank you. We have a follow-up from the line of Brandon Dobell of Credit Suisse.

Ken, Just a clarification the tax rate. You mentioned 2 points lower. Was that in reference to where Q4 finished up or '06?

That would be in reference to full year 2006 range.

Great. Thanks.

Thank you. There are no further questions. I will turn it back to our speaker.

Thank you, everyone, for your time. We look forward to talking to you at the end of the first quarter, and have a nice day.

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