世邦魏理仕集團 (CBRE) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CBRE Q2 earnings conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Nick Kormeluk. Please go ahead, sir.

Thank you, and welcome to CBRE's second quarter 2012 earnings conference call. About an hour ago, we issued a press release announcing our Q2 financial results. This release is available on the homepage 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 the presentation slide deck which you can use to follow along with our prepared remarks. An archive 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 hosted 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 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 on the SEC's website at 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 includes 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, Bob Sulentik, our President, who as you know, will succeed Brett as CEO at the end of the year, and Gil Borok, our Chief Financial Officer. I'll now turn the call over to Brett.

Thanks, Nick. Please turn to slide 4. I'm happy to have Bob join our call today. Bob is well known to most of you. I know you'll enjoy interacting with him more regularly as he gears up to assume the CEO duties at the end of the year.

We are very pleased with our results for the quarter. We grew our top line by double digits, improved our bottom line by nearly 30%, and increased our normalized EBITDA margin by 170 basis points. Our strong performance reflects a broad well-balanced global platform we've built over two decades, one in which strength in certain business lines and markets compensates for weaknesses in others, and also demonstrates our ability to control costs, while executing on our growth strategy.

Right now, the Americas is faring the best of all our regions. Our preeminent position in markets across the US, Canada and Latin America has enabled us to sustain double digit revenue and profit growth despite a lack of meaningful job creation. Asia Pacific achieved solid growth in the second quarter as well, notwithstanding China's economic slowdown. As expected, EMEA saw softer results, as they continue to fight formidable headwind related to both the Euro zone's ongoing economic and debt issues, and notable negative currency effects.

Benefits continued to accrue from the acquisition of the ING REIM businesses last year. We believe the blending of ING REIM's professional talent in with our own has forged a new industry leader in Real Estate Investment Management, and has certainly given us an enhanced stream of stable revenue at higher margins than most of our other businesses. The 25% normalized EBITDA margin for this business achieved during the quarter serves us particularly well in a choppy market environment, and we expect positive contributions from the ING REIM acquisition to continue.

Our global Outsourcing business continued to make strong gains with double digit revenue growth for the seventh consecutive quarter. We signed 54 total contracts, including 24 with new outsourcing customers, setting a Company record for new wins in a quarter. This business continues to exhibit good momentum, for reasons we will discuss later.

Our Capital Markets businesses also performed well. Although a small component of total Company revenue, mortgage brokerage had robust revenue growth of 36%, as loan origination volumes and related servicing demand continued to rise. While still a relatively moderate portion of overall revenue, property sales moved higher in all regions, paced by the Americas, reflecting generally soft occupier market conditions, particularly in Europe, property leasing inched up slightly on a global basis. The Americas and Asia Pacific accounted for the increase.

While the global market recovery progresses, macro challenges continue to limit its strength. Nonetheless, CBRE continues to be in an advantageous position. Our unique combination of people, brand, and mature global platforms gives us the ability to perform well for clients and shareholders, and to build market share across our spectrum of services. Shown here on slide 5, are notable transactions we completed during or immediately following the quarter. As usual, I'll not go through them individually, but we've included them for your review.

And with that, Gil, I'll turn the call over to you to go through the financial deck.

Thank you, Brett.

Please advance to slide 6. Total revenue was approximately $1.6 billion for the second quarter of 2012, up 12% from last year or 13% when excluding discontinued operations. This increase was driven by growth in outsourcing, investment sales, investment management and commercial mortgage brokerage. Normalized EBITDA improved at more than twice the pace of revenue, rising 28% to $220.9 million in the second quarter of 2012 from $172.4 million in the second quarter of 2011, and our normalized EBITDA margin expanded by 170 basis points to 13.8%.

Cost of services fell 240 basis points to 56.7% of total revenue in the second quarter of 2012 versus 59.1% in the second quarter of 2011. This reduction was primarily driven by the fact that all costs associated with ING REIM which were not present in the second quarter of 2011 flowed through the operating expense line, as opposed to cost of services. Despite the inclusion of all of ING REIM's cost in operating expenses, this line was essentially flat as a percentage of revenue compared to the second quarter of 2011, indicating effective cost management.

In the Americas and Asia Pacific, consistent with historical patterns, positive operating leverage was readily apparent. Due to the more fixed nature of costs in many parts of Europe, and the rapid decline in leasing revenues in EMEA during the quarter, such operating leverage was not yet as evident in this region.

Interest expense increased by $10.2 million in the quarter as compared to the second quarter of 2011 primarily due to the full impact on the financing of ING REIM, and [disturbing the nominated] term loan A1 facility that were not present in the second quarter of 2011.

Our second quarter 2012 tax rate was approximately 40%, and we expect the full-year 2012 tax rate to be a little below this. Second quarter 2012 GAAP diluted earnings per share was $0.23 versus $0.19 last year, and adjusted diluted earnings per share was $0.27 versus $0.21 in the second quarter of 2011, an increase of almost 30%.

Please turn to Slide 7. Property and facilities management was our largest service line in the second quarter of 2012, representing 34% of total revenue in the quarter, with a 10% increase over the second quarter of 2011. Leasing was our second-largest service line, representing 30% of total revenue in the second quarter of 2012, with increases in the Americas and Asia Pacific.

Investment sales accelerated to a growth rate of 16% in the second quarter of 2012, driven by the Americas, with positive contributions from EMEA and Asia Pacific, as well. It represented 16% of total revenues in the second quarter of 2012. Global Investment Management revenue more than doubled again quarter-over-quarter, driven by increases in asset management fees attributable to the ING RËIM businesses.

Appraisal and valuation revenue increased 6% to $95.2 million, led by a business in Asia Pacific that was acquired late in the second quarter of 2011. Commercial mortgage brokerage revenue grew 36% year-over-year, driven by continued capital availability, generally low interest rates, competitive spreads, and investors' continued search for yield. Development services revenue was up slightly to $15.5 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 57% of total revenue for the second quarter of 2012.

Although not our typical sequence, I will briefly cover our debt maturity and capitalization table, before handing the call over to Bob. Slide 8 shows our amortization and debt maturity schedule for all outstanding debt. This is virtually unchanged from the first quarter of 2012 With considerable liquidity and cash flow, we remain very comfortable with our debt maturity schedule and the flexibility it provides.

Please turn to slide 9. Excluding cash within consolidated funds and other entities not available for Company use, and excluding our non-recourse Real Estate loans and our mortgage brokerage warehouse facilities, our total net debt at the end of the second quarter of 2012 was approximately $1.9 billion. This is flat as compared to the end of the first quarter of 2012 and up versus the end of 2011 due to bonuses and other incentive compensation payments made in the first half of the year. Consistent with historical trends, our net debt is expected to decrease as the year progresses.

At the end of the second quarter of 2012, our weighted average interest rate was approximately 5.7%, when including interest rate swaps, similar to the end of the first quarter of 2012. Our leverage ratio on a covenant basis now stands at 1.76 times at the end of the second quarter of 2012 on a trailing 12-month basis. Our total Company net debt to trailing 12-month EBITDA stood at 2.19 times.

I will now turn the call over to Bob, who will cover business line performance.

Thanks, Gil. I'm glad to once again be joining these calls on a regular basis.

Please turn to slide 10. Our Outsourcing business continued its pattern of consistent growth, driven by record new account additions. In the second quarter of this year we signed 54 contracts, the second highest total in Company history. We landed 24 new accounts, the most ever for a single quarter, 21 renewals and 9 expansions. All of this contract activity in the second quarter and from many prior quarters suggest very strong underlying momentum in our Outsourcing business, and we expect that momentum to continue well into the future.

The outsourcing trend is being propelled by globalization and the desire by occupiers of all sizes and across industries to increase efficiency, and improve all overall performance, particularly in light of the global economic slowdown. For this reason, this business has significant head room for growth. We believe there is as much as $50 billion to $60 billion in total market potential. We're poised to capture a significant percentage of this opportunity by delivering services to more space users, in established outsourcing markets, as well as newer markets.

For example, we see big potential among mid cap companies, which accounted for more than a third of our total contracts in the second quarter. We also continue to add customers in the government and healthcare sectors where cost pressures are especially acute.

We saw evidence of this in the second quarter with three new contracts in the government sector, and three new contracts plus a client expansion in the healthcare sector. In addition, four large corporations selected us to provide various services to their properties in Latin America, and we were hired by Sony to handle transaction management and lease administration in Asia Pacific and EMEA.

Please turn to slide 11, which demonstrates steadily decreasing vacancy rates and positive absorption in all three market sectors depicted, along with forecasted improvement over the next two years. Average national cap rates were slightly down in the second quarter versus both the first quarter of this year and the second quarter of last year, primarily due to continued strength in core and Class A property sales.

Please turn to Slide 12. The Americas posted very good growth in property sales revenue in the second quarter which continued to be driven by activity in core markets with modest improvement in secondary markets. Our position as a market leader across asset sectors, office, industrial, retail and multi-family, and our ability to provide integrated equity and debt solutions are clearly a distinct advantage.

RCA data shows that we improved market share by 230 basis points from a year ago to 16.2% in the second quarter of this year, once again, the highest in the industry. Leasing markets generally showed some improvement in the second quarter, with vacancy rates declining modestly. During the quarter, the US office vacancy rate fell 30 basis points to 15.7%, compared to the first quarter of this year, indicating that our office market recovery remains intact.

Market fundamentals continue to be helped by very low levels of new construction. Occupier demand, however, remains modest. In light of this, a second-quarter leasing revenue increase of 5% is a good result, and in line with our expectations. This growth reflects our premier position in key business centers such as New York City, where we negotiated four of the five largest leased transactions in the first half of this year. Our Americas Outsourcing business grew by a strong 13% in the second quarter.

Please turn to Slide 13. In EMEA, property sales provided a positive surprise. Despite almost daily headlines about the Euro zone debt crisis and heightened investor anxiety, our EMEA sales revenue rose 3% in the second quarter. Excluding the notable impact of negative foreign currency movement, EMEA sales revenue grew by 11%. We are especially pleased with this outcome, given that property sales activity across most of the EMEA is weak.

Leasing performance showed greater effects from the flatlining economies across Europe. While average rents across the region have remained relatively stable, occupiers have been hesitant to make commitments in the current environment. As a result, EMEA leasing revenue decreased 17% in the second quarter of 2012 versus the same quarter of 2011.

Excluding the impact of foreign exchange, leasing declined 10% in the second quarter, versus the second quarter last year. Consistent with our first-quarter results, France, in particular, had a very negative comparison against a strong second quarter in 2011.

EMEA outsourcing revenue was flat in the second quarter as compared to the second quarter of last year. This was primarily driven by negative foreign currency movements, excluding the impact of foreign currency outsourcing revenue grew 9%. Our total revenue in EMEA declined 5%. However, when excluding the impact of foreign exchange, it grew 3%.

Please turn to slide 14. Asia Pacific generated solid growth in all three major business lines during the second quarter. We saw excellent performance in Japan, as the economy there continued to recover from last year's natural disaster and the related investment in infrastructure continued. Investors increasingly perceived Japan as a safe haven and an integral part of any overall Asia investment strategy.

Australia, India, and Singapore all performed well, despite moderating global economic activity. Property sales revenue advanced 4% in the second quarter, led by activity in Japan. Excluding the impact of negative foreign currency movements, the increase was 8%. Leasing revenue in Asia Pacific grew 6%, with growth evident in almost all geographies. Excluding the impact of foreign exchange, growth was 9%. Outsourcing revenue improved by 5% in the second quarter versus the second quarter last year, and excluding the impact of foreign exchange, outsourcing revenue grew 13%. Our total revenue growth in Asia Pacific was 11%, when excluding the impact of foreign exchange.

Please turn to slide 15. Revenue for the development services segment totaled $17.8 million in the second quarter versus $17.2 million in the second quarter last year. Second-quarter EBITDA declined by $6.6 million from the second quarter of last year due to higher profits from property sales in the prior year quarter.

At the end of the second quarter, in-process development totaled $4.7 billion and the pipeline totaled $1.4 billion. Our equity co-investments at the end of the second quarter in development services totaled $89.2 million, and our recourse debt stood at only $15 million.

Please turn to slide 16. Second-quarter 2012 global investment management revenue increased to $119.7 million from $58.9 million in the second quarter of last year. The increase resulted from higher asset management fees largely stemming from the inclusion of ING REIM, which contributed approximately $7 million in revenue in the second quarter. Assets under management or AUM totaled $91.2 billion at the end of the second quarter, down from $95.9 billion at the end of the first quarter this year. $2.8 billion of the drop was due to a non-traded REIT's Board's decision to internalize its management.

In addition, AUM declined in the current quarter by $1.8 billion due to currency fluctuations, $500 million due to declines in asset values, primarily in Europe, and $400 million due to dispositions, while acquisitions added $800 million to Assets Under Management. Included in the $91.2 billion of AUM at the end of the second quarter was $21.4 billion of listed securities. Net outflows, combined with changes in market valuation in this portfolio decreased AUM by $300 million versus the end of the first quarter.

During the second quarter of this year, we raised new equity capital of approximately $700 million in the direct real estate business and had approximately $2.6 billion of equity capital to deploy at the end of the quarter. Our co-investments in this business at the end of the quarter totaled $215.1 million.

Please turn to Slide 17. Our global investment management EBITDA reconciliation is shown here. In the second quarter of 2012, we incurred $9.1 million of expenses related to the ING REIM acquisition, primarily for retention, severance, facilities and information technology. As of June 30 this year, the Company maintained a cumulative accrual of carried interest compensation expense of approximately $40 million, which pertains to anticipated future carried interest revenue. This reflects a reduction of $4 million from the end of the first quarter, due to an income tax related distribution. This business operated at a pro forma normalized EBITDA margin of 25% for the second quarter of 2012.

Brett, I'll now turn the call back over to you.

Thanks, Bob, and please turn to slide 18.

The commercial real estate recovery continues to progress at a historically slow pace, relative to prior recoveries with a high degree of inconsistency globally. We are pleased that CBRE continues to perform well, and we continue to build our position as a market leader. Our views following the completion of the first half of 2012 are that outsourcing is expected to continue its strong consistent growth trend, leasing growth rates should be relatively modest, investment sales growth will vary widely depending on local and regional market dynamics, and finally, that Investment Management will benefit from a full year contribution from the acquired ING REIM businesses.

With the first half now behind us, we remain comfortable with our full-year normalized EPS guidance of $1.20 to $1.25 with higher normalized EBITDA margins than in 2011. However, given the ongoing uncertainty regarding the global economic picture, we will take a close look at our guidance again at the conclusion of the third quarter, which of course is our standard practice.

And with that, Operator, we'll now take questions.

(Operator Instructions)

Our first question will come from the line of Anthony Paolone with JPMorgan. Please go ahead. Please go ahead.

The facility management business you mentioned $50 billion to $60 billion of potential in that business, first thing, is that an annual revenue number that you were citing?

That, the $50 billion to $60 billion of potential revenue is an annual figure for the total outsourcing segment, so we believe look, this is a very big market, as you know, it's a market that's very difficult to size, but if we extrapolate what we think is out there in terms of total firms that could outsource, and all of the services that could be outsourced, you'll get to a number we think generally in that range.

Okay so this is potentially folks that would outsource, not necessarily that they're outsourcing now?

That's right. This is total potential market.

Okay, what's been sort of the conversion over the past, I don't know, two or three years to an outsourcing model, trying to get a sense as to, have you been driving it from share, is the market just expanding very quickly, is there any way to put some parameters around that?

Well I think first, Anthony if you just observe the two firms are doing most of this work are our good competitor back east, we both have been reporting very strong growth rates in this business, and I think that's a combination of two things. The first is the market is clearly expanding more quickly, or has been expanding more quickly the last three or four years, than it has been in prior years, so the business is maturing, and more and more firms are coming to market with outsourcing contracts. The second dynamic though that greatly supports our firm is the movement of outsourcing work away from niche, boutique and regional players over to true global firms, and so that trend, which is for quite some time as you know, Anthony, is a big benefiting dynamic to ourselves and to one other firm in the industry.

Okay, thank you for that. In Europe, is Europe getting better or worse from the point of view of just seeing somewhat of a normal flow of either leasing and/or sales transactions? I guess what I'm asking is, are people becoming more constricted or are they adapting to this environment?

Right, well I think it's fair to say that Europe is a very unsettled region, and it's a region that has not been given the opportunity to take a pause, catch their breath and deal with the trends that are extant in their marketplace. There seems to be a new issue as you know, Anthony in Europe, every week, every month, so the marketplace in Europe is troubled, and when you have a marketplace like that, what tends to happen is people freeze on making decisions around dispositions of real estate, acquisitions of real estate, expanding their business's footprint, contracting their business's footprint. Everybody takes a time out until they can digest what is going on in their marketplace.

And this market is very dynamic. I don't think anybody in Europe at the moment, we certainly can't predict with any certainty what that marketplace is going to look like a month from now much less a year from now, and until that sort of view is available in the marketplace, until large customers of ours can look forward for a few quarters and have some comfort around what that marketplace is going to bring them, this market is going to remain troubled, as you saw in the leasing volumes and you saw in the sales volumes. I do want to ask Bob, who's on the line to add his commentary into this. Europe reports to Bob, and he's much more closer to that situation than I am. Bob, what would you like to add to that?

Well first of all, I agree with all of it, Brett. I think that's a very good description of what's going on. Obviously, we saw a different circumstance with investment properties than we did with leasing in the last quarter, and I think the explanation for that is in core markets, and there certainly are some important core markets most notably London, people are going to invest in real estate because they think they can get some yield. It's so hard to get yield on anything you invest in today there's going to be investment in core solid properties and we saw some of that. The flip side for that is leasing, businesses simply aren't going to make decisions with this much uncertainty, and we saw real pressure in leasing markets, so that's really the only thing I would add to what Brett said, and generally I agree with the whole description.

Anthony I'd add to Bob's comments and to my own, this is a sentiment issue. So at the moment, as you know, and all of our callers know, capital is very easy to obtain. Businesses, if they choose to, can make investments with their own cash, or through borrowed funds, this is a sentiment issue, and if there's good news or a silver lining around this dark cloud in Europe, it is when sentiment changes, there is an enormous amount of pent-up demand that needs to be satisfied, and we believe that at some point the situation will resolve, and when it does, we should see very good performance out of Europe. And when that occurs, who knows.

Thanks for that. In the press release, you talked about just cost discipline. Is there anything just specifically any programs to actually cut costs at this point, or is it just being mindful, what's happening there?

Anthony, it's just status quo, so as you know, and I hope everyone on the phone knows, it's simply part of our culture to be very mindful about margins. Once again, we're very proud this quarter with our performance at the margin side. We again have leading margins in the industry. That comes from hard work, but also comes from our culture which is to mind costs while making smart long-term investments in the business. We have no particular programs underway right now in terms of restructuring or the types of things I think you're referring to, but it's fair to say that in an environment like the one we're currently operating, everybody is very careful of the OpEx line. Let me ask Gil to add any comments he would like to that.

Anthony, I think the reason that we highlighted was, that it is quite visible, certainly in the Americas and Asia Pacific, as we've had some improvement in transaction revenues, and the idea was to remind folks that sometimes it does take a little while to see that leverage. Clearly we're seeing it very well in Q2 in Americas and Asia-Pac, not as much as Europe, but when you deal with the cost as we do, it's certainly a situation where revenue is down so you aren't seeing leverage as much as you might in the other two regions.

Got it. Last question, Gil. The tax rate was about 42% in the quarter. It just seemed a little higher for six months versus last year. Any thoughts on what we should be looking at for the balance of the year, how to think about the year in total?

I think we actually said it but it's slightly south of 40% for the year. You sometimes have discrete items in the quarter and any particular quarter, that on a quarterly basis can raise it a little bit or lower it a little bit, but for the year I expect it a little bit under 40%.

Okay, thanks, good quarter.

Thank you. The next question will come from the line of Brandon Dobell with William Blair. Please go ahead.

Couple things. A couple quarters ago you talked a little bit about taking a look at where your headcount was, especially in the US on the leasing side of the business. Doesn't sound like there's any updated thoughts there in terms of adding more headcount given how the markets are going, but maybe you could address what the plans might be in the back half of the year, in the US in particular?

Brandon, I think you're referring to comments we made last year regarding recruiting, is that what you're referring to?

Correct.

So it's a matter of standard course of business, we're always looking for talent in the industry. There's a normal attrition rate that we have to deal with every year, and there's a certain amount of hiring we like to make every year on the competitive side. I think the trend that we spoke about last year remains the same this year, which is, there is a clear fundamental dynamic in the industry of high-quality talent moving from what I would describe as kind of the regional or quasi national players over to the global players, and that's one of the reasons we referenced earlier on outsourcing growth. There's just more and more the larger high ticket clients are moving to these firms, and so therefore, so is the talent. I also wanted to ask Bob to comment on this, again Americas reports to Bob and Bob, this question is regarding our recruiting this year and whether or not we're seeing good things there or not.

Well, I would bifurcate the question into two parts. Our absolute recruiting and our net recruiting, and in an absolute sense, we've done a good amount of recruiting, Anthony. And in a net sense, its been much closer to flat, and the reason for that is that we're upgrading positions around our system in a very strategic way and with a plan in place to get that done. I suspect that effort is going to play out, and that you're going to start to see an increase in headcount over the next year or so, as we go from replacing spots where we wanted to upgrade to actually adding net headcount.

As you think about the pretty strong start to the year, the first six months in the property management business, the impact of on-boarding those contracts in the back half of the year, should we expect margin pressure out of that part of the business, or are you starting to get any benefit from all of the deals you guys on-boarded list year and should out strip the costs that will come on the back half of this year?

Gil, go ahead.

Hi, Brandon. I think there will be some transition cost impact, which we have seen, but I don't expect it to be as notable as what we saw last year, because you're right, some of what we on-boarded last year is now maturing and we're getting into more of a mature portfolio in that regard, but the larger complex deals are more and more, so I think it's going to be apples-to-apples a lot more comparable.

And final question for me. In the US, around investment sales as you work through the second quarter, looking at secondary markets or Class B property types, any further progress there in terms of maybe a quicker paced recovery in those markets than you saw in the first quarter, or is it still pretty lackluster?

I would describe it, Brandon this way. There is still a concentrated focus on core markets and core real estate, but that having been said, there has been an awful lot of money raised the past 24 months with a value-add type hurdle to it, and those returns are only available in the secondary and tertiary markets and we are seeing a decent amount of activity in those markets, and I had a discussion with a client the other day who bought a very large office asset in Orange County that was 40% vacant. The yield on that building with the vacancy was north of 7%. That's a true value-added transaction, and they told me they bid against a number of buyers to get that building, so I would say as this market continues to season, as it continues to mature, we're going to hear more and more of those stories and the core focus we see in the last two years will still be the big element of the market, but it won't be the only headline story.

The final one. Any large kind of single transactions last year in the third quarter, either leasing or sales side, that we should be aware of from a year on year comparison basis?

Gil?

No. Nothing to call out, Brandon.

Perfect. Thanks. Appreciate it.

Thank you. The next question will come from the line of Will Marks with JMP Securities. Please go ahead.

I wanted to just ask I guess first of all, Gil, any further ING integration costs, or are those all behind you?

No, there are still more to come in Q3 and Q4.

Approximately how much, can you give us?

Well, there's some that will come at the EBITDA line, and some will come to amortization, in total, I think about $15 million in each of Q3 and Q4.

Thank you. Okay, second question on, we've read a lot of industry reports, I don't think I've seen you guys quote this, but just on US industry leasing volumes being weaker than expected at the beginning of the year, and definitely showing a decline for the full year, and certainly year-to-date looks pretty good. I'm wondering if the components of your guidance have changed at all for that or anything else?

No, Will. They haven't and just let me put a finer point on your question. If you look at the second quarter in the US, which you talked about US market I'll answer on the US market. Number of transactions for us in the leasing business was basically flat. The length of lease in the second quarter was basically flat. They're both actually down 1%, but the average lease size was actually up 5% for the quarter, so those three dynamics, which are the dynamics that give us revenue, gives us 7% increase in reported leasing revenue for all product types in the second quarter of 2012, versus second quarter of 2011. That's a decent number given this current market environment, and there's nothing going on in that business that is materially different from what we forecast when we built our guidance for the year.

Okay, actually, I have to ask you to repeat that so average lease size up 5%, meaning the dollar value of the lease?

Square foot per transaction.

Square foot, okay, and then rental rate did you say is flat?

What I said was that the number of transactions was down 1%, the lease term was down 1%, and square foot was up 5%. The rental rate increase year-over-year, I'm going to give you a rough number call it 2.5%, and we will give you a little bit finer number, but it's a rough science and 2.5% for the MSAs would be the right number.

Okay. Great. That's all for me, thank you.

(Operator Instructions)

The next question comes from the line of David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.

Sure. So if I understood you right on the cost side, it sounds like you're being mindful there, but just to be clear, you don't have any plans to take significant cost out of EMEA?

What Gil said and I'll just underscore it is that EMEA, along with Asia Pacific, Americas, and our global business lines are all being mindful on cost. When we talk about taking material cost out, we'll talk about that when we're going to do something that likely will fall into a restructuring charge. Ad there's nothing going on in the business right now that would lead us to talk about that at the moment, but we're watching EMEA carefully. Obviously as you know, David but I'll let the other callers know as well, the cost structures in Europe are different than the Americas and Asia Pacific, and a lot of the cost that you have underpinning your business in Europe is more structural than it is variable and it's harder to get out of than it is in other markets. So what tends to happen is you tend to lag a bit in Europe on the cost side and I think the underscoring point that is important for callers to understand is that as you saw in our performance for the quarter, and for the first half of the year, we're paying a lot of attention to cost, and we're going to continue to pay a lot of attention to cost until these markets are stabilized, and growing at a rate that we think indicates a good recovery. Gil, anything you want to add on cost issues in Europe?

No, I think I said what I was going to say, and I'll reiterate it which is again that because of the revenue situation there in the quarter, the decrease in leasing in particular, there is not leverage that's apparent, like it is in the Americas and Asia Pacific and as Brett says, we're paying attention to costs and obviously in all three regions and Europe is the most concerning at the moment, given the results, but nothing particular to talk about.

Maybe, David, to put another angle on this, what you should not expect in Europe are large cost increases year-over-year. So in the market like Europe, where you're able to make the biggest impact on cost tends to be on deferring on additional expenses in the business rather than Americas or Asia Pacific, where it's fairly straightforward to reduce tens of millions of dollars of costs very quickly and very easily, it's just not easy to do in Europe, but again, as we mentioned in our script earlier one of the great benefits of this firm is that we are so highly diversified around product line. We have so many businesses that we benefit that the firm can absorb issues like Europe right now, and still post industry-leading margins and industry-leading profits. And that's by design and that allows us to be patient with Europe, not to make draconian cuts to their cost structure later, because this is a terrific business and we're very comfortable with where they stand at the moment, on their cost side although we are concerned as Gil said on the revenue side.

Okay, great and then in the Fourth quarter, you're going to have a full quarter anniversary of the ING acquisition. When you look at your full-year adjusted EBITDA margin, that's obviously benefiting from that but would you expect year-over-year adjusted EBITDA margin expansion in the fourth quarter as you have that full four-quarter anniversary of ING?

David, in isolation that's correct, but if you recall when we did back to our fourth quarter call back in February and we gave our outlook for 2012, what essentially we said was, we called out certain development gains that were, I think I used the terminology outsized at the time. There were gains that were normal course for development but then there were those that were outsized but my comments around the fact in the principal business whatever upside there was from Investment Management, which at the EPS line, remember, was reduced by things like interest expense, amortization that doesn't get normalized and so forth. When you look at the net income and EPS line, whatever favorability you had was more or less offset by the absence of development gains, and so that's how I think you should at this point, I still would affirm that's how you should think about the fourth quarter so that the upside, the fourth quarter and year so that the upside and the expansion in margin will come from the services business which is exactly how we framed it up when we gave the outlook at the beginning of the year.

Okay, thank you very much.

Next we'll go to a follow-up from Anthony Paolone with JPMorgan. Please go ahead.

I think you mentioned maybe it was $2.6 billion of equity that still needs to be deployed in investment management and I was wondering I guess A, do you collect fees on that currently or is that kind of a revenue backlog if you will? And B, is there anything like on the flip side, for instance where you have an exit queue in any of your funds that are of size?

I'll pitch that to Bob. Bob?

Anthony, in terms of the fees, we collect fees when we deploy the capital, and in terms of exits, we announced the single biggest exit we anticipate for the year, which is the non-traded REIT that we were the manager for, where the managements been internalized so we wouldn't expect to see anything of major significance like that between now and the end of the year.

It was that just in the sense is there something we should pull out of numbers, like did that happen late in the quarter? Is it that material in terms of the internalization of the manager there with the non-traded REIT?

Gil, you'll take that?

Yes. It was announced and I forget the exact timing, I think it was probably late May or early June, and I'd just say that there's no single fund in the US, no single venture in the US that is going to impact the fees for assets under management in a material way in a business of this size. You might get a little more of that in Europe, where those core funds, the fees are based in large part on market valuations, but again, core funds don't fluctuate the way value add does, so short answer I guess is no, we don't expect a material impact.

Okay, thanks.

Thank you. I'll now turn it back for closing remarks. Please continue.

Thanks, everyone. We are very pleased with our quarter. Look forward to continued good results for the year.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.