世邦魏理仕集團 (CBRE) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CB Richard Ellis' second quarter earnings call. At this time all participants are in a listen only mode. Later we will conduct a question Q&A session instructions will be given at that time. If you should require assistance (Operator Instructions). And I would now like to turn the conference over to our host, Mr. Nick Kormeluk. Please go ahead, sir.

Thank you, and welcome to CB Richard Ellis' second quarter 2011 earnings conference call. Last night we issued a press release announcing our financial results. This release is available on the home page of our website at www.cbre.com. This conference call is being webcast live and is available on the Investor Relations section of our website. Also available is a presentation slide deck which you can use to follow along with our prepared remarks. An archived audio of the webcast, a transcript and a PDF version of this live presentation will be posted to the website later today. Please turn to the slides labeled forward-looking statements.

This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 including statements regarding our future growth momentum, operations, financial performance, business outlook and the ability to complete and integrate our announced acquisition of the ING REIM businesses in Europe and Asia. These statements should be considered as estimates only and actual results may ultimately differ from these estimates. Except to the extent required by the applicable Securities Laws we undertake no obligation to update or publicly revise any of these forward-looking statements that you may hear today.

Please refer to our second quarter earnings report filed on Form 8-K, our current annual report on Form 10-K and our 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 at www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today. We may make certain statements during the course of this presentation which include references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations we have provided reconciliation of these measures to what we believe are the most directly comparable GAAP measures which are attached hereto within the appendix.

Please turn to slide 3. Our management team members participating with me today or 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 please turn to slide 4. We are very pleased with our revenue growth of 21% in the second quarter of 2011 versus the second quarter of 2010. This clearly demonstrates the underlying strength of the recovery of our business and our industry. Our revenue growth was strong across all geographies and was particularly notable in our leasing investment sales and outsourcing businesses. Leasing revenues increased 22% with each geography posting growth of at least 15% over the second quarter of 2010. This performance comes against a backdrop of gradually improving market conditions evidenced by falling vacancy and an uptick in rents in many parts of the word. These conditions have prompted more companies to lock in long-term occupancy at today's relatively low market rents.

Investment sales revenues increased 44% led by the Americas and Asia-Pacific. Market activity accelerated very strongly in the US during the quarter due to increased demand for core assets in prime markets a broadening of investor appetite for properties in secondary markets and improved access to low cost financing. Outsourcing revenues increased 13% with double-digit contributions from all geographies. We continue to see more and more companies embrace outsourcing solutions as a means of lowering costs and remaining competitive in a slow growth economic environment. Demand remains high for global mandates and is growing in Europe and Asia where outsourcing is a newer concept.

Normalized EBITDA increased to $172 million from $165 million. It is important to note that in second quarter 2010 Development Services normalized EBITDA was $19 million greater than in the second quarter of 2011 predominantly resulting from outside gains from property sales. In addition, in the second quarter of 2011 we recorded $5.3 million of carried interest compensation expense due to the expectation of future profits from a fund in the investment management business. These items negatively impacted quarter-over-quarter normalized EBITDA comparisons in an absolute amount of $24 million.

In the absence of these two items our normalized EBITDA growth would have been 22%. Our normalized EBITDA margin was 12.1% while the prior year normalized EBITDA margin was 14.1%. Had it not been for the two aforementioned items, normalized EBITDA margin would have been approximately 12.5% in both years.

Despite an uneven and somewhat subdued global economic recovery, and a heightening of sovereign debt concerns in Europe during the last few months, we were pleased to observe continued commercial real estate recovery in the second quarter of 2011 as evidenced by our very strong revenue growth. We continue to be mindful of the potential impact of any real or perceived economic weakness. We continue to believe that the future timing and magnitude of the commercial real estate recovery is linked to the broader economic recovery.

Some of the more impressive transactions we completed during, or immediately following the quarter, are listed on slide 5. As usual I will not go through these individually but have included them to show some key business wins. I will now turn the call over to Gil to go over the financial deck. Gil.

Thanks, Brett. Please advance to slide 6. Revenue was $1.4 billion for the second quarter of 2011, up 21% from last year. This increase resulted from improvements in nearly all business lines. Normalized EBITDA was up 4% to $172.4 million in the second quarter of 2011 from $165.2 million in the second quarter of 2010. Delivering a normalized EBITDA margin of 12.1%.

As Brett just mentioned, excluding the impact of the outsized development services gained in the prior year, and a carried interest expense in the current year, normalized EBITDA would have grown by 22% and normalized EBITDA margin would have been approximately 12.5% in both years.

Our cost of services as a percentage of revenue increased to 59.1% in the second quarter of 2011 as compared to 57.9% in the second quarter of 2010. This was primarily due to US-based compensation reinstatements to pre-recession levels at the tail end of the second quarter of 2010 as well as select hiring predominantly in the [MEA] in 2010 and early 2011 in anticipation of improving transaction revenues and in support of new initiatives and recently won contracts. Despite an absolute increase in operating expenses and support of revenue growth, the impact of compensation reinstatements, and the aforementioned carried interest expense, second quarter 2011 operating expenses as a percent of total revenue dropped by 130 basis points to 30.4% versus 31.7% in the second quarter of 2010. This is indicative of effective cost control in the indirect and support areas of our business.

Interest expense decreased by $16.1 million in the second quarter of 2011 as compared to the second quarter of 2010. Primarily due to a more than $600 million reduction in outstanding debt in the second half of 2010 and lower interest rates resulting from our refinancing activities in the fourth quarter of 2010. Our second quarter 2011 tax rate was approximately 43% but we expect it to be approximately 40% for full year 2011.

Second quarter 2011 GAAP diluted earnings per share was $0.19 versus $0.17 last year. Adjusted diluted earnings per share was $0.21 as compared to $0.18 in the second quarter of 2010.

Please turn to slide 7. Property and facilities management was our largest service line in the second quarter of 2011. Representing 35% of total revenue in the quarter. Leasing was our second largest service line in the second quarter of 2011 after posting a 22% increase versus the second quarter of 2010. It represented 33% of total Company revenues in both the second quarter of 2011 and the second quarter of 2010.

Investment sales again posted strong growth with an increase of 44% in the second quarter of 2011, another significant improvement following a gain of 61% in the second quarter of 2010 versus the second quarter of 2009. Appraisal and valuation revenue jumped 16% in the second quarter of 2011 as compared to the second quarter of 2010. This was driven by continued strength in Capital Markets activities in the quarter.

Global investment management revenue increased 27% year-over-year driven by increases in asset management fees. Commercial mortgage brokerage posted an increase of 47% driven by continuing improvement in capital availability, the finance commercial real estate properties and a search for yield by investors in debt instruments. Development Services revenue was down 17% primarily due to lower rental revenue resulting from property dispositions.

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 comprised approximately 58% of total revenue for the second quarter of 2011.

These turn to slide 8. The outsourcing business growth rate remained quite strong this quarter with revenue up 13% versus the second quarter of 2010. This was driven by robust new account growth as well as client renewals and expansions that we experienced throughout 2010 and in the first half of 2011.

This strong performance was evident across all regions. In the second quarter a record 47 total long-term contracts were signed. This exceeds the previous quarterly record which was 44 in the first quarter of 2011. We signed 15 new accounts, 18 renewals and 14 expansions.

The revenue in RFP pipelines in this business are very healthy with a bias toward global portfolios. Overall, our global portfolio of commercial property and corporate facilities under management totaled 2.8 billion square feet at the end of the second quarter. An increase of 17 percent from the second quarter of 2010.

Slide 9 demonstrates the stabilizing or improving vacancy rates and absorption in offers and industrial markets through the second quarter of 2011 and our forecasted improvements in all three areas for 2011 and 2012. Average national office cap rates improved meaningfully in the second quarter of 2011 as compared to the second quarter of 2010. Driven by class A property sales and some early improvements across other classes.

Please turn to slide 10. The recovery of the Americas sales market accelerated in the second quarter of 2011 with revenue for the second quarter jumping 68% on a year-over-year basis on top of a 47% increase in the second quarter of 2010 versus the second quarter of 2009. For the first six months of the year our US investment sales market share totalled 14.3% according to RealCapital Analytics. This share was more than 450 basis points larger than our nearest competitor.

Our Americas leasing revenue posted a 23% increase in the second quarter of 2011 as compared to the second quarter of 2010. This comes on the heels of a 37% increase in the second quarter of 2010 versus the second quarter of 2009. Our year-over-year second quarter Americas leasing performance was also significantly better than our year-over-year first quarter performance. This confirms our belief that despite the lower growth in the first quarter of 2011, the underlying recovery and supporting fundamentals are solid.

During the second quarter of 2011 the US office vacancy rate decreased by 20 basis points to 16.2%. Net absorption in US office product improved modestly and this has had a slightly positive impact on vacancy rate.

Please turn to slide 11. Our investment sales revenue growth in EMEA slowed in the second quarter of 2011 but was still up 9% as compared to the second quarter of 2010. Growth was evident in the United Kingdom and the Nordic region. CBRE's revenue from leasing in EMEA grew 23% in the second quarter of 2011 versus the second quarter of 2010. This comes on top of a 15% increase in the second quarter of 2010 over the second quarter of 2009, and despite slower economic growth in the Euro zone than in other parts of the world. The United Kingdom, France and the Netherlands were the primary drivers of leasing revenue growth in the second quarter of 2011 in EMEA.

Please turn to slide 12. CBRE's sales revenue in Asia-Pacific increased by 28% in the second quarter of 2011 as compared to the second quarter of 2010. This followed a 66% increase in the second quarter of 2010 versus the second quarter of 2009. Australia an China drove this growth.

CBRE's leasing revenue in Asia-Pacific grew 17% in the second quarter of 2011 versus the second quarter of 2010. The strongest revenue growth came from New Zealand, China and India.

Albeit a relatively small part of our overall revenue under the circumstances it is appropriate to provide a brief update on our performance in Japan. While our Capital Markets activity has slowed by 30%, leasing improved slightly versus the prior year. Business conditions in Japan have begun to stabilize.

Please turn to slide 13. Revenue for the Development Services segment was $17.2 million in the second quarter of 2011 versus $19.7 million in the second quarter of 2010. Operating results for the second quarter of 2011 for this segment included normalized EBITDA of $9.4 million as compared to $28.4 million in the second quarter of 2010.

As previously mentioned, the declining normalized EBITDA was driven by outside gains from property sales in the second quarter of 2010. At June 30th, 2011 In-process development totalled $4.9 billion unchanged from December 31st, 2010 and up $500 million from the $4.4 billion in process at the end of the second quarter of 2010.

The pipeline at June 30th, 2011 increased to $1.4 billion, up $200 million from year-end 2010 and $600 million from the end of the second quarter of 2010 which indicates continued improvement in the sector. At the end of the second quarter our equity for investments in the development services business totalled $79.4 million.

Please turn to slide 14. The global investment management segment revenue was up 26% to $58.9 million including revenue from discontinued operations of $1.4 million in the second quarter of 2011 from $46.9 million in the second quarter of 2010. Increased fees for assets under management, acquisition fees and modest carried interest revenue all contributed to the overall increase.

Assets under management, or AUM, totalled $39.1 billion at the end of the second quarter of 2011. Which was 4% higher than the $37.6 billion under management at year end 2010 and 16% higher than the $33.7 billion at the end of the second quarter of 2010.

During the second quarter of 2011 we completed approximately $1.3 billion of acquisitions and approximately $800 million of dispositions globally. Property valuation increased our AUM by $600 million and currently (inaudible) increased the portfolio by approximately $100 million. Year-to-date 2011 we have raised new capital of approximately $600 million and had approximately $1.7 billion of capital to deploy at the end of the quarter.

Our current investments in this business at the end of the quarter totalled $105.8 million. On July 1st we close the ING Clarion real estate securities portion of the ING real estate investment management or ING REIM transaction for consideration of approximately $324 million. We also acquired core investment positions of approximately $59 million in select sponsored funds. This portion of the acquisition brings approximately $21 billion of listed securities assets under management to this segment. We remain on schedule to close the ING REIM Europe and Asia portion of the transaction in the second half of the year.

Our global investment management EBITDA reconciliation details is shown on slide 15. In the second quarter of 2011 we incurred $4.8 million of expenses related to the ING REIM acquisition predominantly for legal and other professional services. In the second quarter of 2011 we recorded $5.3 million of carried interest compensation expense which relates to gains expected in future periods. As of June 30th, 2011 the Company maintains a cumulative accrual of carried interest compensation expense of approximately $26 million which pertains to anticipated future carried interest revenue. This business operated at a pro forma normalized EBITDA margin of 21% for the second quarter of 2011.

Please turn to slide 16. Slide 16 shows our amortization and debt maturity schedule for all outstanding debt. On June 30th, 2011 we drew down our $400 million term loan deed to fund the closing of ING Clarion real estate securities on July 1st. The terms are liable plus 350 with 1% annual amortization and maturity in 2019. While we have sufficient cash on hand and debt capacity to fund our remainder of the ING acquisition, we are still considering whether or not we will utilize the $250 million ACM equity raise authorized by our Board of Directors. We are comfortable with the balance maturity profile we have on our debt with no meaningful maturities until 2015.

Please turn to slide 17. Excluding our non-recourse real estate loans and mortgage brokerage warehouse facilities our total net debt at the end of the second quarter of 2011 was $1.2 billion. This represents an increase from year end 2010 primarily due to seasonal incentive compensation and tax payments. In addition, we spent approximately $45 million on three (inaudible) acquisitions during this time frame. These included our affiliate operation in Switzerland, a retail property management company in Central and Eastern Europe and evaluation business in Australia. At June 30th, 2011 our weighted average interest rate was approximately 6.2%, slightly lower than the 6.4% at the end of the first quarter of 2011.

Our leverage ratio on a covenant basis now stands at 1.25 times at the end of the second quarter of 2011 on a trailing 12-month basis. Our total Company net debt to EBITDA stood at 1.64 times which remains below our current target of two times. We continue to anticipate that this ratio will be approximately two and a half times post the closing of all of ING REIM. I will now turn the call back over to Brett.

Thank you, Gil. And please turn to slide 18. This quarter demonstrated that the recovery in commercial real estate continues despite some bumps in the road to global economic recovery. Outsourcing fundamentals remain strong as evidenced by our execution of a record number of contracts in the second quarter. We continue to look for double-digit revenue growth from this part of our business.

We expect our investment sales business in the Americas and Asia-Pacific to continue to generate strong revenue growth throughout the year with somewhat less certainty in this regard in EMEA. Leasing revenue growth should remain solid even in the face of tougher comparisons later in the year.

While individual transactions can often greatly influence quarter to quarter performance of our global investment management and Development Services segments, we are generally quite optimistic about the outlook for these businesses for the rest of this year. Carried interest compensation accruals, taken in the investment management business, are good indicators of future asset valuation increases and corresponding carried interest revenue for the Company.

We continue to target peak EBITDA margins of 20% for the Company. We continue to expect earnings to be in the range of $0.95 to $1.05 per share for full year 2011. Operator we'll now take questions.

Thank you, sir. (Operator Instructions). One moment, please. Our first question is from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thank you. Good morning.

Morning.

Morning.

The extra comp costs that you guys took on in Europe and then returning some of the comp levels to pre-recession levels you mentioned you did a lot of these things in anticipation of a higher revenue base andI'm just wondering if you think you're going to hit that higher revenue base or what that sort of return looks like on making these investments back into costs.

Sure, Anthony. I'll take a stab at this and then Gil, you can, I round out what I neglect to mention. You know, Anthony, when we set our budgets for the year we need to forecast not only the amount of aggregate revenues that the Company will benefit from during the year but also their timing and their mix and that anticipation of revenues timing and mix then determines the amount of expense that we will load into the business for future growth. And the hiring that we've been doing across the business has been in anticipation of the type of revenue growth that we're seeing right now. You know, these are really at the revenue line unprecedented numbers for a services industry firm in this space. So the revenues are coming in at a level that that are very close to what we expected. However, the mix is a bit different and that mix that we're experiencing at the moment is weighted a bit more heavily towards the outsourcing space and a bit less heavily in Europe towards the capital markets business which is our highest margin business.

Not withstanding that our view regarding the recovery in general and in the mid and long-term remains right what it has been all along, which is we are in the early stages of a cyclical recovery, it will be a good recovery and the hiring that we've been doing in the business is well timed and well placed for the revenues we're both experiencing today and what we will be experiencing down the road in the future. But quarter to quarter and in the early stages of this recovery cycle it won't match perfectly we saw a little bit of that in the second quarter results. Gil, you want to add anything to that?

Yes. Brett, the only thing I would say I would just reiterate that we do manage costs and philosophically manage costs relative to revenues but you don't know what's in front of you and you certainly do know what's behind you and so seeing what we've seen this quarter in our conclusions regarding that we can then make adjustments to our cost base to match anticipated revenues based on the latest performance.

Is there anything that you're seeing out there that prompts you to maybe take your foot off the gas in terms of investing in some businesses and just watching things on the cost side a bit more at this point?

Well, you know, it's a great question, Anthony. It's something that you know as I said it's an art and so we feel very strongly that our commitment to the market, to our shareholders, and to all of you is that we focus very, very heavily on margin and you know that about us. So we're probably more likely to make adjustment to the cost base quickly and early as opposed to standing on the idea that these investments should stand as they are and continue a pace for some future date of revenue increase. So all that to say that based on the mix of revenues that we've seen year-to-date and the derivation of geography of those revenues, we've already begun to address components of our cost structure and you should expect us to do whatever we need to do to deliver the margins and the earnings that we've talked about the last few quarters.

Okay. I have a question on the leasing side and that part of the business can you talk to just general activity levels over the last few months?Like did you see much of a slowdown in May across the regions and are you seeing any sort of pickup in July? Just how has the business felt? How has the business been feeling just over the last few months?

Well, let me first of all say that the growth we are a seeing globally right now is unprecedented. It follows a year where we had very strong growth as well and leasing was not hit any why near as hard as the capital markets were during the downturn. So the leasing business generally speaking is in very good shape. Now, that being said there's so much uncertainty out there in the marketplace and has been for a few months here that it's very difficult to tell month to month what leasing revenues are going to look like and they can very lumpy as well.

You know, a few large transactions can really move the needle either way on your leasing business in any geography. I would say generally, Anthony, that the leasing business looks quite good but our expectations are that it will remain quite good for the year and I guess I will remind you an the other callers of what we talk about a lot in our Investor Day and we talked about on this phone call, which is shocks to the Capital Markets such as we're seeing in Europe right now with the sovereign debt concerns, and what that does. It doesn't tend to have an immediate impact on leasing. It tends to call a time out in our Capital Markets business. So, for instance, our investment properties performance in Europe is what below what we had expected and that's absolutely to be expected when you've got these shocks to the capital market system in Europe. It's a time out. It's certainly not a change of course and we remain very bullish on the Capital Markets both mid and long-term but these issues that we see in Europe, the spectacle that's occurring in Washington right now , at the moment don't seem to be having a material impact on leasing. Now, if they continue for a protected period of time that could change but at the moment I would say leasing looks quite

Okay. And then just my last question. How much did you guys spend on those few acquisitions you made in the quarter and what were the EBITDA multiples like?

I will give you the multiples an then Gil if you want to give a number, you can. I don't think we will but I will leave that up to you, Gil. The multiples in a market like this are going to be a bit higher than they will be later in the cycle because we're buying off of trop EBITDA. So the kind of multiples that we're looking at today, they vary by degree geography and they vary by business line. Generally speaking I would say on the low end they run probably four to five times and at the high ends they're probably getting into the eight range and again it really depends on what type of trop EBITDA you're buying of off and the kind of terms you can get around the measurement. But that would be the range and that range is as you know, Anthony, is fairly typical for our acquisition program. Gil, you want to talk about any of the numbers in there?

Yes. We already disclosed an aggregate. It was $45 million.

That's helpful.

Okay. Sure.

Thank you.

And we have a question from the line of Sloan Bohlen with Goldman Sachs. Please go ahead.

Hi. Good morning guys. Not to beat a dead horse on the cost but, Brett to your point, on a time out in certain markets do you think from a strategic standpoint that you are staffed, I guess, appropriately for a time out meaning that you think it's temporary for this year or do you think that to your point about managing costs going forward that you would manage more to a margin target for the cleaned of the year or an earnings target for the end of the year?

Well, there is a lot in that question, Sloan. I will start with we manage the business to a margin target and to an absolute earnings target and we expect the business to produce at both those metrics according to the plan we set forth at the beginning of the year, but let me be clear what I mean by a time out. This can be a two weak phenomena. It's not a year phenomena and these time outs tend to be, you know look at the performance of any of the Capital Markets in the second quarter we were up 9% which I believe was the highest growth rate of the industry in the second quarter. We had a very good performance there in the Capital Markets but not the level of performance that you would expect at this stage of recovery and that's because of these issues occurring, I believe, these issues occurring across pan continental Europe. But that slowing of Capital Markets transactions can be a very shore life phenomena. And what it is Sloan, I think you and I have talked about this before, it's simply buyers pausing because they want to see what resolution of these specific issues in the market will be because that will allow them to set pricing.

So it may be a two weak phenomena, it may be a two month phenomena. I doubt it's a two quarter phenomena. It's definitely not a year phenomena and, therefore, as we think about our business and we think about sizing cost, certainly we're looking at those businesses in the Capital Markets we're really looking at the entire business to make sure that where we see the revenues coming from both by line of business an by geography, that we can deliver at the EBITDA, the margin, and the earnings line, the numbers that we believe are appropriate for the year.

So all that to say, again, and you're not beating a dead horse,I think you're asking the right question, Sloan,we really believe that delivering those metrics is important. I don't feel great about the performance of the net income line this past quarter. I don't feel great about it the all. And we're not going to continue along at that kind of performance for the balance of the year. We'll do whatever it takes to deliver the kind of numbers that we believe are appropriate for this firm and this market and those, you know, for instance, Sloan, to be specific, our expectation remains that our full year EBITDA margin 2011 will be greater than our full year EBITDA margin 2010 and, you know, let that one sentence define for you probably a lot or answer a lot of questions you were going to ask.

Okay. That is fair and that's very helpful. And then just a follow-up question with regard to what we're seeing from your competitors being a little bit more aggressive in trying to take share in parts of the world that you are the leaders in is that causing any pressure on costs with regard to retaining your own talent?

No, it isn't. You know, first of all, Sloan, I would say that phenomena, I don't know that it's any different today than it was last year or three years ago or five years ago. The competitive environment that we live in is fierce, but our ability to not only retain, key talent and frankly to attract it, from our competitors remains very, very high for all the reasons that we've talked about before. In our industry we employ a population of 31,000 people who take enormous pride in our position in the marketplace and I believe in our business, having been in this business now close to 30 years, it really does matter where you sit in the table in this business. People take great pride in that, they think about it a lot, and they believe that it brings meaningful business to the table being number one in these markets and in these business lines.

All that to say that we certainly see a lot of recruiting going on in the marketplace. We haven't lost any to my knowledge we haven't lost any significant revenue producing personnel or for that matter management in some time. In fact, we're picking up, I believe we're picking up, some pretty terrific talent right now in all three of our major geographies.

Great. Thank you, guys.

Sure.

And we have a question from the line of Brandon Dobell with William Blair. Please go ahead.

Hi, guys. I want focus on heads count for a bit. I guess in two different ways. One in terms of brokerage professionals you're adding in investment sales and leasing. Give us a sense of what it may have looked like to finish out 2010 and where we are now and any color by geography would be helpful also and then based within that, to a certain extent, support people that have come along with those broker hires? I'm just trying to gets a sense of how we think about the human capital fixed costs that's in the business now versus last year.

Yes. It's a good question, Brandon. The heads count on revenue producing professionals and the transaction business probably hasn't moved much year-over-year. And I'll just remind you and the callers what we've talked about before a lot, which is the capacity of the business to onboard additional revenues as a (inaudible), FTE, (inaudible) at the position while it's not unlimited we've never yet hit that maximum amount that requires the hiring of additional revenue production people to accommodate the revenues. What does change as the markets begin to improve is spending in other areas and those other areas are things such as travel for marketing.

It's overall marketing expenses, it's foreign expenses we'll put into large Capital Markets dispositions or large letting assignments. In this market we're in one of the big areas where cost is being on-boarded is we're experiencing at the moment unprecedented levels of on-boarding of very large corporate services and institutional asset services of clients. These are huge, huge opportunities for us. You see some of them in our key win slide such as PRUPIM and others. These are very, very big assignments and the facts of the matter is, with 44 of these assignments this quarter, 41 the quarter before we'll onboard well over a hundred major new contracts this year, probably close to 200, and those tend to be very, very heavily weighted front end with cost and tend to have very little, if any, profit for ten to 12 to 14 months. So there is a lot of cost in there. That cost you're not going to touch because that's directly associated with large accounts and revenues that we can see, but the marketing costs, some of the production costs, some of the support costs in the business, if we don't see the revenue production in those business lines that we expect, those are the areas we'll pull back a bit on.

Okay. And then taking a different tact for a second, given that most industries have seen some sort of price compression or commission compression, have you guys seen, either in sales or leasing, any pressure from your customers on the commission rates they're paying to you guys or would you anticipate any if the economy remains stagnant/weak globally does that put more pressure on you guys, or doesn't it because of sort of it becomes more valuable?

Yes. It's the latter. So commission rates, you know, we talked about this before, they don't tend to move much.

Yep.

But the movement that does occur, commission rates tend to go up in tougher markets they tend to compress a little bit in better markets. It's interesting, Brandon, as difficult as the macro economic environment is at the moment the commercial real estate market is quite good and what we're seeing at the moment is really no movement in our commission rates in any geography. We saw some years ago and it has stuck, a lowering of commission rates on large Capital Markets transactions but nothing has changed there in the last 24 month. And I don't expect you're going to see much movement in commission rates going forward for a few years either.

Okay. And then a final question from me if you look at larger services deals, facility management, property management deals that you on-boarded during 2010, have those generated the types of follow-on revenue either management process for facilities or managing the leasing around those facilities that you had expected when you went into those contracts?

The answer is yes, but we know going into those contracts those follow-on revenues take a quite a bit time. I'll give you an example, there is a terrific global engineering client of ours that we took on as a global client three years ago. That account has embedded within it an enormous amount of follow-on activities that we can conduct at high margin. And that account didn't really start spinning off those opportunities until two years into the account. It took that long to burn off the legacy business that the prior incumbent had had, their protection on deals that were not yet done, and for us to fully exploit our opportunity with that client.

So all these wins that we're getting last year, all the wins that we're getting this year set us up for a very, very good long-term picture in terms of cross selling within the business, and on-boarding additional revenues but they take time. Unfortunately in the outsourcing business you can on board a client in January and you will bring all the costs on January 1st, but the profits may be a year out and they tend to ramp up once they start coming in. So we're not surprised by anything we're seeing but that's the way that business works.

Okay. Appreciate it. Thanks.

And our next question is from the line of Bose George with KBW. Please go ahead.

Good morning. Actually I want to switch to a more macro issue just the whole debates that are going on in Washington. Just curious, your thoughts on what would happen if there was a ratings down grade of sovereign debt just in terms of business confidence?

Well, I don't really know what is going to happen. The spectacles that is occurring in Washington if anyone knows how that's going to end up let us know because we don't. At the moment I don't believe it's had any impact at all on business activity in the states. I think it certainly has worried a lot of our global partners to no end. The outcome of all this, I suppose, if we default and we get a serious down grade here, I suppose that could have a material impact on business confidence. But I think at the moment there is a broad based expectation that a downgrade is going to occur no matter what the outcome is now and we're not seeing that have, at the moment, a big impact, any impact at all, on the business. It's just impossible to say.

You know, trying to judge what impact a change in (inaudible) is going to have on the business is very difficult, but I will say in the commercial real estate world a different than perhaps consumer spending or some of the other metrics you might look at. In our world we are dealing with clients who are generally making very long-term decisions on a capital market side, as I mentioned earlier, folks buying or selling investment properties they can be very, very nimble. They can pull a property from the market for a month and put it back on a month later. They can put a property under contract in a month, cancel the contract, put it back under contract six weeks later. And so that business tends to be a bit fickle with these types of issues in the marketplace. It tends to fix, by the way, fairly quickly. But on

the leasing side, on the outsourcing side, on the valuation side, on the property management side, these businesses are very slow moving, big, long-term oriented contracts and awards and these types of day to day issues and both issues we have here in the States and the sovereign debt issues we have in Europe right now don't tend to have a big impact on those businesses. If your firm has a lease coming up December of this year, it doesn't matter if there's a ratings down grade, it doesn't matter what the Congress and the Senate do next week, what matters is you need new space and you're going to get that space regardless. So as we watch all this play out, we're seeing the impact of the sovereign debt issues in the Europe play out in the Capital Market in Europe, you can see it. It's a bit of a pause there as people wait for some certainty around these issues and the States so far no impact but no way to tell.

Okay. Great. Thanks for that. And then just one more Company specific question. I was curious about the impact of currency adjustments on your reported numbers this quarter. Is that something you disclose?

Generally we don't say a lot about currency because it doesn't have a very big impact on the EBITDA line. There are notable impacts on each of revenue and cost lines. I would tell you, though, that on the EBITDA line, again, this quarter it's a little bit more notable than usual but to the positive but low single-digit million.

Okay. Great. Thank you.

Sure.

And we have a question from the line of Will Marks with JMP Securities. Please go ahead.

Thank you, good morning, Brett. Good morning, Gil. First, Gil, do you have based on your guidance with approximately interest expense would be for the year? Do you mind giving that?

I'm happy to do that. I think it's going to run for the rest of the year in each of the quarters, around $35 million.

Okay. Thank you. Second, Brett or Gil, is it relevant to discuss the cost cutting you made back in whatever it was, 2008 and 2009 and how that's going and if your targets are still in reach?

Gil, you want to take that?

Yes, sure. So, Will, what we said in the first quarter was that we're going to stop giving specific guidance on it in large part because falling along our philosophy of matching cost to revenue, our revenues were coming in at a faster pace than what we anticipated when we had the forecast of how the costs would come back. So I would tell you that that trend continues in the second quarter meaning the costs are coming back faster than we thought they would when we gave the original targets because the revenues have come back faster. But I don't want to get into specifics numbers for the same reasons I didn't want to in the first quarter, which is it's a little difficult to judge but we do know that we will continue, from a philosophical and practical standpoint, continue to monitor them and monitor them in the context of revenue and mix of revenue.

Okay. Great. And, Brett, back to your I think powerful comment about potential margin expansion this year. Should we think about this year as a year when you're doing some things to ramp up where you've got added costs but maybe not the revenues and that next year the margins should expand more?

You know, is that a good question, Will. I suppose the answer is a little bit of yes and a little bit of no. So philosophically and generally speaking our approach has been to very carefully onboard cost that is supported by near term revenue. So we've really tried to stay away from the idea that we're going to get on these calls and say we crushed margin this quarter, but in 2012 you're going to see some great results. We try not to do that and we're not doing that this quarter.

What we're saying this quarter is that the mix, well first we have a compare issue that's significant. We're not asking you to do that, but if you normalize out those compare items we talked about we had 22% EBITDA growth and we had flat margins year over year, that's pretty good. We consider that to be a pretty acceptable performance. However, we think we can do better and the reason we think we can do better is the mix of the revenues that came in was different than we had forecast late last year when we put the budgets together and because it's different we're actually making some cost adjustments now, Will.

So what we're not saying to you is hey look, folks, you know this is what it is we are he going to spend these dollars today regardless of mix and regardless of what it does to margins an we're going to give you great performance in future years. We just don't think that way and what we're saying to you is we're not satisfied with the performance we put up in the second quarter. We know we can do better and we can do better by more properly matching cost to where the revenues are coming in.

Now, that having been said, there is absolutely no doubt that as we went into 2011 we consciously on-boarded significant cost around our transaction businesses because we knew and we continue to believe that we're in the early quarters of what is going to be a good recovery. And remember, Will, we talked about this at the end of the third quarter call last year, the fourth quarter call an the first quarter call this year. We knew back then that the recovery, we described it as incremental and rocky. It's been exactly that. We're not hugely surprised by the GDP forecast numbers that are out there. We're not hugely surprised by the performance of the leasing businesses or the outsourcing businesses. What is a bit different than we expected is the (inaudible) Europe based on the sovereign debt issues there and a few other selected items.

So our commitment to you and to our shareholders is we watch margin every day and we're committed to deliver on margin every day. At this stage in the early days of recovery cycle, though, the phenomena you mention is certainly real and there is cost being brought into the business, there is opportunity being brought out the business that will pay dividends in future years. Most specifically what I referenced a few moments ago with outsourcing. These outsourcing contracts that we're winning are material, they're significant and they're very, very important to the business and when those opportunities arise we're not going to walk away from them because you know they're going to hurt margins for a year. You go after them and you build agreat business around them knowing that you've not now 10 years or 12 years, perhaps 15 years of a terrific opportunity to cross sell additional services through and to manage one of the world's best corporations for institutional investors. So we are focused on margins this year, Will, we're focused on margins next year. There is cost coming into the business right now around accounts that will pay dividends in futures years. And there is some amount of cost we brought in the business this year knowing that the revenues we would be chasing with that cost might not materialize until 2012 or 2013. But all that having been said we believe it's appropriate at this point in time, in fact we have believed it for a few months, to take another look at our cost structure an make adjustments.

Okay. And then, thank you for that full synopsis of that. One final question kind of related to ING, free cash flow, and your balance sheet. I imagine you had the opportunity around the ING announcement to issue some equity, I guess you always have that opportunity through an ATM or some sort of offering. Would you say that that's off the table, would you still considering issuing equity were you ever thinking about it?

Well, as Gil mentioned in his scripted comments earlier today, it is an option that remains available to us and we've also talked about sizing that option which I wouldn't say it's immaterial but it's close to it. We talked about a $250 million, something like that, program. At this point I don't want to predict whether we will or wont. I think it was something that we want you to know for large acquisition we'll keep in our back pocket and if we feel that it's a proper use of the equity and it's economically the right decision that we're prepared to do it. We've chosen not to do it so far, but I don't want to tell you conclusively we decided not to do it around this deal at all. I would say we're probably leaning that way, but i don't want you to call up angry if we end up issuing some equity later this year. I suspect it's becoming less likely but that possibility remains.

Fair enough. Okay. Thank you.

Thanks, Will.

And we have a question from the line of David Ridley-Lane with Merrill Lynch. Please go ahead.

Yes. Some questions on the US office market. My impression is that your nationwide absorption is positive, vacancy rates are down, but the rents are still flat. So the first question is would you agree with that characterization? And then to follow on that, you've spoken in the past about an acceleration in leasing when rents start to rise and pickup but given how strong leasing is growing today, would that still be the case in this cycle?

It is, David. What you're seeing right now occurring both here in the States and outside the States is a real nice pickup in activity among corporate clients. However, what they're chewing through right now is a fairly significant amount of shadow space, of subleased space that was out there, or empty space that corporations just weren't using. So we have to chew through all of the shadow space in the market before we can start making a real dent on vacancy's which will then make a real dent on rents. Our forecast are that we're about there. The leasing strength is now good enough that we're forecasting increased rentals across all types of the commercial real estate asset class in the coming quarters and I think that's about right. I think we're at that point now where we're about at rent inflection and you are seeing, David, in some markets, and yours is certainly one of them, in Manhattan, we're seeing rent increases in the stronger markets right now.

Alright. Thank you. And did the movement of distressed property sales in the second quarter did that accelerate? Is it still very sluggish and maybe if you have any thoughts on the pipeline there in the second half of this year?

You know, we have talked about this on every call for three years now. And really nothing has changed there, David. The distressed property market certainly exists. There's been trading in that market ever since, you know, really 2009. The trading has been heavily muted both because of the fact that lenders have been predisposed to work these issues out with their current borrowers rather than foreclose and put the properties into the market and because the market is improving.

The situation we're in now is that, I think there's a broad based consensus that the market is only getting better not getting worse and, therefore, any people on the bubble with a distressed property who think that they're in a position to hold on or to refinance or to feed a little bit of equity to a property to keep it are going to do that and those folks who have been thinking about selling their property are encouraged because there's there are better days ahead.

So the distressed property pipeline, the distressed property market at the moment I would not describe it as a material component of the business we operate in right now. The real action on the property trading side remains in the core asset class. The best properties in the best cities which are now trading at prices approximating or equal to peak pricing from 2007. The action there is unabated and not withstanding the issues we see in Europe, not withstanding all the nonsense in Washington at the moment there is enormous amount of capital out there that warrants to buy commercial property right now. The one place that that velocity hasn't really moved much has been quite strong is in core. It's not in distress.

All right. That's very helpful. And then maybe a final question. We have seen in the first Euro since the recession this quarter but we've also as you've highlighted, seen a lot of economic concerns and financial uncertainty there. In net-net is the availability of debt still improving on the margin or have we kind of seen it sort of stabilize here in the second quarter?

It's improving. The big metrics that you and I would watch to determine the forecast help in the asset class are all moving the right direction. The underlying dynamics below the commercial real estate services business are very, very good right now. They've been good now for going on a year. They remain very good. The kind of numbers we're seeing in leasing and outsourcing and property management and Capital Markets in the States, these are impressive figures and so financing is getting a little bit easier every day. The CMBS issuance this year, which we think will be between $40 billion and $60 billion, is a real improvement over last year and a huge improvement over two years ago and that's just more liquidity into the financing of commercial real estate. And that improvement, that trend, remains a pace and we don't expect it to be impacted day to day by the issues that are occurring in the market outside our sector. Pricing will move a bit. That's for sure, but the availability is certainly getting better.

Alright. Thank you very much.

You're welcome.

And we have a follow-up from the line of Anthony Paolone. Please go ahead. JPMorgan. Excuse me. Please go ahead.

Thanks. In the investment sales business what do margins look like for the big property trades versus more of that $10 million to $50 million type transactions just curious as you start to see some of these bigger trades in these core markets starting to happen right now?

It's a great question, Anthony and its one of those ironic data points in our industry. Margins are better on the little deals so on the smaller transactions there's very little fee compression. On the very, very large transactions the fees can get fairly skinny as a percent of the total consideration and the margins on the small transactions are quite high.

The margins on the biggest transactions are still quite good but there aren't not as good as the small ones. Now, on the big core deals you're seeing going down out there I would have to guess what kind of margin one of those deals goes down at. Every one of those deals is different. They're still quite good. They're certainly within or above the range we target for the firm on an annual basis, but to compare that to a small deal, let's say a $5 million or a $10 million deal, you could have a margin on one of those deals that's close to 30%.

The bigger deals are something less than that. Gil, I know you look at this quite a little bit. Would you like to add anything or be more specific on that?

No. I think generally that's right that that is exactly the way it plays. That the larger the deal the smaller the return.

And does that suggest that even though we're watching a lot of this core stuff and these big properties trade and that's all good that what we really need to see is maybe a more broad spread across secondary tertiary markets where you just have on average smaller trades to kind of help boost margins in that business?

I think that's a fair comment. You know, I don't want to leave you with the impression that selling core properties isn't a fantastic business because it is. It's still very large fees, it's still very, very good for the business and in the core property trades. What's also available there which is very interesting to us is when those properties trade, there tends to be an opportunity to sell-through in a very significant way follow-on product whether it's valuation or property management or leasing and those matter. So, the trade of big core properties and it very important and is very good for the business.

Certainly as recovery of the capital markets continues to mature and we see buying, and we are beginning to see that now as Gil mentioned in his comments, as we see buying now spread away from just core property you get into some of the secondary markets and secondary product types that will be helpful to margin. There's no doubt about it and when we get into a completely normal environment in the Capital Markets, margins will be above in that business where they are now. There's no doubt about that.

Okay. Thank you. And then just one thing maybe for Gil with the securities part of ING closing on July 1, lookslikes like we'll get a full quarter of that in 3Q. Can you help us roll forward with some numbers maybe on how much of the billion dollars was allocated to securities and maybe what the multiple on that piece of it looks like so we can try to pick that up properly?

Yes. Here's what I would say. We disclosed that we spent $324 million on that piece of it and we spent $59 million on stepping into co-investments that came along with that business. So I'll make that statement. I'm not going to get into, we have multiples on a portion of the business. We previously disclosed the multiples for the total and you saw that in what we presented. We put out there based on, I think it's on the pro forma 2010. What I will say is with that business coming you are correct.

It will have two quarters of activity that will be for our books and records and will benefit CBRE, but we haven't yet done the purchase price allocation and part of the purchase price will go to intangibles that amortize which will be an offset to any of the EBITDA that that business has and frankly that the rest of the business has. And then of course there is an interest expense associated with the funds used to make the acquisition. So what that does, I would reiterate what we have said before which is a modest positive impact in 2011 and a slightly better one in 2012. Takes quite a bit to move the dial you know relative to the earnings of the entire corporation.

Yes. Not on that topic but as another comment, Anthony, and for the rest of the callers we've covered a lot of very specific questions today around cost and around what's going on in the business today based on these issues both in Washington and in Europe. I think it's important that we let you know that not withstanding what we're seeing, the issues we're seeing in Europe, and not withstanding the nonsense occurring in Washington right now, our views around the strength and the durability recovered are not changed. These are the kind of bumps you will hit in the road from time to time but none of this has in any way, shape or form, modified our view about the strength, durability and the duration of the recovery we believe we're in.

Okay. Thank you.

And we have no further questions in queue, gentlemen. Please continue.

Great. We appreciate everyone dialing in. We'll talk to you again in three months. Thanks.

And ladies and gentlemen, that does conclude our teleconference call for this morning. Thank you very much for your participation and for using the AT&T Executive Teleconference Services. You may now disconnect.