世邦魏理仕集團 (CBRE) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBRE first quarter earnings call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be given at that time.

(Operator Instructions)

And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Nick Kormeluk, please go ahead.

First quarter 2012 earnings conference call. About an hour ago, we issued a press release announcing our Q1 financial results. This release is available on the home page of our website at www.cbre.com. This conference call is being webcast 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 and a PDF version of the slide presentation will be posted to the website later today, and a transcript of our call will be posted tomorrow. Please turn to the slide labeled Forward-Looking Statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future growth momentum, operations, financial performance, business outlook and our ability to integrate the ING REIM businesses. These statements should be considered as estimates only and actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today.

Please refer to our first quarter earnings report filed on Form 8-K, and our current annual report on Form 10-K, 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 references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, which are attached hereto within the appendix. Please turn to slide 3. Participating with me today are Brett White, our Chief Executive Officer; Mike Lafitte, President our Americas Region, and Gil Borok, our Chief Financial Officer. I will now turn the call over to Brett.

Thanks, Nick, and good afternoon everybody. Please turn to slide 4. The macro market trends that have prevailed for most of 2011 have generally continued in the first quarter of 2012. The market is recovering, but at an incremental and uneven pace. While no two recoveries are identical, this current one is marked by mix performance across geographies and market sectors. That being said, our highly productive market-leading and diversified platform help us deliver a strong opening quarter for 2012. We especially benefited from strong performance in the Americas and in a moment, Mike Lafitte our President of Americas will describe our integrated Americas business platform in a bit more detail. Not unexpectedly, EMEA performance weakened versus the prior year first quarter as transaction activity has slowed against tough economic conditions. In Asia-Pacific, while there was overall revenue growth, investment sales in the region cooled a bit. We also saw a material and immediate contributions from the addition of the ING Real Estate Investment Management people, programs, and platform to our investment management business. We expect these positive contributions to continue as we complete our integration process.

Our global outsourcing business continued to make strong gains with revenue growing by double digits for the sixth consecutive quarter. Both total contracts signed and new wins set records and we surpassed a 3 billion square foot managed milestone. In our transaction businesses, we've seen resumed growth with a 3% gain over the first quarter of 2011. Investment sales revenue increased 10% and also deserving special mention is commercial mortgage brokerage, which jumped 46%. As a result of all this, we posted solid 14% revenue growth and even stronger 25% normalized EBITDA growth during the quarter. And I am particularly pleased to report that our EBITDA margin expanded 90 bps to 11.1%. Some of the most notable transactions we completed during or immediately following the quarter are shown on slide 5. As is our practice, I will not go through them individually but we have included them here for your review. And with that, I'd like to turn the call over to Mike Lafitte, our President of Americas to discuss real strong performance in the Americas business. Mike?

Thank you, Brett. Please advance to slide 6, if you will. As you have read in our earnings release and as Brett mentioned, our Americas business had excellent performance in the first quarter of 2012. We were very pleased to achieve 13% revenue growth and 29% normalized EBITDA growth in a sluggish economic environment. Credit for this goes to our nearly 21,000 Americas employees who are intensely focused on providing superior service to our clients and maintaining disciplined expense control. We took tough actions in 2011 to align our cost base to the difficult operating environment and we are now seeing some benefits from those actions. In the Americas, we have built a very large, deep, diverse, highly integrated and arguably unparalleled platform. It took many years and considerable investment to build this robust platform and to integrate its component parts so they work together cohesively. We are focused on continuous improvement of our platform to stay ahead of our evolving client needs.

Our financial business statistics for 2011 shown here were just published late last week. They underscore the magnitude of our platform. Even in a lukewarm market environment, we closed more than 38,000 sales and lease transactions in the Americas, valued at approximately $92 billion. You can see this activity was evenly split between sales and leasing. Our people specialize in each of the major product segments -- office, industrial, retail, and the multi-housing space. This specialization provides unique expertise and insight which positions us very well to capture market opportunities. Our valuation platform is also robust. We maintain the largest market position in this space, serving financial institutions, corporations, and special services and there is great synergy with both our capital markets and our outsourcing business in the valuation space.

Our commercial mortgage brokerage business involves loan origination and sales, which is growing well, as liquidity returns to the investment markets. Americas loan origination volumes rose nearly 50% in the first quarter of 2012 versus a year earlier. We do significant work with government agencies. For 2011, the Mortgage Bankers Association ranked us number one originator of government agency loans. The volume of work with these agencies has continued to grow into 2012. Through our joint venture with GE Capital, GEMSA, we are also one of the industry's largest loan servicers with over $100 billion of loans being serviced today. In our 1.6 billion square foot Americas property and corporate facilities portfolio, we are achieving strong growth by focusing on winning trophy asset assignments from institutional owners as well as occupiers. You saw an example on the previous slide, the 4.2 million square foot Houston Center, which we are now managing for J.P. Morgan Investment Management. Project leasing is also a core offering in our outsourcing portfolio and is highly synergistic with our leasing business. We managed over $13 billion in projects during 2011. Strong growth opportunities also exist for us throughout Latin America and our Canadian operations. They now account for 11% of the Americas revenues for the first quarter of 2012.

Please turn to slide 7. These are new statistics published this month by National Real Estate Investor. You'll see that our sales and lease transaction value in the Americas approaches or greatly exceeds the global activity for any other firm. We compete with many firms in different markets across the region. Many are focused on certain niches such as tenant representation or sales or finance area. Few have the depth and breadth of our service platform, and none have achieved our scale or our market position. Please turn to slide 8. This slide illustrates how we put our powerful platform to work for our clients. In leasing, some of our largest 2012 closed transactions are depicted here. First, we represented Carter's, an infant clothe retailer in connection with a lease for a 1 million square foot distribution facility outside of Atlanta. Site selection was done with the assistance of our Labor Analytics Group.

You may know that we represented Conde Nast last year in its 1 million square foot lease at 1 World Trade Center in New York. Conde Nast continues to grow and has taken an additional 139,000 square feet in the building. CIBA LOGISTICS and E-Trade are both broker-led outsourcing accounts. We have long-term contracts with them to perform transaction work across the region. Accounts like these generate approximately 15% of our Americas leasing revenue. In capital markets, Hess Tower is yet another example of a great platform story. This trophy office building in Houston was developed by the Trammell Crow Company along with principal real estate investors and sold recently for a record price. CBRE service platform played a key role in assisting the Trammell Crow Company in principle, first in managing the asset, and serving as the agent in the lease to Hess, then in the sale to H&R REIT, a Canadian open-ended REIT.

Our debt and equity finance team also arranged a $250 million loan for H&R to finance the purchase. The Mount Airy transaction noted here, which closed last week, is evidence of CBRE's unique comprehensive capabilities. This is a $165 million recapitalization of a Poconos resort and casino. Our investment banking group, CBRE Capital Advisors, acted as exclusive financial advisor and co-arranger in a syndicated loan. The last example is representative of our growing impact in Latin America. We arranged a $100 million sale of a Class A asset in the heart of Santiago's business district. CBRE's local team in Chile collaborated with our US capital markets professionals in the sale of this tower on behalf of a German open-ended fund, a truly cross-border transaction. Please turn to slide 9.

Outsourcing continues to be our single largest business line. Its 45% share of the Americas revenue in the first quarter is a little high due to seasonality, slower leasing, and sales activity in the first quarter. For the full year in 2011, it accounted for 39% of the Americas revenue. The business continues to grow at a double-digit pace. In asset services, we are focused on large strategic accounts. Our goal is to deliver multiple synergistic services for those institutions and to be their preferred provider throughout the entire lifecycle of their investment. There are currently about 30 strategic accounts in total, the 5 largest are listed here in alphabetical order. On the corporate services side, we are continuing to rapidly on-board new clients and expand our service offering with current clients.

Of the record 58 contracts signed in the first quarter of 2012, more than 40 are in the Americas and others are global relationships, generally with significant Americas components. I like to comment on just a few of these. First, for Deloitte, we provide variable project management services for its space throughout the United States. We recently added and extended this nine-year relationship. Additionally, we won new facilities managements assignments with Microsoft and NYSE Euronext, demonstrating our ability to nurture and grow client relationships. Adventist Health Systems and the University of Cincinnati are emblematic of our increasing penetration of the healthcare and education markets. These sectors, as well as government, face enormous pressure to become more efficient and we believe the opportunity is large as outsourcing adoption in this space is in its infancy. Now I'd like to turn the call back over to Gil.

Thank you, Mike. Please advance to slide 10. Total revenue was approximately $1.35 billion for the first quarter of 2012, up 14% from last year. This increase was driven by growth in outsourcing, investment sales, investment management, commercial mortgage brokerage, and to a lesser degree, leasing. Normalized EBITDA grew at a stronger pace than revenue, up 25% to $150.5 million in the first quarter of 2012 from a $120.6 million in the first quarter of 2011, delivering a normalized EBITDA margin of 11.1% or an increase of 90 basis points over the first quarter of 2011. Our cost of services decreased to 58.3% of total revenue in the first quarter of 2012, as compared to 60.2% in the first quarter of 2011. First quarter 2012 operating expenses were 32.6% of total revenue, versus 31.8% in the first quarter of 2011.

This offsetting impact on cost of services and operating expenses resulted from the inclusion of ING REIM expenses, all of which flowed through the operating expense line, as opposed to cost of services. Interest expense increased by $10.3 million in the first quarter of 2012, as compared to the first quarter of 2011, primarily due to the ING REIM and sterling A1 financings, which occurred after the first quarter of 2011. Our first quarter 2012 tax rate was approximately 42%. Consistent with prior years, this is seasonally higher than the anticipated full-year tax rate. We expect the full-year 2012 tax rate to be a little below 40%. First quarter 2012 GAAP diluted earnings per share was $0.08 versus $0.11 last year and adjusted diluted earnings per share was $0.14 versus $0.13 in the first quarter of 2011.

Please turn to slide 11. Property and facilities management was our largest service line in the first quarter of 2012, representing 39% of total revenue in the quarter, with a 10% increase over the first quarter of 2011. Leasing was our second largest service line, representing 27% of total revenue in the first quarter of 2012, with increases in both Asia-Pacific and the Americas. Investment sales showed a solid increase of 10% in the first quarter of 2012, driven by the Americas, and accounted for 13% of this quarter's total revenue. Global Investment Management revenue more than doubled quarter-over-quarter, driven by increases in asset management and incentive fees, attributable to the ING REIM businesses. Appraisal and valuation revenue increased 6% to $79.7 million. Commercial mortgage brokerage revenue jumped 46% year-over-year, driven by continued capital availability, generally low interest rates, competitive spreads, and investors' continued search for yields. Development services revenue was down approximately $3 million. 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 62% of total revenue for the first quarter of 2012.

Slide 12 demonstrates stabilized vacancy rates and faster positive absorption in all three market sectors depicted along with forecasted improvement over the next two years. The cap rate and investment sales volume data that we typically show is not yet available due to our slightly earlier reporting date this quarter. Please turn to slide 13. Sales revenue in the Americas increased 33% in the first quarter of 2012, versus the first quarter of 2011, still driven by activity in core markets. Market share data for the first quarter of 2012 is not yet available but we are pleased to note that late last week, CBRE closed the largest single asset investment sale on the West Coast since 2006, the $480 million sale of Russell Investments Center in Seattle. This transaction is indicative of the activity that appears to be surfacing in secondary markets. Our Americas leasing revenue increased modestly in the first quarter of 2012, as compared to the first quarter of 2011, in line with our expectations. During the first quarter of 2012, the US office vacancy rate remained constant at 16% compared to the fourth quarter of 2011. The Americas outsourcing business grew a solid 11% in the first quarter of 2012, versus the first quarter of 2011.

Please turn to slide 14. Our EMEA investment sales revenue decreased 9% in the first quarter of 2012, versus the first quarter of 2011. This weakness comes as no surprises, as economic challenges in there region persist, causing market-wide investment activity to decline 18%. CBRE's EMEA leasing revenue decreased 6% in the first quarter of 2012 versus the first quarter of 2011. This weakness stems from caution around large space commitments, somewhat offset by stability in prime rents. It should be noted that France, which had an exceptional first quarter in 2011 in transaction activity that tapered off as 2011 progressed, was largely responsible for the decreases in sales and leasing. Outsourcing slowed a bit with revenue only increasing 6% in the first quarter of 2012, as compared to the first quarter of 2011, driven by new assignments. EMEA decrease in normalized EBITDA resulted mainly from the reduction of the aforementioned higher margin transaction revenues, additional compensation expense associated with retention and severance, in part related to acquisitions, as well as slightly higher occupancy costs.

Please turn to slide 15. CBRE's sales revenue in Asia-Pacific decreased 34% in the first quarter of 2012, versus the first quarter of 2011, primarily driven by a cooling of activity across the region, as decisions were delayed due to global economic uncertainty. CBRE's leasing revenue in Asia-Pacific grew 8% in the first quarter of 2012, as compared to the first quarter of 2011. Some growth was evident in most markets, led by Australia and India. Asia-Pacific saw outsourcing growth of 10% in the first quarter of 2012, versus the first quarter of 2011, as it continues to gain adoption in this region. Asia-Pacific first quarter 2012 normalized EBITDA margin was negatively impacted by the aforementioned reduction in higher margin investment sales revenue, investment in China, and a favorable impact of a notable bonus accrual reversal in the first quarter of 2011 that did not occur this year. Please turn to slide 16. Revenue for the development services segment totaled $14.9 million in the first quarter of 2012, versus $19.2 million in the first quarter of 2011, primarily due to a decrease in incentive fees and lower rental revenue, driven by property dispositions in the later quarters of 2011. At the end of the first quarter of 2012, in-process development totaled $4.8 billion and the pipeline totaled $1.3 billion. Our equity core investments at the end of the first quarter of 2012 in the development services business totaled $93.6 million.

Please turn to slide 17. First quarter 2012 Global Investment Management revenue increased to $125.2 million from $51.4 million in the first quarter of 2011. The increase resulted from higher asset management and incentive fees, stemming from the inclusion of ING REIM which contributed approximately $85 million in revenue in the first quarter of 2012. Assets under management, or AUM, totaled $95.9 billion at the end of the first quarter of 2012, up about $1.8 billion from year-end 2011 primarily due to increases in valuation and benefits from currency fluctuations. In the first quarter of 2012, total AUM in the direct real estate business was impacted by $300 million of asset acquisitions, $1.1 billion of dispositions and transfers, and $1.2 billion from improvement in asset values. In addition, currency fluctuations increased AUM by $1.4 billion for the first quarter of 2012. Included in the $95.9 billion in AUMs at the end of the first quarter of 2012 was $21.7 billion of listed securities. Changes in market valuation in this portfolio increased AUM by $1.9 billion in the quarter versus the fourth quarter of 2011. In the first quarter of 2012, in the direct real estate business, we raised new capital of approximately $400 million and had approximately $2.8 billion of capital to deploy at the end of the quarter. Our core investments in this business at the end of the quarter totaled $176.9 million.

Our Global Investment Management EBITDA reconciliation detail is shown on slide 18. In the first quarter of 2012, we incurred $10 million of expenses related to the ING REIM acquisitions, primarily for retention and severance. As of March 31, 2012, the Company maintained a cumulative accrual of carried interest compensation expense of approximately $44 million, which pertains to anticipated future carried interest revenue. This business operated at a pro-forma normalized EBITDA margin of 36% for the first quarter of 2012. If you could recall, this is right within a range in which we anticipated we would operate at the time we announced the ING REIM acquisition. Slight 19 shows our amortization and debt maturities schedule for all outstanding debt. This is virtually unchanged as compared to year-end 2011 and we remain very comfortable with this schedule and the flexibility it provides.

Please turn to slide 20. Excluding cash within consolidated funds and other entities not available for Company use, and excluding our non-recourse real estate loans and mortgage brokerage warehouse facilities, our total net debt at the end of the first quarter of 2012 was approximately $1.9 billion. This represents an increase from year-end 2011, primarily due to incentive compensation payments, which are generally made in the first quarter. At the end of the first quarter of 2012, our weighted average interest rate was approximately 5.7%, similar to the end of 2011, when including interest rate swaps. Our leverage ratio on a covenant basis now stands at 1.81 times at the end of the first quarter of 2012 on a trailing 12-month basis. Our total Company net debt to trailing 12-month EBITDA stood at 2.29 times. I will now turn the call back over to Brett.

Thank you, Gil. And please turn to slide 21. While the commercial real estate market recovery continues to be incremental and uneven, it is a recovery, nonetheless. Updates on our view for the year are that outsourcing is likely to continue strong growth; leasing growth rates across the globe will track job creation and should continue to be modest for the time being; investment sales growth is going to be dependent on specific regional market dynamics, noting that the economic climate in EMEA is challenged and there has been a recent cooling in Asia-Pacific; and finally that investment management will benefit from a full-year contribution from the acquired ING Real Estate Investment Management businesses. With the first quarter now behind us, we are maintaining our view from year-end 2011. First, that our EPS guidance remains unchanged and second, that we should see solid EBITDA margin expansion and with that, operator, we would be happy to take questions.

(Operator Instructions)

We have a question from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thanks and good afternoon. Your gross margins in the first quarter were a lot higher than they were in the year-ago quarter. Just curious what drove that because it seemed like throughout 2011, in each of those quarters, the gross margin actually declined year-over-year and so just wondering what changed there?

And are you looking at the gross margin on the press release, whether it is normalized or not, what you will see is the comment that we made, that I made, was with regard to ING and all the costs from ING are throwing through OpEx and not through Cost of Services. So the mix of what flows through Cost of Services versus what flows through OpEx has now changed. Of course, it's against the same denominator when you do the math. The revenues in the revenue number but we have had a shift, a fundamental shift, in what flows through cost of services and OpEx because of the acquisition.

So should we assume that, I guess on the year, as the next few quarters play out, that we will continue to see a pretty big pop, I guess maybe minimalize it a little bit in the latter part of the year because you had some ING last year but is a 200, 300 basis point pick up on that gross margin safe to assume?

You've had about a 200 basis point impact on Cost of Services and I think it is safe to assume -- I don't know that it will be that every quarter but it is safe to assume that we will have the shift between the two, yes.

Okay and the roughly $17 million of transaction fees in investment management in the quarter, do those more or less drop right down to EBITDA or are there any real costs that have to get accrued against those?

No. There are costs again it, there is compensation cost that go against it, for sure.

Okay but that would not be carried interest compensation because it did not seem like you accrued much there.

It is not carried interest, it is other incentive fees.

Okay, on the facilities business, the revenue was actually down a little bit sequentially from 4Q. I was under the impression that that business is not quite as seasonal as some of the others and you picked up a lot of contracts in 4Q and you picked up a whole bunch more in 1Q and so just wondering kind of how that declined sequentially?

Anthony, it's Brett. (Inaudible) likely on that question. First of all, the facility business is growing very, very rapidly. There are a lot of cats and dogs that flow through that revenue line and I would look at this more as an aberration than any sort of trend to be concerned about. The bottom line dynamic in the facilities business right now is it is going through historic growth at the moment and you should expect to see that generally going forward.

Okay and then just in terms of your key lines like sales and leasing. Brett, can you -- and maybe Michael -- can you comment on just the competitive landscape for brokers and just some of your larger competitors out there? I think last quarter, Brett, you had mentioned that you did feel that some of the competitors out there were nipping at your heels but you felt good about your positioning. I'm just wondering if you can give us some updated thoughts on that?

Sure, well let me give you a short-term answer, kind of quarter-to-quarter, but what is much more important is the long-term answer. It was funny, in the fourth quarter we had a soft compare against one competitor on leasing numbers in the quarter and we spent some time talking about that and letting all of you know that this is a very big, very powerful integrated business and we focus on lots of things all the time and any time we see a competitor or our competitive position at risk or a competitor coming in and as you said nipping our heels, we redouble our efforts to correct that situation. Now ironically or not, the belle of the ball this quarter is, guess what, Americas. By the way, that is why we brought Mike Lafitte in because that business is so much more than US leasing. It is -- there is no competitor even close to what we do in our US integrated business and that's why we had Mike talk about it.

In terms of the competitive landscape on sales of leasing, this industry is -- and we have been talking about this for so many years I can't even remember when we started, but this industry is rapidly consolidating down to two groups of players. And we've got on the global landscape, I think we've got two big high-quality multi-national integrated companies out there. And we've got thousands of boutique firms out there that do whatever they do really, really well in single markets or single business lines and we've got these folks stuck in the middle that are going away so fast, it's almost hard to keep track of it at this point. By the way, we love that dynamic. We love it. Because every day, more and more of the accounts that we want to own, that we want to do business with, are turning to us for their services.

The competitive landscape on leasing and sales in the US and globally is really a tale of two stories, or two tales. The first is that in the US, the leasing landscape is a very, very competitive marketplace. We are dominant in that marketplace and expect to remain so. However, the competitors that we had just three years ago are -- some of them are gone -- and that share is going to be spread among other competitors in the business and you should expect to see that going forward. On the sales side, that marketplace is one we've dominated for many, many years and our competitive position in the sales space, if anything, just gets better and better. So we like where we sit. As I said last quarter, we also like having a couple competitors nip a little bit our heels, it makes us better. It gets us more focused and, as Mike talked about in his comments, it is a good dynamic, and we welcome them to the party.

Do you see any advantage or do you think there is anything behind Newmark was purchased by a financial services firm and they also picked up Grubb & Ellis and do you see anything behind being backed by a financial services firm going into real estate services or anything emerging there that makes you think about being just an integrated on your own platform?

I think it is all interesting and we welcome to the dance these new players. And it sounds to me like that BCG, I think that is right, it sounds like these players are sophisticated, they are smart. They purport to be well-capitalized, I think that is great. And I think that this elimination of this middle group of firms is just inevitable. It is absolutely -- it is going to get done. We are watching it get done and the way that that is going to happen is there's only a few choices -- they either go bankrupt and just disappear off the face of the earth but these businesses have people in them. And so if a good, well-heeled company like BCG or another, can come in and pick up the pieces of these failed firms, I think that is great. I know a lot of the people inside those businesses, in particular, Grub & Ellis, these are high-quality, good people and the fact that they found a home with an owner that is excited about the industry, I think is a plus for everybody.

Do I -- I don't think being owned by one type of owner or another is necessarily an advantage or disadvantage. It all comes down to leadership. It all comes down to the people and it all comes down to platform. There is a very, very long wave that any of these aggregators need -- the distance to go to, to get to the level where I think these couple big multi-national firms are, is a huge distance. But, you know what? Having folks that want to be there, having folks that are aspirational, having folks that are putting capital into this industry is a net benefit for everybody. They make us all better. And we welcome them to the dance. It is all good and by the way, I think it is way better that these firms that have gone through these horrible problems that they've had, again, it is way better that the good things inside those firms, which is the people, have found a place to land and do business and stay in the business in the marketplace. That benefits all of us.

Okay. Thanks and nice quarter.

Thank you.

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

Thanks. Hello, Brett and Gil and Mike.

Hello, Will.

Hello, Will.

Let's see. A few questions here. First to start with, just the D&A level and I'm wondering if you can give us some amount of visibility in terms of run rate? It was, I think, high here in the quarter but is there some one-time costs in there?

Will, can you just repeat the first part? It was a little hard to hear you. Sorry.

Sure so on depreciation and amortization of, I think the quarter, was $46 million or so. I'm just wondering what we should be looking for on a quarterly basis for the rest of the year?

Yes, sure and that is a GAAP number off the press release so again we have got a little bit of noise in the numbers. I think the increase year-over-year on a GAAP basis was $23 million, of which $16 million, was normalized. I'll come back to that normalized number in a moment, that will not be the same each quarter. But what we are dealing with non- normalized, if you will then, is about a $7 million increase and there are two components to that. One is, and it is about 50/50, one is amortization of servicing rights in our mortgage brokerage business. We get to capitalize those up front and then we have to amortize them over the service period. So one is from the mortgage brokerage business servicing rights, one part of it is. The other part is the intangibles that we acquired in the ING acquisition for which we cannot normalize. So we have, on a normalized basis, about a $7 million increase year-over-year and then on a GAAP basis it is the $23 million and of that $16 million about $10 million of it is the result of incentive fees that we received during the quarter in the ING REIM business so the normalization will go down as the year progresses.

Okay so it is closer to $30 million for the quarter?

Correct.

Actually, okay, all right, I think I've got it.

Exactly.

Okay. Looking at investment management specifically, how should we think about revenue seasonality in that business?

Will, let me just give you a general answer on this. It is becoming a lot less seasonal than it used to be. And that is a combination of a number of different dynamics, but I think you should think about the investment management business now as a very large business that has a high proportion of core funds and assets within it and the way in which we are paid for that business is now a lot smoother than it used to be. Gil, do you want to add anything to that?

I think that is right on because we've got much more core funds in it so it is much more ratable.

Okay and then just a couple of other things. One, I'm just looking at the guidance, can you just remind us what that would assume? I think you said in the past a normal year with development gains?

You mean in terms of what the guidance implies?

Yes, thank you.

Well, you know it is all in, Will, right? So we don't and we've never really broken out component pieces. We are certainly in the third year of a recovery and I think the most I can say to you is the guidance anticipated that and we haven't changed our view at the moment.

Okay, and last question, anything in terms of the next three quarters, should we look at any as having a more difficult comp then another?

Well, again, the guidance would incorporate that and we talk about it in terms of a full year. But, of course, and maybe you are getting back at the development gains, I don't recall them off the top of my head, which quarters they necessarily hit, and maybe this is what you were alluding to, we did call out $33 million of development gains in the fourth quarter as being outsized. But that business has gains every year and the guidance that we have this year would incorporate the gains we think would be recurring. So we had an outside number in the $50 millions, but it is not going to be that this year and we said that on the last call but there will be some run rate of gains, that is what that business does. And that is incorporated in the guidance. So, the only things that would really stand out and you've really got to go back and analyze it quarter-by-quarter. I can't do that on the call here. We could one-on-one if you need to. But is when the gains hit and when carried interest hits to the good and to the bad. Those are the biggest things that would be anomalistic to a quarter.

Okay. That's helpful. Thank you very much.

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

Sure. I wanted to get an update on the four drivers of the US leasing -- average term length, average rent, average square footage per deal, and then deal velocity, if I could?

David, let me do this, we are fortunate today, and we have Mike Lafitte on the phone call actually dialing in from Dallas and on that specific question, I want to come back to that in a minute, but, Mike, I'd like to take you back for a moment to the question on the competitive landscape, maybe you could add a couple comments on how that landscape feels to you at the moment, both sale and leasing, and then Mike, I've got something here I can give to David on the velocity and so forth but if you want to talk about it just, the way it feels to you, Mike, I think that would be fine, as well.

Sure, no, I would be happy to do that. Obviously the leasing and the sales business is a very competitive marketplace, it always has been. The distress that we have seen with some of our competitors over the last couple of years has frankly benefited us. We've been able to attract talent from some of those that were experiencing distress. So, nothing has really changed, I think, as it relates to the playing field that we see in the Americas on the -- in terms of just the industry dynamic. Certainly, some of the names are emerging in that middle tier, there is really a fight for three, and four, and five, those places in the space. All good brands and all good people and all that, but it is really interesting kind of watching it all play out and how those, Brett commented on that. As I think about some of the -- and Brett you may comment on some of those specific metrics that we do follow.

Sure.

As it relates to the leasing drivers, I would say, David, a couple of things that I think about that are bigger drivers than some of those metrics ultimately that drive the vouchers and the revenues and the commissions in that business, the first is our new customers. Just landing to customers, we are very active on that, both on our investors' side of our business as well as our occupiers. We are deep in mid-caps, we're deep in healthcare, so we are very focused on landing new customers and we are doing that a lot. The second, I would say, is productivity advances that we are focused on around our leasing professionals. Training, specialty practice groups that are raising up in very specific niches that really take us into areas, they can actually expand our own business. Certainly strategic hiring is part of it and we've continued to remain very active on the hiring front through all of the downturn. We were always in the marketplace for great talent. Through '08 and '09 and '10 and '11, we were adding and were attracting great talent to our Company at the mid and the higher levels for the most parts, always with a program to grow our own. And then, lastly, is the improving fundamentals that I think that are ahead of us in some of those metrics that you asked about, Gil and Brett, you may want to comment on those metrics that we do track, but the fundamentals are improving and that is I think good news ahead although it is slower growth on the leasing side than what we're seeing certainly on the sales side.

Well, well, said, Mike, thank you. And David, just on the numbers, let me fill in some numbers that Mike was referencing. First on the fundamentals, as you saw from the deck, what we are seeing at marketplace is not surprising at all. We are in the again, I think early innings of a protracted recovery, although it is uneven and it is incremental so vacancy rates are very slowly coming down. We are seeing positive absorption bounce around but it is positive. And we are seeing cap rates slowly coming down as well. All of that, of course, is what Mike is referring to and it augurs towards an improving recovery as we look forward. On the actual sale and lease numbers for the US, I'll give you a few numbers. On the sale side, what we had was a fairly strong pickup in number of transactions first quarter 2011 over first quarter 2012 and in the US, for instance, that was 11% higher. On the average transaction side, and again this is just US, it is not Americas, what we saw there was a 25% increase in transaction size. And these together produced a 37% increase in reported sales revenue first quarter over first quarter, year-over-year.

Now, I want you to be careful, these numbers bounce around because we are in the early stages of recovery but that's what sales was for the first quarter. On the leasing side, it was generally flat year-over-year and when you look at office leasing. And where the real pickup was, was actually in retail and industrial and those together gave us, in the US at least, a 5% increase in reported leasing revenue year-over-year. Again, these numbers bounce around because that is where we are at this point in the cycle. But as Mike said, and as we have mentioned in our deck here, the leasing business is all about job growth. And job growth has been -- true net job growth -- has not been anything to write home about for a while. When that picked up, and it will, leasing numbers will pick up along with it and sometimes they pick up in an outsized weight when you see real job growth. The sales side actually is chugging along in the US pretty well and we talked about the slowness in Europe and Asia.

Okay, great, and one more question on a different topic. European investment sales volumes, I'm sure you've been getting assignments, but I've been reading that a couple of European banks have suspended their commercial real estate lending operations altogether and I'm just sort of wondering from your perspective, how are lending conditions in Europe now, and how you see that affecting you over the next couple of quarters?

Yes, usually we get these question about New York, so someone reads a headline in New York and they extrapolated that that is the world. And the point I'm trying to make, and probably not very well, is that in Europe, you do have a couple of banks that are -- more than a couple -- that are out of the commercial real estate lending market, there is lots of capital flowing around the world that can support the purchase of high-quality investment grade commercial real estate. Now, that having been said, the real issues at the moment in Europe is just uncertainty. And it is -- whenever and we've talked about this, we talked about it in 2008, 2009, 2010, and last year -- when you have uncertainty in a marketplace, it makes it hard to find pricing. And so when there is an uncertainty in a marketplace, people just slow down and they take their time and they do a lot more work to make sure that they've got a view on pricing. And right now in Europe, I think the story is more about uncertainty in the marketplace, which slows down transaction volumes and it is a lack of financing to buy an asset. If you and I want to go out to London or to Paris or Amsterdam or for that matter, New York or Houston or LA, and buy a high-quality asset, we will get the financing to do it. That is not really the major driver of the slowing we are seeing. It is a piece of it, but it is not the major driver.

Okay, thank you very much.

Yes.

(Operator Instructions)

And our next question is from the line of Brandon Dobell with William Blair. Please go ahead.

Thanks. First question, given the pace of wins and new space you guys are adding in the corporate business, how do we think about the -- I guess the margin dilution near-term and when or at what point should we see, I guess those margin comparisons get easier, i.e., where the incremental margins from the existing contracts are strong enough to offset the upfront spend from the new wins you guys are putting on?

Right. And I'm going to let Gil and I both take this question. I just want to, first of all, it is a very good question. It is one that we talked about at the Q4 2011 call. And we are in an interesting environment in that we are winning so much business right now that it is actually hurting the margins a bit, because these are big, big accounts and they come in, depending on the account, they could turn run rate margin level and profitable six months in, but more likely it might be a year in or even a bit more. And so, it is a high-class problem to have, that we are winning so much new business, that this now is impactful in a negative way on the margins and as I said on the fourth quarter call, if you just kind of do the math in your head, if you want the margins to move up nicely, you actually stop winning new business and then you get there in 8 to 12 months. We are not going to stop winning new business.

But I do think that this pace of winning is -- it's unprecedented. I've never seen anything like it. And I think that, that will normalize and become a steadier process perhaps than it's been in the last couple years. But the margins will get back to a number that I think is more typical for us, part of it will be these accounts, these big, big accounts we are getting, seasoning in, part will be just a changing market place. But again, we've got an expert on the phone that might want to speak to this. Mike, you understand the question well, and this is the issue that as we bring in these huge accounts, we don't necessarily lose money on them in the early days but we certainly are not making a lot of money, and the question I think that the analyst/investors are trying to get their head around is, how does that play out in the mid-term and the answer you heard what we are saying. Any opinions on this, Mike?

Well I guess the other thing I would add is, is that the other lines of business are growing at equal or even some of the lines of business, capital markets, has been growing at a faster rate. So when you consider the margins of the entire business, and you think about our higher margin business lines, certainly investment management, certainly capital markets, when it is stabilized, and going into markets like we are in today, which we are still operating at only 60% to 70% of where we were in peak of '07, I would submit to you that the overall margins of the business, given the diversification of the entire pie, really don't dilute. Yes, on the front-end, there is transition cost, on these GCS accounts, but we've been able to manage that year after year into the business that we planned for it and it is the investments that then also fuel the growth of our business.

So we are investing back into our platform in a big way, in people, and in technology, and all those things. I would submit to you that our corporate services professionals would say, yes, the more GCS business we are going to add in, overall, relative to all of our lines of business, and they may not be the highest margin business, but I would submit that they are all still have nice trajectory of growth. And our margins are pretty consistent year-over-year in that business. It is not a loss leader by any stretch. We are in that business to make money and find new ways to serve our clients in the higher end margin pieces, too, so if we land an FM account, it is not unusual to find ourselves in a consulting role doing capital market transactions doing sale lease back transactions and adding on other services that can bolt on to those relationships. So oftentimes, they are the gateway to just tremendous activity down the road with very, very long 15, 20 year relationship.

And Mike makes a good point here and I just want to stress it for our callers, which is, the way in which we account within our P&L the various revenues that pull off our various businesses, can be a little tricky. And so when you look at a single line and you look at the outsourcing business, for instance, and you all know this on the phone call, it is not the entire picture. Lots of the higher margin revenues that flow off these accounts are not captured in that segment. They are captured in leasing, as Mike just said, they are captured in sales, they are captured in valuation, and so just to paraphrase or say a different way what Mike said, when we tell you that in 2012, in a very tricky global economic environment, that our margins will see solid growth, part of the story there is higher margin work flowing from these corporate accounts, even though the corporate account statement you are looking might look like the margins went down a bit because these businesses came in with transition costs, et cetera. So I think Mike makes a very good point. The big picture story here is that this business, the other businesses we have, all play a role in a firm that has been able to grow margins, quarter-over-quarter-over-quarter, in up cycles and we intend to continue that going forward. And by the way -- having growth like this in the outsourcing business is one of the things we take massive pride in. These are the absolute best in class world corporations who are trusting with us the facilities work in. This is great, great stuff we are seeing here.

I think, and since I hopped on later, I'm not 100% sure, but I think Gil touched a little bit on secondary market activity and kind of a two-fold question there. One would be, pace of a recovery in the secondary markets for investment sales and, Gil, does your comment also include leasing or should we not assume that secondary markets are showing the same kind of trajectory for a recovery in leasing or growth in leasing as they are for the pure investment sales business now.

Yes, Gil is going to let me catch this one. I can't help myself. But here's what I would say. Again, I want to go back to the same thing, which is we are in the early quarters of what I think is going to be a very exciting protracted recovery in the asset class. And this is a particularly rocky, uneven recovery. And so, and as you know this as well as anyone on the phone call, where we saw the recovery start was in the safest places. Whether it was leasing or it was sales, what we saw when the recovery was people began to make investments whether they are owners or occupiers in those places where they thought they were bulletproof. If you were buying an asset, it was Main and Main in Manhattan. If you were going to open a data center, you were going to expand a corporate office, you were doing it in the places where you felt most certain about your business.

As this recovery seasons, that recovery, and Gil referenced this earlier, that recovery begins to move a bit up the risk spectrum. And so what you see is, you see assets and you've certainly seen this personally, you've seen assets begin to trade in areas outside of Maine and Maine in Manhattan. You see corporate, whether it is retailers or industrial logistics firms or big office clients, they begin to do things in markets outside of the major world financial centers. It is absolutely typical for early-stage recovery and what we said a couple quarter ago, I just want to remind you again is, let's look forward a year from now, or whether it is three quarters or five quarters or whatever it's going to be, the strength you see in the major markets, both in leasing and sales, will have spread out to the secondary and even some of the tertiary markets. And that is just the cycle this business goes through and will go through for a very long time, I think.

And final question from me, I guess conversion of the pipeline in I guess it's the three major segments -- sales, leasing, and outsourcing and corporate services -- the, I guess, pace or the kind of the feel of conversion as you were for the first quarter, how did that compare to either what it felt like last year first quarter or what it felt like in the fourth quarter? Was there more predictability, less predictability, good things happening, or kind of out of the blue, or deals getting pushed kind of out of the blue? I guess I'm just trying to get a sense of how to compare your kind of cautious optimism tone with what we would have seen the past several quarters?

Yes, so, I think the answer lies in the results. And what you saw in the result was that we saw in Europe and Asia, a cooling of the investment property market, so, definitionally, or let me translate that for you. What you saw was hesitancy in closings. What you saw was protracted closings and what you saw was canceled closings. When you see an investment -- a capital markets market cool down, that is what is going on, there. On the leasing side, it is a little bit different. On the leasing side, generally speaking, when occupiers launch a property search and they get into a negotiation to lease 20,000 square feet of retail or 100,000 square feet of office, they don't generally collapse the negotiations and walk away. It is a little bit more, I guess I would describe it as a little more sticky.

And that is why, by the way, the leasing, even over the last 20 years, just look at the deltas in leasing revenues, they are much, much less volatile than what you see in the capital markets. And it is a lot about that. I think anecdotally what I would say to you is, that for the last eight quarters, what we have seen is just fits and starts and you and I have talked about it. You get some traction going in the spring of 2011 and people feel that things are a lot better, and then there is a shock to the system, the euro sovereign debt issues, and then suddenly the brakes are put on again. And then you get some traction again, and then there's a China housing bubble issue. And I think that we are going to continue to see these kinds of things through the business until this recovery really get its sea legs and it is not there. It is getting incrementally better every quarter, the fundamentals, as Mike Lafitte referenced, are getting better every quarter, but it is going to be a bumpy ride I think for a bit. But again, I want to put that in context. If I'm describing a bumpy ride and revenues are up 14% for the quarter and EBITDA is up 25% for the quarter and we are reaffirming guidance, we are telling you our margins, I will take that bumpy ride all day long.

Yes, I appreciate the commentary. Thanks, Brett.

You bet.

And we have a question from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thanks. Your cash balance declined from year-end as expected, as you guys paid bonuses and so forth, but if I look at where your guidance and so forth is, if you hit numbers it seems like your cash balance would start to go back up to close to $1 billion. And just wondering how you're thinking about use of that cash and just, perhaps, acquisition opportunities that might be out there?

Yes, fair question. You're absolutely right on the first quarter activity, obviously, with the seasonality of the business, the balance will come down and then it ought to build as the year progresses. The top-of-mind for us is de-levering it, and I'll remind you that we do have -- we don't have debt coming due but we do have callable debt in June of 2013. And that is our expense of 11.625% debt so I won't give a definitive, but I think logic would suggest that we need to look at that very carefully. M&A is always something that we look at. You know we do it and we do it well. And it is, again, something that is on the menu of items, but, short of something that is going to be accretive and very positive for us and strategic, de-levering is really the order of the day. And we've got a reason to do it with extensive debt coming due in June of '13, but at the moment we are in a bit of a wait-and-see. That is looming and we are still in early days in terms of the cycle, so there may be opportunities, nothing definitive that we are going to talk about or that -- and it is just a function of where we are in the cycle that we've got these two opportunities, I suppose, to utilize cash, but de-levering is top of mind.

I'm going to add to that, Anthony, and I agree 100% with what Gil just said, I would just add to this, that in a market environment like we are in, M&A is something that, well first of all it is dial tone for us. So we are always looking at what is out there and available. You are just going to see us probably do a little bit less of it in a market like this. As Gil said, de-levering is certainly at the top of our list. There is a lot of stuff moving in the market right now, in terms of very small M&A but not much that is very attractive. And we have our priorities at the moment are not really built around doing 100 M&A deals this year. And we've got this world class platform, now, top business line in every business line we are in and really leveraging the synergy of those business lines and growing our business now with this great platform is a very, very exciting proposition. If a opportunity arises out in the marketplace, though, as we've always said before, in a good market or bad, and this I would describe as a pretty good market, we're going to look at it. But the high-quality opportunities are few and far between at the moment.

Okay. Thank you.

Sure.

And I'll turn it back to our speakers for any closing remarks.

Great. Well thanks, everybody. We will talk to you in another quarter. Goodbye.

Ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.