世邦魏理仕集團 (CBRE) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CB Richard Ellis third quarter earnings conference call. At this time, all lines are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded. I would now like to turn the conference over to Senior Vice-President of Investor Relations, Mr. Nick Kormeluk. Please go ahead.

Thank you, and good morning, everyone. Please turn to the slide labeled forward-looking statements. Welcome to CB Richard Ellis' third quarter 2007 earnings conference call. Last night, we issued a press release announcing our financial results for the third quarter of 2007. This release is available in 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 this presentation will be available in a 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 3 months. A transcript of the call will also be available on the website later today.

Before we begin, I must 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 in 2007, future operations, the impact of acquisitions, and future financial performance. These statements should be considered as estimate only and actual results may ultimately differ from these estimates. These forward-looking statements are reflective of the information we have on the day of this conference call and except to the extent required by applicable securities laws, CB Richard Ellis Group undertakes no obligation to update or publicly revise any of the forward-looking statements that we make today.

For a more detailed discussion of these forward-looking statements and risks and other factors that could cause results to differ, please refer to our third quarter earnings press release dated October 29, 2007, and filed on Form 8K, our first and second quarter 2007 reports on form 10-Q, and our current annual report on form 10K, 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 references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures which are in the appendix of today's presentation.

Please turn to slide 2. Our management team members participating today include Brett White, our President and Chief Executive Officer; Ken Kay, our senior Executive Vice-President and Chief Financial Officer; and Ray Torto, principal and chief strategist, CBRE Torto Wheaton Research. With that, let me turn the call over to Brett.

Thanks, Nick. Everyone, please turn to page four. In the third quarter, we had excellent results in all lines of business and geographies. The Americas, Europe and Asia Pacific all posted solid gains. Asia Pacific remains our fastest-growing region, and our investments in China, Japan and Australia have all delivered very good results. Global investment management also continues to perform exceptionally well as noted by stronger results for the third quarter. Additionally, the businesses continue to grow assets under management with significant equity capital raise and accelerated investments of funds into new assets.

The integration of Trammell Company is almost complete, and we're still forecasting annualized net expense energy savings of approximately $90 million and expect to realize about 60% of those savings in calendar year 2007. Please turn to slide 4. As you can see, we achieved 54% revenue growth for the third quarter of 2007. Excluding one-time items, net income for the third quarter of 2007 was $130.2 million. That's compared to $94.5 million for the same quarter last year. Adjusted EPS of $0.55 which constitutes an increase of $0.15 or 38% as compared to the prior year third quarter earnings of $0.40 per share. Normalized EBITDA was $254.6 million which increased $89 million or 54% from the same quarter last year.

Let me now turn the call over to Ken Kay to discuss the quarter in more detail. Following Ken, Ray Torto will then discuss the current state of the economy and market conditions. Ken.

Thanks, Brett. Please turn to slide 5. This slide depicts the strong growth we achieved this quarter across our global business lines. For comparison purposes, we've included our 2006 results including the operations of Trammell Crow Company prior to December 20, 2006 acquisition as we believe it is a more meaningful way to view our improved performance. Our results have benefited from our integrated platform and the diversity of our revenues both in terms of geography and service lines. These factors enable CBRE to post strong gains in a variety of economic conditions.

In the Americas, investment sales activities showed solid growth despite a pullback in property valuations primarily for secondary assets, reduced availability of debt financing, and tighter underwriting standards. Leasing results were affected by uncertainty surrounding the domestic economy. However, office and industrial leasing market fundamentals remain positive with higher rents, flat to lower vacancies, and continued absorption.

Ray Torto will provide more color on the state of the economy and markets later in the presentation. As Brett noted previously, the international businesses and investment management reported stronger performance while the outsourcing business continued to gain momentum with new account wins, renewals and extension of service offerings to clients through cross-selling.

Please turn to slide 6. In the Americas, third quarter revenue increased 46% to $915 million. Excluding the impact of one-time items, EBITDA was $139.6 million for the third quarter, an increase of $37 million or 36% as compared to the third quarter of last year. The U.S. investment sales market remained active in the third quarter despite the emergence of the credit crunch over the summer. Market-wide investment sales totaled $80.2 billion excluding privatizations, according to Real Capital analytics, an increase of 18% from the third quarter of 2006. For the year-to-date, we have achieved a 61% increase in aggregate sales volume and accounted for 17.9% of the $274 million of sales transacted in the marketplace.

We did begin to feel the effects of a more challenging financing market as the third quarter progressed and expect to see year-over-year sales decrease moderately in the fourth quarter. Still, we remain very well-positioned to maintain and grow a leading market share in a more uncertain environment. During these times, investors value more highly than ever, the breadth of our platform, depth of our relationships and most significantly, our ability to integrate debt and equity solutions.

In the EMEA, revenue increased by 50% to $320.2 million for the third quarter of 2007 compared with $214.1 million for the same quarter last year. This revenue increase was primarily driven by strong performance in the United Kingdom, France, Spain, and Germany. EBITDA excluding one-time charges was $70 million which represents an increase of $30.9 million or 79% as compared to the third quarter last year.

In the third quarter of 2007 turbulence in the credit markets had little impact on deal flow in the European investment market. Total investment volume reached 65 billion euros, a record level for the third quarter. Investment activity was up across a wide range of markets compared to the same period in 2006. However, it should be noted that some third quarter deals were initiated before the credit squeeze began. The restrictions on financing and generally higher borrowing costs are likely to have an impact on future investment activity. Rental growth is evident in most markets.

Major business centers such as London, Paris and Madrid have continued to see double-digit year-over-year increases. In Asia Pacific, revenue totaled $134.5 million for the third quarter of 2007, an increase of 55% from $87 million for the third quarter of 2006. This increase -- this revenue increase was driven by improved performance in Australia, China, Japan, and Singapore. EBITDA was $19.1 million which represents an increase of $10.4 million or 120% as compared to the third quarter of last year.

Across Asia Pacific, economic fundamentals remain strong in the third quarter. India and China continue to act as growth leaders. A rising level of domestic consumption in many Asian countries, most notably China, India and Vietnam, continue to fuel substantial requirements for logistics facilities. Investment sentiment remained positive in Asia with continued strong demand from capital sources within the region as well as from other parts of the world. Due to high occupancy levels and rising rents, office properties continue to attract the most investor interest. However, investors are increasingly broadening their focus on opportunities in retail, hospitality and value-added industrial properties.

Please turn to slide 7. We continue to significantly expand our contractual work for major corporate clients by parlaying the strength of the legacy TCC outsourcing platform with CBRE's transaction expertise. We won 6 new outsourcing clients during the third quarter including Fifth Third and DIAJO bringing our total to 24 since the start of the year. We have also expanded 12 existing client relationships including Fifth Third Bank and Nissan North America in the third quarter.

In addition, we renewed our relationship with 14 clients year-to-date including the 17.5 million square feet McKesson portfolio. Outsourcing services now account for 23% of total revenue in the third quarter of 2007, up from 14% in the prior year quarter. Examples of cross-selling successes resulting from the acquisition of Trammell Crow Company include CBRE's expansion of its relationship with Fifth Third bank to provide product management services for the bank's aggressive branch rollout program an existing 11.5 million square feet of facilities across the United States. This is a legacy CBRE client for whom we handle transaction management services since 2003 and we're able to recently add project management.

CBRE has worked with Regions Bank for over ten years through a variety of their M&A activities including their most recent acquisition of South Bank. We have recently expanded our existing facilities and project management contract with them to include the combined 22 million square-foot portfolio as well as added transaction management and lease administration services. CBRE expanded its relationship with Covidian, a manufacturer of medical devices and supplies as exclusive provider of transaction management brokerage and portfolio administration services. The 8-year United States based relationship has been expanded to include global coverage and encompasses more than 20 million square feet.

Please turn to slide 8. This slide reflects some of our other major successes during the third quarter of 2007 for your reference.

Please turn to slide 9. The global investment management business also continues to show strong growth. Revenue totaled $99.1 million for the third quarter of 2007, a 139% increase from the $41.4 million recorded in the third quarter of 2006. EBITDA was $23.2 million which represents an increase of $8.1 million as compared to the third quarter of last year. This increase was mainly due to higher incentive fees as well as increased investment manage fees, a source of recurring revenue in the U.S. and the U.K.

Higher investment management fees resulted from a continued steady increase in assets under management. Assets under management totaled $35.6 billion at the end of the third quarter, up 7.2% from mid-year 2007 and up 24.5% from year end 2006. Across the first nine months of 2007, we made acquisitions of $7.3 billion, dispositions of $4 billion, and portfolio take overs of $200 million. The remaining increase in assets under management resulted from changes in valuation.

Please turn to slide 10. For the third quarter of 2007, the company recognized $10.6 million of carried interest revenue and recorded $17.6 million of carried interest incentive compensation expense, substantially all pertaining to future period revenues. Excluding the incentive compensation expense pertaining to the future periods, pro forma EBITDA for the third quarter of 2007 would have been $40.7 million as compared to $20 million for the same period in 2006 culminating in a pro forma EBITDA margin of 51% for the first nine months of 2007. As of September 30, 2007, the company maintained a cumulative remaining accrual of such compensation expense of approximately $48 million which pertains to anticipated future carried interest revenue.

Please turn to slide 11. Revenue for this segment totaled $24.3 million for the third quarter of 2007 while EBITDA was $2.7 million. EBITDA was impacted by purchased accounting for the Trammell Crow Company acquisition which dictates the writeup of assets to fair value upon acquisition, generally eliminating any gains in the near term.

Excluding the impact of purchase accounting, this businesses earnings would have increased by approximately $8.4 million from gains on real estate sold during the third quarter of 2007. Despite not being able to recognize these gains on sale, the company does receive the related cash. In the third quarter of 2007, we continued to see significant activity in our funds, programs and initiatives. Development activity remained strong, evidenced by our inventory of in-process and pipeline projects at September 30, 2007, which totaled $9.6 billion matching the level at mid-year 2007 and remaining a high for the company.

Please turn to slide 12. This slide reflects the company's operating results for the third quarter. The second and third columns from the left represent the 2006 third quarter reported results for CBRE and the resulting variance when comparing the quarter-over-quarter performance. As you can see, we have also added our 2006 results including Trammell Crow Company's operations prior to the December 20, 2006 acquisition date and the resulting variance in the remaining two columns. We believe comparing our current quarter results against 2006 including Trammell Company is a more meaningful way to view our improved performance. On a pro forma basis, revenue increased by $278.5 million or 23% from last year.

As you heard already, strong growth globally drove the company's performance for the quarter. Cost of services as a percentage of revenue decreased from 54.9% for the third quarter of 2006 to 53% for the current year quarter primarily attributable to the mix of revenues with a higher composition of revenue being noncommissionable primarily from the global investment management and development services segment. The increase in operating and administrative expense is primarily due to increased payroll and marketing costs, higher carried interest, incentive compensation accruals as well as higher bonus accruals resulting from improved performance.

Excluding one-time charges, operating expense would have increased 18.3% and as a percentage of revenue decreased from 32.1% for the third quarter of 2006 to 30.8% for the current quarter. Equity income decreased by $7.6 million or 56% primarily due to lower equity income in development services primarily driven by purchase accounting adjustments. Minority interest expense has increased by $9.6 million primarily driven by higher minority interest expense associated with development services operations and ICOMA in Japan.

Gain on disposition of real estate decreased by $2.2 million or 12% primarily due to the exclusion of certain gains from development services activities in the current year which cannot be recognized under purchase accounting rules. Excluding one-time costs, EBITDA for the quarter improved by $62.8 million for 33%. This improvement reflects the positive impact of increased revenue and operating leverage inherent in our business model as well as the continued benefits of the combination of CBRE with the Trammell Crow Company. Normalized EBITDA margin increased to 17.1% from 15.8%.

Please turn to slide 13. This slide reflects the company's year-to-date operating results through the third quarter. We provided this information for your reference but will not be devoting time to discuss this in your prepared remarks.

Please turn to slide 14. I will only be highlighting selected items in the balance sheet since most of the variances are relatively self-explanatory. The cash balance at September 30, 2007 of $435.2 million was $190.7 million higher than at December 31, 2006. The increase was primarily attributable to strong business performance in the nine months of 2007 partially offset by the payment of bonuses and debt paydown. The decrease in restricted cash was primarily due to the payout on outstanding shares of Trammell Crow Company common stock that were tendered during the first nine months of the year. The decrease in trading securities was primarily due to the sale of the investment in (inaudible) at the beginning of 2007.

Please turn to slide 15. Current liabilities excluding debt decreased by approximately $234.9 million. This fluctuation is mostly due to the payment of remaining purchase consideration for Trammell Crow Company common stock as well as seasonal net decreases in accounts payable, accrued bonus and profit sharing. The outstanding balance on the multi-currency revolving credit facility was $43.3 million at September 30, 2007, reflective of borrowings by several of our foreign operations. As of September 30, 2007, we have paid down $283.3 million of the senior secured term loans of which $146 million was paid against the tranche A loan with the remainder applied against the tranche B loan. We expect to achieve an annual interest savings of approximately $20 million as a result of our deleveraging efforts to date in 2007.

The development services business finances its projects with third party financing sources. The majority of these real estate loans are recourse to the development projects but nonrecourse to the company. As of September 30, 2007, other debt includes a nonrecourse revolving credit line balance of $49.1 million related to the development services business. The outstanding balance of the real estate loans was approximately $514.2 million of which only $16.2 million was recoursed to the company. Minority interest increased by $120.6 million primarily due to the consolidation of a fund in which there is a 90% minority share holding.

Please turn to slide 16. Our net debt to EBITDA multiple at September 30, 2007 was 1.48 times as compared to 2.25 times at the end of December 30, 2006. Our trailing 12-month interest coverage ratio was 7.34 times. Our weighted average cost to debt was approximately 7% at September 30, 2007, which is comparable to our rate at December 31, 2006.

Please turn to slide 17. The third quarter 2007 trailing 12-month internal cash flow was $696 million. Capital expenditures net were $53 million for the trailing 12-month period. For 2007, we anticipate capital expenditures net to approximate $60 million excluding one-time expenditures attributable to the integration of Trammell Crow Company. I will now turn the call over to Ray Torto.

Thanks, Ken. Please turn to slide 18. World economic growth has entered a period of uncertainty due to the tight credit conditions that developed in the summer and early fall. Nevertheless, the most likely outcome is one of guided growth. Across the world markets, we find that there is little impact of the credit market issues in Asia including Australia and a mix of signals across Europe. Most concerned is found in North America.

Despite the strength of the occupier market across Europe, especially in Germany, EMEA office yields saw their first increase since early 2003. The CB Richard Ellis EU15 index of prime office yields grows marginally in the third quarter to just over 4.8%, an increase of 5 basis points since the second quarter. Yields in the major U.K. office markets rose by between a quarter-and-a-half point. Elsewhere in Europe, yields are generally stable. This guided outlook is not evident in our markets in Asia. Across Asia, economic fundamentals remain strong in the third quarter. India and China continue to have the highest growth while Hong Kong, Singapore, Japan, South Korea and Vietnam posted strong economic performances.

Investors from around the world and within the region continued to display keen interest in Asian real estate which has not been directly impacted by the recent credit market instability. The U.S. economy which was driven for years by strong growth in consumer spending and residential construction is now more dependent on the business sector.

While higher oil prices and declining home values are nipping the consumer budget in the home-building industry, the business side of the economy's ledger shows continued good profits and remarkable strength in technology and export-oriented industries due to the world's demand for agricultural products and in part to the falling dollar. It is best summarized in the chart. In the last quarter, strong growth in nonresidential investment and exports accounted for 265 basis points of the 382 basis points of growth in real GDP. Put differently, business-driven GDP accounted for 70% of the second quarter growth.

Please turn to slide 19. This shift in the primary drivers of the economy is affecting the commercial real estate markets in different ways. Those property types that are closer to the consumer sector are more immediately affected. Those more distant, must much less so. Performance indicators show that the economic impacts while slowing all markets are affecting retail the most.

Please turn to slide 20. For commercial real estate, a better economic indicator of demand is job creation and the employment figures for September are some relief from earlier concerns about the economy. The employment report for August was initially a loss of 4,000 workers, but the revised report in October was a positive 89,000 jobs created in the month. These revisions do nothing to alleviate the volatility seen in the capital markets but clearly, the economic fundamentals are not as worrisome as initially reported.

So what happens? Behind the headline, the goods producing sector of the economy still had a weak month in August and into September. But the service producing sector continued to have a good month. The service sector had monthly job gains of 143,000 in September, slightly above the monthly pace of 113,000 average service sector jobs added in the prior 3 months. The service sector, as opposed to the goods producing sector, construction and auto to mention, too, is growing at a relatively constant and steady pace. Within the service sector, the intense users of office space, the financial activities sector has gone through a bit of a rough patch of late, losing 12,000 jobs in the third quarter. This pace of job losses will have an impact on office absorption, particularly in markets that are large financial centers. However, there is also good news for the office market as the business and professional service sector saw the addition of 21,000 jobs in September and the professional and technical services sector added 37,100 workers in the month, above the recent average of 20,400 per month.

Office analysts often focus only on the financial sectors when thinking of demand trends in the office market, but a good proportion of the demand is generated by the professional and technical services sector. Credit issues in the financial services sector will not shrink demand in the office market but it will slow this demand.

Please turn to slide 21. The U.S. office market diverged in the third quarter as vacancy declined in downtowns and rose in the suburbs. Overall metropolitan office vacancy rose 10 basis points to 12.5% from 12.4% at the end of the second quarter. Downtowns are a drop in vacancy of 30 basis points to 9.6% while suburbs saw a 10 basis-point increase to 14%. Markets with exposure to the residential housing finance sector and/or significant new construction completions saw some of the largest increases in vacancy. It is notable that 27 of the 57 markets saw vacancy declines in the quarter.

Many office markets are continuing to see strong fundamentals despite the drag from the housing sector, and the disruptions in the finance markets that began in earnest about halfway through the quarter. The markets with the largest vacancy declines in the quarter include some that are generally not thought to be the among the fastest growers. Memphis, Cincinnati, Fort Worth, and Charlotte. The technological -- the technology markets of Raleigh and San Francisco also fared well. We expect office demand to continue at a pace below its long-term average though not turn negative for the length of the housing slowdown. With the supply pipeline generally moderate, the expectation is for vacancy increases to be minimal in most markets. Asking office rents surged in the third quarter rising about 10% over the first nine months of the year based on preliminary estimates. The highest rate of increase since early 2001.

Going forward, the vacancy levels around historical norms, we expect asking rents to continue to outpace inflation but to slow from the heated pace of the last 12 months. With the industrial property market, one indicator is industrial production which is rising steadily. For the third quarter, the index increased at the annual rate of 4%, faster pace than that of the second quarter. While household consumption suffers, businesses are keeping the economy afloat. This is evident in the gains for the output of business equipment which increased .4% in September and for the third quarter as a whole at an annual rate of 7%.

Industrial markets that are more consumer-based will suffer while the markets that are driven by business activity will fare much better. The national industrial availability rate declined 10 basis points to 9.2% in the third quarter and is now down by 30 basis points year-over-year. The national industrial market is weathering the economic slowdown thanks to increased export activity driven by a falling dollar and strong international economies. Consumer-driven industries and import-focused markets are feeling the current slowdown while businesses with significant international operation are continuing to prosper.

Many markets exhibiting the greatest quarterly improvements in availability are located on the East Coast. Trenton, Boston, Charlotte, Raleigh and Long Island are in the top 15 markets ranked by quarterly availability declines. On the western side of the nation, the California markets of Los Angeles, Oakland, and San Diego have all experienced year-over-year increases in availability most likely due to the slowing demand for imports. Riverside availability also increased by 110 basis points.

Preliminary estimates show industrial asking rents grew at a brisk 5.2% pace over the past nine months. Rent growth is expected to moderate as industrial demand should remain at the lower levels of 2007 going into next year as the housing slowdown dampens consumer spending. Overall the industry sector remains healthy.

Supply pipeline remains generally in check and availability levels should encourage rent growth rates above inflation. Though not as far above inflation as were seen in 2007. Poor retail sales grew at a moderate .2% in September with sales at gasoline stations being particularly prevalent. Year over retail sales have fallen from growth rates of about 7% to now 4%. These facts being that consumers are still feeling the crunch. Housing-related sales are stuck in a holding pattern which continues to negatively affect core retail sales as well.

We expect that consumers will remain circumspect when it comes to the retail spending and the months to come, and leading up to holiday shopping season. We expect, therefore, retail-centered absorption and rent growth to continue to be modest in the short run. Brett, I will return this back to you.

Thank you, Ray. Despite the strength of our investment sales business in the third quarter of 2007, this does not fully reflect the current underlying industry conditions. The U.S. and U.K. markets are experiencing some selective repricing in response to the instability of the credit market and the velocity of transactions has declined.

Secondary assets in terms of location, quality or leasing status are more exposed to this repricing. Trophy assets, however, have seen little change thus far. At this point, it is still too early to know where and when the investment property market will settle. However, when it does, we expect the sales market will then return to a more traditional, orderly and sustainable rate of growth. As you heard from Ray earlier, the leasing market fundamentals have remained positive. Although we saw some softness in the U.S. leasing business during the third quarter due to the mixed views about the general economy, longer term, the ongoing health of the leasing business will ultimately depend upon the underlying strength of the economy.

In the third quarter of 2007, our investment management business recorded significantly higher incentive compensation expense for future period carried interest revenue. There is a possibility that similar additional incentive compensation expense for future period carried interest revenue may be required in the fourth quarter of 2007 while the associated revenue may not be recognizable until early 2008. As you know, of course, the silver lining to this increased expense is that this serves as an indicator of future carried interest revenue expectations.

At this time, we are maintaining our guidance of approximately 50% earnings per share growth over 2006 excluding one-time items. This is certainly a closer call than it was at the end of the second quarter, but we still feel it is achievable. In the past when the markets have become more difficult, CB Richard Ellis has increased its capture rate of both clients and talents from our competitors as there tends to be a fairly strong flight to quality. While the markets remain relatively healthy currently, should they soften, we believe that our significantly improved position over our competitors will only amplify this historical trend. Operator, I would like to now turn the call over for Q&A, if you could please give our callers the instructions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Mike Fox with JPMorgan. Please go ahead.

Good morning, guys.

Good morning, Mike.

Actually, I have several, so I am trying to pick the one I want to ask first. I guess I will go with investment management business. I estimate about $0.05 of incremental expense associated with what the compensation expense. Could you give us an idea of the amount of revenue associated with that that you're likely to recognize in future quarters?

No, not really. We accrue, instead of compensation, based upon a kind of vesting a process and the timing, if you will, the expected recognition of revenues and so you can't necessarily tie a specific revenue number to that amount of expense that we booked in the quarter because it is a subset of the full amount of the expense associated with carried interest revenue that pertains to that. No, I mean, as we talked about before, the best way for you to correlate that is kind of look at it from a projected margin perspective which we had said on the carry program we expect to margin in approximately the 45% range.

Great. Thanks a lot. I will get back in the queue.

Our next question comes from the line of Jeff Kessler with Lehman Brothers. Please go ahead.

Thank you. Earlier on in the year, you had described how the more leveraged buyer, that's 70% to 80% leveraged buyer had basically disappeared from the market, and I want to know the more typical buyer who has some leverage. Are you still seeing them in the marketplace or has this become mainly an equity buyer's business because the worry is that if you cut down on the number of people buying obviously down to just 80% to 90% equity buyers, pricing will be affected by that as well. Are you seeing any of that in the fourth quarter, or is there some remaining -- are there some remaining semi-leveraged buyers in there looking for real estate as an asset against other classes?

Jeff, this is Brett. First of all, I would say that most of the buyers in the marketplace, they are still using leverage at some level. What we talked about at the end of the second quarter and actually at the end of the first quarter as well, as we've seen a wholesale exit, for the most part of the TIC buyers who were very highly levered and other, I would say, more exotic-type buyers who are using capital stocks with 80% to 90% leverage. The folks who are in the marketplace today are using more traditional levels of debt financing or as you mentioned, some buyers are not using any debt at all, but those are certainly the minority.

What we've seen in the third quarter and fourth quarter is that the velocity of transactions has softened somewhat, and that number is in the low double digit, let's call it something in the 8%, 13% to 14% range, and that I think is both a function of some exit of buyers but really more than that, we believe it is a return to more, what I would call, coherent and traditional underwriting but just takes a bit longer and particularly longer to get done.

Thank you. I will get back in the queue.

Thanks, Jeff.

Next question comes from the line of Jay Hibermann with Goldman Sachs. Please go ahead.

Good morning. Question on guidance. If you go back to February and look at sort of your expectation for the full year, you guided a sort of $2, I guess, based on 30% growth and implicit in that was Q4 of this year being roughly $1, 50% of that number, based on maintaining your guidance for the full year or your more recent updated guidance of 50%, that Q4 assumption now drops to roughly $0.70 or $0.75 from that $1 expectation, and again, it seems like a pretty big delta, roughly at 25% to 30%. I am wondering if you can comment on that and what the implication that is for 2008 and can you still maintain your 15% EPS expectation even with sort of sales and leasing really dropping to single digits.

I got 2 comments, and I will let Ken weigh in as well. First, we didn't give quarterly guidance. We gave a full year number and then we revise that number up last quarter, and in terms of 2008, we're not prepared at this moment to comment on 2008.

I think that's right, Brett. I think the other thing, remember, Jay, as we talked about earlier in the the year, we had some carried interest revenue that we recognized earlier in the year that we said we originally anticipated, I think getting later on in the year, so I think sticking to kind of the number that you got for the fourth quarter doesn't sound like it takes into account the fact that we already said that we had taken some of that revenue earlier in the year in the investment management business, but as Brett said, when we give a guidance number, it is really an annual number.

We always stress that because of the nature of the business that we're in, it is really important to look at this business on an annual basis as opposed to getting too hung up on quarterly numbers, and so I think it is the annual view that we tend to look at and feel comfortable with as opposed to trying to get too specific on any specific quarter.

But in terms of maintaining that sort of mid-teen EPS even with sort of 2 significant drivers of that growth really slowing now?

No. As you know our philosophy is that we don't really talk about next year until such time as we come out with our fourth quarter numbers, so we're sticking to what our guidance philosophy is. This is just our first really kind of view that we'll provide you with regard to next year will be and when we talk about the fourth quarter numbers at the beginning of next year.

Okay. Did the leasing deceleration come as a surprise because, I think, most of us would have expected the investment sales to decelerate more.

I would say it does, Jay. Although, it wasn't a significant deceleration, but it was certainly noticeable, and I think it is a result that is obvious to everybody which is the U.S. economy this year has been rockier than we certainly forecast when we were doing budgets last year, and it has remained rocky throughout the year, and that has a very direct influence on the leasing business, and that's what you're seeing coming through the numbers. I think as soon as the U.S. economy declares itself, that leasing business will perform accordingly.

Thanks. I will get back in the queue.

Sure.

Our next question comes from the line of Will Marks with JMP securities. Go ahead.

Thanks. Hello, Brett, Ken and Ray, and others. I had a question on cash flow, particularly how it relates to share repurchase. It appears that you paid down, if you exclude the Trammell Crow acquisition in the fourth quarter of last year, your net debt was reduced by about $500 million, and given that fourth quarter is really strong and you're expecting growth in this fourth quarter at least of earnings, would you consider a share repurchase and how do you look at that right now, your net debt level is fairly low, and I think a lot of us are comfortable with that, and why wouldn't you announce some level of share repurchases?

Sure, Will. It is a good question. I would tell you and the rest of our callers we look at uses of capital all the time regardless of market conditions or our level of net debt and certainly, as we continue to very rapidly delever the company, share repurchase remains and becomes an option, but it is one of many options. I would tell you that we'll be revisiting the topic again shortly, and we'll make some decisions on that topic in the near term, but just to keep in mind we're always looking at our uses of free cash, share repurchases, one of some attractive uses as is M&A and capital investment and other items.

Okay. Thanks.

Sure, Will.

Our next question comes from the line of David Boardman with Wachovia. Please go ahead.

Thank you for taking my question. Just really regarding the real estate outsourcing business, I was wondering if you could frame up how this business might perform if it is countercyclical and how corporation's attitudes might have been towards real estate outsourcing in previous downcycles, and what's the long-term expected growth rate out of that business?

Those are good questions. The outsourcing business has been a growing business for us and the other providers of outsourcing services as you know, David, for many years. I would say that if you want to generalize, generally speaking, in tougher economic times, there is certainly more pressure on corporations to find efficiencies and the outsourcing of real estate work to providers like CB Richard Ellis tends to pick up a bit in more difficult times. Now, that having been said, I would say that this business has been growing nicely through some pretty good economic times of late, and I think that's based in a large part on just the idea that outsourcing is a good idea and that has taken a hold firmly throughout corporate American and frankly is beginning to take hold in corporate Europe as well which is another encouraging trend.

The long-term growth rates in that business, we talked about that business growing at something in the high single-digit, low double-digit range year-over-year, and I see no reason why it shouldn't continue to do that.

Thank you. I will get back in the queue.

Sure.

Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead. Your line is open, if you're on mute, sir.

Hey, guys.

Hi.

Just want to see if I can get more color or clarity on the delta between the revenue growth in the Americas and the cost of services growth in the Americas. I know you said there are some things in there for incentive compensation and better performance, but it seems like there was a bigger delta than we've seen historically versus year-over-year growth and absolute dollar expenses. Thanks.

I will let Ken take that. Ken.

You're saying that the cost of services was a little bit higher on a percentage basis?

That and also in terms of comparing year-over-year growth rates which you would expect the cost of services to grow at or let's say slower than revenue growth rate within that region. It seemed kind of flip-flop this time.

It is really the impact of the reimbursables. If you look at the numbers and back out the impact of reimbursables in the outsourcing business, you would see kind of a more consistent trend if you will from the cost of services standpoint and actually seeing it modestly come down which is what we would have expected to see. The reimbursables distort it because the reimbursable this year are running at a higher rate than they were historically.

From a modeling perspective going forward, any things of seasonality or timing, other things we should take into account as we build out that line?

Yes. Given Brett's comment with regard to the growth of that business, I think you have to ratchet up the impact of reimbursables going out consistent with kind of the growth of the business because it is one of the elements that comes part and parcel with that business.

Okay. Thanks.

Our next question comes from the the line of Mike Fox, JPMorgan. Please go ahead.

Good morning, guys. On the capital raising front, have you noticed any change in the environment given that the markets change a little bit or is the environment still pretty robust on that front?

Welcome back, Mike. It is very robust. We are in the marketplace at the moment, raising capital for a variety of funds, and we're finding that the marketplace is as aggressive towards commercial real estate as it has been the last four years, so at least at the moment, there seems to be a tremendous appetite by capital for commercial real estate as an asset class, and we and the other investment managers are certainly benefiting from that.

And is that true around the globe, even in the U.S.?

Yes.

Thanks.

Our next question comes from the line of Jeff Kessler with Lehman Brothers. Please go ahead.

Thanks. I want to get back to this fourth quarter question and kind of really dumb it down to the extent that you earned what we'll call -- you earned $0.55 adjusted in the third quarter. To get to the types of numbers that you're talking about for the year of 2007 means that you would have to earn something in the area of $0.70 plus per share for the fourth quarter. Given the trends that you were seeing in the industry right now, are you still comfortable saying that you can get up to that type of level for the fourth quarter given that it is easy enough for us to back out what the last 3 quarters have been?

Well, we've a firm guidance for the year. I don't know, Jeff, what more we can say to that.

I am trying to dumb the question down, so it is fairly obvious what I am asking here.

Well, Jeff, it is Ken. I think I understand your question. We are obviously maintaining our guidance number, and which then becomes a math exercise. Based upon the first 3 quarters are in the bank so to speak, so given the fact that we're confirming that guidance number today, I mean, I think we have a high level of confidence relative to what that number would be for the fourth quarter. I think that's all we can say at this point in time, and obviously time will prove out the veracity of that statement.

Are there areas of your operations which you find stronger or weaker going into the fourth quarter which can give us some color? I know you obviously talked about this already, but the fourth quarter particularly, are there areas that we can point to for strength?

I think Ray talked about the economy and kind of what the expectations are there. We have talked about kind of the ongoing strength in the outsourcing business as well as kind of the robustness of the business internationally, so I think what we discussed relative to kind of the concepts or the support for the third quarter performance is the same type of stuff that I would be looking at for the fourth quarter.

Obviously, as Brett had mentioned previously, the economy in the U.S. is something that has ups and downs or perceptions about the economy has ups and downs, and that would be something that I think has to sort itself out to give us a better view as far as how the business will perform in the Americas, but certainly outside of that, I think the things that we talked about as far as strength in the other areas of the business, I think, are things that you can look to.

Okay. Thank you.

Our next question comes from the line of Jay Habermann, Goldman Sachs.

Just curious, obviously more color, I know August and September were slow. Investors seemed to take a little bit of a pause. Are you seeing a reacceleration, and I guess more importantly is the CMBS market, can you give us a sense there obviously? It has been closed for some time, but can you give us a sense of where that will pick up going forward?

Sure. First of all, Jay, the investment sale market was actually fairly strong in the third quarter, and what we've tried to describe in our prepared statement earlier is that we think that some of that strength was carryover from deals originated in the second quarter before the credit market dislocation and the implication that in the fourth quarter, we would see a slower rate of growth in investment property business than we did in the third quarter, so as we look at the fourth quarter right now, our view is that the full effect of the credit market dislocation should show through the numbers in the fourth quarter and that will take that business down a bit. I don't know how far, but our pipelines look pretty good. Deals are getting done, but certainly they're taking long to her get done, underwriting criteria theoretically more stringent than it was four months ago. That's what we're seeing at the moment. Again, third quarter was pretty darn good in that business. We think it will come off a bit in the fourth quarter, and as I mentioned in my summary comments, where it actually settles out is just too early to tell.

I guess that was more focused on the debt side because of the importance of leverage in terms of getting the transactions done.

Sure. Debt side at least in our business, we're definitely seeing a slowing on mortgage side of the business although it is not a particularly consequential line to our P&L. We're definitely seeing some slowing in that business, and, yes, as you asked in your question, that market has definitely improved from where it was, say 30, 45 days ago. The CMBS market is out there. There are deals getting priced although it is very rocky at the moment, but there are outs lots of other sources of financing, as you know, that have come to play in the last couple of months, and those are still, other sources of finances are still quite active, so I would say that the best way to characterize the debt market is it still remains very rocky compared to what it was in the first and second quarter. However, it is markedly improved where it was the first few weeks of August.

Thanks.

Our next question comes from the line of David Boardman with Wachovia. Please go ahead, sir.

I just wanted to dive down a little bit on the leasing weakness. I just wonder if you could characterize how much of that might have been due to your exposure to financial services sector and then also with California being such a large part of your business. Was there any effect from the residential mortgage, in (inaudible) or leasing revenues as well?

That was a good question, David, but we don't believe so. First of all, the financial services sector as a whole is primarily a New York Tri-State issue, just doesn't have that big of an impact on our overall leasing numbers, particularly globally, same holds true for Southern California. There is no question that deals or pulled in Southern California based on some loss of tenants in that marketplace in the mortgage side, and I am sure that in New York, there are deals that are being put on hold or deals that have already been put on hold that we would have earned revenue from, but in the broad scheme of things, law of large numbers, it really doesn't come through our numbers and doesn't have any meaningful impact. The slowing lease on leasing is simply due, we believe, to the fact that, as I mentioned in my prepared comments, that the U.S. economy has just been weaker this year than we had forecasted. When I say slowing, I am talking about slowing from where we had expected it to be. We still had a very strong quarter in leasing compared to prior year, but not where we have hoped it would be or where we planned it would be, and we think that is really due to the macro trends extent in the U.S. economy. The European leasing business was very strong in the third quarter as was the Asia Pacific leasing business. We believe that should the U.S. economy remain healthy or improved, the U.S. leasing business should do the same. If the U.S. economy slips into recession, that will have a direct impact on our leasing revenues as well.

Thank you.

Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead.

Quick follow-up on a previous question. As you look at the investment management business, how should we think about the impact of slowing, either transaction volume, pricing, leasing, how that impacts either the incentive fees that will flow through or in carried interest fees that will flow through over the next couple of years? Sounds like there is not an issue with capital raising so that AUM equation might maintain some strength but in terms of other things, it is more difficult to predict, how should we think about the impact from what you're talking about macro-wise on that business?

At the moment, we don't believe there will be much impact to the incentives coming through. The reasons are really a couple. First, in our investment management business, regardless of what type of property we're buying, if it is a value-add property, we're converting it to a core A property, and if it is an A property, that's what it is, and those properties I have not experienced any repricing in the marketplace. So, when we exit those funds, expectations are that we're going to receive the pricing that is currently in those models and the incentive fees will be quite robust. The long-term in that business, the investment management business has the ability to reset its incentive hurdles, so whereas we might have been looking at net yields in the high 20s, low 30s for our LPs 3 or 4 years ago, now we're looking at net yields in the high teens or midteens, and our incentive fees are based around those revised expectations. We're really,at the moment, in very good shape in our investment management business and believe that we have a very robust and long-term pipeline of quite good incentive fees coming our way.

One quick, one on the outsourcing business follow up. If you could characterize how the renewals have been so far in terms of the Trammell customers that you've had now for a bit, kind of halfway through that customer base, 2/3, and what have been the generalizations in terms of the number of clients you renewed and how those dollar contracts look?

Sure. Well, I would tell you that we're probably more than 20% through the Trammell Crow base if you assume these contracts on average run, something between 3 and 5 years, it is going to take us into the math, and I would tell you it would take us four years to get through all those contracts. We are renewing virtually all of the contracts that have come due, and, Ken, I know you have the statistic in front of you. Do you have the exact number of Trammell Crow contracts that came up so far this year and how many we renewed?

No, I don't have that. The one that is have come up we renewed. I thought it was around 12. Let my take a look. It is 14.

Without the specific number of contracts, I would just tell you we're renewing virtually all of them.

Brett, it is 12 account expansions and 14 account renewals.

Okay. We don't know what the total population that came up were?

I don't have that.

My recollection is we lost one of the total. I don't want to be held to that but I think we lost one of all the accounts that came up for renewal.

Thanks a lot.

Our next question comes from the line of Jonathan Litt with Citi. Please go ahead.

Good morning. Thank you. I was just thinking about this fourth quarter question. Is it reasonable to think about it that either promotes or development gains may be higher in the fourth quarter in order to offset some of the weakness you might see on the sales front?

I don't think we're going to get into the specifics in terms of the fourth quarter as we talked about in the the past. We look at our business on a consolidated basis, and we have multiple businesses that are contributing to the kind of the performance of the company as a whole. I think it is best to look at it that way as opposed to specific division that may contribute more or less.

I was trying to think about where you would make up for the weakness you described on the call. I don't know, maybe if you could give us color on where you might see -- I was trying to pinpoint, but maybe Asia or offshore or --

Think of it this way. First of all, it is relatively -- let me be clear. What we're talking about is a blackening in the rate of growth and some of the businesses have been growing very, very strongly the last few years. That doesn't necessarily mean that any of those businesses aren't going to come at what we had originally expect them to come in. I don't know yet. Our expectation is they're in pretty good shape. As Ken mentioned, I think this is the important point. When you think about our business, it is a very, very diversified business, and every quarter in every year, we have some businesses that are doing exceptionally well, some that will miss their plan for a month or 2 months or 3 months or whatever reason, and in the fourth quarter, actually dynamics, as we look at the business or not that unusual. We're seeing some businesses that we think will perform right where we originally expected them to, and we've got one that we think won't, which is the investment property sale business. That weakness in the investment property sale business, we believe, we're confirming guidance, will be mitigated by good performance in most of the other businesses and again we're not going to get into the specifics of which businesses we think will do better or not do better in future quarters, but I would tell you that the bottomline is the diversified revenue model we have is extremely helpful in times where you've got some rockiness in the market.

Looking at page five of your presentation, I apologize I am new to the company, but year-to-date, it looks like about 30% of your revenues are coming from sales, and then on the following page, it looks like about 70% or maybe just a little under is coming from America or the Americas of your revenues, and so I guess that your sales, $190 billion, is breaking out between each of the regions. Is it reasonable to assume that roughly 70% of that is U.S.?

Ken?

On a macro basis, it is probably somewhere between, I would say, 60% and 70%.

Okay. That's great. Thank you, guys.

Our next question comes from the line of Will Marks, JMP Securities. Please go ahead.

I don't think this question has been asked or addressed, but can you give us some light on head count and maybe where you'll be in terms of revenue-producing employees at the beginning of '08 versus '07 and how important is that figure because if the average broker is producing less income, maybe you can offset that with the higher head count obviously, so any indication that would be helpful.

Well, I would say that, Will, on our head count we just went through a very significant acquisition where we actually were letting brokers go because we got what we believe is the proper number of brokers in our key markets and critical mass in those markets. Our growth,at the revenue line, at least in the near term isn't really going to be driven by the acquisition of new brokers rather increased productivity among the brokers we have and increased productivity from non-brokerage businesses, and we're in a unique position, Will, which is virtually every market in the world we dominate the brokerage business. To us, this company, going out and trying to build revenue by getting brokers is not something we need to do unless they want to do.

What about in other areas? I guess that probably covers it because that's a large part of your business, but are there some other areas where you've grown that would offset any kind of weakening on a same-store basis?

Sure. It is the same answer we gave to the prior caller which is again, Will, as you well know, we have a number of businesses in this company, and business lines in this company. Two of them are broker related, sale and lease brokerage business, but the other business lines are not, and many of them are doing very, very well at the moment, and by the way, as is -- as are, both of our brokerage business lines and as I said a couple times this morning, when we talk about weakening, it is relative. We still have a very, very formidable and strong U.S. and global brokerage business in both sales and leasing.

Brett, just to kind of supplement your answer I think on Will's question relative to broker count and productivity. Will, I think, as we talked about in the past, we have seen an increase in producer head count, probably in the high teens over the last year as a result of really kind of the integration of the 2 businesses, meaning Trammell Crow, and for the last 5 years, we've seen continued increases in broker productivity with a kind of year-to-date kind of add to broker productivity that's kind of consistent with the run rate we've seen over the last 4 or 5 years, so we are benefiting from that as well, just to kind of give you some statistics.

Great. Thanks. Thanks, Brett.

Our next question comes from the line of Mike Fox with JPMorgan. Please go ahead.

Just one topic that hasn't really been talked about is the outlook for acquisitions, and I was wondering, given the environment has changed somewhat, if more people are coming to you, if the environment has changed at all for acquisitions?

It is a great question, and I would say the environment has changed for acquisitions. First, change very much in our favor is that the purchase multiples are declining, and I think that we're going to see that continue to occur at least for the near term so deals that were, as you know, we're looking at a lot of deals all the time, and deals that might have been in the 6 to 6.75 EBITDA multiple were now letting our sellers know that we are looking at lower multiples than that at businesses we're buying, and I think that in the seller market just like in the property sale market while there is a bid spread certainly in the marketplace, we're getting deals done now at a bit lower multiples. I think that for an outlook, the way I would think about it is there are an awful lot of companies in the real estate services space that are really one-trick ponies. They have one business line. If their one business line is capital markets related, be it debt or equity, those folks are certainly feeling this current market dislocation a lot mr severely than we are. Some of those folks will ride it out fine. Some won't. We're, as I mentioned in our summary comments, one thing you can count on from us is we're going to be very aggressive at pursuing companies that we think strategically need to do something, and we're watching a number of them at the moment, and if valuations get correct and we have a willing seller, we're going to certainly take a look at them.

Okay. Great. Just to follow up on an earlier question, I think somebody was trying to figure out the percentage of investment sales in the U.S. I don't know how much detail you normally give on that. Can you confirm it is less than 15% of the total revenue of the company?

Ken?

Hold on one second.

Our next question, are we ready for that?

Why don't we do that and Ken when you're ready with your answer, just interject and we'll give it to the group.

It is -- Mike, it is around 15%.

Okay. Great. Thanks a lot.

Operator, we have time for about 2 more questions.

Okay. We have Jeff Kessler of Lehman Brothers. Please go ahead.

Thank you. You've put out a good slide with regard to the outsourcing gains, wins, that you've gotten. Can you talk to some extent about what large or even -- what types much deals are you working on in terms of gaining clients from one end of the business, transaction business to come on to your outsourcing business and vice versa? Are you beginning to actually see a natural progression of clients wanting to do business on the other side? In other words, how much easier is it for to you cross-sell, and can we expect to see cross-selling effects in the next couple quarters?

Sure, Jeff. I would tell you that as a general statement, both the legacy Trammell Crow clients and the legacy CB Richard Ellis clients are aggressive at looking at other services they can get from our platform as we're selling them to them. The reason is probably obvious, it simply benefits them to be able to one-stop shop. Without naming any client names, just taking an example of a large legacy Trammell Crow account where Trammell did not have international capabilities and because Trammell did not have a fully developed U.S. brokerage network, this large client almost within days of being on board in the integration, began to work with us to explore opportunities in Europe which at the time and currently is being provided by one of our competitors, and opportunities to enhance the work they're doing with us on U.S. transaction work. I think that the bottomline is we have the most developed platform in the real estate services business globally. Our clients are fully aware of that, and our clients are pushing this integration of additional services frankly as hard as we're pushing it towards them, and I am quite confident you're going to continue to see as you have already a significant number of our on board clients expand the number of services they are utilizing from the firm and that will result in impact on our revenues.

Are you going to be able to give some type of end-of-year impact on this business progress because it is obviously very important with regard to offsetting any weakness you might have in other segments of your business?

Jeff, it is not easy to do, but I would say that there are certainly some data points that you and your peer group can look at. One would be the increase in our revenues from corporate services clients. Vis-a-vis our competitors, and if our rate of growth there is higher than that would imply we are adding services to those clients that we're being done by others last year. Certainly that is an important data point to look at. I think also the percentage wins on clients that we're bringing aboard that are in the market with RFPs is an important data point. I wouldn't tell you but we're doing quite well there at the moment. At the end of the year, we'll try to give you some data work, but it is very difficult to go through the entire universe of corporate clients we have, and we have thousands of them, and pull for you a general rule. We can give you lots of anecdotal evidence, and we'll give you the data we can. Thank you.

Our final question comes from the line of Jay Habermann with Goldman Sachs. Please go ahead.

Thanks. Last question, of course, but question for Ray, you mentioned guarded growth obviously and no impact really Asia and Australia. In terms of property yields and cap rates, though, North American cap rates are up probably 25, 50 basis points. Europe you mentioned first increases in several years, and they've gone up roughly 5 basis points. U.K. are up 25 to 50 basis points, and Asia still strong, but I am just curious what your outlook for cap rates would be over the next 12 to 18 months and specifically with regard to perhaps Europe and additional increases in North America?

The cap rates we've been looking at, we look at it by property type, and so we see increases in the neighborhood of 25 to 50 basis points in cap rates with the highest increases being in the multi-family sector.

In addition to what has already taken place.

In addition to what's already taken place, yes.

What about the emerging markets where you've seen cap rates move from the low double-digit to say single-digits? Do you see sort of a reversion there?

I can't really speak to is that fully yet because we haven't built our models to do all of that forecasting as we have in the states, so I would like to beg off on that until we get that done in the next few months. We're building kind of metric models on that, and I like to base my analysis on data as opposed to anecdotes, so I am going to beg off from that one right now. Okay? Thank you.

Thank you, callers, for participating in the third quarter earnings call. We look forward to talking to you again at the end of the fourth quarter.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and thank you for using AT&T executive teleconference service. You may now disconnect.