世邦魏理仕集團 (CBRE) 2010 Q3 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the CB Richard Ellis third quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. At this time I would like to turn the conference over to our host, Chief Executive Officer, Mr. Brett White, please go ahead.

Third quarter 2010 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 been webcast live and is available on the investor relations section of our website. Also available is the presentation slide deck 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 the slide labeled forward-looking statements.

Presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 including statements regarding our future growth momentum, operations, financial performance, and 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 security laws, we undertake no obligation to update or publicly revise any of these forward-looking statements you may hear today. Please refer to the our third quarter earnings report formed on Form 8-K last night and our current report on Form 10-K and current quarterly report on 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, 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 to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures which are attached here to within the appendix.

Please turn to slide 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 over to Brett.

Thank you, Nick. And please turn to slide four. We are pleased to once again report strong revenue and earnings growth in our business as we continue to benefit from the ongoing recovery in the commercial real estate services industry, our increased market share and continued discipline in managing our operating expenses. Our third quarter total revenue was $1.3 billion, a 24% increase over the third quarter of 2009. As was the case in the second quarter, our revenue increase was driven by sizable gains and our three largest lines of business. Investment sales revenue increased 63% around the globe. Leasing revenue rose 27% led by the Americas and outsourcing revenue grew 7% led by Asia Pacific and EMEA.

The recovery and the commercial real estate services business is especially welcome given the continued mixed signals and uncertainty about the pace of the global economic recovery. Although we have benefited from a recovery in our industry, our revenue growth has also been fueled by our ability to continue to grow market share. An example of this is US investment property sales where our US market share grew to 17.9% in the third quarter, more than 400 basis points higher than the third quarter of 2009 and more than double our next largest competitor according to real capital analytics. While we grew revenue by 24%, our normalized EBITDA was $175.5 million in the third quarter of 2010, a 60% increase over the $109.9 million in the third quarter of 2009. This translated into a normalized EBITDA margin of 13.9% in the third quarter of 2010 versus 10.7% in the third quarter of 2009. This accelerated growth in normalized EBITDA results from a shift in our revenue for the transaction business and the operating leverage created as we significantly reduced our expense structure during the industry downturn.

We are pleased to be able to generate this EBITDA growth in the third quarter when we restored certain salary, commission, and other reductions implemented during the downturn. Some of the more sizable transactions completing during or immediately following the quarter are listed on slide five. As usual, I will not go through them individually but have included them to show some key business wins. And, with that, I will now turn the call over to Gil to go over the financial results. Gil?

Thank you, Brett. Please advance to slide six. Revenue was $1.3 billion for the third quarter of 2010, up 23.8% from last year, resulting from improvements in sales, leasing, outsourcing, and commercial mortgage brokerage activities. Reported EBITDA increased 73.1% in the third quarter of 2010 to $169.9 million from $98.1 million in the third quarter of 2009. Normalized EBITDA was up 59.7% to $175.5 million in the quarter from $109.9 million in the third quarter of 2009, delivering a normalized EBITDA margin of 13.9% for the third quarter of 2010.

Our cost of services as a percentage of revenue was down 120 basis points to 58.1% in the third quarter of 2010 versus 59.3% in the third quarter last year. This improvement is particularly notable considering the full restoration of commission rates to pre-recession levels in the current year quarter. The improvement also resulted from the increase in overall revenue and a higher mix of transaction revenue versus the prior year quarter along with the benefit of cost reductions.

In the third quarter of 2010, operating expenses as a percent of total revenue declined by 340 basis points to 29.6% versus 33% in the third quarter of 2009. In absolute terms, the 10.9% year-over-year increase in operating expenses was driven by restoring salaries to pre-recession levels as discussed in prior calls and higher bonus compensation accruals as a result of stronger financial performance. Third quarter 2010 GAAP diluted earnings per share was $0.18 versus $0.04 last year. Adjusted diluted earnings per share was $0.20 versus $0.08 in the third quarter of 2009. Third quarter 2010 earnings per share was held by a $4.3 million reduction in interest expense stemming from debt pay down, but negatively impacted by approximately 33 million more diluted shares outstanding mainly as a result of our November 2009 equity offering. Our third quarter 2010 tax rate was 41.5%, primarily due to losses in certain jurisdictions that could not be benefited, and our full year tax rate continues to approximate 36% to 38%.

Please turn to slide seven. Property and facilities management remained our largest service line in the third quarter of 2010 increasing 7% versus a year ago. It represented 34% of total revenue in the current year quarter as compared to 40% in the third quarter of 2009. Leasing increased 27% in the quarter versus the third quarter of 2009. It came in a close second to outsourcing at 33% of total company revenue in Q3 2010. Sales revenue increased 63% in third quarter of 2010 versus a year ago, reflecting the continuation of the strong trend we have seen throughout 2010. Investment sales increased to represent 16% of total company revenue in the third quarter of 2010 versus only 12% in the third quarter of 2009. Appraisal and valuation revenue was down 4% in third quarter of 2010 as compared to the third quarter of 2009. This was driven by EMEA where investment sales activity growth, while still robust, slowed slightly. Global investment management revenue increased 17% year over year, development services revenue was up 7%, and the commercial mortgage brokerage business posted an increase of 216% driven by loan sales and strong government sponsored entity activity as well as some improvement on the part of additional lenders. Revenue from property and facilities management, fees for assets under management, loan servicing fees and leasing commissions from existing clients are all largely recurring. This revenue represented approximately 57% of total revenue for the third quarter of 2010.

Please turn to slide eight. The outsourcing business continued a positive growth trend with revenue rising 7% in the third quarter of 2010. This is indicative of the steady growth we expect from this business. Business was strong again in the third quarter of 2010. We set a new CBRE record with 19 new accounts. We renewed eight contracts during the third quarter and we also expanded our service offering for six existing outsourcing clients. Our performance this quarter also includes two notable trends that bode well for our future. One is the growth of international business, particularly in Asia Pacific where outsourcing is in its infancy and also in EMEA where the pace of adoption is quickening. The second is increased penetration in the government and healthcare sectors, two vertical industries we have targeted for opportunity. Overall, our global portfolio of property and facilities under management totaled 2.5 billion square feet at the end of the third quarter, an increase of 14% year-to-date.

Slide nine demonstrates the improving or expected improvement in vacancy rates and absorption into 2011. The slide depicts the average national cap rates and notwithstanding the related projections we continue to see cap rate contraction more specifically among high profile properties in large markets. Further evidence of the recovery of the investment sales market is that top tier assets are trading actively at cap rates between 4.75% and 6% and financing for these assets has become much more available at attractive rates.

Please turn to slide 10. The recovery of the US investment sales market continued in the third quarter of 2010 as market wide sales more than doubled to $28.9 billion according to Real Capital Analytics. Our CBRE Americas sales revenue for the third quarter increased 69% on a year-over-year basis. This was the strongest year-over-year increase since the fourth quarter of 2007. This strength is certainly evident in CBRE's institutional pipeline activity which more than doubled when compared to trough levels but is still less than half the peak levels of 2007. Our Americas leasing revenue outpaced year to date growth in the third quarter of 2010 increasing by 36% as compared to the third quarter of 2009. Nationally, the office vacancy decreased by 10 basis points to 16.6%. Net absorption in US office product was positive for the second straight quarter.

Please turn to slide 11. Our investment sales revenue, EMEA increased by 43% in the third quarter of 2010 as compared to the third quarter of 2009. Total market investment sales turnover on a year-over-year basis increased 24% from the third quarter of 2009 to the third quarter of 2010. Cap rates in the market continue to decrease against specifically for prime properties. CBRE's revenue from leasing and EMEA grew 11% in the third quarter of 2010 versus the third quarter of 2009. Sales and lease activity in EMEA was led by France and the United Kingdom.

Please turn to slide 12. CBRE sales revenue in Asia Pacific increased by 76% in the third quarter of 2010 versus the third quarter of 2009. The increase was reflective of the continuation of solid economic growth and surging capital inflows. CBRE's leasing revenue in Asia Pacific grew by 12% in the third quarter versus the third quarter of 2009. Office, retail and industrial markets all showed signs of improvement. The strongest revenue growth came from Australia, India, Japan and Singapore.

Please turn to slide 13. Revenue for the development services segment was up 9% to $22 million in the third quarter of 2010 versus the third quarter of 2009 driven by higher development fees. Operating results for the third quarter of 2010 for this segment included normalized EBITDA of $10.7 million, a meaningful improvement over prior year that was driven by gains from asset sales. At September 30, 2010, in-process development totaled $4.9 billion up from $4.4 billion at June 30, 2010, and $4.7 billion at year end 2009. The pipeline at September 30, 2010, totaled $1.1 billion up from $800 million at June 30, 2010, and $900 million at year end 2009. The combined total of $6 billion is up 15% from June 30, 2010, and 7% from year end 2009. At the own of the third quarter, our equity core investments in the development services business totaled $60 million.

Please turn to slide 14. Global investment management revenue was up 51% to $49.5 million in the third quarter 2010 from $32.9 million in the third quarter of 2009. $9 million of this increase 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 asset under management were up 12% in the third quarter of 2010, and acquisition fees increased to $4.8 million from $1.8 million as a result of a notable increase in the pace of capital deployment. Assets under management totaled $35.7 billion at the end of third quarter of 2010 which was up 3% compared to the fourth quarter of 2009 and 6% versus the second quarter of 2010. During the third quarter we had $1.5 billion of acquisitions and portfolio takeovers and $600 million of dispositions globally. Currency fluctuations increased the portfolio by $1.1 billion. Year-to-date 2010 we have raised new capital of approximately $4 billion and have approximately $2.4 billion of capital to deploy at the end of the third quarter. Our current investments in this business at the end of the quarter totaled $94.1 million.

Our global investment management EBITDA reconciliation detail is shown on slide 15. In the third quarter of 2010 we wrote down only $1.2 million of investments. In both the third quarter of 2010 and the third quarter of 2009 we did not realize any carried interest revenue. In the third quarter of 2010 we reversed a net $1.4 million of carried interest compensation expense accrual as compared to the $6 million we reversed in the third quarter of 2009. As of September 30, 2010, the Company maintains a cumulative accrual of carried interest compensation expense of approximately $13 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. This business operated at a normalized EBITDA margin of 33% for the third quarter of 2010 and 20% year-to-date 2010.

Please turn to slide 16. Real Capital Analytics classified $192 billion of commercial real estate as distressed at the end of the third quarter of 2010. This includes properties that are troubled including those that are delinquent or in default in lender REO or in work out. The Company's portfolios of distressed assets currently being marketed for sale in the US is now approximately $7.5 billion. Year-to-date 2010 we are sold $1.5 billion of such distressed assets in the US. The $7.5 billion appears to be consistent with the second quarter of 2010 but it is actually up slightly due to continued sales in the third quarter and in asset values based on current appraisals.

Please turn to slide 17. The left side of slide 17 shows our amortization and debt maturity schedule for the period ended September 30, 2010. The right side of this slide has been adjusted to reflect outstanding debt post closing of the $350 million, 2020 senior unsecured notes offering completed immediately following the end of the third quarter. As you can see we continue to prepay debt and maturities have been significantly extended. In addition, as you may recall we previously announced that we intend to use approximately $500 million of cash on hand and $650 million of proceeds for proposed new secure term loans to retire the remaining existing term loans outstanding. Further, we are planning on putting a new $700 million revolver in place to allow us more financial flexibility and remove the need to carry excess cash on the balance sheet that returns very little in today's interest rate environment. These activities are expected to close in the fourth quarter and are, therefore, not depicted on this slide.

Please turn to slide 18. Excluding our nonrecourse real estate loans and mortgage broker age warehouse facility, our total net debt at the end of the third quarter of 2010 was $1.16 billion. During the nine months ended September 30, 2010, our net debt position decreased by $245 million or 17% including the $150 million of existing term loan prepaid this quarter with our seasonally strongest quarter still ahead for 2010. At September 30, 2010, our weighted average interest rate was approximately 7% which should come down in the fourth quarter of 2010 depending on our current refinancing efforts. Our leverage ratio exam the covenant basis now stands at 1.27 times at the end of the third quarter of 2010. Our total company recourse net debt to EBITDA stood at 1.85 times which is below our current target of two times. And, with that, I will now turn the call back over to Brett.

Thank you, Gil. Please turn to slide 19. We are very pleased with the overall year-to-date performance. Our industry has benefited from a sharp recovery thus far in 2010 which, frankly, we did not anticipate at the beginning of the year. This type of recovery is not unusual for our industry, as it initially comes out of a anything down cycle and it is normally followed by periods of more moderate growth as the continuing recovery is fueled by improving commercial real estate fundamentals. We are encouraged to see the investment sales market become more active, to see lending improve and become more competitive, to see tenants enter into typical or even opportunistic leases and to see outsourcing clients think longer term as they look to restore their businesses to order.

We believe that revenue growth in sales and leasing should continue, but are of course mindful of the year-over-year comparisons getting tougher here in the fourth quarter. We also believe that the number of new contracts recently signed in our out sourcing business is an indicator of continued solid growth in that business. We believe that the addition to clients and the expansion of services with existing clients by the return to more normal activity volumes will drive a low double digit growth rate in outsourcing over time. As already mentioned in the third quarter we restored salary, commission, and other reductions implemented in the industry downturn. Despite doing so, we continue to generate year-over-year growth in our normalized EBITDA margins achieving close to 14% for the third quarter of 2010. Give these trends and the fact that we are almost ten months through 2010, we are revising our full year earnings estimates to between $0.65 and $0.70 per diluted share. With that, operator, we will now take questions.

(Operator Instructions). And our first question today comes from the line of Sloan Bohlen representing Goldman Sachs. Please go ahead.

Good morning.

Morning, Sloan.

I wonder if you could just elaborate a little bit about the expense ramp or how we should think about it going forward, either from an EBITDA margin perspective or I guess a comp-to-revenue perspective?

Sure. Let me take the first stab at that and then I will ask Gil to round out my comments. The first thing I would say, Sloan, is that it was evidence through our numbers through the third quarter, I think we have done a really remarkable job in maintaining expenses or keeping a good governor on expenses even though revenues are growing quite rapidly. Our margins for the quarter were significantly higher than our major competitors in the business and frankly so that we are quite proud of.

As we go into later quarters of this recovery and then expansion cycle we will continue to on-board expenses in prudent fashion. We are bringing on an enormous amount of new business right now, but we don't see any great need to ramp up expenses for those new business wins. And I am sure that as the months and quarters ahead come through we will have opportunities to invest into good opportunities that present themselves. But, again, I want to stress the point, as you know, we spend an ordinant amount of energy here maintaining industry-leading margins, we are going to continue to do that. Gil?

Thanks, Brett. Hi, Sloan. What I would say is that just following along consistent with what Brett said, I would say that I would not expect the OpEx as a percent of revenue to go up significantly more than in any other quarter. It does ramp a little bit because of seasonality, but I wouldn't expect a big jump. I would also caution that, as you know, we did start adding back some costs that we cut during the downturn mid-year and we saw a bit of that impact in Q3, not too much, and it will be a little more back-end loaded in Q4. So there's that aspect as well to consider.

Okay. And then, Gil, with regard to those expenses that have been cut previously, is it still the idea that maybe a fifth of them or so come back and that's paced over the next four or five quarters I guess?

That's correct, yes.

Okay. Switching gears to forward-looking acquisitions or capacity for acquisitions, just wondering about the decision to use cash to rework the balance sheet in this quarter versus what other alternatives of cash could have been.

I think we are in a terrific position right now, Sloan, which is we can do both. We believe we have more than enough capacity to pursue any acquisitions that may come our way for the next few quarters, few years, and we had the ability to do some pretty terrific things with our balance sheet and are continuing, as you know, to do some work there, we are almost done. I think we will end up, by the way, with a remarkably clean and strong balance sheet and terrific capacity to pursue opportunities that come our way.

Just in terms of sizing the amount of dry powder after you rework the credit facility, how much do you think relative to the cash you had on the balance sheet, what size of acquisition? Is it going to be the type of bolt-on type of deals or could you pursue something a little bit larger?

I can't image an acquisition right now in the marketplace that we couldn't pursue with there.

Okay. And then just maybe one other question on that same topic, where share repurchase may fall within that list of opportunities?

At the lower end. I believe, Sloan, as we look at the market today, there are, to your earlier question, there are a number of opportunities in the market today that we find interesting and we believe that putting capital to work on M&A is a great place to put it. We believe putting capital to work in co-investments, in our principal businesses is a great place to put it. Share repurchase is always an attractive alternative, particularly at the early stages of a recovery cycle. It is something we are thinking about all the time. We will, as we prepare our budget for 2011, it will certainly be one of the considerations that we spend some time on.

Okay. Thank you guys.

Our next question will come from Will Marks representing JMP Securities. Please go ahead.

Thank you. Good morning, Brett. Good morning, Gil. I had a question I guess starting with guidance and you touched on this a little bit. The implied fourth quarter guidance is, I believe, $0.26 to $0.31, last year it was $0.28. Can you maybe discuss in more detail, with consensus numbers revenue growth looks to be only 13%, EBITDA growth 15%. The first three quarters of this year your EBITDA grew something like 60%. I know that the comp's tougher and -- but it just seems like this is an extremely conservative range?

Well, the comp is tougher, Will, and we are getting into what I think is going to be a more normalized environment for the firm. We have had some terrific quarters as we entered the recovery phase against some incredibly soft comps, and we are now getting in to whether it is the fourth quarter or first quarter of next year, we are getting into a period of time when the comps are going to get tougher. Guidance range we have put out there is something we are comfortable with. We have a history with guidance that probably speaks for itself. We could always consider not giving guidance but we think it is important to try and we are comfortable with where we came out.

Is there anything we should think about whether it is development gains or anything outside the ordinary for the fourth quarter that we should model in?

Will, it is Gil. We don't normally comment on specific lines of business but let's just say the guidance we gave we'd consider any and all of those.

Okay. Alright. One other unrelated question, you were just discussing acquisitions earlier. I am curious on the deals you are looking at. Is there much competition? I know this isn't like buying real estate where these days you may have 25 buyers competing for a property. Is it -- we know your other large competitors are looking at deals as well. Are there sometimes just two competitors, is it sometimes no one else, maybe general thoughts would be appreciated.

We --at least to date we have never had a situation with a services firm acquisition where we're competing against anybody. We obviously would prefer not to. We generally tell firms out there that if they're interested in talking to us, it needs to be exclusive. We will not participate in an auction in the services business and today we haven't; it's not to say we won't, but the firms that, the opportunities that we see out there in the services space, the ones that are more interesting to us, we believe we are in a position where if they decide to do something they will come to us first and try to make a deal. If they can't, they will move on. I don't know if that's absolutely going to be the case but that's our intent. That's the way it has worked so far.

Outside of the services space it is a different world, and outside of the services space you see auction as the preferred route. So what would be outside of the services space would be things such as real estate investment management, these sorts of things. So, there's a lot out there to look at. There's plenty of growth available through infill M&A for everybody and my suspicion is that there isn't going to be a lot of competition for these infill firms. At this point in our industry I really believe that for all intents and purposes, you've got two firms out there who are driving this business and who will probably make the bulk of the infill and strategic acquisitions, which we are one. We like that dynamic. Our competitor is a terrific competitor and fortunately for us, and maybe for them, we really haven't competed much on M&A.

Great. Thank you very much, Brett.

Sure.

Next we will go to the line of Anthony Paolone representing JPMorgan. Please go ahead.

Thank you. Can you talk about how much of your leasing strength and growth has come by way of market share versus potentially pulling forward some demand versus say just improving market trends globally?

Yes, generally. So first of all the market space for leasing globally has improved demonstrably over the past 12 months and I think that that improvement most benefits the dominant firms in the business. So I believe that when all the numbers are counted up at the end of the third quarter what you'll find is that for those firms that have a major presence in leasing around the world, that they all did fairly well. We note that our leasing business seems to be improving in all geographies. Share, I would give you the same comment that we have talked about the last year and a half which I believe that share generally is accreting to a couple of firms and diminishing among most of the others. And I think that's ran which has been expanding the industry for quite some time will continue for quite some time and we like that trend. In terms of kind of what's going on within the leasing numbers we note that there is a marked increase in the number of transactions that are occurring. So I would look at that as some of that is pull forward, and some of that is companies who have discretion on moving, now taking opportunity to take advantage of a relatively low-rent market; and we are definitely seeing some of that. That would be my answer to your question.

How much, what is the risk that those comps get pretty difficult if we move out 12 months and you don't have to pull forward as much as maybe you did in 2010 and economic growth is still pretty modest. What do you think happens to those comps?

That's a good question. I think the risk to the numbers is GDP and job growth. I think -- I understand your point quite clearly and you are on a very important, a very valid point which is how much of this improvement of leasing was pent-up demand and how much of this is structural improvement based on market dynamics. I think it's a little of both. If we are sitting here a year from now and there has been no material job growth globally and economic activity is generally flat, these comps are going to get harder, materially harder. However, that is not our view and if job growth continues to improve, even incrementally, that's okay as long as economic activity continues to improve and, again, even incrementally, that's okay, then the leasing numbers should continue to improve along with them.

Remember that our forecasts are that rental rates have likely bottomed in every major world market, and that rental rates will now begin improving depending on which market and which product type you are looking at. Some time, right now or over the next six to nine months, our improvement in leasing revenues reflects rental decreases. So when you get even rent stability or rent increase, that's a huge supporter to our leasing revenues. So there's a lot of factors you have to think about in this. The way I think about it is we are going to be enjoying increasing rents generally over the next few years. We are going to be enjoying improved economic activity over the next few years and improving job growth, and all that should support quite descent growth in leasing revenues globally.

That's really helpful with the description there. On -- I want to switch to the transaction side. Can you give us a sense as to what the incremental margins, EBITDA margins have been as sales transactions have ramped up in the last six to 12 months?

I can't but maybe Gil can.

I will answer it this way and I think I always answer it this way. You are on the right point in terms of incremental margins beyond fixed costs obviously being higher than the first dollars of revenue in that business, and sale and lease frankly aren't that different. What I would say to you is that those businesses on average, including those incremental dollars that you are referring to, will give us a margin somewhere in the 16% to 19%, 20% range depending on where we are in the cycle.

The 16% to 19% being overall.

Overall for those service lines.

Okay.

So that takes the first dollars of sales and the last dollars of sales.

Okay. Then just last question on the outsourcing business. I think in the third quarter of last year you had, I think it was 2 billion square feet of space and I think that's up 25% I guess to about 2.5 billion but your revenues are up and just wondering what the difference is there and whether or not there's some rate or fee compression that you've experienced there.

I think there isn't a direct comparison between our revenues and square feet under management. I wish that there was. The business with the square feet under management includes transactions in our sort of those global accounts. So when we talk about square foot under management, it includes accounts where we maybe have contractual transaction management arrangements as well as facility management, management for landlords and project management. When we talk about the fees in that revenue pie chart in the earnings there, it excludes transaction management because those revenues are included in sale and lease. That accounts for one difference. The other is just there's -- as I have listed, there's a large mix of four specific mixes of businesses within that square footage and so you can have varying dynamics, but the biggest drive is going to be square footage under management where the revenues portion are not in that property management and facilities revenue number.

And this is Brett. Just to that point, I think it is true that I think our reporting on this is less than perfect. It is very difficult to aggregate exactly right. The revenues that flow from these global clients, and we think that tracking it by activity is a better depiction for the market than by client types. So, in other words, in that outsourcing space, as Gil mentioned, what is stripped out of there is virtually all of the transaction revenues which are frankly a big piece of, as you would imagine, of those -- in fact the highest margin piece of those accounts, those we put over by activity lease or sales or valuation, et cetera. So, as Gil said, that can, I think, distort the view of that business a little. But I'd say, generally speaking I would say we are quite pleased with the trajectory of our outsourcing business. It is growing very well right now. And we also are quite pleased with the perspective or the attitudes of our major global clients which is resoundingly positive. These folks, and we listen to them very carefully because they tell us in a very clear way what we should expect from the market in the coming years, and what they're telling us is that they're much less concerned about economic activity or job growth this quarter or next quarter or for that matter even this year. They're a lot more focused on what they think the prospects for business are for the next three, four, five years and I would say there's a very high percentage of our major global clients have a positive outlook over that mid- and long term. And it is that positive outlook that is driving their decisions to-- around a real estate. That's what is driving, frankly, a lot of revenue growth in leasing, sales and in the outsourcing space. Sorry for the long answer but it's a complicated question.

I appreciate it. Thank you. That's all I have got.

Our next question comes from the line of Brandon Dobell. (Operator Instructions). Your line is open.

Thanks. Good morning, guys.

Hey, Brandon.

Gil, I wanted to go back to your cost comments for a second. Any way to size out the magnitude of the reinstatement? In the past you talked about $100 million or $200 million of stuff you thought might pick its way back in the business depending on the trajectory of revenues, but is that the right way to think about the magnitude or are we talking something smaller or larger than that range?

Brandon, I want to be a little careful about what I say because some of that is, of course, discretionary.

Right.

So you will respect that please, but I want to just stick with what we have said which is 20% to 25% of the $600 million could come back on a run rate basis almost by design and about half that number comes back in 2010. There could be a little bit more but it will depend on performance which fits into sort of the commentary we have made vis-a-vis our outlook.

Brandon, just on that point, I want to underscore what Gil is saying. We are paying very close attention to the top line and letting that dictate for us what flows through OpEx, where we make discretionary investments around OpEx in the business mindful of margins. And, as Gil said, we are watching all of this very carefully. We like the trends that we are seeing, we like them very much the trends we are seeing in the market at the moment and in the business, and that's giving us some flexibility to make some forward investments. We watch that literally daily and we have an ability which I think we have proven to you both through the down cycle and up cycle to keep a very, very good hand on the tiller as it comes to OpEx. We will continue to do that.

Along those lines, for Brett, if you were to compare maybe how much flexibility or discretion you give the producers or the office manager producers out in the field, at this part in the cycle relative to where you were nine or 12 months ago or even compared to four or five years ago, how much flexibility do they have to kind of make their own decision about what to spend, when to spend it or how much is run through your and Gil's office from that point of view?

Well, regardless of cycles, regardless of where we are, up market or down market, we keep rigid control over expenses and the way that works is our local markets and our business lines produce budgets as you would expect and hope for. They're doing that right now for next year. And those budgets get worked over quite hard by us and there is a iterative process where these budgets move back and forth between corporate and the field. That may happen two, three, four times over the next few months, but we will end up with a budget for every single office we have around the world, every business line, and we demand strict adherence to those budgets. So the flexibility that the business has around expenses they exert during the budget process, but once that budget process is done there really isn't any flexibility they have to increase spending. Now, in a year like this year where we saw revenue growth frankly much stronger than we expected, we went back out to them and provided some flexibility around some initiatives that we had tabled that they had wanted to do this year and we do that a lot. We will get this year 20, 30 different growth initiatives from around the business, around the world. We may approve a third of those, maybe half of those and we will table 2/3 or a half and we will then take a peak at the business at the end of the first quarter, at the end of second quarter, and if the business warrants a further investment, we will make it. But the way in which you keep margins up and the way in which you position a firm to come through a downturn like we did is, I believe, is you must keep very, very strong, very rigid control over spending and in a market like we are in now that feels quite good, there's an enormous temptation to loosen up those reigns and that isn't going to happen.

Fair enough. Brett, in the context of your comments around the macro-environment, two questions on development. What's the medium term outlook for your ability to build a pipeline of projects, and is there an appetite to take that business and make it bigger in what I call structural growth markets like Asia, for example, or do you think you are better served keeping that business primarily here in the US?

So two questions, first on pipeline and second geography. The first question, a lot of interesting things came from the last three or four years. One of them for me was watching how quickly our commercial development company was able to reduce expense structurally. That business reduced more expense as a percent of total than any business we had in the world and they did it more quickly than any business we had in the world. They for all intents and purposes maintained positive EBITDA profitability throughout the down cycle. Imagine that, a commercial development firm throughout the down cycle and, in fact, had been a material contributor to our EBITDA this year, all of the things I just told you were lessons for me and were very surprising and very impressive attributes to that business. It is a very, very well managed business. That business is superbly positioned at the moment to take advantage of an improving market. That business is very much a programmatic business in the sense that it isn't a commercial development company that goes out and ties up land and looks for a lender and builds a spec building and hopes for leasing to occur. Rather, it is a very sophisticated business. It looks a lot more like a fund management business. They have institutional partners. They have programs that they run with those partners. We have virtually nothing at risk in those programs other than a very small co-investment. It is a business also that has focused a lot of energy on development work that doesn't have any risk.

So this is build-to-suit work for large customers, it is also government work, it's educational related. So housing at colleges or health centers, this sort of thing. These folks have found really a terrific way to build a successful development firm that is sustainable in up markets and down and I think they would tell you that their opportunities going forward look quite good. In terms of expanding outside the United States, they spent quite a bit of time and energy exploring those opportunities at the peak of the last cycle and even then they determined that it probably wasn't right for us. That the risks to the business outside the states were just too high to warrant the investment and I think that's smart. It is like the rest of our business, we go to some pains to tell all of you folks that there are a lot of places we could invest money and make money. We could -- we managed 2.5 billion square feet of commercial buildings around the world. There's probably a lot of services on those buildings we can do. We can do janitorial, we can do elevators, we can do window cleaning, a lot of things we can do, but we don't do them either because we think the risks are too high or there's business we don't understand. I think in development, what they concluded is the opportunities are ripe enough in markets they have been in for 30 or 40 years that they can achieve their growth targets without putting the business at risk and frankly I like that.

Last question, within capital markets I guess in the US and EMEA, if you were to parse out the types of transactions, trophy assets, stress assets, middle-of-the-road assets, how would the mix of business look now compared to six months ago, do you think it changes dramatically in the next 12 months or just keep this kind of current mix?

It is a great question, and I would answer it this way. The market for the past year globally in the capital markets has been almost exclusively focused on core Class A properties which isn't all that surprising given the pain that fund managers and limited partners went through the past three years. What has clearly occurred is that while a lot of money has been raised for investment in commercial real estate, the current exceptional interest rate environment allows investors to find acceptable yield in the least risky investments which are core assets; therefore, the bulk of the buy/sell activity is occurring in that segment of the marketplace. The distressed market, and we have talked about this on earlier calls, while we have a terrific restructuring business and we are working for the FDIC and excited about the business in there, that's not really the distressed market that people think about. The stress market people think about is $1.4 trillion of commercial mortgages that have a higher face value with the properties they're on. And the stress market people are interested in is that group of assets, and it seems clear or clearer at the moment that there isn't going to be a titanic flushing of those assets through the market like we saw in the early 1990s with the RTC. Rather, the way that the government and entities around the world are dealing with this issue, be it Ireland with their loan purchase program or the United States with the accounting rules that have been put through, the incentive to the banks is to work out these issues or hold them. So that has been the rule of the day. And as long as that stays the rule of the day, you're not going to see a big distressed opportunity. What you will see as this recovery and expansion phase matures is you will see invested capital migrate away or -- migrate into, not away from, but into higher risk opportunities and that will happen when limited partners are accepting a higher risk in the asset class. It will happen when folks determine they can't place their money in core; there's not enough to go around. It will happen when interest rates move up a bit and the arm between those rates and yields require folks to take a bit more risk. But at the moment, the activity is almost entirely focused right now on these core assets. That's true globally. It is true in Hong Kong, it's true in the States, it's true in London. This will be, I think, a slow migration into higher risk, higher yield properties over time.

Fair enough.

Gentlemen, there are no other participants queueing up.

Great. Thanks, everyone, for your time. We will talk to you at the end of the fourth quarter.

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