世邦魏理仕集團 (CBRE) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBRE third-quarter conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. And I would now like to turn the conference over to our host, Mr. Nick Kormeluk, in investor relations. Please go ahead.

Welcome to CBRE's third-quarter 2013 earnings conference call. About an hour ago, we issued a press release announcing our Q3 financial results. This release is available on the home page of our website at CBRE.com.

This conference call is being webcast and is available on the Investor Relation 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, and business outlook. These statements should be considered as estimates only and actual results may ultimately differ from these estimates.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our third-quarter earnings report filed on Form 8-K; our current annual report filed on Form 10-K; and our current quarterly report on Form 10-Q, in particular any discussion of risk factors or forward-looking statements, which are filed with the SEC and available at the SEC's website, 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 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 are Bob Sulentic, our President and Chief Executive Officer; Gil Borok, our Chief Financial Officer; and Mike Strong, our EMEA Chairman and Chief Executive Officer. I will turn the call over to Bob.

Thanks, Nick. Please turn to slide 4. The third quarter was another period of strong growth for CBRE.

Before we review this quarter in detail, I would like to take you back to our second-quarter earnings conference call in July. As we looked ahead to the rest of 2013, we said we expected that property sales would remain strong, despite modestly higher interest rates and anxieties over the US Federal Reserve's policies.

Occupier outsourcing would sustain steady, low double-digit growth rates. Leasing would gain momentum as a result of our increased focus and slowly improving market fundamentals. Investment management would benefit from significant carried interest revenue, much of which was anticipated in our initial expectation for 2013. EBITDA margin would expand by around 50 basis points for the full year, driven by increased contributions from investment management, as well as the normal increase in transaction activity during the second half of the year.

The third quarter, overall, played out much as we expected. Our performance relative to our three primary financial metrics -- revenue, normalized EBITDA, and earnings per share -- was consistent with our plan.

Importantly, we achieved solid top- and bottom-line growth, while continuing to make very important strategic investments, as previously announced, in people and technology. These investments are strengthening our ability to support our professionals and serve our clients, while positioning us for future success. Gil will provide more details on these efforts.

Our growth in this quarter came amid highly variable global market conditions caused by a soft economic recovery and ongoing US fiscal and monetary policy uncertainty, underlined by the extreme policy discord in Washington, DC in recent weeks. Despite all of this, there were many areas of significant strength, along with a few weak spots, which added up to healthy growth for the quarter. In fact, in a market like this, we benefit significantly from our well-balanced Business and lean position we hold across business lines and markets across the world.

Regionally, our growth was paced by very strong performance in EMEA. Mike Strong will join us shortly to discuss how we have strengthened this business and how we are benefiting from the beginning of an economic recovery in Europe. We also achieved another strong quarter of double-digit revenue growth in the Americas, our largest business segment.

Looking at Asia Pacific, in US dollar terms, revenue rose only 1%. However, this result was impacted materially by weaker foreign currencies, notably the Australian dollar, the rupee, and the yen. In local currencies, Asia-Pacific revenue grew solidly, rising 13% when compared to a year earlier.

Please turn to slide 5. You can see that we experienced strong growth in most service lines.

Property sales again set the pace for growth. Globally, revenue from this business line rose 29%, led by resurgent activity in EMEA, while Asia Pacific and the Americas also produced double-digit growth.

Global leasing revenue grew by 11%, our best performance in eight quarters. Notably, we saw a 12% increase in the Americas, reflecting our ability to take market share. As you know, we have been focused on growing this business line, and we are especially pleased with the result this quarter.

Demand for occupier outsourcing services also remained strong. This business, called Global Corporate Services, or GCS, signed 54 total contracts during the quarter, including 20 with new clients.

Globally, GCS revenue rose 14%. This led to 9% improvement overall in our property facilities and project management revenue line. Appraisal and valuation revenue rose 7%, led by EMEA.

Our results in the third quarter were further bolstered by our global investment management business. As we noted last quarter, we have been capitalizing on the favorable property sales environment to harvest gains in our investment management portfolio. As a result, we realized outsized carried interest revenue during the quarter reflecting incremental revenue for exceeding performance hurdles and leading to an 11% revenue increase.

Since we have already recognized all of the compensation expense associated with this revenue under GAAP accounting rules, we also saw an outsized impact on the bottom line, with normalized EBITDA rising approximately 52% from a year ago. Generating carried interest revenue is integral to our strategy of having a highly diversified business mix and to achieving success for the investors in the funds we manage. Gil will discuss this in detail shortly.

One business line that was a cause of concern in the quarter was US commercial mortgage brokerage. Revenue dropped meaningfully, which caused downward pressure on our results in the quarter. This business line felt the effects of the Government Sponsored Enterprises' or GSE's efforts to scale back their lending activity as mandated by their regulators.

This [action] affected the profits associated with mortgage servicing work we perform for these entities. Gil will take you through the bottom-line impact of this situation.

As our third-quarter results demonstrate, CBRE continues to perform for our clients and our shareholders. This is a tribute to our people, who are collaborating effectively and leveraging our brand, product offerings, and geographic footprint to create solutions for our clients and capture opportunity for CBRE. Now I will turn the call over to Gil for our financial review.

Thank you, Bob. Please advance to slide 6.

Revenue totaled approximately $1.73 billion, up 11% from the third quarter of 2012. Recurring revenue comprised approximately 62% of total revenue for the third quarter of 2013, consistent with the third quarter of 2012. This included leasing commissions from existing clients, property facilities and project management fees, asset management fees and loan servicing fees, which are all largely recurring.

Cost of services totaled 59.5% of revenue in the third quarter of 2013 versus 58.8% in the third quarter of 2012. The increase was primarily attributable to a concentration of commissions among higher producing professionals in the US and Asia Pacific. In addition, higher recruitment costs associated with client-facing professionals increased this ratio.

We continue to manage operating expenses prudently while making necessarily strategic investments in our Company. During the quarter, we added senior Executive leaders in marketing, IT, and research; increased our sales management depth; and added marketing support for our brokers and other professionals.

We also continued our escalated efforts with several strategic IT initiatives. The majority of these investments were in the Americas, given the size of that business.

Even with these investments, global operating expenses totaled 28.6% of revenue compared to 31% in the third quarter of 2012. The prior quarter included $24.8 million of acquisition-related and cost-containment expenses. Excluding these costs for the third quarter of 2012, operating expenses still declined 80 basis points for the current quarter.

In the third quarter of 2013, we benefited from a 36% decline in interest expense. This was the result of the refinancing activities we completed earlier this year, particularly the early redemption of our 11.625% senior subordinated notes in June. With our restructured balance sheet, the annualized interest expense savings is expected to be approximately $50 million.

Depreciation and amortization expense rose by approximately $7.4 million to $47.5 million, driven by increased capital expenditures in facilities and technology that are further strengthening CBRE's competitive position in the marketplace. Amortization of previously capitalized amounts related to GSE mortgage servicing also contributed to this increase.

Our tax [rate] was 37% for the third quarter of 2013 versus 31% in last year's third quarter. The third quarter of 2012 benefited significantly from a favorable discrete item. In addition, there was a shift in earnings to higher tax jurisdictions in the third quarter of 2013.

As we have previously noted, we continue to work hard to improve the tax efficiency of our legal entities and operating structure. Given these efforts, we expect the full-year 2013 tax rate to be approximately 35% or slightly higher.

Normalized EBITDA grew by 15% over the prior quarter. This resulted in a 13% normalized EBITDA margin for the quarter, a 50 basis points expansion over the third quarter of 2012.

Adjusted earnings per share also rose 15% to $0.30, while GAAP earnings per share more than doubled to $0.28 due to higher selected charges in last year's third quarter related to the ING [line] acquisition, cost-containment expenses, and a write-down of a trade name that is no longer in use. The increase in adjusted earnings per share was muted, primarily as a result of the impact of the elevated tax rate.

Please turn to slide 7. Strong growth was evident in much of our Americas operations in the third quarter of 2013. Overall revenue grew 11%, marking our fourth consecutive quarter of double-digit growth in this, our largest, business segment.

Sales revenue rose 26%. This robust growth came amid concerns about how the rising interest rates, and more generally speculation over when the US Federal Reserve will begin to curtail its bond purchases, would affect property investment. Clearly the effect in the third quarter was negligible.

Leasing revenue growth of 12% was a very satisfying performance. Leasing markets generally remain sluggish with weak demand and rent growth.

We estimate that gross office leasing activity declined during the third quarter of 2013. That CBRE would achieve double-digit revenue growth in such an environment is evidence of our continued success in taking market share.

Property facilities and project management, overall, continued to show steady growth of 9%. GCS, our occupier outsourcing business, grew revenue by 18% in the Americas during the third quarter of 2013, reflecting occupiers' growing appetite for outsourcing their real estate management functions.

We also completed an acquisition in the Americas in the third quarter of 2013. Fameco, a specialty retail firm serving parts of Pennsylvania, New Jersey, and Delaware gives us a market-leading presence in retail real estate services in those areas.

I know want to elaborate further on the 10% revenue decline in US commercial mortgage brokerage. When the GSEs were required to curb their lending during the quarter, we saw life insurance companies and others quickly fill the void for multi-family financing. Indeed, our loan origination volume was up strongly from virtually all major debt sources, except the GSEs.

Overall, our US loan originations rose 16%. However, where our mortgage business was especially impacted was in the origination and servicing work we do for the GSEs.

We are the largest originator of GSE multi-[family] loans in the US. While this is a relatively small business for us, it has a disproportionately large impact on our income statement, due to GAAP accounting requirements. The profit associated with servicing work for the GSEs is recognized up front, as loans are originated and the related assets are amortized over the life of the servicing contracts.

The unexpected decline in GSE originations drove a third-quarter year-over-year decrease in earnings of approximately $15 million. Excluding the impact of the upfront GSE servicing profits in both the third quarter of 2013 and the third quarter of 2012, the Americas' normalized EBITDA margin would have improved modestly.

Please turn to slide 8. Our quarterly market statistics also highlight the fact that CBRE's strong performances is coming against the backdrop of slowly improving fundamentals.

As you can see, the US market recovery continues to progress with a steady fall in vacancy rates and generally positive absorption. CBRE economists expect this trend to continue over the next 24 months.

Average national cap rates are largely stable compared with a year ago, although they came down a bit for office properties over the past 3 months. Year-over-year volumes continue to improve in all three property sectors, most notably in office.

Please turn to slide 9. An overall revenue increase of 1% understates the strength of CBRE's growth in Asia Pacific during the third quarter of 2013. While slowing economic activity in much of the region has not been helpful, CBRE nevertheless improved revenue 13% in local currencies, with several countries showing growth, particularly Australia, India, and Japan.

Investment markets in the region continue to recover from a soft 2012. CBRE's property sales business performed roughly in step with that improvement, with revenue rising 15% or 30% in local currencies. Japan was once again the biggest growth catalyst, as the country's improving economic fortunes continue to draw more foreign and domestic capital to its real estate markets.

A leasing decline of 3% in US dollar terms masked underlying improvement in leasing performance during the quarter. In local currencies, our leasing revenue was up 6%, a very good result considering that leasing markets across the region remain subdued. Greater China and India paced performance.

Like leasing, underlying strength in property, facilities, and project management was offset by negative foreign exchange, which translated to a healthy 10% revenue gain in local currencies into flat growth in US dollar terms. While the region exhibited good top-line growth in local currency, EBITDA was impacted by continued investment in the platform, including headcount additions in certain markets to drive future growth, a concentration of property sales commissions among higher-producing professionals, and foreign currency movements. Now I will turn the call over to Mike, who will discuss our EMEA business.

Thanks, Gil. Please turn to slide 10.

As Bob mentioned, the third quarter was strong for CBRE in EMEA, with revenues up 25% on the same period in 2012. Unlike Asia Pacific, there was no material impact from foreign currency. This improved performance is also reflected in a 146% increase in normalized EBITDA during the period.

The quarter builds on a strong overall performance for the region this year. Through the first 9 months of 2013, revenues were up $110 million, or 16%, compared to this point in 2012, and with an impressive level of EBITDA growth.

Please turn to slide 11. Our growth in EMEA in Q3 was broad-based. Every one of the major business lines recorded double-digit revenue increases.

Our biggest advance was seen in property sales, where we achieved a 50% increase year-on-year, with notable performances in several countries, but particularly in Germany and the UK. Our sales revenue growth exceeded the market, which delivered a 21% increase overall in sales volume for the quarter.

Leasing revenue growth of 20% was equally impressive, especially given that the leasing markets have yet to respond to improved sentiment, with overall market activity down year-on-year. France, the Netherlands, and the UK led our growth in Q3.

We also saw positive upside in our outsourcing businesses. Property facilities and property management revenue rose 19% on the [back], capturing more opportunities from both occupier and investor clients.

Please turn to slide 12. Our strategy over the past few years has been to diversify our offering; to first provide our clients with a comprehensive set of services that can meet all of their needs; and secondly, to reduce the impact of market cycles in our Business.

As recently as 2007, we were far more dependent on our transactional-based service lines, but these businesses now account for 50% of the total EMEA revenues, having reduced from 67% in 2007. With market activity increasing, all business lines are growing, and we continue to increase market shares.

Please turn to slide 13. We have a three-prong strategy for sustaining our growth across EMEA. The first is to grow our core traditional business lines through market share gains. Our market analysis reveals that there is significant head room to continue building market share in every line of business and geographical market in which we operate and our senior Management teams have been challenged to grow the Organization organically, right across the Business.

The next is to acquire best-in-class firms to further develop our geographic and service-line footprints and to help build scale. For example, prominent openings remain in the property management sector, which we have been actively filling through M&A, something I will touch on later.

Finally, we have the opportunity to expand new and high-margin service lines, such as real estate finance, where we see a particular opportunity in debt and equity finance and loan servicing. That is in addition to our fast-growing prime residential business in London.

Please turn to slide 14. Looking in more depth at some of our core service lines, one of the highlights for Q3 was, without a doubt, the share gains achieved by our transactional businesses. The third quarter of 2013 was the European investment market's strongest third quarter since 2007, with higher activity levels from both local and international capital sources.

Our international market coverage and footprint is particularly well-suited to today's more global capital markets and we continue to achieve significant transaction wins across the region. You can see on the slide, three examples of large investment transactions we completed in the United Kingdom, France, and Germany, during Q3.

Once again, we also achieved the number one market position in investment sales in the UK during the quarter. We expect capital markets activity to remain strong due to returning investor confidence, more debt availability, and the fact that institutional funds are increasing the amount of capital they apportion to real estate.

Please turn to slide 15. As just noted, we also successfully grew leasing revenues by 20% year-on-year in Q3, largely through market share gains. This growth was achieved despite the continued weakness in the overall leasing market. We do expect that the market will grow and will resume its growth as we move into 2014 on the back of an improving economic environment.

In more developed markets, such as London and Paris, we have further extended our market leadership position. In Q3 2013, we again achieved the highest market share in the London leasing market.

The two large deals shown on the slide are indicative of the type of prominent leasing transactions we are currently completing in Paris and in London. We are also focused on improving our market position in developing markets, such as Warsaw, where we have just taken market leadership.

Please turn to slide 16. Here you can see some of our EMEA and global wins in the GCS business.

In EMEA, corporate outsourcing is in its infancy. European-based companies are increasingly recognizing the benefits of relying on outside service providers to manage their real estate.

CBRE is well-positioned to capitalize on this trend. Our Global Corporate Services business is a premier global platform with a growing pool of professional expertise in EMEA.

Our client roster is also growing. This year, we have brought eight new clients on board. Our client satisfaction scores are up and we are recruiting to strengthen teams and grow the service line across the region. As a result, we have also expanded or renewed our contracts with nine existing customers.

Please turn to slide 17. Asset services has seen large-scale changes over recent years, with our talent pool and on-site expertise increasing dramatically through a combination of multiple acquisitions and organic expansion.

Acquisitions we have completed this year include firms in the Czech Republic, Belgium, and Sweden. This area of our Business has gathered real momentum with our latest win being a premier London property, 30 Saint Mary Axe, better known as The Gherkin.

Our footprint in the shopping center sector also goes from strength to strength, with CBRE now managing 198 centers across EMEA. Two recent and significant new mandates are shown here in Sicily and in Bucharest. We are now the largest independent manager of shopping centers in the EMEA region.

In closing, we are optimistic about the future prospects for this business line, as we are for our entire portfolio of services in EMEA. With that, I will turn the call back over to Gil.

Thanks, Mike. Please turn to slide 18.

Global investment management revenue rose 11% in the third quarter of 2013 to $127.3 million from $114.3 million in the third quarter of 2012. All of the growth was attributable to carried interest, which reflects CBRE's incremental revenue earned, as portfolios are liquidated at values that exceed return thresholds.

Asset management fees and rental revenue from consolidated real estate assets were lower largely because we have been selling assets in the portfolio and because of the internalization of management of a non-traded REIT. Our fees associated with this REIT ended in the second quarter of 2013.

Under US GAAP accounting, we have already expensed the compensation costs for our fund employees associated with carried interest revenue. As a consequence, the carried interest revenue we generated had an outsized positive impact on EBITDA during the third quarter of 2013. This impact was partly offset by the previously mentioned lower asset management fees and rental revenue due to asset sales and the REIT internalization.

Carried interest is integral to our investment management business and is a by-product of the success of our investment programs. As you can see, we have earned carried interest in more than a [half of a year] since 2005.

However, carried interest is not realized in regular intervals, as the timing is dictated by the macro market environment and fund life cycles. These two factors are now conspiring positively to produce significant carried interest revenue, approximately $30 million in the third quarter of 2013.

We expect similarly sizable carried interest revenue in the fourth quarter of 2013, some of which might have been spread over future years, but for the strong current market environment. As a result, carried interest revenue will diminish significantly in 2014, reducing year-over-year EBITDA comparisons in this business.

Our EBITDA reconciliation table for the investment management business is on slide 19. As of September 30, 2013, we maintained a cumulative accrual of carried interest compensation expense of approximately $42 million, $36 million of which pertains to anticipated future carried interest revenue. For the third quarter of 2013, we recognized a net carried interest incentive compensation expense reversal of $2.3 million.

In the second quarter of 2013, we started to normalize carried interest compensation expense for new funds where the related carried interest revenue has yet to be recognized. During this quarter and 9 months ended September 30, 2013, we normalized $800,000 and $3.5 million respectively.

We will continue this practice for new funds going forward. However, there were $3.1 million of carried interest compensation expense reversal in the quarter that we did not normalize because it pertained to an existing fund for which carried interest compensation expense had been previously recorded.

Please turn to slide 20. Global investment management assets under management, or AUM, totaled $87.6 billion at the end of the third quarter of 2013, a decrease of $4.4 billion from year-end 2012.

Included in the current AUM is $23 billion of listed securities. The decrease from year-end 2012 was primarily driven by the aforementioned property sales.

Property dispositions totaled $7.4 billion through the first 9 months of 2013. This was partly offset by acquisitions of $3 billion and positive foreign currency effect of $500 million. The value of the investment portfolios, including net outflows in the securities business, decreased by $500 million.

Year-to-date in 2013, we have raised new equity capital of approximately $2.5 billion in the direct real estate business and had approximately $3.2 billion of equity capital to deploy at the end of the quarter. Our core investments in this business at the end of the quarter total $183.1 million.

Please turn to slide 21. Revenue for the development services segment totaled $12.6 million in the third quarter of 2013 versus $17.8 million in the third quarter of 2012.

The lower amount resulted from property dispositions, which reduced rental revenue. However, normalized EBITDA improved to $6 million due to higher earnings from property sales, primarily reflected in equity earnings.

Development projects in process totaled $5.2 billion, up $500 million from the second quarter and $1 billion from year-end 2012. This is the highest level of combined activity since the fourth quarter of 2008, reflecting gradually improving fundamentals.

The inventory of pipeline deals totaled $1.6 billion, down $100 million from the second quarter of 2013, and $500 million from year-end 2012. Our equity core investments at the end of the third quarter of 2013 in the development services business totaled $80.8 million and our recourse debt stood at $17 million.

Please turn to slide 22, which shows our liquidity position at September 30, 2013, as well as our amortization and debt maturity schedule for all outstanding Corporate debt. Our March 2013 refinancing transactions included amending our credit agreement to provide for $715 million of term loans and to establish a $1.2 billion revolving credit facility.

We also sold $800 million of new 10-year 5% fixed-rate senior unsecured notes. In June 2013, we paid down our $450 million, 11.625% senior subordinated notes, which were due in 2017. You can see here the benefits of these actions.

We have extended maturities far into the future, with little debt coming due for 3 years. We also reduced total corporate debt by about $500 million. We believe that these actions leave us well-positioned to make strategic investments to drive further growth with increased financial flexibility, to be opportunistic, and continue navigating an uncertain recovery.

Please turn to slide 23. 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 third quarter of 2013 was approximately $1.5 billion. Net debt is down $309 million from the third quarter of 2012.

At the end of the third quarter of 2013, our weighted average interest rate was approximately 5%. This is about 60 basis points down from year-end 2012. Our leverage ratio on a covenant basis, as of the end of the third quarter of 2013 stood at 1.46 times on a trailing-12 month basis.

Our total Company net debt-to-trailing 12-month normalized EBITDA stood at 1.5 times. This is a marked improvement from 2.1 times at the end of the third quarter of 2012. I will now turn the call back over to Bob for closing remarks.

Thanks, Gil. Please turn to slide 24.

All in all, we were very pleased with our performance in the third quarter and through the first 9 months of the year. Like everyone in business, we would like to see a more robust global economic expansion and our policymakers in Washington, DC finally unite around a pro-growth agenda. Nevertheless, CBRE remains well-positioned to continue driving strong revenue growth and the sector's best margins, while making measured strategic investments in people and technology, two critical components of our long-term success plan, as well as in continued infill M&A.

We expect the revenue improvement we achieved in the third quarter to continue through year-end. Property sales activity should continue to be healthy.

Global capital flows into real estate remain strong and, increasingly, investors are expanding their horizon into secondary markets and secondary assets in search of yield. This is very good for us given the breath of our market coverage.

Steady double-digit growth should sustain in our occupier outsourcing where we see a robust pipeline of corporate and healthcare space users turning over their real estate work to outside service providers. Reflecting this, last week we signed one of our largest ever outsourcing engagements with JPMorgan Chase. CBRE will provide the bank with facilities, management, and brokerage services across the US, Canada, and Latin America, as well as project management services in the US and Asia Pacific.

We expect improved leasing performance, fueled by a combination of market lift and share gains, resulting from our increased focus on this business. And further significant carried interest contributions will underpin growth in investment management during the fourth quarter.

In terms of challenges, tempered economic growth and the resulting occupier caution, along with foreign currency effects, will continue to contain our performance in Asia Pacific. And the mortgage servicing business in the Americas will remain under pressure, as a result of the new regulatory limits on GSE lending.

Considering all of this, we continue to expect normalized EBITDA margin improvement for the full year. We also anticipate that we will achieve full-year adjusted earnings per share of between $1.40 and $1.45, consistent with our overall outlook at the beginning of the year.

Before we take your questions, I would like to take a moment for a few brief announcements. The first is the opening a month ago of our new global headquarters at 400 South Hope Street in downtown Los Angeles.

The office has been designed based on alternative workplace strategy principals and sets a new standard for collaborative work environments in our industry. Congratulations to our workplace strategy a LA area teams.

Next I want to acknowledge Nick Kormeluk, who has served as our Vice President of Investor Relations since 2007. Nick will be ending his association with CBRE effective at the end of the year.

As many of you may know, Nick transitioned from employee to consultant in early 2009 and he now plans to focus 100% of his energies on his growing consulting practice. We thank Nick for his service to CBRE and wish him the best of luck with his future endeavors.

Going forward, Steve Iaco, our Director of Corporate Communications, will serve as our liaison, along with Gil to the financial community. Steve is a 20-year veteran of CBRE and its predecessor companies who possesses deep knowledge of our operations and strong relationships up and down the Organization. I know that you will enjoy interacting with Steve.

Finally, I would like to remind all of you that our annual business review day will be held at our New York City office on November 21. If you have not received the details, please get in touch with Nick or Steve. I look forward to seeing you there.

With that, operator, we will open the lines for questions.

(Operator Instructions)

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

Thanks, good afternoon. I was wondering if you could tie together -- you mentioned in your comments at the end mid to high single-digit revenue growth. If I look at your number for the first 9 months, you are already at 9% to 10%.

It suggests a little bit of a slow down perhaps in the fourth quarter, implicitly, is what I'm gathering. But when I look at what your guidance is, it suggests about a $0.10 year-over-year pickup in earnings. I'm just trying to tie those together?

Anthony, it's Gil. I think you are reading too much into it.

Mid to single high digits is exactly what it says. So we've got a range of mid to high single-digits, right?

That hasn't changed. So I wouldn't be concerned about that.

(Inaudible) we don't expect a slowdown in the fourth quarter.

Okay. So, then, in terms of the pickup, though, year-over-year and bottom-line EPS, how much do you think you will get in carried interest in 4Q?

Anthony, we are not planning to disclose a number but what we will say is that -- and what I said in the prepared remarks was that it would be similarly sizeable. So that means at least as much as in the third quarter.

Okay and then can you talk about just the cost structure and just how much these technology initiatives and the people and so forth that you are investing in are adding, or put definitely, maybe what the impact on your EBITDA margins are? Can you put some parameters around that?

Certainly. What we said and I need to put a bit context around this -- is we said at the beginning of the year, or earlier in the year, we gave an indication that we expected net spend to be around $40 million.

The actual spend on investment would be greater than that, offset by savings in other areas that we knew we could get. So, in essence, we were substituting lesser-quality spend, if you will, for higher-quality spend, i.e., for investment. So, it was programmatic and we were not free spending in terms of investment but rather [soft] funding at least some of that investment.

That all would net to an investment amount of $40 million for the year. We have not gotten into tracking against that $40 million, but what I will say qualitatively is through the 9 months, we are probably a little behind -- meaning, not behind on our investment, but actually a little bit ahead of our savings.

But I don't want to get into exactly what those numbers are because then we will be in a situation like we have been in the past where we are chasing our tail. So I will just tell you that qualitatively, I think we are doing just fine relative to that net bogey.

Maybe I'm trying to oversimplify, but if I were to just take the $40 million and look at your rough annual revenues, is it as simple as saying it's a -- call it roughly 60 basis-point drag on EBITDA margins?

50 to 60, yes.

Okay. And then as we look out, does that go away or is this money that you expect to get a return on up in revenue or do actually OpEx go down?

You said a lot there. Clearly, if we are investing, we are expecting a return. So clearly there will be some revenue.

Again, we are not talking, as you know, about a very major effort, $40 million on a significant business is not that much. But we do expect a return.

A good portion of that will then be in the run rate. So its investment in people, for example, will stay.

There are some items that are one-time in nature on systems and so forth that once they're spent they won't recur. So not the full $40 million in and of itself will be run rate. A good portion of it will be.

But we have not yet completed our budgets for 2014. When we do and we know what that number is, run rate plus perhaps additional [1 times[ for next year, perhaps not, we will give you a clear number probably on the next earnings call as to what we expect that equivalent number to be for 2014.

Anthony, this is Bob. Let me add a little bit to what Gil said.

In general, I think that you should expect to see us on an ongoing basis escalate our investments in technology and people relative to where we have been. Not to the point where we are going to yield on our priority of having the industry's best margins.

And in this environment -- as you know, this year, we expect to expand those margins by 50 basis points. We will see how next year goes. We may expand them again next year.

But we are -- with regard to technology and certain targeted expenses with people -- we are escalating our expenses -- and that's on a net basis, by the way. We have also got, as Gil said, a targeted program that we put together for some cost savings to offset a portion of that.

All right. And just last question on investment management, I think it was $90.8 million and I don't have the slide in front of me, in terms of base fees. Is that a decent run rate at this AUM going forward or is there any more impact from some of the sales or you said you had internalized management in one of the private REITs or something?

There are no additional privatizations or internalizations that we are aware of. So I'm not going so far as to say it's a decent run rate because we expect, hopefully and ultimately AUM growth, but it is a more normalized fee for assets under management. We had a comparable quarter Q3 2013 versus Q3 2012, which was not the case prior to.

And again, I am going to add to that, Anthony. We now expect -- we have gone through an aggressive disposition program. We have a sizeable value-ad business.

We also have a sizeable core asset business in these gateway markets where we thought it was particularly opportune to sell assets. So the combination of those two led us to dispositions of $7 billion-plus during the course of this year.

We think that activity will taper off now and that in fact that we will start net investing next year. Our capital raise activity in the third quarter was 50% higher than the first and second quarters combined. We expect that capital raise activity to increase again in the fourth quarter and we expect next year to be significantly higher than this year.

So we are going to have a lot of dry powder. We will have worked through that disposition phase and we feel like that there is an opportunity to grow that base of AUM next year.

Okay, thank you.

Our next question from the line of Brandon Dobell with William Blair. Please go ahead.

Good afternoon, guys. Maybe I'm splitting the hairs a little bit too thin here but last quarter I felt like the language around the EPS range was a little more maybe bullish, i.e., exceeding the top end given the impact of carried interest. Sounds like you've backed off that a little bit or I am splitting hairs too much or is it just the GSE stuff was unintended dilution to profits?

Yes, the way I would answer that, Brandon -- we don't foresee an upside to the full-year range of $1.40 to $1.45, mostly because of the GSE servicing slowdown. And so all we are doing is returning to our initial and unqualified guidance.

Got it. All right. That makes sense.

So maybe as a transition there, given that the GSEs are still trying to figure out what they are doing from a number of perspectives, but in particular what the scorecard is going to look like for next year, how do we think about the impact here in the fourth quarter or maybe on a longer-term basis? Could this be a headwind for two quarters, four quarters? Any sense of how that GSE scorecard may come out?

I can comment on the fourth quarter but you said it. We don't know the picture for 2014.

It's really not determined at this point. We will be better qualified to talk about that, obviously, on the next call or maybe even prior to, once the government themselves figure out what they are going to do.

But in terms of the fourth quarter, if we, based on what we know right now and based on the mandate of reducing volumes by 10%, we expect that we will have an impact of maybe a little bit less than this quarter but in that $10 million to $15 million range year-over-year. So it's similar -- slightly lower negative impact versus Q4 2012.

And we know that because the mandate is to reduce volumes by 10% on the year. We were over that through June 30 and we were perhaps under that in the third quarter. We do know that Fannie and Freddie have said that they maybe have overshot the mark a bit in the third quarter and would ease up in the fourth, such that they don't get to volumes that are greater than 10%, less than the full year 2012.

So there is perhaps a little bit of upside, which leads me to say that I think the impact on our quarter, though negative, will be a little better than it was in Q3. Hopefully that is clear.

Yes.

But to be redundant here, Brandon, you weren't splitting hairs and that was contemplated in the way we gave guidance in our release.

Got it. Makes sense.

Given what feels like a pretty decent rebound in growth rates in EMEA, maybe some thoughts on investing in more systems, more people, more support people. I would imagine you guys in the past year, 1.5 years even, maybe 2 years, have been a little reluctant to put any capital to work there, given how little growth was going on.

But with the growth recovery, any thoughts of getting a little more aggressive in terms of going after market share? And then the sideline to that is there must be an assumption within that answer of sustainability of these kind of growth rates out of EMEA the next several quarters if not longer?

Brandon, obviously, we are going to have Mike Strong answer that question.

Perfect.

But I want to comment on something globally in response to what you just said. Under the leadership of our Global President of Brokerage, Jack Durburg, and our Global President of Capital Markets, Chris Ludeman, we have an aggressive program in place in all regions of the world to add talent to our Business.

We haven't been sitting back waiting for the markets to get to a certain point before we did that. We believe we have head room for growth organically in all regions of the world.

We think it's starting coming through pretty nicely in the numbers. And that decision was made by our global operating committee that Gil and Mike Strong and myself all sit on, independent of the comings and goings of results in the current quarter or current year.

Okay.

If I may make a more general comment about Europe. If you look at what is happening in the economies, you will see that of the more established economies such as Germany and the UK, the consensus growth rates being put against those countries are now increasing and have increased a lot over the last quarter. If you look forward, the view of the next 3 to 4 years is that those countries will grow 2%, possibly even 3%.

If you look at the growing areas of the Nordic CEE, Turkey, their estimates around growth rates of 3% to 4%. And even in the more troubled places, such as Italy, Spain, Netherlands, and France, they are all turning positive with 1% to 1.5% to 2% growth assumptions estimates over the next 3 to 4 years.

We have lived with declining economic environments for 5 years, declining demand for space, and obviously a relatively weak investment market. But I think we are now seeing -- you can see from the numbers -- that the level of investment and capital coming into the European markets has materially increased.

Whilst it was originally focused on London and some of the German cities, it is now much more broadly based. The UK regional markets have improved. There is much better demand for the Southern European markets -- Italy and Spain -- and we do foresee that with the [weight] of capital coming in, that there is every prospect that that will continue.

And with recovering economic environment, we do see that demand for space will turn positive. As you'll see, it's -- we think it's probably hit a low point and will turn positive with vacancy rates coming in.

So against that, to answer your questions, we have been investing quite materially over the last 1 to 2 years in headcount. We have put substantial numbers of people into several of our markets and we are continuing to do that, as Bob referenced.

We are also expanding in the non-transaction areas, in property management, particularly, and in the outsourcing businesses, both of which are growing at a brisk pace. So, yes, we are out there hiring the very best people we can get our hands on, selectively doing M&A, and I see every prospect that that will continue.

Okay. And then final one for me, last quarter you called out Brazil as a bit of an issue just from operating leverage perspective. Maybe scale the headwind if there was one this quarter, relative to what it was last, and what the outlook for that part of your Business becoming not a headwind or potentially a tailwind from a margin perspective? Thanks.

Brandon, in the third quarter we did not have the issues that we had in Q2. It was anomalistic to Q2.

Q1 and Q3 were good quarters for us in Brazil. Q2 was not. Year-to-date, we are a little better and the forecast for the year on Brazil, in particular, I would say, is flat to slightly better.

It's highly dependent on transactions and there are large capital market transactions that happen in that market. If one flips that can have an impact on that particular market. In fact, as you saw, even on our overall results, they are that big, some of those transactions.

Got it. All right. Thanks, guys, appreciate it.

We have a question from David Ridley-Lane with Bank of America Merrill Lynch. Please go ahead.

Sure. I was wondering how sustainable you think the acceleration you are seeing in Americas leasing is. Just wondering that because we haven't seen necessarily an uptick from the property owners in terms of rents and that sort of thing?

David, I will answer that. We have really focused on growing our leasing business around the world, and specifically in the Americas, and we expect to see good momentum ahead of the market certainly through the balance of this year.

And we're putting our plan together for next year. My guess is when that plan is all said and done, we will have expected ourselves to grow market share again next year. That area is receiving a lot of focus from us.

Could you give us a rough idea of maybe what your headcount is up?

Those numbers -- we don't publish our headcount numbers.

But it's safe to say, you are adding net new people to grow ahead of the market in Americas leasing?

We are adding a significant number of people and we are doing two things. We're adding people and we're switching out people in a number of markets where we had the opportunity to bring in better talent.

Got it. If you had to -- maybe particularly -- and not to get too detailed -- but Americas leasing in terms of the vacancy rate, it continues to tick down, absorption continues to be pretty positive -- when do we hit an inflection point where occupiers feel the need to take that additional year or take that additional amount of square footage?

We are already seeing some of that now. The fact of the matter is, rates are coming up, occupancies are coming up, and sophisticated users -- and we advise a lot of them -- are attuned to that. They believe that the space is going to get more expensive, particularly the better space, and there is some aggressive action to secure space in the environment we are in today.

All right. Thank you very much.

We have a question from Mitch Germain with JMP Securities. Please go ahead.

Hey, gentlemen. How are you?

Bob, you guys made a strategic acquisition in the US in the retail segment. I'm curious if that is one of your offerings you are looking to -- targeting for growth now?

Mitch, this is going to sound glib, and I apologize for that, but retail is one of the product lines we offer. We have very pointedly said that we expect to be able to grow organically and through M&A, all of our product lines and all our geographies.

We like the businesses we are in. We like the geographies we are in. And we are aggressive about growing all those businesses and all those geographies.

We happen to think we have an exceptional opportunity in retail in the United States. We have a very good leader in that business. We have a bunch of regional leaders, geographic leaders, who have identified opportunities for us to grow, and the situation in Philadelphia with Fameco was a really nice example of that kind of opportunity.

Great and just curious about year-over-year trends and investment sales -- more so domestically obviously we had some benefit of tax-motivated selling. Are you still pretty positive on the abilities to sustain that growth rate in 4Q?

We think there is going to be solid growth opportunity in investment sales in all three regions of the world in the fourth quarter.

Thank you.

(Operator Instructions)

We will go to Todd Lukasik with Morningstar. Please go ahead.

Hi. Good afternoon. Just a couple of questions.

First on leasing in Europe, you mentioned that sentiment there is improving and the outlook for economic growth is improving. Is that something you think is going to show up in increased leasing volumes in general in the market, perhaps as early as the next quarter, or is that something that is going to take longer to play out there? And then just as a follow-up, are there any particular factors to which you would attribute your share gains in Europe?

Values being volume? As opposed to value price, yes?

Yes, the leasing [volume]?

Okay, well, I think what we are seeing in the prime markets of, say, London and Paris and the German cities, and for prime retail and prime logistics, is that leasing demand has picked up quite materially. We are starting to see that moving into some of the markets that have been more depressed in term -- economically. There is the start of seeing signs of demand in Spain, some of the Italian cities, the Netherlands, and Belgium.

So generally demand is picking up and against a backdrop of historically low supply. Some markets are also now coming under pressure in terms of pricing pressure upwards and that is particularly true of parts of London and some of the German cities, as well. To that degree it's happened.

In terms of how have we secured increased market share, fundamentally, it's all down to the people we have and the teams of people we have in the markets in which they operate and their ability to connect up the region and connect up globally to make sure that we can access national and international tenants. That is something that we concentrate on a great deal across our Organization.

Okay and then just a question on investment sales in the US and the potential impact of higher interest rates. Obviously there has been a rise in rates this year that hasn't really seemed to affect sales volumes yet.

And I am wondering, from your perspective, if maybe there is a threshold level of interest rates or a magnitude of change in those rates over a short time period that might put the brakes on investment sales where both sides of the transaction are waiting to figure out where the price settles? And what your thoughts are around that in terms of sustaining strong investment sales volumes in the US in particular?

There is probably a threshold out there [amidst] somewhere but we are not foreseeing it any time soon. We think the more likely situation is if interest rates tick up it will be because the economy has gotten better.

As the economy gets better, what we have already started to see, and what we will see more of, is that the activity picks up on property sales in what are typically called second-tier markets and second-tier assets. Which, by the way, still very, very substantial business centers and very substantial assets that, up to this point, have not yet been captured in that kind of activity.

So, we think that kind of circumstance will offset any impact of higher interest rates based on anything that we foresee now. Now there could be again a threshold out there somewhere that we are not seeing.

The other thing that is always worth keeping in mind when you think about real estate assets now is the liquidity and the transparency associated with real estate assets is appealing in the market environment we are in today and also the fact that they are considered to be a hedge against inflation, which everybody knows. We are not concerned about the circumstance that you are describing is possible and obviously we and the market haven't seen that playing out at all.

Okay, great, thanks for taking my questions.

I will turn it back to our speakers for closing remarks.

If that's all the questions, we appreciate everybody joining us today, and we will talk to you again when we release our year-end information. Thank you very much.

Thank you. And ladies and gentlemen, this will conclude our conference call for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.