世邦魏理仕集團 (CBRE) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by today. Welcome to your CB Richard Ellis second quarter earnings conference call. As you may know, all participants are in a listen-only mode for this conference. Later we will conduct a question and answer session, we will give you instructions at that time. (Operator Instructions).

As a reminder, the call is recorded. With that, we will turn the call over to your host, Nick Kormeluk, please go ahead sir.

(audio break) --quarter 2009 earnings conference call. Last night, we issued a press release announcing our financial results. 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 Relation section of our website.

Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archive audio of the webcast, a transcript, and a PDF version of the slide presentation, will be posted to the website later today. Please turn to the slide labeled 'Forward-looking Statements.' This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our momentum in 2009, future operations, and future financial performance.

These statements should be considered as estimates only, and actual results may ultimately differ from these estimates. Except to the extent required by applicable Securities Laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our Annual Report on Form 10-K, and our current quarterly Form 10-Q, in particular any discussion of Risk Factors, which are filed with the SEC, and available at the SEC's website, at www.SEC.gov, for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

We may make certain statements during the course of this presentation, which includes references to nonGAAP financial measures, as defined by the 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 attached hereto within the Appendix.

Please turn to slide three, our management team members participating today are Brett White, our President and Chief Executive Officer, and Bob Sulentic, our Group President and Chief Financial Officer. Also with us today for the question and answer session are Gil Borok, our Chief Accounting Officer, and CFO of the Americas, and Jim Groch, our Chief Investment Officer.

I will now hand the call off to Brett.

Thank you Nick. Good morning everyone.

Please turn to slide four. Before I turn the call over to Bob, for a detailed review of our second quarter results, I want to make some brief remarks regarding the progress we have may on several key initiatives, most of which we have discussed in the past. First, we have continued to focus on providing superior service to our customers, and increasing our market share, throughout this industry's cyclical downturn.

Our outsourcing business continues to perform well. In the current operating environment, many new clients are embracing the concept of outsourcing, as a means to save on real estate operating costs, and are focusing their attention on the higher quality platforms, when choosing their service provider. As a result, global RFP activity has been very strong, and new account wins are up 25% versus second quarter 2008.

These same concerns about cost management and service quality, are also creating many opportunities to expand our relationships with existing outsourcing customers. Square footage growth under management improved for this part of our business during the quarter. This was highlighted by our Bank of America account expansion in EMEA and Asia Pacific. In addition in investment sales for the first half of 2009, we once again captured the #1 position in the US, with a share of 18.6%, as compared to 17% in the same period last year, according to Real Capital Analytics.

I am particularly pleased to report on our progress in managing operating expenses. We are now targeting a run rate reduction of 575 million to $600 million in operating expenses, compared to a 2007 base here, an increase of $100 million over the previously reported range of 475 million to $500 million. As we have previously discussed, this target excludes the very significant reduction in certain variable expenses, including commission and other incentive compensation expenses, that automatically occurs as a result of the Company's reduced revenues and profitability.

The impact of our cost cutting efforts on the Company's current financial results is profound. While the Company's quarterly revenues have declined by 27% compared to 2008, our operating expenses have decreased 30% over the same period. The result is that although we currently are operating in one of the worst downturns our industry has seen, the Company has actually increased its normalized EBITDA margins to 9.5% in the second quarter of 2009, from 8.7% in the second quarter of 2008. We believe that these efforts to manage our cost structure have created tremendous operating leverage in our business, which should allow us to accelerate earnings growth when the markets recover.

As long as the environment remains difficult, we will continue to be diligent in seeking out opportunities to cut costs even further, while maintaining the high levels of service that our customers have come to expect. I should also mention that although we have implemented a very rigorous cost cutting program, it has been executed without eliminating or significantly impacting any of our geographies or business lines. In fact as I mentioned earlier, we have continued to build our business. Our efforts to strengthen our balance sheet also continued in the second quarter. Since November 2008, we have raised approximately $800 million in capital.

In June we issued $150 million in common stock, at an average price of $7.84 per share, which compares quite favorably to our price of $4.48 per share at the beginning of the year. During the quarter, we also raised approximately $450 million in a private placement offering of subordinated debt with an eight year maturity. Paulson and Company elected to purchase $100 million of our equity, and $100 million of the subordinated debt in these offerings. Given John's reputation as one of the world's savviest investors, we were especially pleased that he believed it to be a prudent time to invest in our industry, and that he chose CBRE as the company he wanted to bet on.

We have prepaid $195 million of bank debt amortization, and have significantly extended the weighted average maturity of our outstanding debt. We have also launched a loan modification program for our revolver, and portions of our term loans, to further spread out amortization and extend maturities. Bob will give additional details on this program in a moment, but I wanted to note that we have already received preliminary commitments, to modify approximately $425 million of the targeted debt.

We are pleased that the market seems to have faith in the actions we have taken in this regard. Since the beginning of the year, our equity market cap increased from $1.1 billion, to $2.7 billion at the end of the second quarter. The markets have responded favorably with our term debt trending up from approximately 55% of par value, to approximately 95% of par value. We are very pleased with the progress made in implementing these strategic initiatives, and are excited about CBRE's position to take advantage of opportunities that present themselves, as the market recovers. Even though market challenges persisted, slide 5 provides examples to demonstrate that there was in fact activity in the marketplace, and some of it was meaningful in size. That concludes my introductory remarks.

I will now turn the call over to Bob to provide a detail review of our results for the quarter.

Thank you Brett. Good morning, everyone. Please advance to slide 6. Revenue was $955.7 million for the second quarter, down 27% from last year, driven predominantly by weak sales and leasing activity. Normalized EBITDA came at $90.9 million, for a normalized EBITDA margin of 9.5%, which was a marked improvement from the second quarter 2008 margin of 8.7%. This is of course very difficult to accomplish in a declining revenue environment.

Our cost of services was down materially, but as a percentage of revenue rose to 59.3%, from 56.1% in the second quarter last year, primarily driven by the large decrease in overall revenues, and a shift in mix of revenues with outsourcing including reimbursables, comprising a materially greater portion of the total than in the prior year quarter. Second quarter 2009 operating expenses of $328.7 million, declined by 30% versus the second quarter of 2008, a reduction of $140.2 million. This decline was obviously greater than the decline in revenue on a percentage basis. These reductions will provide very substantial operating leverage when market conditions improve.

Please turn to slide 7. Revenues from property and facilities management, fees for assets under management, loan servicing fees, and leasing commissions from existing clients, all of which are largely recurring represented 65% of total revenues for the second quarter. Our property and facilities management business accounted for 42% of total revenues, which was a little lower than the 44% in the first quarter, due to a seasonal improvement in sales and leasing revenues. However this was up materially from the 32% of revenues outsourcing accounted for in the second quarter of 2008.

Leasing declined 31% in the quarter versus the second quarter of 2008. This decline was similar to the decline in the first quarter of this year. Sales revenue dropped $98.2 million, or 61% versus a year ago. A large decline, but less than the 66% year-over-year decline we experienced in the first quarter. The appraisal and valuation business declined by 24% in the second quarter, also less than the first quarter decline, and comprised 7% of total revenues in the second quarter. Global investment management revenue was down 30% year-over-year, while development services revenue was down 29%, and the commercial brokerage business was down 42%, as the challenges in the credit market continue.

Please turn to slide 8. Outsourcing revenue for the quarter declined 5% on a year-over-year basis. This decline was driven by lower corporate spending, a rise in vacancy rates, and client consolidations. As you can see from the slide, many fundamental aspects of this business continue to perform very well, most noteworthy, is the fact that new client contracts we signed are up 25%. The total number of customers is up. Square footage under management is growing, and we won seven new accounts, expanded six client relationships, and signed nine renewals during the second quarter.

Although I will not run through the details, we have attached slide 9 ,which provides certain US market statistics to illustrate just how challenging vacancy and absorption trends have been, and are project to be through the rest of this year.

Now please turn to slide 10. The US commercial property investment market remains weak. Nationwide sales volume in the first half decreased 78%, compared with the same period in 2008 according to Real Capital Analytics. We again held the market share position in investment sales in the US, with an 18.6% share in the first half of 2009, versus a 17% share in the same period last year. Our Americas sales revenue for the second quarter declined 59% on a year-over-year basis, which was an improvement from the 70% decline in the first quarter of this year. The number of distressed assets continue to rise.

A Real Capital Analytics report earlier this month identified $108 billion worth of commercial properties in default, bankruptcy, or foreclosure, double the level at year end 2008. Distress sales are expected to account for the lion's share of transactions in the second half of 2009, and well into 2010. We are extremely well-positioned to capture significant share of this opportunity, and are currently marketing over $2.25 billion of distressed properties for sale.

Looking at our Americas leasing business, revenue declined 30% in the second quarter versus prior year, slightly better than the 32% decline we experienced in the first quarter. US office vacancy rates increased by 80 basis points in the second quarter of 2009, versus the first quarter of this year to 15.5%.

Now please to turn slide 11. Our investment sales activity at EMEA declined 71% in the second quarter of 2009, relative to the second quarter of last year. This compares to a 52% sales decline in the first quarter of 2009. While the rate of decline in the UK has remained fairly stable, the rate of decline elsewhere in Europe, particular in central and Eastern Europe, is still worsening.

As was the case in the first quarter, foreign currency exchange rate changes also negatively impacted Q2 2009 versus Q2 2008. CBRE revenues from leasing in EMEA declined 39% in the second quarter of 2009, versus the same quarter in 2008. This compares to a 33% leasing decline for the first quarter of 2009. These leasing results are highly correlated to economic performance in the region.

Please turn to slide 12. CBRE sales revenue in the Asia-Pacific region fell 42% in the second quarter, versus the prior year second quarter. This is a meaningful improvement from the 69% sales decline for the first quarter of this year, driven by actual growth in Australia and New Zealand, that we believe may not yet be indicative of a trend. CBRE's leasing revenue in Asia-Pacific fell 25% in the second quarter versus the prior year's second quarter, fueled by improved performance in China. This compares favorably to a 33% decrease in the first quarter.

Please turn to slide 13. Revenue for the Development Services segment was down 29% to $22.2 million in the second quarter of this year. Operating results for the second quarter of 2009 showed improvement, due to cost savings efforts. Results for the quarter included $800,000 of cost containment expenses, and $1.2 million of net write-downs of impaired assets. At June 30, 2009, in-process development totaled $5.2 billion, which was down approximately 16% from year ago levels.

The pipeline at June 30 totaled $1.5 billion, which was down almost 60% from year ago levels. The combined total of $6.7 billion of in-process and pipeline activity is down by about one-third from year ago levels of $9.9 billion. At the end of the second quarter, our equity coinvestments in the Development Services business totaled $88 million. We continue to expect a very low level of activity in this business, at least for the remainder of this year.

Please turn to slide 14. Our Global Investment Management revenues were $32.6 million for the second quarter, as compared to $42.7 million for last year's second quarter. The decline resulted from a reduction in asset management and acquisition fees, as compared to the second quarter of 2008. Asset management fees were down for the quarter to $29.4 million, versus $33.6 million in the first quarter of this year, and down from $36 million in the second quarter of last year, driven primarily by downward pressure on certain asset management fee structures, and foreign currency exchange rate changes.

Assets under management totaled $36.4 billion at the end of the second quarter of this year. This total was up slightly from the $36 billion level at March 31 of this year, but down slightly from the $43.7 billion at the end of the second quarter last year. Our coinvestments at the end of the quarter totaled $85.2 million.

Our Global Investment Management EBITDA reconciliation detail is shown on slide 15. Second quarter 2009 EBITDA was impacted by a net non-cash write-down of investments of $2.6 million, attributable to decreased property valuations. In the second quarter of 2009, we did not realize any carried interest revenue, and we reversed $300,000 of previously accrued carried interest compensation expense, as compared to the second quarter of 2008, in which we accrued $2.6 million of carried interest compensation expense.

As of June 30, 2009, the Company still maintains a cumulative accrual of carried interest compensation expense of approximately $20 million, which pertains to anticipated future carried interest revenue. The segment's EBITDA margin in the second quarter of 2009 improved as a result of significant cost cutting efforts.

Now please to turn to page 16. We have continued to aggressively remove expenses from our business. We completed all actions relative to our previously announced saving plans, and we are now raising our target by approximately $100 million, to achieve between $575 million and $600 million in total annual savings versus base year 2007. Of this amount roughly $550 million will flow through our income statement this year.

To be clear, these are changes to operating costs that are in addition to variable expenses, such as commissions, and declines that result from lower revenues. To achieve these savings we incurred $17 million of one-time cost containment expenses in the second quarter of this year, $25 million for the six months of 2009 that just ended, and $52 million of cumulative one-time expenses over the last 12 months. Our CapEx spending target for this year continues to be approximately $30 million, which is unchanged from the first quarter target.

Please turn to slide 17. We continue to make significant progress with our balance sheet. Our goals have been to number one, delever, number two, reduce reliance on bank debt, and number three, extend debt maturities. Following the credit agreement amendment announced last quarter, we raised $150 million of equity capital as Brett described earlier, led by $100 million investment from Paulson and Company, and we augmented that with a $50 million ATM program, the combined average price for these two actions was $7.84 a share.

We raised $450 million of 11.625% senior subordinated notes, again led by a $100 million investment from Paulson and Company. We prepaid a substantial portion of our debt, and most recently we initiated a loan modification program for participants in our credit agreement. This program was launched with preliminary commitments of approximately $425 million from a handful of our largest banks. We expect to close on this program in the third quarter.

Please turn to slide 18. Excluding our mortgage brokerage warehouse facility, and nonrecourse real estate loans, our total net debt at the end of the second quarter was just under $2 billion. During the second quarter we paid approximately $150 million of bonuses and incentive compensation related to last year, taking into account these payments as can be seen in the table, actions taken during the quarter supported our objectives of delevering and reducing our reliance on bank debt. Following the completion of our financing activities during the quarter, our weighted average interest rate at the end of the second quarter 2009 was 6.8%, as compared to 5.6% at the end of the first quarter, both before the effective interest rate swaps.

On slide 19, we have illustrated our financial ratio covenant requirements and remaining debt maturity schedule through 2010. You can see that our leverage ratio net debt to EBITDA at the end of the second quarter, provided us even more room under the new maximum ratio permitted of 4.25 times than we had at the end of the first quarter, and this leverage ratio at June 30 of 2.47 times compared favorably to the December 31, 2008 ratio of 3.28 times.

Our trailing 12-month interest coverage ratio was 5.36 times, well in excess of the required minimum of 2 times. The total amount of covenant EBITDA add back to normalized EBITDA related to our credit agreement was approximately $200 million, for the trailing 12-month calculation ended June 30, 2009.

I will now turn the call back over to Brett.

Thanks Bob. And please turn to slide 20. I want to provide some brief summary remarks regarding our expectation [audio break] Market conditions continue to create a variety of challenges for our business, that do not seem to have change significantly since the end of the first quarter.

As it relates to macro trends, that will impact results for the remainder of 2009, and we believe that for investment sales, while we continue to have low expectations for the remainder of 2009, distress sales may pick up toward the end of the year. Leasing activity will stay weak until we start to see recovery in economic performance and meaningful job growth. Our outsourcing business will continue to see growth in our client base, and the square footage we manage for our clients, but continue to be challenged by downward pressure on corporate spending.

We also continue to believe that Global Investment Management and the Development Services business, will have muted results until investment sales pick up and asset values increase. Given these expectations our strategy remains consistent. We will focus on providing great service to our clients. We will continue to aggressively attack costs for the duration of the downturn. We will continue to focus on improving our balance sheet.

We will continue to aggressively compete for market share. We of course know that the commercial real estate market will turn, and when it does, the actions that we have taken to preserve our geographic presence and services offered, together with the offering leverage we have created in our business, will enable us to disproportionally grow market share and earnings, versus the rest of the industry.

For many years, we have told you that our culture and management focus, allows us to attack cost and protect margins, in a manner unique in our industry. This quarter's results once again prove out this claim. We take great pride in this, and are committed to maintaining our superior financial performance throughout this down cycle, and to leverage this highly efficient cost structure aggressively, when revenue growth returns to the sector.

With that, Operator, we will now take questions.

Thank you. (Operator Instructions). Our first question from the line of Anthony Paolone with JPMorgan.

Thank you and good morning. A number of reports out there have shown just a pick up in activity both transaction and leasing, and just anecdotally a pretty strong June. Do you think that is something that you expect to continue, or do you think that was maybe some pent up demand, from activity being so dried up earlier in the year?

Anthony, this is Brett. Frankly I wouldn't characterize June as a strong month, and I wouldn't characterize the marketplace as having seen any particularly strong activity in the back portion of the second quarter.

I do know, and this may be what you are referring to, I do know that in New York which is a very volatile market, there was a sense that transaction activity, leasing activity picked up a bit in the second quarter, but I would say that globally, or perhaps more importantly to our investors, the large markets around the world, the leasing business remains very much depressed, and more abound, and the sales market is in a very, very similar condition as it was in the first quarter.

Okay. That is helpful. In terms of your margins, your gross margin, it picked up from the first quarter, but it still seems a bit on the low side. Why is that?

Well, first of all, Anthony, the thing I would call your attention to is our year-over-year EBITDA margin, which went up by almost a full point, reflective of a phenomenal job of controlling costs, but also reflective of the fact that we kept our platform intact, and we are generating revenues in all of our business lines around the system, and in particular, our outsourcing business, which is our most stable base of revenue, has grown to be 42% of the business in the second quarter.

So while we certainly would love to return to the days mid-double digit margins, we are not in those days now. Revenues are off as what we reported by 27%. So what we are trying to do is extract the best possible margins from those depressed revenues, and frankly, we are satisfied with the margins we generated in this environment.

I would add to that a comment that Bob made last quarter, which I think it is important for context. At the high 9% range for an EBITDA margin in a very, very depressed environment, and in our second quarter, which seasonally is a lower margin quarter, that margin is higher than some of our larger competitors ever achieved in the peak of the hot market of 2004, 2005, and 2006. So high 9% margin is a very, very respectable margin in a good market, frankly it is astounding in this market to me.

Okay. Fair enough. And then just another question. You had made a comment about potentially reducing broker commissions. How do you think about that in terms of the competitive landscape, in terms of retaining folks and so forth?

I didn't make that comment.

I think it was in the maybe in the press release. It talked about --

No. You must be referring to, not this quarter, I think I know what you are referring to. Last quarter we mentioned on the call that in early 2009, our sales and a number of other large firms, had marginally reduced commission rates in the US, and let me just harken back to that. So what we said back in the first quarter was, that commission rates had moved for our brokers, had moved down a very small amount, a percent or two.

Commissions rates in the industry being paid by our clients to us, really haven't moved much this downturn. If anything, what you ought to expect through a downturn like this, is commission rates paid to us by our clients will modestly move up, as clients who have vacancy in buildings, or clients that need to sell buildings, incent brokerage firm a bit more to get those jobs done in a tough environment.

So your comment in the press release about substantially reduce variable commissions, that is just tying to the revenues, not the commission rates?

Oh Anthony, I understand your question. Right. What we are talking about there Anthony is, remember we talk about expense reduction, we talk about 500 million to 600 million of OpEx, that doesn't count, and equal or frankly greater amount of expense that is eliminated from the P&L by commissions being reduced, and bonuses being reduced by the decline in revenues. That is automatic and ratable Anthony, it is not something we do. So we don't take credit for it.

Okay. Just wanted to understand that. And then my last question on the loan modification program, of the $425 million that sounds like you have got teed up there, do you anticipate a big change in rate? What are the big terms that are likely to change?

Bob?

Anthony, we haven't talked publicly about the changed terms. I will tell you the big pieces that we are going to defer maturities. That is the whole motivation to do it. We expect that we will pay some incremental interest rate as a price for extending those maturities, but it won't be dramatic.

And secondly there will likely be some fees associated with it, but again not dramatic. We think the price we paid for the extended maturities will be a very, very fair price, relative to the benefit it delivers for us, but we haven't talked publicly about what those numbers are.

Okay. Thank you.

Thanks Anthony.

Our next question is from the line of Sloan Bohlen with Goldman Sachs. Go ahead.

Good morning, guys. First question just on the cost cutting to go back to that, it sounds like the strategy is pretty much to cut costs somewhat commensurate with what you see in revenue new clients going forward. Do you have an overall level of cost cutting at which you are starting to dig into whether it is a platform or market you may have to cut, or kind of to Tony's question, about talent retention and which producers you keep, how do you think about that?

It is a good question, and I will give you the response that we've been giving for a while now, which is first in a services business like ours, there is a very, very significant amount of cost that can be extracted from the business for a while, without having the on boarded back on, either through the downturn, or when revenues return. I would say we are a long ways away from extracting costs that impacts the business in any material way.

So we are neither there now right now, nor do I believe we are even close to bumping up against that. It is just a fact of these types of businesses that there is an awful lot of expense out there that in a normal environment you would like to have, to invest in these things, but in a constraint environment you can do without for a while, and were the market to become materially worse, there is a pretty significant amount we could go after, in addition to what we have.

Secondly, on your question regarding producers, we don't cut in the United States we don't cut any revenue producers, because it is all variable expense. Now in Europe, and to a lesser extent in Asia-Pacific, where some producers are on salaries, they do get cut if they are not producing, but the folks who get cut in a downturn like this are not profitable folks. They are people that are generating little revenues, and that the cost of we are having to invest to support those people, is not balanced by adequate revenues.

The way I think about it, Sloan, is this is a business that can withstand as you have seen, pretty significant cost cutting, without any material diminutions of business. The support evidence I would give you there, which I know Sloan you are very aware of, is just look at the market share statistics. We are gaining share, and outpacing cost reductions by any other firms in our business by magnitudes, 2 or 3 times the amount of costs coming out from other firms. So I think that is evidence that we can cut.

We know where to cut, we know how to cut. We have all been through this unfortunately a number of times before. As you know, Sloan, we have talked to you folks for years about the fact that there is a culture here around cost that is intense, and I think that the results speak for themselves. Gaining market share, terrific margins, and an ever increasing target on cost reductions.

Thank you, that is helpful. And Brett, just to stay on the market share topic, on that theme, have you seen any smaller niche players dropping out of the market, is that where you are picking up share? As you think about an inflection about when volumes maybe pick up, are there acquisition or merger opportunities that you think you would look at?

First, on the share side, I suppose, perhaps a small piece of this is smaller firms dropping out. I think on the investment property side there is a fairly simple explanation, and I wish it were what you said. It isn't. The investment property side in the States, our largest competitor by far in this business was a boutique firm, that specialized in very, very large transactions, by the way a terrific firm. That firm has seen a disproportionate decline in share and revenues, because those transactions are exactly the ones that have completely disappeared.

I think what has happened is that component of the numerator of the market itself has just evaporated. There was a large competitor that did a lot of that work, and we all benefited ourselves, and perhaps one or two other firms have benefited from that. Add to that in the investment property side, that in a normal market, and we have not had a normal market for nine years, or in a depressed market, like we are in now, our model, our platform outcompetes on the investment property side, because I don't mean to be long-winded about this, but in a very hot market the model for investment property sales is auctions, and I hate to admit it, but any firm can run an auction.

In a tough market or a normal market, what is required to successfully extract the highest possible sales price from investment property, is the ability to underwrite assets, and to convince buyers that you have a very deep knowledge of that asset, and the assets that surround it. So our services platform of property management, mortgage finance, leasing brokers, were able to provide a more comprehensive view into the asset class, I think a better view in the asset class, than can the competitors. So that is the share issue.

On the leasing side, we just have the dominant leasing platform globally, end of story. We should expect to accrete share there generally every year. On the M&A side, there are some very interesting opportunities in the market place right now, because of depressed values.

We are not in the M&A business at the moment. I suspect that when the market recovers, values will go back up, and it will be back to a more normal time for us. We still need to be very, very careful around M&A, but certainly we look forward to those days and if good opportunities are still present in the marketplace, as we have done the last 12 years. We intend to be an aggressive acquirer.

One last question for Bob, if I may. On the loan modification, are you targeting a particular set of the term loans?

On the line with us is Jim Groch, our Chief Investment Officer, who is quarterbacking, frankly who has quarterbacked all of these moves, he did the covenant amendment. He led the strategy with the bonds and the equity sale to Paulson, and so forth. And he is on point for this, and I am going to ask him to comment on that.

Okay, Bob. This is Jim. We are starting to target some early renewal of our revolver, even though that is not up for almost two years, but as we have said in the past, we are really trying to get ahead of issues and be very proactive.

We are targeting traunches that tend to have more amortization over the next few years, but we are also even targeting an extension of some of our term debt, that doesn't come up for 4.5 years. To push a chunk of that out for another couple of years, just to extend maturities in general across the balance sheet, and to have a little less reliance on the bank debt.

Okay. And then Jim right now it is just going to be term and rate, in terms of new terms, not any restrictions on CapEx, or acquisitions, or anything like that?

Correct. Yes.

Thank you very much.

Next question from the line of Will Marks with JMP Securities.

Thank you, and good morning. A few questions here. Can you just address the tax rate, what we should be expecting for the full year this year, and if there would be a change next year?

38% Will. And we don't expect a material change.

Okay. And how about the run rate of interest expense? I know you mentioned comments that would help drive that. But how should we be thinking about the second quarter number looking ahead?

We expect our weighted average interest expense to be about 6.8% for the balance of this year.

Okay. And assuming stable rates in the market would that continue into next year?

That is correct.

Okay. In terms of, back to the whole margin ratio and I realize that your margin was a great improvement year-over-year, I am wondering more on the expense ratio that is related to that, and that is the comp expense ratio, which has been going up, and I believe it is tied to you are getting more revenues from lower margin business management outsourcing. Can you comment on that, and what we should expect to see? That ratio has been running about 61% in the last few years, and if you can help us understand where it should be going from here?

Well if things play out the way we all hope they do, you will see two circumstances. Number one, you will continue to see steady expansions of our outsourcing business, which of course does have a bigger component of labor in it, than other revenue streams, but the other thing you should see, is that our leasing and investment properties businesses rebound pretty substantially. Obviously they are going to rebound, and it is not going to be long-term growth.

It will be a cyclical bounce back, which will be at some point precipitous. So even though the long-term trend is for the stable outsourcing business to contribute a bigger portion of our revenues than it has historically, we are going to go through a period where that is not the case because you will see a bounce back in our transaction revenues.

When you are in the middle of that bounce back, you are going to see a move back toward compensation expense being a lower percentage of our overall costs. But the long term trend is for the stable outsourcing business to be the bigger part of our revenue stream, and it is embedded with a little larger labor costs, it is also embedded fortunately with a lot more stability, and so we are very accepting of that.

Great. Thank you. And moving on to a different topic, leasing, we have now had nine months of about 30% revenue declines. And as we look ahead, particularly the fourth quarter has a very easy comp. I am wondering, what we are hearing, is that a lot of the leasing that is taking place is renewals and short-term extensions, and it appears if that is the case, if business can't be much worse, then the fourth quarter wouldn't be down as much as the first and second quarters in particular. Can you just comment on the nature of that easy comp?

Well, I wish it were an easy comp. I would be very cautious about drawing that conclusion. The challenge, Will, that both you and I have in thinking about that question, is there are a number of contradictory or competing dynamics at play in the market, and let me just describe a few. First of all, your description is spot on.

So what you are seeing in the marketplace right now generally, is that amount of, first of all, the amount of leasing we are getting done out there is pretty much structural. It is those leases that have to get worked on. There is not a lot of opportunistic leasing getting done at the moment, and those folks that are in the market, the general rule right now, because and we have talked about this for years, ironically in a downturn when leasing rates are a little bit better, attitudinally our clients are in the bunker.

So rather than take advantage of those lower lease rates, and perhaps the landlord is willing to give us a few more concessions, most of our clients don't do that, and they sign shorter term leases, because they are worried about their own future, and they also by the way, take the minimum amount of space they can possibly take.

Now, that is counterbalanced a bit by more, what I would describe as perhaps a bit smarter clientele, or a bit more opportunistic clientele, that really does take advantage of a marketplace like this, and goes out and you saw this in the journal yesterday, that law firm in New York, that goes out and signs a very long term lease in this market, and takes advantage of terrific terms available in the marketplace. But that right now is the minority component of the client set.

The challenge in looking forward and viewing the fourth quarter as an easy comp is this. If you believe that rental rates have bottomed, then you are correct. What you would expect to see then, is that at some point clients are going to begin to get a bit more opportunistic, sign more traditional leases, with a little bit longer term, a little bit more space. However, that implies that rental rates have bottomed. And I am not sure that is right.

If you believe that rental rates have not bottomed, and that rental rates will continue to climb 5%, 10% more, 3% more, pick whatever number you want, that just goes into your mathematical model, and will impact your revenues in the leasing space in Q3 and Q4. What we have said about all of that this year, is first it is impossible to give discreet guidance around leasing or sale revenues this year. However, directionally, this down 30% range we talked about that kind of number a year ago, as what we would see this year.

It is playing generally along those lines, and I think that we are generally near that bottom level. But it could get worse. Leasing rates could continue to decline.

On the other hand, there is no question that there is a lot more optimism in the marketplace today, than there was six months ago, and if that level of optimism continues or increases, it is not unlikely that we are going to see a higher percentage of tenants in the marketplace taking more traditional lease terms, and more space than we did in the first two quarters, and that could help the comps. It is just very difficult to tell.

Okay. That is really helpful. I guess one follow-up to that is, if we see a pick up in activity, given much lower rents, how important is that to commissions? You mentioned earlier how people, landlords are incentivized to either sell property, maybe to lease property. Is it all about activity, or is the rental rate that important, or is it 75%/25%? I will let you comment.

Right. As you know Will, and It is a good question, because I think a lot of our callers don't. Leasing commission is a mathematical formula, A * B * C * D. And that is rate, times term, times commission rate, times square footage. Each of those variables, A, B, C, and D, you can see the math yourself. They all matter, and I think the best way to answer your question is, use history as your guide.

If you go back and look at the leasing downturn of 2001 to 2004, what you saw at least for our firm, and we were anomalous in the marketplace, the other firms did not behave this way, but in our firm during that downturn, our leasing revenues began to pick up fairly significantly, ahead of the bottoming of the leasing of rental rates, and the reason for that is what you are alluding to Will, is that as the market became comfortable, and that might be the wrong word.

As the market digested where things were, and that rental rates were really at abnormal lows, you began to get more and more tenants getting into the marketplace, to lease greater amounts of space for a longer term. So our revenues picked up well in advance of the bottoming of rental rates. I suspect the same thing will happen here. The question is when, and I don't want to pin that as late 2009, because there is no way to tell. But that is how I think it will play out, as you will see, our leasing revenue and the leasing revenues of other firms pick up, in advance of the bottoming of rental rates.

Okay. Thank you very much.

Thank you. (Operator Instructions). We do have a question here from the line of Vance Edelson with Morgan Stanley.

Thanks, this is [Vikram] in for Vance. I just had a quick question on Asia, you mentioned China a little better results came from China. Can you give us more color on what is driving results there, and in conjunction with China and India, we have been hearing a lot of IT companies wanting to shift a lot more work offshore, to the lower cost locations. Is that part of the reason, and do you see that offshore demand continue, at least remain one of the [eventually] positive points?

Let me give you, I think the question you want answered, but I want to condition it with a couple of things. First, when you look at China, at this point in time, what you see is a country that has injected a massive amount of stimulus into the economy in a very, very quick fashion, and there is no question, that if you and I were sitting in Beijing or Shanghai or Guangzhou today, the attitude and the sentiment in those markets is very bullish, and the residential prices have been moving up now since the first of the year.

There is lots of capital flowing around the system, and we are picking up some of that, and I think in China in that business, that would explain a lot of what you are seeing through the China numbers. In India, a very big market, and there is a lot going on in India, positive and negative, and certainly that trend of outsourcing of different, what I would describe as white collar activities, to that country continues. But I need to condition this with the bigger point, which is good or bad, the India and China markets as a contributor of overall profits to the firm in revenues are immaterial. They are not large.

I would like to get excited about what has happened in China and India, they are very important markets to us, they are very important to our clients, but where those markets go plus or minus month to month, don't hugely move the needle, but certainly we are very pleased to see that those markets did better in the second quarter. But as Bob mentioned in his comments, I wouldn't read a lot into that right now.

Thanks. And then you mentioned on the investment management side, there was some pressure on fee structures. Can you give us a little more color over that?

Yes. The pressure was spotty. There were a couple of places in our portfolio where there was some downward pressure on our fees, due to unique circumstances within individual funds, and as you know, and everybody on the phone knows, there is a lot of pressure on investment properties of all types everywhere in the world.

We had certain circumstances where that resulted in some downward pressure. We had some valuations come down, and that resulted in a diminution of some of those fees. We were seeing some of that in different places in our portfolio. Other than to say that values are generally down, and new opportunities are slow in the current environment, I wouldn't generalize.

Let me add to that. Bob makes the right point. Keep in mind, or for all of the callers, the clients in our investment management business don't have the ability to renegotiate fees within these funds. What Bob is referring to, is the fees go down if the overall value of the fund declines, because we are paid a percent of the value on the management fee. So the incentive fees of course goes down, as the profit in those funds decline. I want to be clear that there isn't pressure on the fees from the clients and the funds. Those are set, those are contractual. They don't change. There is pressure on the fees because of the market.

Great. Thank you.

Thank you. Our next question is from the line of Robert Riggs with William Blair.

This is Brandon in for Rob actually. I wanted to get a little more color on your level of comfort with the idea that distress selling will pick up, from the context a couple of things. One, if you are having success pushing out net amortization and things like that, with your bank group, is that would be the way things work with banks that are exposed to commercial property, do they just want to keep pushing things out in the hopes that either leasing revenue gets better, so therefore the pro formas look okay, or get more transparency on the cost of capital, so you can hold on to that property longer than you would have thought.

Does that relieve some of the pressure on the distressed selling part? And the flip side of it is, if a lot of the distressed properties come out, and are run by auction if they aren't that difficult to get done in those big portfolios, do you think you have the same kind of revenue opportunity, as you would in a single sale difficult transaction kind of scenario?

Right. Three good questions in there, and let me hit all of them. First, there are real differences, I believe, in the way in which lenders look at operating companies, and their debt, and the way that lenders look at assets, and the debt against those assets, and one of the obvious differences is that, on a building you have a value that can be imputed fairly easy against an asset.

So when you have a building value that is significantly less than the mortgage, I think it is more difficult for the lender to deal with that issue, than it is a services company, that is producing trailing 12 $600 million of EBITDA, and is a business that produces income and cash flow at a pretty significantly level. Our situation is fairly straightforward, and was fairly easily dealt with by Jim and others, but when you own a building, and you have a $750 million mortgage on it, and the building is worth $500 million, that is a tough conversation. And the bank I think that has a mortgage in that building is really in a tough position. They have to deal with that mark-to-market.

They have got to make a decision around what to do with that asset. Do they take it back? Do they rework the mortgage? But in almost any event on an asset, that lender is going to be looking for some infusion of equity into that capital stack, if they are going to do something with rework the loan. And so I think what all of that means is that, you are going to see a pickup in distressed selling, as we move through this cycle.

Now let me condition that by saying so far what we have seen is a preponderance of workouts. We haven't seen a lot of distressed selling go through the system, but I think that you are going to see that pickup in the coming months and coming quarters, as these lenders are really forced into a corner, and have to make some pretty fundamental decisions about what to do with these assets, and the folks that are the owners of these buildings, have to make some fundamental decisions, about whether or not they are willing to put equity in, to carry some of these issues. Some will, some won't.

As it pertains to the volume of that business flowing through the services business, and what we should expect from that, I do believe that we will capture a disproportionate share of those types of sale opportunities, just due to the nature of our platform, and the fact that as a dominant firm in the business, we are the easy first choice to handle those types of tough situations. We have deeper and better relationships with the largest lenders. We have been in this a long time, we have a lot of expertise around these types of sales, and we have a very large business that is right now focused on distressed selling.

So I think distressed sales provide us a real opportunity for revenue growth, and have and will in the future quarters, comparing a distress sale to a typical one-off discreet asset sale. There is probably some validity in what you said, which is if he could sell every asset discreetly from a different owner on every asset, we might be able to get a bit better fee, than if we take a portfolio of $1 billion of assets. I think that is definitionally true, but we will take it how we can get it, and the market is bringing us right now, some pretty interesting opportunities, on both properties to be sold.

Okay. Do you have enough data either historically going back ten years, or just in the last couple of quarters, to give you any sense of whether there is a knock-on effect from handling a distressed sale, either portfolio or discreet asset, from the perspective of either getting the property management business, or getting and retaining the leasing business on that property? Is there a cross sell, that becomes a little bit easier if you are the distressed selling manager put it that way?

The answer is yes. Certainly in our business, what we want is to be in that decision cycle as early as possible. So when an owner gets control of a property, however they get control of it, we would like to be there in the early days, to talk to them about the various things we can do for them to add value to the property. So if we are working on the sale of a property, and we are introduced to a buyer that way, I would expect that buyer will probably talk to us about how we might increase value on that asset, through property management, or leasing, or other things we can do.

Okay.

Certainly better than the alternative of being on the outside watching someone else do it.

Right, clearly. Shifting a bit to investment management, how much money is there to put to work within the various funds? Are we talking about minimal buying power that you guys need, or dry powder that you have to put to work? Is there a decent chunk there, is it US focused, international focused, how do you think about the growth in assets under management, exclusive of any kind of mark-to-market?

We have right at $2 billion of 'dry powder,' most of it in the US, but we have the ability to do some things in other parts of the world. We are also pursuing some strategies to raise new capital, and we are getting some early returns to suggest that we are going to meet with some success there. Certainly a much different environment now raising capital than it was historically, but we think we will get some new raised this year, but the amount of dry powder we have available immediately is about $2 billion. Of course that will be, we are able to lever that.

That was the next question. And finally in relation to that, in terms of your exposure on the coinvest going forward, where does that stand? Has there been any push back from the guys you deal with, in terms of wanting you to put more money on the table to take some more of the risk, those kinds of things?

Well, you have a couple of things there. Our coinvestment exposure and our new coinvestment. Today we have about $85 million of coinvestment, and as you know, each quarter we have thoroughly examined the value of those portfolios, and we have taken some significant write-downs. So we think we are in pretty good shape there, although that all depends on how values go from here on out, and the answer is yes. There is, as you go out to raise capital in this environment, a desire on the part of limited partners to see more coinvestment. But that is not moving radically at this point. That is moving slowly, and because the pace of raising new capital has been relatively slow, the market is still in a feeling out stage, as to where that is going to land.

One more follow-up. Given where the balance sheet is right now, do you have to balance how much capital you think you can go out and raise, with the expectation that you have got to protect the balance sheet a little bit, so you can't coinvest a whole lot of money, or is the coinvest even the current requirements, or current thought process is just not going to make a difference in terms of how your balance sheet looks?

We are being ultra careful about every dollar we spend in an expense sense, and we being ultra careful about every dollar we invest in an investment sense, and yes, the status of our balance sheet is something that we are very, very cognizant of, as we consider new coinvestment opportunities, but we have budgeted, and do intend to do some coinvestment.

Great. Thanks a lot.

Thank you, and our next question from the line of Will Marks with JMP Securities. Go ahead.

Thanks. Bob, on the balance sheet, can you explain, you guys raised money during the quarter. The net debt level did go up. I believe from the payment of bonuses, can you maybe quantify that, and then confirm that you would expect that level to decline throughout the year?

What we did, obviously we raised $150 million of equity, and we paid bonuses of about that amount. So in the second quarter, so that was an offset. Our expectation is that we will generate some cash in the second quarter from operations, that will be, we are not as you know giving specific guidance on that, but I can tell you directionally, we expect to generate some cash from operations, and we expect that to be a benefit to our balance sheet.

The fact that the net debt number did go up by 200 million or so during the quarter, even after the capital raise, is that typical in terms of second quarter negative operating cash flow, if that is the case?

Well, the second quarter is not a strong quarter for operating cash flow, and we did have the bonuses that created a circumstance, but our actual net debt was down by $42 million.

Was it during the quarter?

If you look, Will, at the slide deck page 18, or slide 18, you can see our total net debt went from 1.997 billion, down to 1.995 billion, or a positive move of $42 million.

Okay.

Which is about right, and let me tell you why that is. The equity we raised about offset bonuses, and the second quarter is an environment where you don't expect to generate much cash flow.

Right. Okay. That makes sense. And I guess one final comment. I have been reading a lot about B of A, and I know you guys do a lot of their business. Can you explain how the branch reduction helps or hurts you, and if you are working on this?

Will, with the bank, they have asked and we very much respect, that we not comment about any of their strategies, or work around their strategies. The only comment I would make is that we were very pleased to be awarded the EMEA and Asia-Pacific Latin America portfolio, but that is really the only thing I want to say about the bank account. They are understandably want us to remain silent on their activities, and our work with them. I apologize. But I certainly appreciate and understand their position on this.

Fair enough. Thanks, guys.

Thank you. And no further questions in queue. Please go ahead, sir.

Thanks everyone for your time. We will talk to you in a quarter.

Thank you. Ladies and gentlemen, that does conclude the conference call today. Thanks for your participation. You may now disconnect.