Jones Lang LaSalle Inc (JLL) 2006 Q3 法說會逐字稿

Good day and welcome to the third quarter 2006 earnings release conference call for Jones Lang LaSalle Incorporated. Today's call is being recorded. Any statements made about future results and performance or about plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those included in the forward-looking statements as a result of factors discussed in the company's Annual Report on Form 10-K for the year ended December 31, 2005 and in our other reported files with the SEC. The company disclaims any undertaking to update or revise any forward-looking statements. A transcript of this call will be posted and available on the company's website within two days of this call.

At this time I would like to turn the call over to Mr. Colin Dyer, Chief Executive Officer, for opening remarks. Please go ahead, sir.

Thank you, Operator. Good morning and thank you for joining us for this review of our results for the third quarter and first nine months of 2006. Joining me today in Chicago is Lauralee Martin our Chief Financial and Operating Officer, and Lauralee will discuss our continued investments in growth in a moment. Then I will talk about current market conditions and report on the effects of our growth investments. And finally we'll be happy as usual to answer your questions.

To begin the discussion today let me offer some comments about our strong third quarter and year-to-date performance. Our revenues climbed to 462 million during the quarter, an increase of 42% from the third quarter of 2005. Year-to-date revenues totaled $1.3 billion, an increase of 47% from 2005 levels. Net income for the quarter totaled $24.7 million or $0.73 per diluted share of common stock. Net income for the same period in 2005 was 20.6 million or USD $0.61 per share. Year-to-date net income reached $995.5 million or $2.85 per share, up from $36.8 million or $1.10 per share in the first nine months of 2005.

We have also announced that our Board of Directors has declared a semi-annual cash dividend of $0.35 per share of our common stock and that dividend will be paid on the 15 of December 2006 to hold as a record at the close of business on November 15. This amount represents a 40% increase or $0.10 per share over the amount of our most recent semi-annual dividend which we paid in April 2006.

To sum up, we have continued to record very healthy growth this year with all of our operating segments generating substantial increases in revenue for both the quarter and first nine months compared to a year ago. Our results for this quarter include particularly strong contributions from both our EMEA, that's Europe, the Middle East and Africa, and our America regions, and we are successfully maintaining our overall year-over-year operating margins while we continue to make significant investments in future growth.

So now I'll turn the call over to Lauralee to discuss those investments.

Thank you Colin and good morning to everyone on the call. As Colin has just highlighted, we are pleased with the firm's performance thus far this year. We're seeing healthy increases in our top line across the globe as the result of our focused acquisition and investment strategy. Similar to the last quarter, my intent is not to discuss the financial information already in the earnings release, but instead provide more color on our investment activities including acquisitions, hiring and office and geographic expansions. These activities are key components of maintaining our growth into the future, as well as sustaining our strong competitive position in the global marketplace.

In the current year we've already spent approximately $180 million on four acquisitions. In addition to Spaulding & Slye in the US we've completed three strategic acquisitions in EMEA. These acquisitions have enabled the firm to add immediate scale in key markets, secure market leadership and take advantage of both existing platforms and books-to-business. In the income statement we have recorded intangible amortization of $3.3 million in the third quarter of 2006 and $9 million year-to-date relating to acquisitions, the majority of which will be fully amortized over the next three years.

We've also been focused on hiring teams and enhancing our systems and processes, having spent approximately $18 million thus far this year on planned market expansion and infrastructure. As a reminder, on last quarter's call we mentioned that we're anticipating a full year spend of approximately $25 million and we're currently on pace to reach that target by the end of the year.

In the Americas this year the most visible example of investments activity has been the Spaulding & Slye acquisition, which provided immediate scale in Boston and augmented our already strong presence in the DC area. WE have also actively expanded in other important markets in the Americas. Earlier this year we extended our Los Angeles presence by opening a new office in West L.A. and are in the process of opening another California office in the Silicon Valley. In September we opened a second office in New Jersey at Metropark in the central part of the State, bringing in a new team of market leaders. We have hired teams of professionals in Atlanta and Chicago as well as in Florida. The impact of these investments in the Americas year-to-date is approximately a 1% reduction in operating income margin.

In Europe we've completed a number of acquisitions this year adding about 100 people, beginning with Rogers Chapman and subsequently the Littman Partnership, a specialist planning business, both of which we discussed on our second quarter call. We most recently acquired the RSP Group in the United Arab Emirates, securing a market leading position in Dubai and an excellent platform for our planned growth in the Middle East and parts of North Africa. In October we also purchased areAZero in Spain, a leading occupier fit-out company which has 35 people based in Barcelona and Madrid. In Italy we hired market leaders and opened an office in Rome and finally, to accommodate organic growth in our UK operations, 400 of our colleagues will begin to move into new state-of-the-art office space in London's Canary Wharf early next year. This will require a transition expense this year but will place us in more cost efficient space in 2007 and beyond. Investments year-over-year to date are reducing EMEA's operating income margin by approximately 1%.

I Asian-Pacific we've been active in terms of both expanding existing offices as well as opening new offices. We opened an office in Tianjin, China's third largest city, in September. Early this year we also established new offices in Chengdu, China, Pune, India, Ho Chi Min City, Viet Nam as well as Newcastle and Liverpool in New South Whales, Australia. During the quarter we outsourced our Asia-Pacific IT infrastructure, call centers and application development and as a result incurred transition costs of 1.6 million. This positions us to respond faster to client requests and better support future growth. In Asia we've invested close 3.5 million year-to-date, principally in the growth markets of China, India and Japan. To more clearly compare year-over-year performance, if we adjust 2005 year-to-date results in Asia-Pacific for the litigation settlement credit of 2.4 million and adjust 2006 year-to-date results for the IT outsourcing costs and investments, year-over-year operating income would be up approximately 15% and margins would be comparable.

I would also like to highlight that we've maintained the financial strength of our balance sheet as we've pursued acquisitions and investments. Despite investments, healthy co-investments to support the growth of LaSalle Investment Management, capital expenditures, share repurchases and paying dividends, our debt level has only increased 77 million compared to the prior year. This is after $180 million borrowed for the acquisition of Spaulding & Slye as well as the other acquisitions I have mentioned. We are taking advantage of the favorable market conditions, the large incentive fee earned by LaSalle Investment Management and the strong year-to-date results to reinvest actively in the business to perform consistently in the future. Overall, we remain mindful of the need to grow core earnings on a current basis as we make investments for future growth. Operating income growth was 40% for the quarter year-over-year, including all of our investment activities.

This concludes my discussion, let me turn the call back to Colin.

Thank you, Lauralee. First then let me review global market conditions. World gross domestic product is on tract to grow at a healthy 3.9% in 2006, albeit slightly below 2005 levels. China with GDP growth likely to reach 10.5% this year will be the fastest growing large economy, followed closely by India. From a regional perspective, Eastern Europe and Southeast Asia are among the fastest growing in the world, Western Europe has a more positive outlook than in previous years and France, Germany, Italy, the UK and Spain grow faster than the previous year. In Asia the Japanese economy continues to recover and finally in the US, 2006 GDP growth is expected to be between 3 and 3.5%. In 2007, looking forward, economists anticipate global growth to be slightly than this year, around 3.2%.

As the global economy continues to expand, global direct real estate investment is reaching record levels increasing to $290 billion in the first have of 2006, a 30% increase on the first half of 2005. We anticipate that real estate transaction volume will remain high next year. Strong 2006 corporate earnings will continue to feed the demand for commercial space and there is an undiminished supply of investment capital still trying to get Indian real estate. In the US investment markets, office transaction volume was up about 10% in the third quarter of this year. Cap rates have stabilized somewhat in almost every US market, with more aggressive cap rates still being bid in the key investment markets of Washington DC, New York and California.

In other key markets, Chicago, Florida, Boston and Seattle for example, cap rates are very aggressive for the best product but get less so as the quality of an asset and/or tenancy declines. Other investors, notably some German funds, have begun seeking premium yields by looking for investments in secondary markets. The bottom line is that there is still an abundance of capital pursuing virtually all property types in virtually all US markets. And with the privatization of almost $30 billion of REITs this year, there may be sustained delivery of investment product to market that these purchases turnover their now privatized portfolios.

In Europe there are no signs of investor demand abating in the region, with global and cross-border investors remaining dominant players in the market. As a result, the expectation of further yield compression remains in a number of markets, office yields continue to converge and remain in a tight band around 4 to 5.5%, with the average midpoint yield across Europe at around 5%. Key niche yields remain in Dublin at 4%, London and Paris at around 4% and at the other end of the spectrum yields in Moscow are just in double figures at around 10%. Rental growth has been high there, but Moscow is still perceived as a relatively high risk investment destination. In the Asia-Pacific region investor interest in commercial property remains strong with yields continuing to tighten in all sectors. Transaction activity has been particularly strong in Japan and in China.

In the US leading markets, overall assumption across the markets covered by Jones Lang LaSalle was 34 million square feet year-to-date, slightly below last year's level. Rental rates continue to grow across some US markets slightly ahead of inflation, gross asking rents increased in most markets during the quarter, growing faster in CBD submarkets than in suburban markets. The largest quarterly rent increases were seen in Boston, New York, San Francisco, Miami and Dallas. Given continued corporate growth, vacancy will continue to trend downwards and rents will continue to rise as a consequence.

In Europe prime rental growth across major leasing markets remain stable, with growth averaging around 2% quarter-on-quarter. Most European office centers are seeing signs of accelerating rental growth where there is only Moscow seeming to be nearing the peak of its rental cycle. Office vacancy rates are now in single-digits across most European markets as the strong recovery continues, and our leasing activity across the region is showing healthy growth for both the quarter and year-to-date. In Asia-Pacific demand for office space is well sustained by those domestic businesses and multinational corporate demand.

So summarizing all of these trends, the economic market conditions which we see remain positive for all of our businesses across the globe. With that as background, I'd now like to discuss the progress we made through investments in five areas across our operation, the five areas we continue to focus on. Firstly, strengthening our local and regional service operations, expanding our three global service delivery lines, corporate solutions, corporate capital markets and LaSalle Investment Management and finally establishing the world standard for client service delivery infrastructure.

Our local and regional service operations first of all, as Lauralee mentioned in detail in her remarks, we are continuing to invest in local and regional markets growing our existing teams, opening new offices and making a number of well targeted acquisitions, all with the aim of strengthening our leading market positions around the world. In the process we are generating new business in all three regions.

Some examples for you, in the Americas Beacon Capital Partners significantly expanded our relationship by awarding us nearly 3.5 million square feet of assignments in Chicago. We'll provide management and project development services for 2 North LaSalle and 550 West Washington, and 10 and 50 South Riverside Plaza. We will also provide leasing services for the two South Riverside Plaza buildings. Members of our US retail team are collaborating across the globe with their retail colleagues in Hong Kong to provide consulting services for Morgan Stanley, preparing the retail market study and financial analysis for the 1.2 million square foot retail component of a proposed mixed use project in Macau.

Over in Europe, we advised UBS Wealth Management, Continental European Property Fund and the [Shaswee] Asset Management Group on the $503 million acquisition of the Skyper One Complex in Frankfurt. Located in the city's banking district, the three-building complex includes the landmark Skyper Tower Highrise. In England our hotels and capital markets team's partnered for the $574 million acquisition of [Arandor Gray] Court in London midtown. The property includes 366,000 square feet of office space and a 189 room Swiss hotel. In Asia-Pacific our major Australian clients, the ANZ, is partnering with Land Lease to develop the bank's new headquarters, which will be Australia's largest office building. It's located on the Malvern waterfront and the building will be purchased by ANZ itself to accommodate 5,500 of their employees. Members of our leasing, tenant representation, project and development services and advisory teams all collaborated to help ANZ structure the transaction. And having visited both client partners recently, I know just how happy they are with the whole project.

In China our Shenzhen investment and Asia capital markets team partnered to act as exclusive advisor on the sale of a 505 equity interest in Central Walk, which is a 1.5 million square feet shopping center in Shenzhen. The developer, Shenzhen Yijing Investment Development Company Limited, sold the interest to US Primerica. When the project is completed in December this year we will also provide asset and property management services to the complex.

Our second priority is to continue to build our global corporate solutions business. We intend to be the leading supplier of corporate real estate services to medium and large companies worldwide, including multinationals, large regional companies and medium and large size national firms. So far this year we have secured nine new multiregional relationships, received an additional five verbal awards and significantly expanded our existing relationship with Motorola. Let me just mention a few of these, starting with Motorola. A client since 2002, Motorola awarded us a new multi-year assignment encompassing 21.5 million square feet of portfolio across 74 countries, a truly huge portfolio. We are going to provide transaction management services globally including tenant representation, lease administration and asset acquisitions and dispositions.

German based Adidas, the world's second largest sporting goods company, recently acquired the US based Reebok company. The combined operation retained us to provide services for its 10 million square foot portfolio across the Americas, EMEA and Asia-Pacific and the portfolio includes office, industrial manufacturing and retail space. Winning this business was the result of intercontinental cooperation between our German business and our new colleagues at Spaulding & Slye in Boston. Finally, Affiliated Computer Services, a Fortune 500 company and global provider of business and process information technology outsourcing retained us to provide tenant representation and leasing administration services. ACS's growing real estate portfolio currently totals 9.5 million square feet worldwide.

Our third priority is to become the leader in global real estate capital flows. Our International Group has been active in all regions identifying capital resources and investment opportunities and then working with our local and regional capital markets teams to complete transactions. Let me quote to you again just a few examples from each continent. In the US we were retained by international investors to sell in excess of $500 million worth of properties in Boston, Washington and Minneapolis and other markets. The owners include McQuarie Office Trust of Australia, Wafra in the Middle East, FFI, Germany and Paramount also of Germany. In Chicago we closed the $255 million sale of 1 Financial Plaza to Beacon Capital Partners on behalf of partnership managed by MetLife. We also retained leasing and management responsibilities for 1 Financial Place as part of the Beacon Capital assignment mentioned earlier.

And over in Europe we represented core client DB Real Estate on a $627 million sale of their fourth German portfolio of the year. This office portfolio, which was sold to Fortress Investment Group, comprises six buildings and more than two million square feet of space. And in Spain we completed the largest single asset real estate in Spain's history when the Five Star Hotel Arts in Barcelona was sold for approximately $524 million. In Asia we represented the Hang Seng Bank on the disposal of their former headquarters in Central Hong Kong. Our local capital markets team coordinated with the International Capital Group to successfully close the sale to a consortium which included Morgan Stanley, Pamfleet, Pioneer Global Group for $290 million. And finally in New Zealand we completed the sale of the Carlton Hotel in Auckland and that for more than $80 million, setting a new record sales price for a hotel in New Zealand.

Our third global service line is LaSalle Investment Management and a very successful global management business, which now currently has just about $40 billion of assets under management for its clients. The three major growth drivers of this business, investment performance, capital raised and capital investments are all either on or ahead of our plans at this point in the year. Investment performance in both our private and public invested equity businesses has exceed relevant industry benchmarks and the quality of that performance is so good that in the UK we won the Estates Gazette's 2006 Property Investment House Award, which is given to the investment firm with the best overall performance in the previous year, an accolade which we won with an aggregate return of nearly 23%. During the quarter we formed new separate account relationships with two of North America's largest public pension funds and the LaSalle Global Securities business also expanded, raising nearly $900 million of capital so far this year and nine new public equity accounts.

You may also have heard that Lynn Thurber will step down from her day-to-day operational responsibilities as CEO at LaSalle and that at the end of the year. Lynn has done a remarkable job in bringing LaSalle to its current level of performance and we and indeed our shareholders all owe here a great debt. We are however fortunate that Lynn will continue in the new role of LaSalle Chairman when Jeff Jacobson takes over as CEO of LaSalle in January. As Lynn and Jeff have met with clients to discuss the transition, they have received very positive feedback about continuity and the seamless nature of the succession process.

Our fifth global strategic priority is to develop the world class service delivery capability. Our goal is to equip our people with the processes and resources they need to create outstanding value for our clients. New PeopleSoft finance and human resource systems will be in place in large parts of Asia by the end of November and we will be implementing these systems worldwide by the end of 2008. They will improve the efficiency of our financial reporting and help us hire the right people, reward them fairly and keep our best people engaged by helping them advance their careers.

Let me close with some comments on the very important subject of our people at Jones Lang LaSalle where our commitment is to a diverse, talented and motivated work force and it's attracted some public accolades. In the UK we were named to the Times of London's list of top 50 companies where women want to work in the UK. In the US our Pittsburgh office was named one of the best places to work by the Pittsburgh Business Times and in Atlanta the Chairman and CEO of the Coca Cola Company presented a special recognition award to a project team led by Jones Lang LaSalle for its commitment to minority and women business enterprise participation. A few highlights which lead us to truly believe that we are the best place to work in the real estate industry worldwide.

So to sum up, we are very pleased with the strong results which our people have generated in the third quarter and throughout the year, and I would like to thank every one of them for their contribution. These results give us an excellent platform for another solid year and during the fourth quarter our people will continue to focus on delivering outstanding results for our clients. Conditions in the world's real estate and capital markets remain encouraging, and as you heard, we are continuing to invest with confidence in our business and looking forward to the future as we finish 2006 strongly.

So now I would like to ask the Operator to please explain the process of taking your questions. Operator?

[OPERATOR INSTRUCTIONS]

Your first question comes from Jennifer Pinnick with Morgan Stanley.

Good morning.

Good morning.

I have a question regarding yesterday's announcement of CB Richard Ellis's acquisition of Trammell Crow, does this change your outlook for the competitive environment? Also did you take a look at this acquisition? And could you discuss the impact that you think this acquisition will have on your outsourcing business?

Three questions, Jennifer, I'll see if I get them all right or in the right order. Well we obviously on an ongoing basis review our competitive environment very closely, we look at the market as a whole and individual competitors. And we have thought carefully about various forms of permutations and combinations which might happen and indeed ones in which we might have become involved. So the announcement was not in any sense a surprise to us. We had looked, as I said, at opportunities ourselves of this sort of scale. From our perspective, we don't believe it makes a major change in the competitive environment. It seems to us to be largely predicated on the desire of CB to grow its position in corporate market where we are very strong.

As we mentioned earlier this morning in the presentation, our corporate business both in the US and worldwide is a very sound one. We win something like 70% of the requests for proposal on which we bid, we win those proposals on the basis of the strength of our business processes and systems in the corporate outsourcing markets on the strength of our worldwide platform, which is integrated and capable of delivering services to corporates across the world. So we don't believe that that's going to make a significantly negative impact on our competitive environment, indeed it will help us in the sense that we've now got just one other competitor and not two between Trammell Crow and CB.

What we're doing with our business is to continue with what we've described in some detail to you before and again this morning. We've got a very clear set of growth priorities in our business, first of all we are targeted on growth, that growth is what we believe to be a very healthy and robust mix of organic growth, and you've heard of some of those underlying growth rates today, combined with add-on additions which help to fill in market positions and skill sets which help us to enhance both our geographical coverage and our service levels to our clients. We've got a very healthily balanced geographical platform across the world, we have a combination of our financial skills which are increasing with our increasing work in investment bank REIT activity, financial activity both corporate and investor clients and we have a very strong balance sheet which Lauralee referred to, which enables us to continue with this process of selective targeted acquisitions over the coming years. So we're very confident in what we're doing, we're very confident in our position and our competitive strength in this market and we're very relaxed about yesterday's announcement.

Thank you. And can you also give a little bit more detail on the change in management in the Investment Management division? Is there going to be any transition issues? And any changes to the philosophy on how the business is run?

Well I commented in my remarks about the smoothness of the transition and the continuity. It's a process which I had been working on with both Lynn and the senior management at LaSalle Investment Management for some time. The Board were also involved in that process because obviously this is a very important profitable and powerful part of our business and we wanted to ensure that, as Lynn moves to retiring and ratchets down her activity on a full time basis, that we have good succession processes in place. Jeff has been with the firm for, gosh, 20 plus years, he's a very experienced and seasoned professional and he is going to provide great leadership to the business. He's already begun to integrate into our senior management team across the organization and making a great contribution to the firm. So we're very confident in the changes, the clients have responded very well, it's the ultimate trust business and they have been very impressed with the way in which we handled the transition and in the person of Jeff himself.

Thank you very much.

Your next question comes from Matt Litfin with William Blair.

Hi, this is [Tim McCue] actually standing in for Matt Litfin, congratulations on a great quarter.

Thank you, Tim.

Just one question, you had talked a lot about your success in recruiting quite a few people over the last year, can you just discuss in a little more detail the recruiting environment as well as recent retention trends?

Well the recruiting environment is competitive, I think you'd say, around the world and in all sectors in which we're involved from the Investment Management business, which we just discussed, right through to our Advisory and Transactions organizations. We have added several hundred people to the organization just in this last quarter, we are doing so on the basis of targeted hiring of outstanding skilled professionals, we've focused on revenue generating professionals rather than support and if you like overhead staff. And what we're discovering is that, although it is a tough environment, we are being very successful in attracting people to our organization from the immediate and obvious competitors but also from other places such as corporations and banks.

We believe that that's happening, we've been successful in doing that for the reasons I described, we are a very good place to work. Remuneration packages are competitive and people like the corporate culture which we have within our organization, the values which we hold dear are of very high levels of ethics, outstanding client service and collaboration within the organization to perform client services to the best possible standard. So people find us to be an attractive environment, our reputation as such is growing and the balance of people arriving in the firm against leaving the firm is very strongly in favor of people coming to the organization.

Lauralee described in her remarks the investments we're making, we have a very deliberate and well thought through policy, we have a budget in place of the amounts of money which we want to devote to hiring professionals around the world and we know how much we're going to spend by region by project on an annual plan basis. I hope that helps you with some perspective of background.

Yes that's great, thanks. Two other quick ones if I could, first growth seemed to accelerate quite a bit in this quarter obviously partly due to the investments you made, was there anything you would point to in terms of timing that was pulled forward maybe this quarter versus next quarter? Or can we take this as a sign of just overall strength of the business and market?

Well I think what you're seeing is a recovery of the leasing business really across the world. If we look at our leasing activity quarter-over-quarter and then year-over-year, in the quarter we're up 65% across the firm. And it's pretty evenly spread, we're up 34% in both Asia-Pacific and Europe. The US is actually up over 100% because you have also the Spaulding & Slye activity in there. And year-to-date we're up 46% across the globe. So leasing is definitely recovering, our Capital Markets business has grown again across the world, particularly strong in Europe but as well as our Hotels business. So I would say that we're feeling extraordinarily good about that activity.

Relative to timing, that's always a tough one because single deals can move from quarter to quarter. I would say that we didn't have significant changes quarter to quarter, the one thing we are seeing is that, because LaSalle Investment Management is always focused on returns for their client, they are optimizing the sales market and we continue to see very strong performance, which then results in incentive fees moving forward and that could continue as we move into the fourth quarter. We have a little bit mixed feelings about that because that means obviously their moving from next year into this year. But that would probably be the only place that I would say we would point to as unusual activity.

Okay great, and one last one if I could. Given the acquisition announcement yesterday, can you just comment on the acquisition pricing environment as you've completed a few in the quarter?

Well if you're referring to yesterday's acquisition price, we note Will Mark's comment that the pricing was pretty attractive to Trammell Crow shareholders. We have no comment on that ourselves but we did observe that. Our approach to acquisitions is rigorous, as I described earlier on, we have a clear approach to way in which we value organizations, we have a sensible approach to pricing and we are looking for accretive investments and acquisitions to be accretive from very much the early phases of their integration into our organization. Pricing is tough in the environment which we're in currently with real estate service firms in demand obviously, and it's important to that sort of environment to keep the rigor and discipline in your acquisition process.

I might also add that we've been focused on the private partnerships in terms of acquisitions, which means that we have a combination ability to structure an amount at the close and then an amount as an earn out for performance. That clearly is not possible with a public structure so our structure enables us to make sure that, as we're paying multiple, we're going to see those earnings fall into our operations because that's really how they get their full price.

Okay great. Thanks a lot.

Your next question comes from David Gold with Sidoti & Company.

Hi, good morning. I'll leave you alone a little bit on yesterday's acquisition since that seems to be the hot topic and ask a couple of questions --.

It's yesterday's news actually.

I guess it is yesterday's news. I'm curious, I wanted to know if you could add some color on the expense front with the area, presumably you're investing in some initiatives and I suspect some that's opportunistic, but that was the area where you're kind of a bit higher than say I might have expected. And I guess my first question there is on the 25 million, can you talk about how much of that fell into this quarter of the 18 million year-to-date?

Yes let me just clarify our definition of investment first of all. what we have in investments are activities that have no revenue attached to them. So for example, if we have searched the -- we need sign on bonuses because people are leaving bonuses from another firm, golden hellos our out-of-pocket costs for offices, the IT set up and so forth. So those are where we've got people coming on board there will be no revenue. That doesn't count normal organic growth where we have new business we add in staff and we see a full margin on that business, but from the get go there is some level of revenue. So Colin discussed the number of new wins that we have in our corporate outsourcing, those will not be at a full margin in the year of transition, but at least the costs are covered rather than a negative. So I just wanted to clarify that piece of it. Third quarter specific we spent about 8 million in the third quarter of the number.

Okay. And as you think about that, presumably -- this is something that you spoke about say last year earlier this year and it's part of your plan, as we start to think about next year, and I know it's early, have we made enough progress on the initiatives that you're investing, talking about the $25 million? Or do you think you might go back to the till and put something similar in the budget to advance further? I mean some of these clearly were one time and some were not presumably.

Well as you said it is early, David, but our thinking at the moment is that, as we go into the process of financial planning for 2007, we're looking to obviously continue our picture of underlying growth in EPS. But at the same time, as Lauralee said, in pursuing that we are balancing off the continued need to invest in the business in the way that we described, the reference point for this year being the $25 million we have in this year's numbers. So we'll be looking to improve the earnings but also invest in a way and balance those two short-term completion demands one against the other. What we see as we continue this process of investment obviously is that our investments we made in '05 are beginning to throw off fruits of returns into '06 and '06's investments which are largely cost for this year, which Lauralee described, impact the P&L year but will begin to show through next year in revenue benefits. And so we have a rolling process of rolling benefit from previous year's investments accounted by the ongoing investments in the current year. So the balance that we are seeking as we do our financial planning is between current revenue and improving that and continuing investments in the business.

The sorts of things we'll invest in will be very similar to the things we've described, acquiring teams, expanding and relocating offices, we've moved or reconfigured 11 offices so far in this last quarter back in Asia-Pacific alone. And we'll continue that process of developing and expanding the business in an organic way. We're clearly also open to investment in acquisitions, we thought the philosophy which Lauralee has described around that will be very much the part we continue with that. We like acquisitions of private organizations, we like acquisitions which are small or medium size and do not over commit the business.

Okay.

David, I might add, because you pointed out with the large incentive fee that LaSalle Investment Management had this year that the natural reaction of that would be a decline in EPS next year. But we did have that large incentive fee and we've used that to accelerate spend and that's one of the things I know you commented as well in terms of when you see the revenue growth you don't see it falling through. But what we know is it takes about 12 months for people to hit the ground and be running. And so to start it now means that they're full out in '07 and so our decision around the investments is to take basically the extraordinary performance this year and make sure that all our core operations have very high growth in '07 as a result of that.

Okay. So you anticipated my next question. But I mean part of that is on the incentive fee side, a couple comments on the release on your hire fees, is it safe to assume that the bulk of that is in LaSalle Investment Management?

Yes. Yes we do break it out if there would be anything other that. But yes it's in LaSalle Investment Management.

Okay. And then just one last if I might, an easy one, you gave some metrics on leasing year-to-year. I'm curious about what you can say about sales year-to-year on the brokerage business?

Well actually the brokerage is up even more strongly than leasing. We're actually up 80% in the quarter year-over-year in our Capital Markets activities and 57% year-to-date.

Can you give an idea on that, say ex Spaulding & Slye? So in other words more organic?

Yes it would be almost very similar to that. Spaulding & Slye has some level of capital markets activity, but they're a very strong contributor to the leasing.

Perfect. Perfect. Thanks so much.

Your next question comes from Richard Wilson with [Red Needle].

Hi, good afternoon Lauralee, good afternoon Colin. I just wanted to follow-up on some of the expenses question that the previous caller was asking about. Firstly the revenue, the magnitude of the revenue beat this quarter was obviously, I mean it was huge, it was terrific at 20% or relative to what most people were looking for. Now in Q4, given that Q4 is your seasonally strongest quarter, will it be possible for you, the way the numbers work, will it be possible for you to reinvest that much if the magnitude comes through in Q4, not as you're suggesting but as the industry seems to be running that way, will it be possible for you to reinvest that same magnitude in people in compensation and expenses? Or will we see finally some leverage in Q4? Because the last two quarters we've, for example this quarter expenses rose 42% and revenues rose by a similar margin, so we didn't really see any leverage on the operating income line. That is my question. And then on 2007, really what is the level of investment relative to 2006 in compensation and benefits?

Well as you've very well noted, we have a seasonal pattern where all of our margins go up in the fourth quarter. So we would expect that we'll have margins that again will track closer to last year's numbers, so you'll see then the patterns come through with for example Europe much stronger than last year and so we'll end up the year much stronger than last year. So the answer is the investment spend that we talked about, we said 25 million, we've spent 18 million year-to-date, so relative to the revenue in the fourth quarter it's clearly a lesser percent. Our compensation is directly related to performance so bonuses generally have the highest accrual levels in the fourth quarter, though we've had very strong accruals as we've been going through the year because of the performance. And particularly in the second quarter LaSalle Investment Management had team shares around the large incentive fee. So I'm not sure specifically what you are looking for in terms of bonus accruals, but there is a natural seasonal pattern to our margins that we would not anticipate changing this year different than any other year. Does that answer --?

Okay that answers - yes that does, Lauralee, for Q4. But then in 2007 are you expecting this continued high level of investment? And indeed will it be up relative to 2006?

I think as a prior question mentioned, Richard, it's a little too early for us to comment on that as we get into our budgeting process for 2007.

Fair enough. Thank you.

But if you ask the same question at the end of the Q4 numbers we'll probably have a crisper answer for you.

And just one more that might help just a little bit, if I just take the Americas, which that doesn't have dynamics like in Europe with a significantly recovering market but just a continued performance year-to-year, we were up slightly year-to-date on margins. So we went from 5.6% last year to 5.8%. We actually would have been at 6.8% without the investments, so we are seeing interest he core business improvement and we're managing those margins to get that operating income growth that then translates into EPS growth, while as much as possible protecting and enhancing those margins. It's obviously a balancing game and from quarter to quarter, depending the size of transactions or the wins in business, it isn't going to be there on a perfect level set, but we clearly have our eye on it throughout the year and we clearly watch it in terms of how each of the individual countries, business lines etcetera are run on a sustainable basis.

Okay thank you.

Thank you.

Your next question comes from Will Marks with JMP Securities.

Thank you, hello Lauralee and hello Colin.

Good morning.

Good morning. I have a couple questions, one is on, and I realize you're not giving guidance and this is kind of heading in that direction, but it is around the outline on the third quarter, I want to get it more right on the fourth quarter. You know your revenue growth seems to not really slowed at all but the earnings growth was huge in the first quarter from a negative number and 34% I think in the second quarter and then slowing to about 20 in the third. In the Street right now, consensus estimate is about 10% growth, should we be look at earnings growth slowing over the next year or so? Like can you comment at all on the trend at the bottom line?

In the course of the year, as we've mentioned, we've putting investment spend into the investment and the rate of investment spend has grown quarter-by-quarter through the year, so that's one influence. Your second question referred to next year's picture.

Right. We've managed each of the businesses to have growth in the core performance. And the one exception I would say this year is we've really taken advantage of the incentive fee from LaSalle Investment Management to get a very robust footprint on the ground in Asia because we think that is absolutely critical to own that space on both a corporate and investment basis, and position us forward. So if you look at the core businesses we're obviously driving the Americas and EMEA in terms of operating income year-over-year. And LaSalle Investment Management, excluding their incentive fees, is having very strong year-over-year performance in that core advisory fee annuity line of business. So growth we know is absolutely critical to success, but in this particular year, because of the incentive fee, we have used it to position that we will have core growth in '07 across the business line.

Okay that's helpful. And speaking of incentive fees, should we be expecting -- and this is a huge fee in the second quarter, but I imagine there's some to a much smaller level that we'll see in coming quarters if real estate values hold, can you comment on that at all?

Again what we have is now a number of funds around the world, both investing, so they're building up, as well as some in a liquidation mode. LaSalle Investment Management does seek to optimize returns for their clients and that is accelerating the liquidation of those funds that are ready to really reap the rewards off of them. So it's possible we could continue to see that move forward in the fourth quarter. Again it's clearly a question of when do you trip hurdles, which transaction tip those trips and how large those fees are. So I wish we could give you more guidance, but as you know we've advised you of the number of funds we have out there, but which properties sell and for how much is even very hard for us to predict and the timing of when those will occur.

And back to China for a second, I mean the China investments obviously impact the Asia-Pacific numbers as we report them and have a comparatively leveraged impact on those numbers. We view it as an investment in China in the context of their global business as a whole, so we view it in the context of the overall Jones Lang LaSalle performance. And over the last three, six, nine months in China we've opened three or four offices, and Lauralee referred to Tianjin and Chengdu in this quarter alone we've developed our retail and our industrial business line capabilities, we've put extra people into our Pan China Capital Markets business, we've grown our Management Solution business, our Project Management business and all those just major levels of investment in people and resources.

And at the same time we've been moving to lock our people in more securely through training and through [lortin] incentive programs and we've reduced our rate of local market labor turnover, which is a significant issue for anyone operating in China by a very healthy amount. So the investments in China are broad, they're across a broad sweep of business activities, they're setting down an infrastructure for a really robust long-term growth platform for our business, but you should view them in the context of an investment on behalf of the global firm, not just our Asia-Pacific region.

Okay. Thank you for that. And one other question just on very big picture, and Australia's announcement makes me think of this. Clearly US based companies, you and CB have this worldwide presence and maybe [Kersin and Lakefield] to a lesser extent, but am I missing anything or are there any Asia or European companies that can compete on a worldwide basis? Or who else would you put in that category?

Well as we said earlier, we track very carefully our competition on both a worldwide, regional and national basis. And your suspicions or your supposition is more or less correct, there a very limited number of worldwide players and in terms of the way the market might have developed, had Trammell Crow linked up with another European or regional business, there might have been a fourth potential worldwide player. That sort of opportunity has gone away and there are now, as you say, just three. Beyond those three major names, the other competitors which we see worldwide and which we track and work out how to compete with are regional based businesses very largely, there are a number in Europe, none are as strong in our eyes as a couple or three of the businesses that you've mentioned of the global players. And we view them as strong competition, we respect our competition, we learn from them, we borrow their best ideas but we believe we are fundamentally superior in our performance to them. Our intention is, as an organization, not to be the biggest but our intention is to be the best in whatever we do and wherever we do it.

Okay and actually one other thing, would you consider a stock split? Is there any reason to do that?

Will, we've looked at it and have gotten advise from a number of different players. There is no evidence that a stock split reduces any stock volatility, there is no evidence that it changes the rate of increase or the performance of stock. The one piece of advantage people have said is, if you had a strong retail base, there are some that just like to say they own more shares rather than look at it as a dollar amount. The only retail base in Jones Lang LaSalle are our employees. So at this point in time there isn't a plan to split the stock but we always look at anything that would best for shareholders and we'll continue to do that.

Great. Thank you very much.

Your next question comes from Franklin Morton with Ariel Capital.

Good morning, congratulations on a great quarter.

Thank you.

Thank you.

I wanted to just return to this investment issue for a moment and you've suggested that investment spending this year will hurt your margins by pretty close to 1%. How would that compare with prior years? Is this unique extraordinary level of investment? Or is this more you're typically at the 1% level?

We're investing pretty close to double what we did last year on a dollar basis, and so clearly it's on a higher revenue basis but I would say this is more aggressive than what we've done in the past and we have the flexibility to do it. It's always going to be the looking at the opportunity, looking at where we can get the highest return and then deciding. As Colin said, we have not yet completed our plans for 2007 and we would look at what level of growth we would anticipate and how we could increase that or improve it with investments and how much we felt we could afford to invest, but that shareholders would still be happy with us. So that's till in process.

Okay. So it's likely then that to have another year of investment at this level would probably require some kind of pretty extraordinary top line again like you've enjoyed this year?

Yes. If you took dollar amounts to retain this level of dollar spending, we'd be looking further very healthy increases in our underlying revenue figure.

Right. Okay thank you very much.

[OPERATOR INSTRUCTIONS]

There seem to be no further questions at this time.

Well thank you, Operator, with that we will then conclude today's call. Thank you, everyone, for your participation and for your interest in Jones Lang LaSalle. We look forward to talking to you again following the fourth quarter results.

Thank you very much and have a good day.

This concludes today's conference call, you may now disconnect.