世邦魏理仕集團 (CBRE) 2010 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the CB Richard Ellis Second Quarter Earnings Conference Call.

(Operator Instructions)

I would now like to turn the conference over to our host, Mr. Nick Kormeluk. Please, go ahead.

Thank you, and welcome to CB Richard Ellis' Second Quarter 2010 Earnings Conference Call.

Last night, we issued a press release announcing our financial result. This release is available on our home page of our website at www.cbre.com. This conference call is being web cast live and is available on the investor relations section of our website.

Also, available is presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio of the web cast, a transcript, and pdf version of the slide presentation will be posted on 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 Private Securities Litigation Reform Act of 1995, including statements of growth momentum, operations, financial performance, and in particular our business outlook.

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 make here today.

Please refer to our second earnings report filed on 8K last night and our current annual report on form 10K and current quarterly report on form 10Q, in particular any discussion of risk factors or forward-looking statements, which are filed with the SEC and available at the SEC's website www.SEC.gov for a full discussion of the risks and other factors that may impact 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 these regulations, we have provided reconciliations of these measures to what believe are the most directly comparable GAAP measures, which are attached hereto within the appendix.

Please turn to slide to three.

Our management team members participating with me today are Brett White, our Chief Executive Officer, and Gil Borok, our Chief Financial Officer. I will now hand the call off to Brett.

Thank you Nick, and good morning everyone. Please turn to slide four. I'd like to begin the call today with some comments about our financial performance in the second quarter. We were pleased to report excellent results for the quarter with revenue, EBITDA and earnings all growing significantly over Q2 2009. All major service alliance contributed to these strong results.

As compared to the second quarter 2009 investment sales revenue increased more than 60%, leasing revenue rose 29% driven by longer term and larger square footage transactions. Outsourcing revenue grew 10% with strong activity in all geographies. Development services sold two high quality assets for significant gains this quarter. Our 23% revenue growth coupled with strong expense management delivered total normalized EBITDA of $165.2 million in the quarter, 82% higher than the second quarter of 2009. This translated into a normalized EBITDA margin of 14.1% in the second quarter of 2010 versus 9.5% in the second quarter of 2009.

A commercial real estate recovery continued to progress in the second quarter. The trajectory of this recovery, however, is difficult to determine as it is set against a backdrop of muted and bumpy recovery of the broader economy -- with wide geographic variability. From the very quick snap back and most of Asia-Pacific, to a moderate rebound in the US and to a rebound and stabilization in Europe.

Our notable quarterly transactions are list the here on slide five. I will not spend time going through them. We have included them to illustrate some of our key business win in the quarter.

I will now turn the call over to Gil to go over our financial results.

Thank you, Brett.

Please advance to slide six. Revenue was $1.2 billion for the second quarter of 2010. Up 22.7% from last year primarily, as a result in improvement in sales, leasing and outsourcing activity. Reported EBITDA more than doubled in the second quarter of 2010 to $161.6 million from $68.4 million in the second quarter of 2009. Normalized EBITDA was up 81.7% to $165.2 million in the quarter from $90.9 million in the second quarter of 2009. Significantly lifting normalized EBITDA margins to 14.1%.

Our cost of services was down 140 basis point as a percentage of revenue to 57.9% in the second quarter of 2010 versus 59.3% in the second quarter last year. This result from a strong improvement in overall revenues and higher mix of transaction revenue versus the prior quarter along with the benefit of cost reductions.

In the second quarter of 2010, operating expenses as a percent of total revenue declined by 270 basis points to 31.7% versus 34.4% in the second quarter of 2009. In absolute terms, the year-over-year increase in operating expenses was driven by a higher bonus compensation accruals as a result of stronger financial performance.

Second quarter 2010 GAAP diluted earnings per share was $0.17 versus a loss of $0.02 last year. The adjusted diluted earnings per share was $0.18 versus $0.04 in the second quarter of 2009. Second quarter 2010 earnings per share was impacted by approximately 50 million more diluted shares outstanding, mainly as a result of our June and November 2009 equity offerings. Our second quarter 2010 tax rate was 36.5% and our full year 2010 tax rate should approximate 36% to 38%.

Please turn to slide seven. Revenue from property and facilities management, fees for assets under management, loans servicing fees, and leasing commissions from existing declines are all largely recurring. This revenue represented approximately 60% of total revenue for the second quarter of 2010.

Property and facility management, which remained our largest service line in the second quarter, increased 10% versus a year ago. It accounted for 37% of total revenue in the current quarter as compared to 42% in the second quarter of 2009.

Leasing increased 39% in the quarter versus the second quarter of 2009. Sales revenue increased by 61% in the second quarter of 2010 versus a year ago providing confirmation that global investment sales markets are recovering. Appraisal and evaluation grew 10% in the second quarter of 2010 as compared to second quarter of 2009. This was driven by an increase in our lending and special servicer business, due to more workouts, restructuring, and foreclosures.

Global investment management revenue increased 23% year-over-year. Development services revenue went down 15% and the commercial mortgage brokage business posted an increase of 33%, another sign that the capital markets are gradually improving for commercial real estate.

Please turn to slide eight.

Outsourcing revenue grew 10% in the second quarter of 2010 as the business returned to a more consistent long term growth rate.

During the second quarter, our global corporate service business set a CBRE record with 34 contracts signed, also set a CBRE record with 17 new accounts signed, expanded seven client relationships, and signed 10 renewals.

In total, for global corporate service and asset services our square foot in the first half of 2010 has increased approximately 10% to a total of 2.4 billion square feet from 2.2 billion square feet at the end of 2009. This growth was fueled by continued strong expansion of the property management portfolio in China, increased property management assignments in the United Kingdom, and new facilities management awards in the Americas.

Although I won't spend too much time on it, we have a attached nine, which provide certain US transaction market statistics illustrating how the outlook is improving for vacancy and absorption in 2011 versus recent historical trends.

Our estimated ranger of cap rates for the next 12 months showed continued possibility of modest contraction. We have continue to see some cap rate contraction among high profile properties and large markets.

Please turn to slide 10. The steady recovery of the US investment sales market continued in the second quarter of 2010. The $20.7 billion of investment sales volume for the quarter was the most since the fourth quarter of 2008 and represents an 86% jump from the depressed level of the second quarter of 2009 according to Real Capital Analytics. Our own America sales review for the second quarter increased 47% on a year-over-year basis. Our America's leasing revenue increased by 37% in the second quarter of 2010 as compared to the second quarter of 2009.

Nationally, the office vacancy rate increased again, but only by 10 basis point to 16.7% based on transactions through the end of the second quarter. Although this is the 11th consecutive quarterly increase, it is the smallest incremental change in 2.5 years. While net absorption remains close to zero and is still slightly negative for the year, vacancy appears to be close to a new peak.

Please turn to slide 11.

Our investment sales revenue EMEA increased significantly by 93% in the second quarter of 2010 as compared to the second quarter of 2009. Total investment turnover showed a healthy level of growth between the first and second quarters of 2010, increasing by 16%. The market appears to be regaining its appetite for large transactions particularly in the United Kingdom and Germany. In the United Kingdom, we topped [Codestar's] rankings for both property of disposals and acquisitions for the quarter. In the disposal category, our volume more than doubled the number two firm. CBRE's revenue from leasing in the EMEA grew by 15% in the second quarter of 2010 versus the second quarter of 2009 led by Paris, Frankfurt, and London.

Please turn to slide 12.

CBRE sales revenue in the Asia-Pacific increase the 66% in the second quarter of 2010 versus the second quarter of 2009. This improvement was indicative of positive economic growth across the region. CBRE leasing revenue in Asia-Pacific grew by 18% in the second quarter of 2010 versus the second quarter of 2009. Rental rates continue to show signs of stabilizing regionwide with improvements seen in Hong Kong, Shanghai, Beijing, Singapore, Seoul, and Tokyo Overall results of Asia-Pacific for the quarter reflect a shift in revenue mix, as well as aggressive hiring in the region to support expected growth.

Please turn to slide 13.

Revenue for the development services segment was down 11% to $19.7 million in the second quarter of 2010 versus the second quarter of 2009. Operating results for the second quarter of 2010 reflected normalized EBITDA of $28.4 million, a significant improvement over prior year that was driven gains on the sale of two high quality properties in the Houston markets. These contributed approximately $25 million worth of gains to the Company in the second quarter of 2010.

In addition, there were no write-downs of cost containment expenses during the quarter. At June 30, 2010, in-process development totaled $4.4 billion down 15% from year ago levels. The pipeline of June 30, 2010 totaled $800 million down 47% from year ago levels. The combined total of $5.2 billion is down 22% from year ago levels.

At the end of the second quarter, our equity current investment in the development services business totaled $57.4 million.

Please turn to slide 14.

Global investment management revenue was up 44% to $46.9 million in the second quarter of 2010 from $32.6 million in the second quarter of 2009. This was driven by rental revenue associated with the consolidation of several properties due to a change in accounting regulations effective January 1, 2010. Fees for assets under management were flat, while acquisition fees increased as a result of an increase in capital deployment. Assets under management totaled $33.7 billion, at the end of the second quarter of 2010, which was down 3% compared to the fourth quarter of 2009, but up slightly versus the first quarter of 2010. June of second quarter, we made $1.6 billion of worth of acquisitions and portfolio takeovers and $300 million worth of dispositions globally. Currency fluctuations lowered the portfolio by $600 million. Our current investments in this business at the end of the quarter totaled $86.8 million.

Our global investment management EBITDA reconciliation detail is shown on slide 15.

In the second quarter of 2010, there were no write-downs or cost containment expenses. In both the second quarter of 2010 and the second quarter 2009, we did not realize any carried interest revenue. We reversed a net $500,000 carried interest compensation expense in the second quarter of 2010 as compared to the $300,000 we reversed in the second quarter of 2009.

As of June 30, 2010 the Company maintained the cumulative accrual of carried interest compensation expense of approximately $14 million, which pertains to anticipated future carried interest revenue.

EBITDA was positively impacted by acquisition fees as well as approximately $7 million associated with the previously mentioned accounting change. Partially upsetting these amounts were bad debts provisions associated with asset management fees due from a fund. It should be noted that the accounting change had no bottom line impact.

This business operated at a normalized EBITDA margin of 22% for the second quarter of 2010. Please turn to slide 16.

Real capital analytics classified $183 billion of commercial real estate at distressed at the end of the second quarter of 2010. This includes properties that are troubled including those that are delinquent or in default in lender REO or workout. The Company's portfolio distressed assets currently being marketed for sale in the US is now approximately $7.5 billion. In addition, through the first half 2010, we have sold $1.3 billion of such distressed assets. We have also been appointed receivable nearly 25 million square feet of property in the US.

Please turn to slide 17.

At June 30, 2010 we have only approximately $160 million of term debt amortizing or maturing through 2012. Although we repaid minimal amounts of debt during the second quarter, on July 1 we did pre-pay $150 million on our Term B loans maturing on December 31, 2013. This will result in interest expense savings not only on the pre-paid debt, but also on all of the Company's remaining Term B loans outstanding by 50 basis points.

Please turn to slide 18.

Excluding our non-recourse real estate loans and mortgage brokerage warehouse facility, our total net debt at the end of the second quarter of 2010 was $1.3 billion.

During the six months end of June 30, 2010, we paid down $56.8 million of debt, of which approximately $55 million was voluntary. This was at the approximately $60 million for acquisitions, primarily the portion of IKOMA in Japan that we did not primarily own--that we did not previously own--and normal bonus payment. These payments were funded by cash flow from operations, which included a tax refund of approximately $85 million.

At June 30, 2010 our weighted average interest rate was 7.1% similar to the first quarter of 2010 and the end of 2009. Our leverage ratio on net debt to EBITDA as defined in our credit agreements at the end of the second quarter was 1.69 times, well under the maximum ration permitted of 4.25 times. Our trailing 12 month interest coverage ratio was 5.51 times well in excess of the required minimum of two times. I will now turn the call back over to Brett

Thank you Gil and please turn to slide 19.

As we have described in our fourth quarter 2009 and first quarter 2010 calls, we are in the early days of recovery and both a broader global economic environment and more specifically the commercial real estate business. As is typical for early stage recovery the trajectory of improvement and the underlying dynamics supporting commercial real estate is uneven.

Nonetheless, all of the significant measures we followed closely--rental rates, absorption, and yield--appear to be either bottoming or improving. We have discussed with you for years that our operating strategy of eliminating large amounts of operating expense during difficult times in this past downturn $600 million not only allows us to drive industry leading margins through the down-cycle, but also produces outsized results although the profit line during recovery. Our adults year to date across all financial measures, revenue, EBITDA, and earnings once again prove our thesis.

This recovery cycle on the expansion cycle to come should provide solid footing for our base case EBITDA and earnings-growth model. That being 10% to 15% EBITDA growth and high teens earnings growth over the long term.

While our second quarter in year-to-date performance far exceeds this model, future results will be tempered from the current extraordinary levels by a steady but careful on boarding of cost to support growth as well as inevitably more difficult quarter-over-quarter and year-over-year comparison.

As we said last quarter our bias at the moment is that we will achieve the high end of our EPS growth model this year, and, in fact, may exceed materially. However, there exists enough uncertainty in the global economic environment and enough evidence at some of the world's major economies are slowing that we will reserve updating our full year forecast until the end of the third quarter.

With that , operator, we will now take

(Operator Instructions) Our first question is from Anthony Paolone from JPMorgan, please go ahead.

Thank you, good morning. My first question is on the leasing front. Can you give us a little sense as to the activity levels you're seeing. How much of it is real expansion and real corporate activity or leasing activity versus a CBG gaining market share or even a little bit of borrowing from, say, future demand?

Sure. Anthony, well on the leasing side, a couple of dynamics to think about here. First is, we're in the very early days of a recovery cycle and expansion cycle in leasing. Rental rates are still not only declining in some markets, flat in others, and in a few markets beginning to appreciate. So, the pick up in leasing at the moment is primarily -- leasing revenues at the moment -- is primarily longer-term and greater square footage. And that is of course typical to the early stage recovery. We're not seeing any benefit really from increased rental rates at this time.

The pretty strong pick up we're seeing in velocity of transactions, and we are seeing good pick up in velocity transactions, is a combination of two things pent up demand left over from the downturn but also a slow return to a more, what I would describe as normal operating environment for our corporate customers. Those folks who had been really in the bunker the last few years are now dusting off their midterm and long term strategic plans. And beginning to think about their leased space in a more typical or normal fashion, and that leads them to enter the marketplace and begin to behave in a more normal way. And of course that brings us more transactions. It also brings us greater square footage in longer term.

Have you seen any noticeable slow down in any regions like thinking through Europe, which is on a lot of folks minds?

No, we really haven't. I think it's -- operative word is, meaningful.

Certainly, during the second quarter, there were in particular a few weeks where there was a very heightened level of concern regarding certain jurisdictions in Europe. We didn't see any material decline in our business activities across Europe. Certainly it has slowed a bit.

But again, material or meaningful is the operative word. And our view at the moment is that the sovereign debt worries or issues extent and Continental Europe are not going to have a particularly meaningful impact on the business in Europe for us.

All right. On the outsourcing side, your revenues were up 10% you had noted Asia and Europe being up pretty strong there. And I can't remember the regional splits. Was the US down or is it big enough that it was still up to get to the 10% over all?

All three jurisdictions were up.

Okay. And then on your expense ratios, if I look back over time just eyeballing it, it seems like in the second of the year your OpEx as a percentage of revenue tends to be lower than in the first half. Do you think that is something that will continue this year?

Anthony, it's Gil, yes. I think that the seasonal patterns that we generally experience will be evidence in the second half as well.

Okay, and then last question here. Your cash on hand, I know you spent a little bit after the quarter paying down some debt, but given that you're going into the second half of the year which is when you particularly build a lot of cash. How do you think about using that -- or how do you think about just your cash position?

Yes, we have to think about cash in terms of what we have domestically versus what we have offshore as we've talked about before the offshore cash not being as readily available to us. After the pay down on July 1, our domestic cash is probably at about $370 million give or take going into the second half. And you're right, we would anticipate building cash in the second half. At this point, and given where we are in the cycle, given that there are uncertainties, it is prudent for us to have a cash balance on hand. We don't have any accordion type debt, i.e. revolver to pay down. So, to the extent we would pay down debt, we would lose permanent capacity. If you will, once we pay down term loans that's a pay down and we don't have that capacity. Given where we are we just think it's prudent to build and keep the cash balance on hand, and we'll evaluate it as the year goes on.

Okay, thank you.

Thank you and our next question is from Sloan Boland from Goldman Sachs. Please go ahead.

Good morning. First question is kind of on your outlook and just specifically to comment on, could it I think exceed materially that upper teen growth on the EPS. I wonder if you could talk to whether you believe that'd be a surprise more on the top line or whether you think that could be lag on expenses or costs kind of ramping back up?

Right. Well, Sloan, it certainly year to date the good news has been, for us has been on the revenue line. We're -- I don't think we're ever much surprised by our expense line. We keep very tight controls over our expenses and we rarely have actual results and expenses very much from our internal budgeting.

So, it's all about the revenue side, and we like what we're seeing at moment and certainly if those trends are maintained full year, then our bias as we said is going to be to have some pretty terrific results. However, I think it's only fair to say at this point in the year that there's enough uncertainty out in the general economic environment that it's prudent to wait going into the third quarter to provide you with any material update to our thoughts about full year.

Okay, but would it be fair to say that the segments that could potentially surprise on the upside would be probably more of the brokerage businesses being transaction activity or leasing activity in the back end of the year?

I think it's fair to assume that at this point in the cycle, the likely upside surprises are going to come from transactions. That's where the biggest market lift is right now because we're coming off of such really miserable compares from 2009 and 2008.

Now that having being said, we've had some really pretty good news coming out of our other businesses as well. We like what we're seeing in our investment management space. We've raised close to $3 billion of capital this year. We deployed a similar amount. Those are good pieces of news for us.

We're seeing our development business in the second quarter had some really terrific realizations that added meaningfully to our results. Our mortgage business is showing some good signs of recovery. We really are at that point, Sloan, in the cycle, where we're seeing broad based recovery.

We could have upside surprise really in any business line but you're absolutely correct Sloan that relatvie -- I'm sorry, absolute numbers in terms of surprise will likely come from the transaction businesses.

Okay. And then kind of along the lines of Tony's question and kind of fitting in with my previous question. As you look ahead, maybe outside of just earnings and outlook but over the next two or three years, if you were to pick a segment where you'd like to have more exposure and in the past you've talked about doing larger type acquisitions. How do you think about growing the business, I guess, outside of your organic growth?

Sure, well, first of all we benefit from the fact that we are everywhere we need to be. We're in every business line that we want to be in and we're the global leader in virtually all of those geographies and business lines. It's a huge benefit to us to not have to spend the money. Discretionary capital to round out our footprint.

Let me just start with that. That having been said, growth for us is going to come from a number of different areas. First and foremost, is share growth and we are seeing quite good share growth in a number of our areas. I think you and the other callers are well aware that in New York, for example, we did eight of the top ten leases in the first half of the year. We did 23 of the top 50. That's more than the number two and three firms combined. We were named again the number one investment property dealer in the United States by real capital analytics. In London, we again, were named the number one firm in acquisition, disposition and leasing.

So we're capturing meaningful amounts of share. We are enjoying terrific lift organically from the market recovery and we are also looking at areas to take advantage opportunistically where we are in the cycle. Those areas could include such items as acquisitions, and as we saw on the last call, the marketplace for acquisitions at the moment is relatively thin. That having been said, there are opportunities in the marketplace, and we're watching them carefully.

We are taking advantage of cyclical business lines such as our restructuring business line, which we have $7.5 billion of distress that we're working on there. And that's a business line that is doing quite well at the moment, but it has life and that will dwindle off over time.

The outsourcing space, as big as it is for us, and it's very large for us, more than twice the size of our nearest competitor in terms of square footage managed, there's a lot of space there for us to grow and we are doing so. So, I think you'll find that our growth is going to come from a variety of different areas both organic and non-organic. The investment management space, which I referenced earlier is an area that there's no better time than now to -- for our LPs to grow investments in commercial real estate. And we're very very active in that area. So, we're very excited about where we stand in the cycle, and seen lots of areas for both organic and inorganic growth.

Great. Thank you guys.

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

Thank you. Hello, Brett. Hello, Gil.

Hey, Will.

Hello. I wanted to ask I guess first on the development line. I'm a little confused on -- you showed operating loss but you recognized some gains. Did those gains impact -- is there any extraordinary impact to the $0.18 of EPS that you would attribute to development?

The best way to get your arms around development is because of the accounting rules sometimes when we have a sale you may recall we haven't had those in a few quarters but if you think back on the consolidated deal we have to sometimes break it out as discontinued operations. We also get gain through equity earnings. So, when you look at the face of the press release. The income statement is a little tough to follow I'd admit. That is all included in EBITDA and the slide and obviously that did have a contribution, we quoted a number of $25 million of gain associated with those sales. So that should give you some insight into the impact on the quarter.

Would that be a pre-tax gain?

That is pre-tax.

So if you tax adjust that and you guys think it ends up to be something like $0.04. Does that sound in ball park?

That sounds in the ball park, yes.

Okay. Thank you. And then on -- I guess this was kind of covered but on acquisitions and how that ties into using your cash. Seems like the balance sheet is pretty safe.

Maybe the preference is to pay down debt a little bit more, but what specifically would you be looking for if you are number one in so many markets and in so many business segments, is it expanding the investment management arm? And you mentioned there's not much available but could you be a little more specific on what would add to the model?

Sure, Will, just to remind everybody there are really two types of acquisitions that firms like us make. There's strategic acquisitions where we've identified a gap in the platform or an area that we want to bolster and we go out and look for firms that can help us there. Trammell Crow and Insignia are examples of those types of acquisitions as you're well aware.

The other type is opportunistic and these are opportunities that come to us and those types of opportunities tend to be infill firms that have for whatever reason decided that they are having a difficult time competing and they want to roll up into one of the larger firms. And we see opportunities in the mid-term in both areas. Strategically, we see opportunities in investment management. We see opportunities in some of the capital markets spaces that we operate in.

And we're watching those and paying close attention to what might be available out there. Opportunistically we are -- I believe it's fair to say we're the buyer of choice in the industry. We have a great reputation as a firm that integrates firms well, has a high respect for the culture and the people that we integrate in. So we're contacted, really, all the time by mid sized and smaller firms that are looking to roll up and we're taking stock of those and paying close attention to those.

Based on where we are in the cycle, there are actually fewer opportunities available today than there might be as a cycle becomes more mature. The reason is, of course, is that the valuations against businesses today. We're very very conservative on our valuations, and most firms today are not particularly interested in selling against the kind of valuations that are available in the market place.

But we're watching all that. I'd love to give you more specifics, Will, and say that we're looking at these seven firms in these places, but that obviously is a competitive issue, but I think it's fair to say that we have been the by far the most acquisitive firm in the industry for decades. We intend to be so going forward.

Thank you.

One final question. On a completely different subject, but on retaining employees. I know its a challenge. There's a lot of companies out there that are trying to add people and -- how are you competing in this way? It's not on providing higher splits I know that, and I know you have a great brand and reputation. I'll let you answer the question

Sure, well, first in terms of retaining employees we really don't have a real issue with retaining our best people. The folks that -- and I'm going to generalize horribly here, Will, but I need to. Generally, the folks that we lose are folks that probably are not usually disappointing to us to lose. If they're in play it's because they're dissatisfied with their business or things have changed for them, and they would like to try and improve their life somewhere else. In most cases that's kind of okay with us and probably okay with them.

In the few cases where we lose people that we like quite a bit is because they're offered really incredible sums of money non-economic terms to leave, and in those cases we're not going to compete with that. If firms want to pay people that kind of money to walk across the street then they should do so, and we're going to let those people make those moves.

But, generally speaking, Will, it's -- we've used this analogy for so many years, but these firms really are a lot like sports teams. And there is -- being the number one firm in the business, people -- that's where people want to be. And to walk away from being with the number one firm to be at number two, or three, or four, or five, requires an inducement and in most cases a pretty serious inducement.

So, on the retention side, the best thing we can do to retain our people and we've always done it is to make sure we have the dominant firm in the business. That we have a platform that is compelling. That we have a culture that is supportive and nurturing and we think we have the most powerful culture in the business.

And certainly we've been ranked that way for a number of years. Look at the Lipsey survey and others and a lot of reasons why staff at CBRE is happy to be here. In a market like this what you will find is that as we enter a recovery firms that have gaping holes in their platform or significant weaknesses in certain markets, need to and will spend whatever it takes to recruit people over to fill those gaps. And you're seeing some that right now. But again, at our firm, given the size of the business, a broker leaving here or a property manager leaving there really doesn't move the needle.

Of course, we're sorry to see some of these people go, but that's okay.

Okay great answer. Thank you.

Thank you. Our next question is from the line of David Ridley-Lane from Bank of America.

Sure, I had a question on America's leasing. We're still seeing pretty weak employment trends in the US. I was just wondering as the market normalizes, what's kind of a longer term growth rate for the American leasing business if we continue to see this subpar employment picture continue say into 2011?

It's actually a very good question, David, and it's something that we think a lot about.

Every cycle both down and up is different. And this particular what I would call recovery phase -- we're truly not into expansion phase yet. This recovery phase is anemic in terms of GDP and job growth, which makes it a bit unusual. And I think it's a very good question to try and think about if job growth stays where it is what impact does that have on leasing.

Let me first say that our projections on the leasing business and leasing market is that they will steadily improve as we move through the recovery phase and into expansion phase. The long term growth rate that I think would be fair to think about in terms of leasing revenues is something in the high single digits.

Certainly, if you look over the data that we track and the results that we have produced year in, year out for many years, you would -- I think you would pretty quickly come to the conclusion that in recovery phase you're going to see some spikes up and in long term expansion phase you're going to see revenue increases in leasing in that high single digit range. You can see some years you have outside gains. You probably won't see years where you have much less than that.

Okay, that's very helpful. And then in thinking about this in your commentary, I think you said that not much change in rents. The rents aren't really helping yet. When would you expect -- again, assuming that we continue to have anemic job growth here in the US -- when will you expect rents to start to increase and you get a little bit even faster velocity on the leasing side?

Sure, I think the right way to think about this is -- I'm going to give you a directional answer because if I give you a quarter I'm going to be wrong. Directionally, it is correct to characterize the markets as bottoming. It is also accurate to say that most markets are seeing rents flat or nominally up.

We believe that you will see positive rent changes in the relative near-term in most markets. I would characterize that as late this year, early mid next year. It may be nominal, but nonetheless moving to a positive from a negative is a very important inflection point in recovery. And we're very close to there in most markets and I think one of the structual dynamics to keep in mind here is new construction is virtually absent in most markets around the world in most product types.

And that has been a huge supporting dynamic behind the amount of decline in rental rates and what we think will occur in appreciation of rental rates. But certainly, on the office side, I would expect that you're going to see some rental increase fairly soon and across a number of the markets.

I did mention earlier -- actually I didn't -- I'm sorry it was in an interview I did yesterday -- rent, take EMEA as an example. Of the 55 markets we track in EMEA, right now rents are stable or rising in 49 of those markets. You really are at that point where we're in an inflection point in most markets, and we should be getting some help from run-rate appreciation fairly soon.

Thank you very much.

Okay.

(Operator Instructions) Our next question is from Brandon Dobell from William Blair. Please go ahead.

Good morning.

Good morning.

Couple quick ones for you. In the leasing business, and I guess primarily in the US, but also within EMEA, a little more color on what kinds of property types you're seeing particular strength or weakness? Or perhaps if there's any market difference between the tenant-rep side of the business and the owner side of the business?

Sure. In terms of product type, the best way for me to answer your question is where we're seeing strength or -- the best, I suppose recovery and that would certainly be in office, retail. Industrial, we have a number of markets where industrial is suffering from some fairly significant vacancies and those markets are a bit more probably further away from seeing rent appreciation. But certainly, the office property market as you would expect in early stage recovery is the services firms that were probably least hurt in the downturn. It's the services firms that are usually quickest to begin hiring again and begin thinking about expansion again and that's primarily office.

So, I would say that's the area that we would look to primarily. Geographically, we are enjoying a good recovery in almost every global market. It is fair to say that Asia certainly came out of this first, and the markets like Singapore, certain markets in China such as Hong Kong, London, Paris. These markets are doing quite well on the leasing side again with a focus on office.

In terms of landlord and tenant, I think what you're, correct me if I'm wrong, what you're asking is, is it a question regarding our revenues, whether it's coming from landlord or tenant? Because it's -- I'm not sure I'm following the question.

I guess it was more about within your customers are you seeing more strength from your relationship with tenants or are you seeing -- I guess that's probably more directionally where I was trying to go with it.

Sure, it's both. We do such a significant amount of business in the major marketplaces that we're enjoying good growth from both categories of clients.

It has certainly been a tenant's market the past few years, and I would say that certainly the last couple years, what business has been out there on the occupier side has been occupier focused and that's because you see inducements for tenants to come into empty buildings, disproportionate commissions paid to tenant rep-brokers. That is the case today -- that will begin to even out as the markets normalize. But the leasing markets generally are coming back to a more normal footing and we're seeing good -- good strength both on the owner and occupier side.

Fair enough.

May be a question for both of you. If you think about the relative attractiveness of the outsourcing kind of facilities management business relative to the brokerage business I'm thinking about capital efficiency, revenue visibility, probably make some good arguments for both ways for why outsourcing is a good business. I guess I'm most focused on the amount of capital that you have to put in that business. And what the newer contracts or renewals are telling you about the margin opportunity as you look out the next couple years?

Let me take half that question. I'm going to let Gil talk about capital deployed because it's not really a huge issue. But in terms of desirability I think that in this business, if you want to be a global leader in commercial real estate services you need to have both legs of that stool in a very big way.

You need to have a strong outsourcing capability because we really are getting into an environment where virtually every major corporation is look at outsourcing in one form or another. So, if you're not in that business in a big way you're just locked out of an ever greater percentage of the large corporate customers that are out there.

On the transaction side, you have to have a very, very strong capability in transactions and all the major markets because at the end of the day what both your corporate customers and your institutional owner customers must have from you is demonstrated expertise and complex difficult negotiations and transactions across product type. So having both is critically important. The margin opportunities in those businesses are both very attractive.

Now, the way we account for those businesses, we tend to bolt most of the transaction revenues that we generate from our outsourcing business in our brokerage business line. Our reported margins in outsourcing really don't reflect the true, I'd say holistic margins, of those clients because a lot of the juice of the margins comes from the transactions that we do for those clients -- and we put those revenues over in the broker's face. I think it's fair to say that both businesses provide very attractive margins to us.

And, certainly, what we saw the last few years is that having a market leading outsourcing business is extremely helpful in down markets. We're seeing now that that business is a growth driver in good markets. But let me let Gil address the question on capital usage within the outsourcing business.

Sure, and Brandon, if you look at CapEx in our financial statements it might be a little bit deceiving in terms of the CapEx spent on the transaction business versus outsourcing for the simple reason that all of the capital expenditures, which as you know in total are pretty light and not particularly meaningful.

But we would show the capital expenditures on that line item and then in many cases in the outsourcing business that's reimbursed through the revenue line. It decreases, if you will, on a net basis, he capital spent on the outsourcing business.

That said, I would say without a lot of quantitative analysis, it's probably not -- it's certainly not more draining on our capital expenditures than the brokerage business and we really only have two area that we spend, which is leasehold improvements -- in any meaningful way, leasehold improvements and information technology, IT.

That makes sense. And then a final question. In terms of head count on the brokage side of the business, some sense of where you guys are now relative to where you were a year ago or even a couple of years ago. Just trying it gets a sense of how -- especially any color by geography would be very helpful as well.

Sure, well, again, I really believe this is one of our competitive strengths in the industry, which is our -- we've enjoyed a compensation model in our brokerage business for decades that provides us with the opportunity to weather down markets without any real need to reduce our head count in the brokerage space. As an example, our head count today in the US brokerage space is within a percentage point. Really a rounding error of where it was in 2008. We have -- one of the nice supporting dynamics to our business is, Brandon, this is something that we've shown for years -- the capacity to grow revenues over this base of fee earners is almost limitless. Certainly, there is a limit to it. We'd never hit it.

So as we see the very strong organic growth, which we expect to see during this recovery cycle we don't have a need to on-board fee earners. Our brokers around the world, our fee earners around the world can take on that business and will do a very good job of it. And I don't expect that our head count in brokerage professionals globally is going to move much in the next few years. If we do an acquisition of course that's different.

We don't -- we're not really in the business of adding brokers to our platform. We're in the business of improving the ones that we have, and we will move out lower performers and recruit higher performers in. But, one of the really amazing statistics around this business at least around our business is because of this compensation model we've had for years, we can onboard significant revenues without increasing much head count we're able to weather significant downturns without reducing broker head count and we didn't really reduce any broker head count the last few years.

Great thanks a lot

Thank you and we do have a follow up question from Anthony Paolone from JPMorgan. Please go ahead.

Hi, thanks. Gil, I was wondering if you could just help us a little bit on the equity income line item just because I know you had some gains in there that came through that line item. I guess if you strip that out what should that be on a normal basis just because it's a little bit of a mystery and tough to model.

You've got two things going on. On the one hand you do have a gain going through that that was in the range of $12 million on the other hand last year you've got impairments in the number because you're looking at it on the face of the financials and that's a GAAP basis. So we had impairments last year running through that line. I guess what I would say on a quarterly basis, generally speaking, I would say without those type of extraneous events and we always seem to have them I know, but on a run-rate basis it's single digit moving into the positive.

Okay. That's helpful, and then just last question just more practically about the development business and where that gain came from. What do you think the next few quarters have in store for selling assets that you may have co-invested on the development side in, and/or, can you even give a sense as to maybe what that mark-to-market is on the $50 million some odd that you've got in equity in that business?

Sure. Well, in terms of the two sales what I would tell you is they were high quality assets well-leased in a -- in the Houston market. So, kind of all of the things you think about at this point in the cycle we attribute, if you think about assets that would sell, these assets had. And so -- and they happen to hit within the same quarter. I would say that there's possibly more sales in the future, but nothing definitive. So, I would say it is not a -- it's not indicative of a trend necessarily, and I would leave it at that.

Do you think there are more danger -- do you think the value of those positions that you have in the embedded gains are anywhere near kind of what you experienced in the second quarter? Because if I look at what that investment was last quarter I think it was $60 million some odd and it went down to $50 million some odd so I'm assuming that I think it was an $8 million change that that was your equity in these two properties that you sold and you booked a $25 million gain. It's a pretty substantial gain over seemingly what you had into it. Like, just wondering, like is that typical?

One those properties was consolidated and one of those was a co-investment. To the extent the gain -- it was split pretty much evenly between the two.

So to the extent that the gain came through for the consolidated property that's actually reflected in discontinued operations. To the extent it was related to the property where we co-invested it came through equity earnings.

But more generally speaking, I think this might answer the question in terms of the co-investment that we have, which is reflected in the slide deck we don't anticipate anymore significant write-downs. There may be one here or there but we don't expect any significant ones and that should be indicative in terms of where we think values are relative to our portfolio.

Thanks.

And at this time there are no further questions in queue, please continue with any closing remarks.

Thank you, operator, and thanks everybody for participating in the call. We'll talk to you next quarter.

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