世邦魏理仕集團 (CBRE) 2009 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. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Nick Kormeluk. Please go ahead, sir.

-- CB Richard Ellis third 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 relations section of our website as well. also available is a presentation slide deck which you can use to follow along with our prepared remarks. An archived 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 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 current annual report on Form 10-K and our current quarterly Form 10-Q in particular any discussion of risk factors or forward-looking statements 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 include references to non-GAAP financial measures as defined by SEC regulations. As required by such 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 - the Americas; and Jim Groch, our Chief Investment Officer. I will now hand the call over to Brett.

Thank you Nick. Good morning everyone, I want to start today's call by mentioning a few key operational and financial highlights which have been summarized on slide four. First, as the year has progressed, declines in 2009 financial performance compared to the same quarters in 2008 have narrowed across our geographic regions. We believe that there has been modest improvement in market sediment. This should encourage occupiers and investors to make more decisions regarding commercial real estate, which in turn, will create revenue opportunities for the Company. In addition, as the year has progressed and taking seasonality into account, quarterly comparisons to 2008 have become easier because the global economic downturn had a more profound impact on the commercial real estate industry as 2008 unfolded. Our facilities management business continued to benefit from strong fundamentals in the third quarter. The firms operating in a wide variety of industries continue their efforts to improve earnings and reduce real estate operating expense by outsourcing their commercial real estate needs. And we continue to grab a significant share of this growing market.

Our property management business also continues to prosper as ownership turnover in our managed portfolio has decreased and we also continue to secure new client engagements as asset owners seek to find the most efficient operators for their properties. Largely driven by outsourcing, third quarter recurring revenue for CBRE was 60% of total revenue, as compared to 54% in the third quarter of 2008. Outsourcing alone now comprises 40% of total Company revenues as measured by third quarter 2009 performance. Our appraisal business showed improvements in the third quarter as work outs, distressed properties, and bankruptcies have begun to modestly revive activity levels, particularly when compared with the depressed levels of late 2008. Appraisal assignments with special servicers and government agencies continue to increase due to higher CMBS loan defaults and bank failures. Our business in Asia-Pacific has also shown marked revenue trend improvement, down only 7% verses the third quarter of 2008. This result was driven by investment sales coming in almost flat, leasing performing better than in other geographies and slight growth in both outsourcing and the appraisal and valuation businesses in the region.

I am very pleased to report that we have met our goal of removing $600 million from our annual run-rate of operating expenses. This largely drove the respectable EBITDA margins we were able to post once again this quarter, during what we believe is close to the bottom of the commercial real estate cycle. The result of our cost-cutting efforts delivered a 20% year-over-year reduction in operating expenses in the third quarter. Nearly matching our revenue contraction of 21%. We expect these expense reductions to be a powerful contributor to delivering positive operating leverage once revenue growth returns. During the third quarter, we continued to make significant progress on strengthening our balance sheet by modifying $985 million in loans. This effort resulted in an extension of maturities on the relevant loans by between 18 and 24 months. The cost of the modifications was very reasonable, at an average loan spread increase of approximately 60 bps. As we proceed through this downturn into the next up cycle, we will continue to focus on strengthening our balance sheet to provide us with the financial flexibility needed to support the growth of our business.

Overall, we are pleased with the progress made in the third quarter and are excited about our positions to take advantage of the opportunities in the market recovery. Despite comparatively lower activity levels and in the prior-year quarter, there were notable transactions executed in the third quarter, that we have mentioned on slide five. I will not go through these individually but I wanted to include them in our slide deck for your review. I will turn the call over to Bob to provide a detailed review of our results for the quarter. Bob?

Thank you, Brett, and good morning everyone. Please advance to slide six. Revenue was $1.02 billion for the third quarter, down 21% from last year resulting primarily from weak sales and leasing activity. Normalized EBITDA was $109.9 million providing a normalized EBITDA margin of 10.7%. Our cost of services was down materially in total but as a percentage of revenue, rose slightly to 59.3% from 58.1% in the third quarter last year, this resulted from large decrease in the overall revenues and a shift in the mix of revenues with outsourcing, including reimbursables comprising the materially greater portion of the total than in the prior year quarter. The third quarter 2009 operating expenses of $338.1 million decreased by 20% versus third quarter of 2008. This was similar to the decline in revenue on a percentage basis. The benefit seen here is largely a result of the $600 million in annual run rate expenses we have removed from our business. Now that these actions have been taken, our focus will increasingly turn to supporting growth in areas of the business that we expect to recover first. However, if we see additional weakness, we will take further actions to reduce spending.

Please turn to slide seven. Revenues from property and facilities management, fees for assets under management, loan servicing fees and leasing commissions from existing clients are largely recurring. As Brett noted, these revenues represented approximately 60% of total for the third quarter 2009, as compared to 54% in the third quarter of last year. Our property and facilities management business accounted for 40% of total revenues. Up from the 34% it accounted for in third quarter of 2008. Leasing declined 25% in the quarter versus the third quarter last year. This drop was less than declines of between 28% and 32% that we experienced in leasing over the prior three quarters. Sales revenue dropped by 44% versus a year ago but with a much less pronounced decline than the 60% plus declines we experienced the last couple of quarters. The appraisal and valuations business declined by 9% in the third quarter of 2009, as compared with third quarter 2008. Much less than the decline of 21% year-to-date so far. In the US , new business in third quarter as measured by the number of assignments increased 12% compared with the third quarter of 2008. Global investment management revenue was down 26% year-over-year while development services revenue was down 33% and the commercial mortgage broker's business was down 37% as the challenges in the credit market persisted.

Please turn to slide eight. Outsourcing revenue for the quarter declined 6% on a year-over-year basis. This decrease was driven by lower client spending; however, we continue to grow the number of clients in square footage we have under management. As you will notice on the slide, we won eight new accounts, expanded eight client relationships and signed seven renewals in the third quarter. Square footage under management crossed the $2 billion threshold. Although I will not run through the details, we have attached slide nine, which provides certain US market statistics to illustrate just how challenging vacancy and absorption trends have been and are projected to be through next year.

Please turn to slide 10. The US investment property market continues to be deeply challenged. Over the first nine months of the year, marketwide sales volumes fell 73% from a year ago to just $32.6 billion according to Real Capital Analytics; however, it's encouraging to note that RCA reported that marketwide sales in the third quarter rose 24% from the second quarter to $12.5 billion. This is the first time since the fourth quarter of 2007 that investment activity improved from one quarter to the next. Our Americas sales revenue for the third quarter declined 50% on a year-over-year basis. An improvement from the 59% decline in the second quarter. Looking at our Americas leasing business, the revenue declined 25% in the third quarter of 2009, versus prior year. Better than a year-to-date decrease for this business. The US office vacancy rate increased by 60 basis points in the third quarter of 2009 to 16.1%. Although this was the eighth consecutive quarter of higher vacancy rates, it was lower than the 80 basis point increase last quarter and with the slowest pace of increase since the fourth quarter of 2008.

Please turn to slide 11. Our investment sales activity in EMEA declined 46% in the third quarter of 2009, relative to the third quarter of 2008. This compares favorably to the 71% decline we experienced in the second quarter of 2009. Consistent with the second quarter of 2009, the rate of decline in the UK continues to be a bit better than the decline elsewhere in Europe. Nearly 15% of the year-over-year investment sales decline in the quarter was attributable to negative foreign exchange currency rates. CBREs revenue from leasing in EMEA declined 31% in the third quarter of 2009 versus the third quarter of 2008. This compares favorably to a 35% leasing decline year-to-date.

Please turn to slide 12. CBRE sales revenue in the Asia-Pacific region fell only 2% in the third quarter of 2009, verses the prior-year third quarter. This is a dramatic improvement from the 42% decline for the second quarter. This improvement was driven by Australia and New Zealand, which posted modest growth in Q3, 2009, versus Q3 2008. CBREs leasing revenue in Asia-Pacific fell 16% in the third quarter verses the prior year third quarter, which was much better year-over-year performance than year-to-date 2009. This was also primarily driven by Australia and New Zealand.

Please turn to slide 13. Revenue for the development services segment was down 36% to $20.2 million in the third quarter of 2009. Operating results for the 30 quarter showed normalized EBITDA of $4.3 million after adding back $0.5 million of cost containment expenses and $1.7 million of net write downs of impaired assets. The year-over-year decrease was driven by an unusually large gain on sale of property in the prior year that did not recur. At September 30, 2009, in-process development totaled $5.1 billion, down 19% from a year-ago levels. The pipeline at September 30, 2009, totaled $1 billion, down more than 70% from year-ago levels. And the combined total of $6.1 billion is down 37% from year-ago levels. At the end of the second quarter, our equity co-investment in the development services businesses totaled $84.7 million. We continue to expect a very low level of top-line activity in this business for the remainder of 2009 and into 2010, mitigated by significant cost containment efforts.

Please turn to slide 14. Global investment management revenue was $32.9 million for the third quarter of 2009, up slightly versus the $32.6 million in the second quarter of 2009, but down as compared to $39.8 million in Q3, 2008. This year-over-year decline resulted from a reduction in asset management, acquisition and incentive fees. Asset management fees decreased $31.1 million -- to $31.1 million from $34.1 million in the third quarter of 2008, due primarily to downward pressure on certain asset management fee structures and foreign currency exchange rate changes. Assets under management totaled $34.9 billion at the end of the third quarter. This total was down $1.5 billion from the second quarter. Our co investments in this business at the end of the quarter totaled $106.5 million. Our global investment management EBITDA reconciliation detail is shown on slide 15. Third quarter 2009, EBITDA was impacted by a net non-cash write down of $2.4 million attributable to decreased property valuations. And $200,000 of cost containment expenses. In the third quarter of 2009, we did did not realize any carried interest revenue and we reversed a net $6 million of previously accrued carried interest compensation expense. As compared to the third quarter of 2008, when we also did not realize any carried interest revenue, but reversed a net $15.3 million of carried interest compensation expense. As of September 30, 2009, the Company maintains accumulative accrual of carried interest compensation expense of approximately $14 million which pertains to anticipated feature-carried interest revenue.

Please turn to slide 16. Real Capital Analytics now classifies $128 billion of commercial real estate as distressed; however, distressed assets have thus far come to the market at a slower-than-expected pace. Lenders have often preferred to extend existing loans. Distressed sales are expected to pick up in 2010 as the market and economic recoveries continue and lenders act to unload unwanted assets in a more hospitable environment. We are currently marketing approximately $3 billion of distressed properties in the US, including properties under our FDIC contract, as well as for lenders, mortgage servicers and bankruptcy courts. The $3 billion represents an increase from the $2.25 billion reported at the end of the second quarter this year. Please turn to slide 17. During the third quarter, we made significant progress on our balance sheet to extend debt maturities through our successful loan modification program. In the quarter, we deferred amortization and maturities of $985 million in bank debt, including a portion of our revolver. The resulting impact of these loan modifications on debt amortization and maturities is shown on slide 17. Currently through the end of 2012, we have only $393 million in debt amortizing and/or maturity.

Please turn to slide 18. Excluding our mortgage brokerage warehouse facility and non-recourse real estate loans, our total net debt at the end of the third quarter was $1.8 billion. In the third quarter, net debt decreased by approximately $111 million, partially due to debt repayments with cash generated from operations. Following the completion of our recent loan modifications, our weighed average interest rate at the end of the third quarter was 7% as compared to 6.8% at the end of the second quarter. Both before swaps. On slide 19, we have illustrated our financial ratio covenant requirements. You can see that our leverage ratio, net debt to EBITDA at the end of the third quarter provided plenty of room under the new maximum ratio permitted of 4.25 times. And this leverage ratio at September 30, 2009, of 2.55 times compared favorably to the December 31, 2008, ratio of 3.28 times. Our trailing 12-month interest coverage ratio was 4.87 times, well in excess of the required minimum of two times. The total amount of covenant EBITDA add-backs related to the credit agreement to normalized EBITDA was approximately $146 million for the trailing 12-month period ended September 30, 2009. I will now turn the call back over to

Thank you, Bob and please turn to slide 20. I would like to provide some brief summary remarks regarding our expectations for our business. There are emerging signals that we may be at or very near the bottom of the commercial real estate cycle. These signs include the following: Sentiment that the financial markets have improved, which help support market recovery actions by key decision makers. Growing agreement that the US economy will grow in the fourth quarter of 2009 and into 2010. The improvement, the industry experienced in total investment sales volumes this quarter compared to the immediately prior quarter and although this increase was small in absolute dollars, this is the first time we have experienced such an increase since the fourth quarter of 2007. Bidders are starting to return to acquire class-a properties despite, of course, still looking for great deals. RFP activity for listings is beginning to pick up. Lending risk premiums are starting to come down and rates of 325 to 375 over are being quoted at 50% to 60% LTVs. Life insurance companies are starting to increase their allocations to commercial mortgages and at least a couple of banks have recently attempted to restart conduit lending programs. We expect these conditions will at some point lead to the expected recovery in real estate transaction volumes and eventually lead to improved performance in both our sales and leasing businesses.

If history is a guide, it will likely push investment sales to recover first followed by leasing. For our outsourcing business, the view is that we will see continued growth in clients and square footage but continue to be challenged by low client spending levels. We also continue to believe that results in global investment management and the development services business will be depressed until investment sales pick up and asset values begin to increase. Our strategy remains consistent. We will focus on providing great service to our clients. We will prudently manage expenses, continue to strengthen our balance sheet, and aggressively compete for market share. We are encouraged by improving sentiment in the market. We are extremely pleased with the market position we have maintained and grown during the downturn. With that operator, we'll now take questions.

(Operator Instructions) Our first question comes from the line of Kevin Dougherty with Banc of America. Please go ahead.

Thanks, guys. I guess just looking at the margin EBITDA trajectory, I guess from your comments, it seems like it's really going to be driven more by improving revenue trends at the point. Would we really have to see revenue turn positive in order to see that margin expand again on a year over year basis?

Kevin, I'll let Bob Sulentic our CFO answer your question, Bob?

Thanks, Brett, thanks Kevin. I want to make sure I understand your question. I think what you're asking, Kevin, is are we going to get at improved margins from here forward by cutting more costs or are we going to do it by adding revenue. Is that essentially what you're asking?

Right, seemed like your comment said since you have already achieved the 600 run rate, it's probably going to be a return to revenue growth that sort of drives incremental leverage from this point. I guess the question would there be incremental cost-savings actions or at this point, assuming nothing else, is it really just a return to positive year-over-year revenue growth that drives year-over-year margin expansion?

Directionally, it's exactly what you just said. Our focus to improve margins going forward has turned more toward revenue growth rather than additional cost-cutting. However, as we said, and we take this very seriously, we are watching each part of our business around the globe. If we conclude there are parts of the business where the business as a whole is not performing the way we want it to be and there is too much cost in the business, we will take additional actions. I will say the attention has turned more toward revenue growth and less toward cost-cutting at this point and we have as noted, achieved our cost-cutting objectives, completed those measures and we're very, very pleased with that result.

Okay, and then as we think about that $600 million in cost savings, could you talk about how much of that might be likely to creep back into the model really as business conditions improve over the next few years or what could we take away that might be viewed as more of a permanent reduction and, therefore, really see a greater degree of margin leverage on that?

We have done different types of analysis to try to answer that question for ourselves and of course, there is no perfect way to answer that question. Those cost come out from so many places and they will ultimately go back in the some of those same places. We think about a fifth of the costs we cut is going to kind of naturally go right back into the equation as the business turns around and starts to grow in a healthy way. The rest of it, we have much more control over. The other 80% of it, the other $540 million, we have much more control over. Our goal and our belief is that we will be able to have those costs go back more slowly than they came out, and we'll have a lot of focus on that. Obviously, if we start to see revenues come back toward the levels that they peaked at in 2007, we're going to have to carry more costs than we're carrying today.

Okay, that is fair and if I can get one more in, I guess as you move through October, have you seen any changes relative to what you experienced in the third quarter? Either looking at it from a marketing standpoint or some of the Company's specific trends and as we look into the fourth quarter, should you see really any shift versus a normal seasonal pattern kind of accounting for the other trends.

Kevin, this is Brett. Let me get you a couple of general comments and I want Bob to answer you question a bit more specificly. First I'd like to say the year is playing out more or less the way that we expected that it would. The commercial real estate markets globally are bouncing along the bottom. We're continuing to see stress across most of the businesses, Bob mentioned in his comments, the positive growth we have seen in our business lines and there haven't really been a lot of surprises the last few quarters and that is good news compared to this time last year. Certainly, there are some emerging signs of stability in the marketplace and even in some jurisdictions. Some demonstratable levels of growth and specifically we have talked about and you have seen in our results that Asia-Pacific seems to be -- due to the good road that the economy is over there, seems to be doing better than most. We have seen as have you, a lot of data and a lot of commentary regarding the London capital markets beginning to strengthen a bit and trading levels beginning to improve. I say that is plain out pretty close to what we thought would happen this year. But as pertains to trends in October and the fourth quarter. I don't know if Bob wants to answer those, but I will turn it over to him.

Not much to add there other than I think maybe a little more anecdotal evidence that things are positive. We commented each of the last quarters that we're not seeing trends we're seeing anecdotes, maybe a little more anecdotal evidence. The other thing is, we are asking our people to think more offensively now. We have asked them over the last year or plus to be very, very defensive, i.e. , to be very focused on costs and it's really hard to both have your foot on the gas and your foot on the brake. We're asking the mindset of our people to shift and we think that in and of itself will make a difference. By the way, we think that's going on around the economy, which will make a difference. Right now, it's more anecdote than trends and more attitude than anything

Great. Thanks for the color.

Our next question comes from the line of Anthony Paolone with JPMorgan. Please go ahead. Please go ahead.

Thank you, good morning. On the operating expenses, how should we think about it sequentially. It seemed like you continued to cut costs going into the third quarter to hit your goals. But yet sequentially, your OpEx was higher and I understand revenues were higher. I'm trying to get a better sense how to think about that and may be the next few quarters.

I think you hit it, Anthony. As the business goes through the natural seasonality with more activity in the third and fourth quarters, operating expenses naturally go up. But on a year-over-year basis, you should see savings of the magnitude that we describe -- Now, again, the one thing to keep in mind is that the savings that we targeted were relative to our peak base year of 2007 and what we said is $600 million of savings relative to 2007, plus the variable savings, the natural variable cost savings which we think will be at or above that level and we expect there to be $535 million of the $600 million in our income statement by year end.

Okay, what portion of the OpEx do you consider to be variable that should really tie with the revenue changes?

First of all, not all of that $600 million is in OpEx there's a little bit of it that's in cost to sales, most of it's in OpEx. Of that $600 million in savings these terms and not absolute, but about a fifth of that is naturally variable, costs that will come back on their own. Certain types of bonuses, for instance. About 80% of it is more of what we would call pseudo fixed costs -- some of them are absolutely fixed, some are not absolutely fixed. But it's about 80/20, we believe, on the $600 million between somewhat variable and largely fixed.

Right, actually I was thinking more in terms of the roughly $300-some-odd million of OpEx, what portion of that. Not the savings but the portion of actual expenses that are variable.

About 50/50.

Okay. On the leasing side, I appreciate the idea on the transaction side, seems like it's close to maybe bottoming and it'll probably come back first, but I was thinking in terms of the leasing side, what type of economic or real estate backdrop do you think you need to see those clumps move from being negative to even, say, flat next year, year-over-year.

Anthony, it's Brett again. Certainly, the single most important indicator for you and our other analysts and investors to watch is job growth. When you see job growth turn positive, I think that is a very, very important signal to you and to us that the leasing environment has turned positive. We, as you know, there has been little construction brought into the marketplace the last couple years. There is going to be very little construction brought to the marketplace for the next two or three or four years. Supply side is not really a big issue at the moment. There is not as large an amount of sublease space in the marketplace at the moment as there was during the peak of the downturn in the 2001-2002 period of time.

So, the market is setting up for what we feel will be an incremental kind of slow, steady recovery in leasing that -- it's impossible to point to exactly when that would occur. I do believe there is a growing consensus in the marketplace. That in the US, the leasing recovery is something like mid 2010. I don't know if that is a quarter too earlier or if it's a quarter late, but I think directionally, that is probably about right. To answer the questions specifically, I would look to job growth first as the single biggest indicator of improvement in that business.

The last one, I'm just curious when you think you might feel comfortable giving guidance again?

I don't know, we seem to be an outlier in the fact that we give guidance in this industry. I'm not sure that we want to be that firm we will certainly revisit that issue again in 2010 as we told all of you now well over a year ago, in this marketplace, it's just foolish to try and provide any sort of explicit guidance. When we get to a more normal marketplace environment, I think we will revisit that issue again. I am not quite sure where we're coming out on that.

Okay, thank you.

The next question comes from the line of Sloan Bohlen with Goldman Sachs. Please go ahead.

Good morning. First just a question on the outsourcing business. I'm wondering if maybe you could perhaps put some numbers behind where clients are cutting costs, maybe how much that's down and whether we're seeing a bottom there. In addition to that, has that impacted the competition for fighting for new business? If you you could talk about whether pricing has changed at all.

Sure, you know, the outsourcing business and its related pieces are obviously becoming a much bigger part of our corporate story. That is part our strategy and this down market simply accelerated that strategic objective. It's interesting, in the third quarter, which is for whatever reason, typically a pretty good quarter in outsourcing, we had a 40% increase in new win revenue, compared to the third quarter of 2008. That statistic is fairly telling. What that tells us is that the pace of putting commercial real estate services into the outsourcing segment out to the market, increased quite a bit year-over-year in the third quarter and we, of course, are a great beneficiary of that. The places that these corporate customers tend to hit the brakes on during a downturn is capital spending. So, if you're a large corporate customer and in a typical year you spend $100 million on your facilities around the world, in a downmarket like this, you might spend $20 million or you might spend $15 million. You go back to a dial tone spend, just like, by the way, like most fronts do, you go back to a dial tone spend on investments in new facilities and systems and this sort of thing. That hurts the outsourcing revenue line. We're paid to perform many, if not most of those activities and those activities are not occurring at the moment.

In terms of price compression, the outsourcing business is a very price-sensitive business to begin with and I would say that in good markets and bad, the outsourcing customers are focused intensely on price. Frankly I think they're more focused on it than the other customers, it's the reason they outsource and so it's a place they spend most of their time when they do their RFP contracts. I don't think that the pressure on pricing is anymore extreme at the moment than it is in good times. Certainly incrementally it probably is. It's not hugely meaningful.

Okay. Thank you. And then just a quick question on the new opportunities that you guys are working on, whether it be the special servicing contract you have on the CMBS thing in Europe or your work with the FDIC. Can you talk about the difference in profitability for that business versus your normal course investment sales activity.

Sure. I would start by answering that question by saying that when you're in the distressed sale business and that is really what the FDIC contract is about and some of our other contracts are about. You're dealing with a grab bag of properties. Everything from high quality, well-leased assets where we make a very nice fee to just garbage that is very, very difficult to trade. Very, very difficult to manage and deal with. It's is really -- unfortunately it's impossible to project what margins are going to be like in those business.

We don't know what the next bag of properties coming through the system are going to look like. Certainly across the spectrum of those properties, the margins network are lower than are the typical margins we would experience in our leasing or our sale business. The lease and sale business for us generally speaking is high-quality assets and high-quality locations. Almost by definition this type of work that we're doing for the FDIC and others fits into other buckets. Now there are some other business lines that we've talked about this quarter and other quarters that take advantage of this marketplace that are high-margin businesses and these would be some of the consulting assignments we get to assist large customers think through portfolio optimization and disposition, some of the restructuring work that we're doing with some of our larger clients. I think to your question, with things like the FDIC where those margins are probably a bit lower than we would see across the business.

Okay, and one more question, if I may. With regards on the FDIC program or the broader market in general. Can you touch on maybe -- there has been more regulatory chatter about how banks mark their commercial real estate loans and can you talk about how -- if there's more pressure maybe that impacts whether assets come back to the market more quickly or not?

Certainly, if there is increased pressure to more aggressively mark down these loans, one would assume that that would put pressure on financial institutions to dispose of those assets. Yet, we're not seeing that at least at the moment. We're seeing is that the financial community is showing what I would describe as almost an unprecedented effort to work out these troubled property loans and to keep the borrower in place and to figure out ways to work those property situations through without foreclosing on the properties and putting the properties back on the marketplace. So-- and your question gets to the what-if scenario that a lot of people are considering at the moment, which is, is there going to be a large amount of foreclosure sales moving through the marketplace in 2010 or 2011 or are the financial institutions going to continue top work out these troubled loans.

The only thing we can tell you is at the moment and so far that, that decision has weighed very, very heavily towards workout as opposed to foreclosure. I'm going to ask Bob to answer that question as well. Bob has deep experiences in the principle businesses and has seen a lot of this first hand right now.

It's hard to add to what Brett said. There is so much uncertainty as to what is going to go on and we've expected to see more action in that area than we have seen so far. On the one hand, you would think that this pressure to mark down assets would force banks to move them. On the other hand, there's a point of view that says, well once they are marked down, they're marked down. Maybe we ought to just keep them, work them out and enjoy the benefit of a run-up so that we don't pass that off to third parties as happened in the early '90s and mid-'90s and with the whole debacles that happened in the last big downturn. It's really -- there is really great uncertainty about it.

There is a lot of people out there with money on the sidelines that are waiting to attack this opportunity. If these assets come off the bank's balance sheet. We certainly have the capability to do it as a principle in the two principle businesses we're in and we obviously have the capability to do it as a service provider -- or to provide help to either buyers or sellers of those assets, or if the banks want to hold them, to service them as they hold them. We're trying to figure it out along with everybody else and we have been a little bit surprised.

And Bob touches on an important point that certainly we hear a lot in the marketplace. I think everyone's trying to understand and model what the end game looks like in the capital market as pertains to commercial real estate. One of the dynamics that is building is this pent-up liquidity and we're now well into two years in this downturn and there is a, we're in a situation again where there is a growing amount of liquidity sidelined with an interest in commercial real estate and certainly a lot of the funds raised, probably almost all the funds raised in the last 18 months haven't been deployed, lots of the funds raised prior to the downturn that were supposed to be deployed have not been.

That liquidity is going to provide some amount of buffer to whatever the outcome is in the capital markets for commercial real estate. It's a lot to pay attention to, it's a lot to try and model. The only thing we can tell you with any certainty right now is that we are certainly surprised at the very, very low level or small amount of commercial real estate foreclosure activity that we have seen through this downcycle.

Great, appreciate the color. Thanks

(Operator Instructions) Our next question comes from the line of Will Marks with JMP Securities. Please go ahead.

Yes. Hello Brett, hello Bob. I had a few questions. One on leasing -- You talked about the big picture and how the recovery happens with job growth. I am more wondering, 2010 versus 2009. Have we seen the first nine months of the year an abnormally low level of activity or let's say short abnormally, short terms of leases that could lengthen in 2010, just because companies are making decisions, they're realizing they're still in business and maybe the rents are lower, so the commissions drop. Is that offset?

Directionally, Will, I think you're on the right track. Certainly in any downturn, what you see occur in the leasing business is, companies -- let's call the early stages and middle endings of a downturn, companies shorten their lease terms. They also decrease the amount of space that they go out for in the marketplace. When companies start becoming more bullish about their mid-term and long-term prospects, it tends to flip and companies get a little more opportunistic about taking advantage of low rents and actually doing the opposite. Maybe taking a bit more space and a bit longer term. Looking at our leasing numbers, there are some interesting trends occurring, one is that the revenue per transaction in a leasing business is now flattening.

We're not seeing less revenue per transaction coming through the system now. We're seeing about the same as we saw in the prior year and what that tends to tell us is that the pricing pressure is -- the downward pricing pressure is wakening a bit or it's being offset by longer-term and more space. I think what all that means, Will, is consistent with our earlier comments, and Bob's earlier comments. We're bumping along that bottom level of the leasing market and whole there certainly is no recovery in the leasing market yet, and frankly, I think that is still a ways off, I would guess at the moment that you're not going to see a lot of significant downward pressure on the leasing business beyond what we're seeing this quarter or next quarter in early part of 2010. Recovering the leasing business is going to come, we think, after recovering the capital markets businesses and recovering the leasing business I think is a late 2010 proposition. We're guessing here and we're trying to read the tea leaves.

The only data I can tell you is that the revenue per transaction is beginning to flatten out and I think that companies are becoming more opportunistic in the leasing markets with the idea of taking perhaps a bit more term and a bit more space off of these lower rental levels. If there is downward pressure on the economy again, in 2010, that is going to flip negative. At the moment today we're seeing reports that GDP was positive in excess of 3% in third quarter we're seeing people now beginning to declare that the recession is over. Those types of data points attitudinally will begin to drive our corporate customers to be even more bullish about their long-term prospects and that should translate to better leasing trends financially.

Great, okay. A couple of other things. One, you had announced or at least discussed your commission splits coming down in 2009. I think as they did come down at all levels, or most levels, do you have any plans to change that going forward?

First of all, I think it's true to say that across the industry commission rates in the transaction businesses, bonus programs in the non-transactional businesses, salaries in all the businesses they have all come down and my guess is that the industry is going to be very slow to bring those programs back to peak levels until we see and our competitors see revenues return to a more normalized state and we're nowhere near that at the moment. Those reductions in compensation to all of our employees are certainly painful reductions to take, but when your revenues are down 20%, 30%, from what they were three years ago, those are the proper moves to make and we have not seen any revenue growth across the broad business. It would have to be a descent amount of revenue growth I think before we would think about wholesale return to peak compensation levels.

Okay, great. Just one last question on cash flow. Third quarter cash flow or dept paid down in the neighborhood of $100 million, I assume that as per, what is typical fourth quarter should be way in excess of that or in excess of that?

Fourth quarter is our best quarter. Traditionally, we don't expect that to be any different this year and the cash flow we generate from our operation is best in fourth quarter. I will say, of course, we don't project that. I will say that those quarter-to-quarter numbers and you're talking, I think, about the $111 million dollar decrease in our net debt.

Yes.

That we stated was partially from operating cash flow, part of that operating cash flow is, I would characterize as the best kind of news. We went went out and did some business and generated some profits and that is the best kind. There are shifts in the balance sheet that caused that as well and we had some positive movements in network and capital over the quarter that contributed to that as well. It's absolutely the case that we would expect again this year that the fourth quarter would be our best year for EBITDA.

Will, I just want to go back to an earlier question you asked about leasing. One of the trends, one of the dynamics in the current market that I think please us quite a bit, our market shares, in some of the world's largest markets. I would point to specifically take central London, or New York City, we're creating very significant share at the moment, in those markets.. That of course, tells us and it should tell you as those markets recover, we're going to get some very, very nice lift out of those markets. In Central London for example, in the third quarter, our share was 29%. I believe our next largest competitor in the business was something in the high single digits. Low double digits. These are very big markets when the markets are healthy and our ability to accrete share in these markets is very, very important. Should bode very well for the firm as those markets continue to move through this downcycle and then recover.

Okay, thank you very much.

Thanks, Will.

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

Hi, guys, good morning. Quick one for you in -- within invested managements, actually it's a two-part question. First, are the -- are you guys putting more money to work than you thought you may at this kind of point in the year and is there a particular geography or types of investments where you're starting to see better opportunities. I guess the genus of the question is it's oftentimes it's the way for the outside person to gauge the confidence that you guys have as an organization, the overall opportunity in this space, so just trying to get a feel for what your guys on the ground are starting to do.

Let me take a stab at that. I will ask Bob also to weigh in. It's a tale of two stories here. On the one hand, I believe, we have been really, all year, one of the very few large buyers in the market and you know that we purchased some very -- assets in New York City and -- And we have done some fairly -- industrial deals this last quarter. So, some of our funds are in the marketplace and getting assets now and there are a very small number of buyers doing that.

That that having been said, it would not be true to say we're putting a lot of money to work at the moment across the board and in fact I think it would be accurate to say, for instance in our distressed debt strategy that we probably put less to work so far than we thought we would have say a year ago at this time, thinking about right now. That is really been about a view that that marketplace really deteriorated more significantly than we thought it would last year or early this year and that the opportunities to make prudent investments. In that debt space, are really ahead of us, not behind us and it's a mixed bag. On the one hand, our opportunist funds are buying I think we're one of the few buyers out there. But generally speaking, we have got close to $3 billion, I believe, in dry powder and it remains dry at the moment. Although, I think it's fair to say that people ourselves and all the other investment managers are definitely getting ready.

Okay, thanks, kind of a followup there and a two-part question. As you think about going forward and raising capital, do you expect the same economics or from your perspective, do you expect to go out and market your funds with the same kind of perspective carried interest versus as it's -- you have in the past or is there a change in how you think you should approach potential sources of capital and how do the economics of future fund raises looking for you guys?

It's a great question and it's one that we're spending time on ourselves. The industry at the moment --, and again I will ask Bob to jump in, he's working on this first hand, -- The industry at the moment is certainly in a state of flux. It's in a state of flux because our traditional LPs are dealing with the investments they made the last few years that have not gone well and are considering how they want to make investments going forward. And at the moment, I would say that capital being raised is being raised generally in line with traditional programs with some differences and I don't want to predict at the moment how that is going to play out. It's fair to say that the economics around the investment management business next year will look a little bit different than it did two years ago. Bob, anything you want to comment on that?

Not a lot to add other than to say this, I think the very first part of Brett's question is exactly the way all of us in the industry would answer and that is, it's the great question we're all faced with. It's clearly changing and it's clearly not clear where it's going to end up and in the interim, we're trying to raise capital and we're meeting with some success in doing that. We raised $1.3 billion this year and so far, things are being tweaked on the margin. But of course there's questions about when this thing all settles out, how much discretion will there be? Will the capital be raised in funds or on a separate account basis? How big will the co-investments be? All that's in play right now. People like ourselves are trying to figure it out, the limited partners are trying to figure it out, the consultants that advise the limited partners are trying to figure it out and I think we'll know more next year.

On that point, in the industry the participants like us are watching all of that because of course, we'll tweak our strategy to make sure we can maximize our opportunities in that business. We're paying close attention to it, they're really hasn't been enough investment activity this year to draw from conclusion at all. By this time next year, we'll have a pretty good sense what that market looks like and where the opportunities are.

And one, going back to your comments on the market share, Brett, as the markets both in leasing and investment sales or capital markets recover, how confident are you that you can maintain that market share and I guess the angle of this question is when times are good, the medium and small firms, by virtue of being in the marketplace and historical relationships tend to get their fair share or more times of business just because they know people that have been in markets for a long time. Or do you think this couple year period has forced such a structural shift, vendor consolidations, financial strength, that kind of thing that even in a recovering market, that you think you can maintain that share or accelerate that share.

That is a great question and here's the way I would answer it. The trend that has been extent in the marketplace for years is a movement from a heavily fractured marketplace with thousands and thousands of firms doing what we do to marketplace, I believe, in the coming years, will be dominated by a couple global firms and I think the share for those firms could easily move through 30%. Then, the balance of the market shared by a good number of very, very good boutique and regional players and so what I think this downturn has done has simply been to accelerate that trend and I believe that it's structural.

I honestly believe and believed this for years that if we all stay in this business long enough, we're going end up with a commercial real estate services industry that doesn't look a lot different than other services industries where your number one and two players are dominant in share and most major markets, capture together something between 50% and 70% of the market. The rest is shared by smaller firms that do certain things very, very well. This downturn I think has simply accelerated that trend. So as we come out of this downturn, I think that those clients, maybe you think of it this way. -- it's hard to imagine that a significant client in London, that this year, move their services business from a London only firm, to ourselves or Jones, Lang, Lasalle is going to change that decision when the market gets better. These are sticky relationships and sometimes you get one shot and in your business lifetime to capture that client. Once you get them, firms like ours don't tend to lose them. I think that what you're going to see is that while these share gains -- I gave the Central London figures which, is frankly striking. If you like the Central London figures our share there is really quite astounding compared to some other players there -- I don't know if we'll hold a 29% market share in Central London the next three years,

My guess is we're not going to go back to what our market share was three years ago. We like that trend a lot. It's frankly one of the many reasons why downturns in the marketplace. We think, play very well for the larger firms. They're painful and we don't like downturns but there is no question -- downturns accelerate very positive trends towards the biggest couple firms in this business.

Great, thanks. Very helpful.

We have a followup question from Anthony Paolone with JP Morgan. Please go ahead.

Thanks, my question's are actually on the market share as well, which you covered pretty well. I guess the only other one I'd have -- can you give us some of your market share stats for some of either your region or bigger lines of business in 3Q this year versus last year, just to give us a sense as to how those have been trending?

I'm going give you a general answer. Unfortunately, they're not tracked by any firm or publication that I would feel comfortable relying on on a public call. By the way, that frustrates us, I think even more that it probably frustrates you -- We calculate market shares ourselves, but -- again, I'm not going to on a public call speculate on share. I will simply say this, I believe that in the major geographies and in all of our business lines you would find that through this downturn, ourselves and one of our very good competitors have increased market share across the board and that the other players in the business, the national, some of the smaller global players and the boutique players have lost share and that has been to our benefit. I'm frustrated not to be able to give you specific numbers. I wish I could. Really there are not public numbers out there I feel comfortable giving.

Okay. Thank you.

We have a question from Will Marks with JMP Securities. Please go ahead.

I think I'm pretty set actually. But one question on when you're competing for a large outsourcing contracts, how many players are in the field typically?

I guess Will, I answer it this way first, there is no -- unfortunately, there is no typical outsourcing contract and they're all very unique and they're based on the type of company, the size of the portfolio, what their historical relationship have been -- generally speaking that business I believe is coming down to a two-horse business and there are, ourselves and one other firm I think are very, very good at the global outsourcing business and I love a business where we get to share a marketplace that is so massive as outsourcing with really one other major competitor.

Those are businesses we love to be in and that is generally how it plays. Now there are other firms that do outsourcing work, frankly, I think most of them are brought in to keep us honest and to keep our other good competitor honest. If you're going to run a bid, the more players you can put in the bid, the better but when you look at where those contracts actually land and you can go out and do this work on your own Will. You know many of these clients yourself. They may be interviewing four or five firms. When you look at the portfolio that was put out to bid and where the square footage actually lands, it's really is a two-horse business at the moment in my opinion. Bob, you're deep in that business --.

well, it's -- I agree with that -- they'll typically be more than two companies bidding, and it depends on the orientation of the contract. If it's more technically oriented, more facilities oriented, you will have one group of additional companies in. If it's more transactionally oriented, you'll have another group in. You have got a couple of companies that are pretty much in there for all of them and if it's truly integrated commercial real estate outsourcing where you have transaction facilities, strategy and all of those things, it's truly global. It's truly got a big human resources component. You will see a couple of companies that are far more consistently at the table and serious competitors in all the others, ourselves being one of them.

Okay, thank you.

At this time, there are no other questions.

Great, well, thank you, everyone. We'll look forward to talking to you at the end of the fourth quarter.

Ladies and gentlemen, that does concludes our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.