Jones Lang LaSalle Inc (JLL) 2006 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2006 earnings release conference call for Jones Lang LaSalle Inc. 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 the factors discussed in the Company's annual reports on Form 10-K for the year ended December 31st, 2005, and in our other reports filed with the SEC.

The Company disclaims any undertaking to update or revise any forward-looking statement. 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, everyone, and thank you for joining me for this review of our fourth quarter and full year financial results. With me today on the call is Lauralee Martin, our Chief Operating and Financial Officer. Lauralee will discuss our financial performance in detail in just a moment. But first, let me review several headlines.

Revenues increased 45% for the year to $2 billion, the product of strong growth across all of our operating segments. Operating income increased 85% to $244 million; and we reported net income of $176 million, a 70% increase over 2005. 2006 earnings per share totaled $5.24, up from $3.12 per share in 2005.

In additions to these headlines, Jones Lang LaSalle was recently named to the Forbes 400 Best Big Companies for the second year in a row, and for the first time we were considered for the award we were also singled out as one of Fortune's 100 Best Companies To Work For. Needless to say we are very proud of both of its awards, especially as we are the only real estate money management and services firm to earn either distinction.

Later in today's call, I'll comment on market conditions around the world and summarize the progress we made last year on each of our five major strategic priorities. Let me now hand over the call to Lauralee.

Thank you, Colin, and good morning to everyone on the call. As Colin has just highlighted, 2006 was a record performance year for the firm. All reporting segments had strong growth and topline revenues for the year and the fourth quarter, the result of healthy market conditions but also continued strong growth in new clients and service lines, geographic expansion and successful integration of acquisitions.

2006 was a year in which we strategically grew our market position while achieving very robust profit growth. In addition to our Spaulding and Slye acquisition, we completed four smaller acquisitions in EMEA in 2006 and already in 2007 we have closed two additional acquisitions -- one in Australia and one in the UK. We have had significant staff additions in our global capital markets and our leasing broker teams. We have added to our professional staff to service corporate clients and have opened an expanded offices around the globe.

These expansions enhance our already strong global competitive market position and, when coupled with our expectation for continued favorable real estate market conditions, we will drive continues growth in 2007 and beyond. Colin will provide more detail on this in a few moments.

The firm recorded record revenues of $2 billion driven by capital markets which were up 52% in the quarter and 55% for the year; recovering and leasing revenues which were up 30% in the quarter and 39% for the year; and strong performance by LaSalle investment management.

Let me now review each segment. In the Americas the acquisition of Spaulding and Slye contributed almost 50% of the total revenue growth of 44% this year, with the remaining half being organic. Spaulding and Slye is now well integrated in parts of our core business. Americas' capital markets had a very solid performance over 2005 with revenue up 74% for the full year and that is almost double in the fourth quarter. During the year we added almost 30 professionals to our Americas' capital markets team.

Leasing revenues in the Americas were up 26% in the quarter and 59% year-to-date. This improvement was a combination of recovering markets as well as the success of the market and account reorganization we made at the beginning of the year, which has brought greater focus to the local market activity.

Throughout the year, we remain active in increasing our presence across the Americas by hiring teams of professionals and by opening new offices to position ourselves to grow. These investments in people have reduced by 1% the operating income margin for the year. The Spaulding and Slye intangible amortization also reduced the margin an additional 1%. However, despite these margin reductions, operating income grew 30% year over year.

In EMEA, the four acquisitions, along with six new office openings and significant additions to leasing and capital markets teams, resulted in an increase of over 350 revenue generators during the year. The staffing additions primarily in Russia, capital markets and leasing reduced Europe's margins by almost 1.5% in 2006. Despite this, Europe's margins improved 1.5% over 2005 while operating income grew 79%. Capital markets in Europe was the main driver of the year-over-year growth in both revenue and operating income. Revenue was up 70% for the year and almost 67% in the fourth quarter compared with the prior year. Almost 45% of this revenue was earned in the last quarter.

Overall the capital market environment was strong with total volume across Europe up 41%. Our 70% revenue growth against this 41% market activity growth indicates both our increasing market share and the success of our regional and global teams that enhanced the local market strength. Our expansion of staff competitively positions us with the strong platform and business models to best serve clients which bodes well in the continued projection of strong investment activity in the region in 2007.

The European leasing market started showing positive signs of recovery in 2006. Our revenue increased 26% for the year but 40% in the fourth quarter. Again almost 40% of our leasing revenues were earned in the last quarter. We were especially pleased with a performance in France and Germany, our two largest markets after the UK. France and Germany benefited from strong flows in international capital that were invested in anticipation of improving market fundamentals. We had strong revenue growth over the prior year with their combined revenue up over 50% compared with 2005.

In Asia-Pacific, we expanded our infrastructure and our platform such as new offices, research staff and technology to position ourselves to support the anticipated strong future growth in the region. During 2006, we expanded eight existing offices and opened five new offices in the region. We also outsourced our IT infrastructure, including call centers and application development, to respond faster to client requests and growth needs. We also added aggressively to capital market staff as a number of these countries position themselves for international investment.

At the country level, our largest market -- Australia -- which is accountable for over 1/3 of the region's revenue was up 22%. Our growth markets of China and India had revenues up 60% and 40%, respectively. Investments in these two high growth markets lowered our overall Asia-Pacific margin approximately 1% but have resulted in us having leading market position. Our one disappointment in the region was in Japan where revenues were down year-over-year due to lower capital market activity. Japan however did win and integrate the first Japanese corporate outsourcing to a foreign firm, a strong statement of our market capabilities. As such we expect 2007 to be a return to solid results.

The Hotels business in Asia-Pacific with its leading market share position recorded a very strong year. Revenue nearly tripled in the fourth quarter compared with the prior year and was up 33% for the total year.

In 2006, we also completed the largest hotel transaction in Australia. At the beginning of January, we completed an acquisition in Australia acquiring the 30 person NSC Corporate Property Consultant -- a purse based agency specialist -- with a strong local client base. The addition of NSC will give us a leading position in Western Australia.

LaSalle Investment Management, our very successful global money management business, completed its record year with a solid fourth quarter performance. The three growth drivers for the business -- investment performance, capital grades and capital investments -- all outperformed our targets for 2006. Advisory fees, which are LaSalle investment management's core revenues that provide a solid annuity, grew almost 50% in the quarter and approximately 40% for the full year. The continued growth in this business is driven by healthy increases in assets under management, which increased approximately $10 billion in the year to over $40 billion at the end of 2006. Supporting this growth, our co-investment capital increased by almost 50% to $132 million at the end of the year.

2006 was also a very strong year with respect to incentive fees. Approximately 2/3 of the total fees were earned from a single client in the second quarter with the remaining $60 million being earned from other clients.

Fourth quarter incentive fees of $24.6 million included fees from accelerated portfolio valuations, resulting from exit of a portion of two separate account portfolios, and also the conversion of a key client into an open-ended fund which both crystallized an incentive fee and seeded this new fund which is expected to generate significant and growing advisory fees in the future. As a reminder, we have excellent potential for ongoing incentive fees. However the amount and the timing of the fees are dependent on the contractual timing of the measurement periods, the liquidation of funds as well as the performance of the investments. As a result, incentive fees will continue to the highly variable by period.

Like incentive fees, equity earnings vary period to period depending primarily on the timing of asset sales. With a significant growth in coinvestment capital this year, we are now invested earlier in the asset lifecycles of new investments, but we are charged the carrying cost of their underlying operations.

The small loss in the fourth quarter was a result of lower asset sales activity and, therefore, fewer gains to offset these carrying costs. No impairments were recorded in the quarter.

Taking advantage of the large incentive fee by LaSalle Investment Management, we aggressively invested in our core service business. The investments in professionals and geographic platform have been made to deliver strong growth in 2007. Although we had modest compression in margins in some of our business segments in 2006 as a result of these investments, we also delivered strong operating income growth in the year.

In 2007, we anticipate margins in the Americas to be stable and anticipate margin improvements in both EMEA and Asia-Pacific. With a strong cash flow generated by our business model, we will be continuing our targeted acquisition strategy which is to gain market positions and skills [or] that can be accomplished more quickly than with an organic build. We also plan to continue to buy back shares under our Board-approved buyback program.

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

Thank you, Lauralee.

First, let me review global market conditions. The domestic outlook remains encouraging. We have world gross domestic product expected to grow at around 3.5% in 2007, down from 3.8% in 2006. Strong global climate will keep demand for all property types high across the world. If [economies] around the world remain at expansionary phases of the business cycle the demand for commercial real estate will continue to grow.

The amount of direct capital flow into real estate has doubled since 2003 to over $600 billion. 2007 direct investment levels are expected to equal or surpass those record 2006 levels.

In the U.S. investment market, the fourth quarter showed continued high transaction volume and 2006 was a record-breaking year for real estate investments. Total U.S. transaction volume including REIT privatizations, portfolio transactions, direct deals and condo conversions was nearly $307 billion for the year, an 11% increase over 2006 record volume.

Large portfolio transactions including REIT privatizations was a primary driver of increased capital flows.

In Europe, investor appetite for commercial real estate continues unabated. Record levels of investment totaled $325 billion or EUR250 billion across the region, 60% higher than in 2005. Cross-border transactions continue to dominate, accounting for 60% of overall investment activity. We anticipate this trend will continue in 2007, particularly with the emergence of REITs in both the UK and Germany during the course of the year. Direct commercial real estate investment in the Asia-Pacific region is estimated to have exceeded $85 billion in 2006, as investor interest in commercial property remained strong.

In the U.S., leasing markets' overall absorption across the markets covered by Jones Lang LaSalle was 18.5 million square feet in the fourth quarter, up from 10.5 million square feet in the third quarter. This brought full-year absorption to more than 47 million square feet, a reflection of strong job growth in the business sector. Rental rates continued to rise in all markets with the greatest growth in New York, San Francisco and Washington D.C. Leasing conditions in European office markets are also on the upswing. Take-up across Western Europe totaled 111 million square feet last year, which is 10.35 million square meters, led by Moscow, Central Europe and Eastern Europe. Those markets also recorded strong levels of take-up. Vacancy rates continue to fall in the region and now average 8.2% across Europe.

In Asia-Pacific, favorable global economic conditions fostered the region's real estate markets in 2006, with office rents in the key financial centers of Tokyo, Singapore, Hong Kong and Shanghai trading at new highs. New business setups and corporate expansion are fueling much of the take-up in office space in the region.

Now to discuss the progress we made in 2006, I would like to look at each of our five global growth priorities in turn. The first is strengthening our local and regional service operations. Our strength in local and regional markets determines the strength of our global service capabilities. Our financial performance also depends substantially on the business's resource and execute locally in more than 450 markets around the world.

Here are some recent examples of local and regional business successes from each of our regions, starting with the Americas.

In New York we have been selected for project management and advisory services at the Empire State building. We will help redevelop the entrances, public areas, observation deck and retailer areas of the 102-story Art Deco landmark. Work is scheduled to begin in May and the observation deck which attracts four million visitors each year will remain open throughout the process.

Eli Lilly & Co., one of the world's leading pharmaceutical firms, renewed a long-standing facilities management agreement with our firm for another two years in the Americas. This is an extension of an arrangement which has been in place since 1996 for 6.1 million square feet of office and data center space.

After competing against seven firms, we were selected by Shell Latin America to manage its 440,000 square foot (indiscernible) research like industrial portfolio in Brazil, Chile and Guatemala.

Turning to Asia-Pacific, we entered into a strategic alliance with WPP, the global communication services group, to provide project and development and transaction services across Australia. In India, we were selected by Nokia, the world leader in mobile communications, to provide project management services for its expansion program in Tier 1 cities. We have started work on our first project at a 120,000 square foot facility in Bangalore.

DHL, the international express delivery service and air freight provider, selected us as a preferred supplier of transaction services throughout the Asia-Pacific region. In Shanghai, we acted as exclusive sales advisor to [Singmat] Investments on the sale of Ocean Towers, a 25-story high-quality office building in the city's central business district. Singmat sold its entire stake in the project in a transaction that totaled $173 million.

In Europe, during the fourth quarter, a Swedish leasing team advised STP's [Handesbank and Liv] in a complex transaction relocating the Swedish Labour Market Board. The transaction, Stockholm's largest leasing deal of 2006, enabled our clients to terminate an existing lease agreement for 184,000 square feet of space which is no longer needed.

Our Spanish retail capital markets team acquired the $180 million (indiscernible) in Barcelona for (technical difficulty) [Brown's] European fund. London's West End investment team worked on the acquisition of Heritage House, a retail and office building near (technical difficulty) and Oxford Street in London for $313 million. And in Germany, London Capital awarded management services a mandate for 13 retail industrial and office properties in Germany with a promise of additional management assignments as our client acquires new assets.

Our second strategic priority, global corporate solutions, is to build a global corporate solutions service line in to a truly global operation and it is prompted by the dual trends of corporate real estate outsourcing and globalization. This service delivery capability helps us create new client relationships while continuing to satisfy corporate clients who increasingly demand multiregional capabilities from their service partners.

Our goal is to be the dominant corporate real estate outsourcing provider on large relationships which we choose to pursue. And we continue to win more than 60% of those mandates which we compete for.

During the fourth quarter Unisys retained Jones Lang LaSalle to provide transaction and lease administration services for its global portfolio of 9.7 million square feet, spread across nearly 50 countries in the Americas, EMEA and Asia-Pacific. The global technology services company also hired us to deliver integrated real estate services across its entire U.S. portfolio. Our ability to deliver complex integrated services across geographies contributed hugely to the win.

The Unisys assignment adds another blue-chip name to our growing roster of technology clients -- a list which includes Sun Microsystems, Microsoft, Cisco, Computer Associates, Oracle and Motorola, amongst many others.

In total we won 15 major multiregional corporate assignments during the year adding companies like Adidas and Schering-Plough to our list of corporate clients.

In global capital markets, we also made significant progress towards achieving our third growth priority -- building a global capital market service line. Our international capital markets group is dedicated to harnessing cross-border capital flows globally, serve the international portfolio needs of our clients.

In Europe, the international capital group teamed with our Frankfurt portfolio investment team to complete a portfolio sale of 14 office properties on behalf of Deutsche (indiscernible) for approximately $1.1 billion. In Asia-Pacific, we were appointed adviser and selling agent with two major landmark buildings in Singapore -- the Singapore Stock Exchange to be sold on a leaseback and the [Lipo] Center which is being sold by an Indonesian consortium. The properties are creating massive interest on the global investment market with both highly likely to be sold to international firms and for a combined value of some $500 million.

In the Americas, our Washington D.C. capital market team sold nine Class A residential apartment buildings comprising 3,370 units in northern Virginia and southern Florida for a total value of $650 million and that on behalf of [Archtone] Smith. The portfolio was marketed internationally to investors from Germany, Hong Kong, the UK and France.

(technical difficulty) Jones LaSalle Hotels joined by our real estate investment group arranged the $363 million refinancing of existing debt and renovation of the Chicago's Luxury Palmer House Hilton hotel on behalf of [Thor] Equities and funding here was secured from the Anglo Irish Bank.

Finally a major transaction which saw midlease and capital active in Europe, our Hotels team represented a joint venture owned by Starwood Capital LLC and Lehman Brothers Holdings in the sale of the Excelsior Hotel [Gallera] in Milan. The Qatar investment authority, the investment arm of the government of Qatar acquired the prestigious property for a price in excess of $130 million.

Our fourth strategy priority is to maximize the value from LaSalle Investment Management. LaSalle recorded a truly impressive year in 2006, growing our global money and management business significantly whilst continuing to deliver superior results to its clients. LaSalle raised more capital in 2006 than in any previous year, $7.1 billion for separate accounts, private direct funds and publicly listed investment programs. At year-end, assets under management totaled more than $40 billion up strongly for approximately $30 billion at the end of 2005.

Every segment of the business exceeded relevant performance benchmarks on a consolidated basis.

2006 highlights for LaSalle included the $3.4 billion acquisition and subsequent privatization of Centerpoint Properties Trust, taking us into the private equity and merchant banking business. The transaction offers significantly expanded LaSalle's market position and competitive outlook. We also grew our position in the global securities business, raising $2.2 billion for these investments. We launched two open-ended funds at the end of 2006, Encore in Europe and the Pan-Asian Core Fund.

Finally the record level of incentive fees which we earned in 2006 offered hard proof of LaSalle's superior investment management capabilities.

Our fifth strategic priority is to develop the world's standard business delivery platform for our industry and to gain maximum benefit for our other priorities, we must have superior operating and support procedures to process and service our clients and support our people. During the year we completed the first phase of implementing our global finance and human resources system in Asia. We remain on track to complete the implementation globally by early 2009.

We also rolled out several client phasing applications that are already contributing to new business wins by differentiating our service offer from our competitors.

To sum up, in 2006 we benefited from both favorable market conditions and our ability to capitalize on the growth of cross-border capital flows into real estate. Our corporate clients continue to outsource their real estate services and rely on our advice and execution capabilities to manage their global real estate needs. LaSalle investment management built on its outstanding track record to deliver secured performance to its clients and we expect these favorable trends for our business and the overall environment for commercial real estate to continue into 2007.

With that, we would now like to open up the call to your questions. Operator, would you please explain the process?

(OPERATOR INSTRUCTIONS) Mike Fox of J.P. Morgan.

Good morning and congratulations on a strong quarter and a strong year. I have a couple questions. The first one -- thanks a lot for all the color on the margins. I was wondering if you could talk about the productivity that you are expecting -- the productivity gains you are expecting from the headcount and office increases in 2006 and how you look at that through the year?

Then the outlook that Lauralee gave on the margins by segment. I was wondering if you could tell us what type of spending or additional headcount increases are embedded in that?

Let me take the first part of your question. We've explained on previous calls that we have been aggressively hiring into strong markets in order to bolster our revenue-generating capability. And the bulk of the hiring which we have undertaken over the last two years has been in revenue generators for the firm. We talked about the impact that it had on 2006 margins of around one percentage point across the firm.

We've also explained in the past that it takes somewhere between 18 months and a couple of years for those people we hire in to generate their full revenue potential. So you can look at, as we do, that our investment is yielding results accumulatively up to full potential over an 18 months to two-year horizon.

Relative to the investment assumptions in my go-forward market comments, the comment on [stable] in the U.S. reflects the fact that we anticipate that the core underlying margins in the U.S. business are going to demonstrate the productivity of the investments we have already made. However there is a fair amount of disruption in the marketplace in the competitive environment, which is creating a lot of opportunity for us to have strong market producers come into our organization. So it gives the business flexibility to take advantage of that. We are managing that through a stable margin.

The expansions in Europe and Asia are really the anticipation of the productivity performance that we've expected off of the investments. There is organic additional growth, but it's at a level that can be absorbed in also an expanding margin. So it is not a specific number. Our people are directed this year to have -- to manage their margins and get the productivity out of it which then gives us the operating growth as well.

Just to follow up on that and on the headcount increases that you are seeing, are you still able to find people at reasonable prices?

How long is a piece of string? We obviously have a very strong culture in our organization and we are particularly selective about the people we choose to hire into the business, both in terms of the way they will fit into our organization and also in terms of their ability to generate revenue. So we are looking for really top-notch people to join what we believe is the best organization in our industry. And people of that caliber do not come cheap, particularly in a market where there is a lot of competition for top talent. So we are competing with other firms for their services.

We believe that -- I mean, the fact that we won the accolades of being in the U.S. one of the 100 best employers in the country is a tremendous accolade for us and it helps us hugely in attracting the right sort of people into our organization.

One of the other things I might add is that in the recruitment process, which I will say is fairly expensive, because it is a culture match, as Colin said. We have an opportunity to showcase really what we call the machine of Jones Lang LaSalle and that is. if someone is of very strong caliber and then can come into and access the entire integrative platform and all of the other pieces we put together to make our people be highly effective with clients and they can see the client base that they can then benefit from in the markets that they're in, that is a piece -- that is sort of the piece that flips them over the line as to the opportunity that they have it Jones Lang LaSalle.

So I guess the answer is we are still taking telephone calls and would [sense] that they're seeing something of a very good nature and ask to be a part of.

On the leasing market it is obviously very strong in the large metro markets across the world. Can you talk about what you're seeing from available space and if the markets are getting maybe too tight or if you see supply coming in, in those markets, over the next year or two?

Yes. The vacancy rates vary hugely from sort of 6's or so, making it single figures in in D.C. and New York and on the West Coast through to midteens still, low midteens in Chicago, for example. Across the world vacancy rates in Shanghai will be 1% -- vanishingly small. They will be of that order in Moscow as well. They will still be into the teens in Frankfurt.

But the general picture which we described is across the world. The vacancy rates are tightening. We quoted an average of around 8% in Europe. When you see vacancy rates getting down to the single figures 8% of the lows then that is obviously a very attractive market, for which -- into which developers start to construct new stock. We are seeing that coming onto the stream as well. Again broadly speaking around the world.

And, Michael, we can share the global class that we've provided at a pretty high level which shows the world all in sort of the favorable half of the global [clock], but we can give you a drill down much deeper than that because we do provide it for clients if you have further interest in some particular market.

Thanks a lot. Appreciate all the details.

Jennifer Pinnick of Morgan Stanley.

You've ended the year with a debt-free balance sheet. I was wondering if you could comment on your plans for your strong future cash flow and what your optimal capital structure is?

We've obviously had an extraordinary year in terms from a cash generation and I think it is really a credit to the business model. As I commented we are continuing to see acquisition opportunities. I would put them in a strategic and modest size. However, the footprint fill out is something that we are very focused on. So our primary goal is to put it into anything that grows the business.

On a secondary basis, of course we have our stock buyback program and we will continue to use that to optimize the balance sheet. We have said we are very comfortable with the balance sheet that is 25% debt to total book cap. So it means that we have a fair amount of room to have that debt go up.

I would remind you that our highest debt balance really comes at the end of the first quarter; because that is when we pay bonuses that are, generally speaking, annual bonuses. So we do have that peaking in the first quarter similar to last year and of course as we collect receivables (indiscernible) throughout the year it comes down.

But you are correct. We started with and paid off the Spaulding and Slye acquisition proceeds, as well as spent healthily on acquisitions, bought back stock and did other things for the firm. So it would be pushing first the opportunities we see to grow the platform.

And a follow up on Mike's question. You've quantified your investment spending for '06 is $25 million. I was wondering if you were quantifying your investment spending for next year?

No. At this point in time we think it is -- we've caught up on the primary things that we felt strongly we needed to do. We've incorporated in such that the business models themselves, they will support organic investments but they will be managed within the growth and margin targets we've set out.

Sure and then could you also comment on the market activity in the UK?

Which aspect of it, Jennifer?

Your performance. And perhaps the capital markets and leasing.

Our performance in the UK, we really obviously had a very strong year in the UK. Capital markets, transactions, and leasing transactions both [are up] strongly.

Yes. I mean, year over year, the UK had an extraordinary year across the board and that was a market that we put a lot of effort into sort of book key acquisitions and we got the benefit out of that.

So you'll recall we did the one acquisition which picked up the West Corridor of London around our anticipated recovery in that market and that has more than proved to be true. We did a planning [boutique] acquisition, which is already getting into the flows of things happening in London and we attracted some very high-profile people into the marketplace. So again it was a strong year in the UK and they are anticipating more because as they look at the global clock for London, rents are anticipated to continue to go up very strongly.

We ourselves are in the process of moving to Canary Wharf which will be our third largest office for Jones Lang LaSalle worldwide. We will still have our city office and Hanover Square Office but that decision was really made ahead of the fact of how much the rents were going to go up in that high-profile marketplace such that we were able to make long-term decision for the profitability of the business by doing that.

But I think it is just a reflection that there is more to come in England.

Thank you very much.

Matt Litfin of William Blair.

My first question is around the investment management ARM. Big growth and revenue there. Was wondering if you could parse out the property value growth versus the square footage growth there on a percent basis?

We don't disclose that because obviously it runs through all sorts of separate accounts and funds, etc. But I would say that the highest percentage of the growth remains in the new capital raised because Colin gave you the significant numbers that we did raise and we did invest. I should say 'invest' because we haven't yet got the capital raise into the investment activity, but the investment activity is an indication. We said we invested $9.6 billion. We obviously had payoff that resulted in equity gains and seeding interest (indiscernible) so there is some reduction of that number.

But in total we were up on a portfolio basis about $10 billion. So you can see that the majority still would come from the investment activity.

Okay and then a separate question. Obviously it doesn't appear that you need to make a larger acquisition, but given industry consolidation we have heard speculation that you might do that. So could you just give us your views on that, perhaps in terms of what the pros and cons would be as you see them?

I think industry speculation has had everybody marrying everybody over last 12 to 18 months and we obviously ignore that and certainly don't comment on it. From our perspective pulling it together, a couple of threads are things we talked about already today.

We have a very strong culture in our organization which is very effective at driving results for clients. And that is what in turn is the bedrock of what drives our business, be it the corporate, the investor or the investment management sector. That means that we are very careful about ensuring that we reinforce our culture and the brand we should, effectively, the reputation of our business with everything we do and therefore margin acquisitions do run the risk or do have an implication that our core values can be impacted and effected. So the larger the acquisition the more difficult that particular issue is.

On the positive side, what we find attractive and what has worked very well for us is as Lauralee described boutique and small, medium sized acquisitions up to strategic size, such as Spaulding and Slye where we can make very careful judgments about the quality of the business and the people and the level of fit of those organizations within our business. And we can also very carefully think through and manage the process of integration of that acquisition into our base organization.

Those are the sorts of acquisitions we like for cultural, for business, driver reasons to fill in footprint, to add skills to our organization. We also particularly like acquisitions where we can deal with private owners, because we have a lot more flexibility in structuring those acquisitions to provide continued incentive to the acquired businesses when they join the organization.

So that's some of our philosophy around acquisitions. It's not new, we've explained to you before and we believe that married with this strong push to bring in producers into our organization really across the business as a whole, that's a very effective mix for driving the revenue and the net income line in our organization.

Yes thanks. Colin, as a follow-up to that and coming at it from the client's perspective as you guys always do, are there holes in your global footprint as you see them? And if so where would those be?

If you mean geographically, no, we are very -- we have offices in 50 countries across three major regions. The balance of our business very roughly has remained 1/3 U.S., 1/3 Europe, 20% Asia-Pacific and 14% LaSalle Investment Management which is itself a worldwide organization and one of the only very few investment management businesses with a worldwide footprint.

So our basic business structure is in place. It is not work in progress. It is hooked up. It is operating very effectively and as Lauralee described, we are putting in an infrastructure of business processes and IT to back up and link that organization in a unique way in our business. Within the regions, we obviously have certain cities where there's growth in markets, for example, in China where we add three or four offices each year. We add in India. We opened in [Punai] last year. We even added in the suburbs of Australia in New Castle -- in suburbs of Sydney -- sorry -- in New Castle.

So where we see reason to client service needs to open new offices within the broad existing framework that we have, we do make those investments. But in general terms, our footprint covers the major markets that we need to be in for clients and services reasons.

Thank you and congratulations on another great year.

David Gold of Sidoti.

Just a couple of follow-ups. Lauralee? Investing, I guess presumably at the end of the third quarter I guess we had spent the 18 million. I think the goal there was 25 for the year. I was curious if you can update us on if that is where things landed No. 1 and part two of the question with I guess your comment that we are pleased with the positioning, maybe some of the investing goes away. One of the areas I guess the last quarter or two we watched and been a little surprised has been sort of a lack of operating leverage. Curious if it would be fair to expect now that we see that pick back up?

The answer on the investments is we feel we accomplished everything and more than the targets that you set out. So you'll definitely -- that is definitely what you see in the operating leverage and I'm sure what you're referencing is into the fourth quarter. If we just look at staffing additions we were up in the above the mid-20s year over year across the firm. But even if we go to Europe or Asia and take a midpoint in that year we were up 12% from we'd say June to December in each of those markets with additional staff.

That is going to back end the cost until those people become productive. As we said we wanted to get as much in '06 so that they are productive in '07 as they can be.

So at this point in time, our focus is driving the productivity and as Colin said, we will selectively build out the platform. But at this point in time, it is driving the robustness of our capabilities and the clients.

Fair. So presumably as you say the year shapes up, it takes some time clearly for them to ramp up, but one would expect sort of a stair step over the course of the year?

Correct.

And then just question two. I guess you know like we know the difficulty in wealth more for us than for you in predicting incentive fees. But curious if there are any out there that you might be able to talk about or some sort of framework that we can think about '07?

Yes. As you know we started providing for you the portfolio of potential both in a separate account as well as in the funds. And in 2006 we actually had incentive fees from only one fund; and we actually booked that before we started showing you the schedule. So when we give you the updated schedule which will be out shortly after our call, what you'll still see in terms of funds potential is everything you saw before plus the additional funds that we completed in the balance of the year this year. So, basically, a bigger portfolio of opportunity. What that means is that those early vintage funds, which are in various stages of their liquidation, if you just look at their lifecycles which are longer for value-adds and opportunity, will be coming to fruition probably some time in '07, late '07 or early '08 in some of those early ones.

We do anticipate one particular fund that is probably going to clear its trigger either in the first quarter or the second quarter. And then we'll have the incentive fees flow throughout the year. We have three additional funds in that early vintage that it will either be late in the year since they trigger their incentives early in '08 and a lot of that just is the timing of when the assets are sold and the prices that are achieved.

So the balance of '06 incentive fees actually came from the separate account or portfolio. Now if we look at that portfolio, we did receive fees as you know from the large one that won't be measured again for five years. We also received fees from several that will not be measured again until '08. Then the balance of them tend to be based on asset sales. So it really depends on where the maturity of those different assets are and when they in fact would clear the various hurdles of the underlying separate accounts.

So that is the piece that becomes much more variable. So again, the portfolio gets bigger. We also have expanded the potential from our separate accounts, when you see the portfolio potential but it does remain highly dependent upon when the assets get sold and the quantum of what they get sold as to when we clear those hurdles which then start the acceleration of all the fees earned during the life of those funds.

Fair. Helpful. Thank you very much.

Will Marks of JMP Securities.

I just want to ask you a question. First of all, Colin, you mentioned global capital flows of $600 billion in '06 and did you say you expect them to be equal or larger in 2007?

I think it was a number transposed they were over 600 million -- billion last year. We haven't got the final numbers yet but they certainly exceeded 600, which is up some 20% on '05.

Our expectation is that they will continue to rise. That is as a total but also the cross-border and cross-continental element will rise as a proportion of that $600 billion plus total investment in real estate worldwide. The reason we believe that is, that we as you know got a sort of an excellent view across real estate from corporate's confidence in our outsourcing world and our client context there right across to the institutions who are investing their money in real estate through LaSalle investment management.

And so we can see a continued level of confidence amongst institutional investors to put funds, incremental funds, in real estate. They are still working up towards their newly raised assets' allocation level for real estate and we continue to see money searching out product in the real estate markets.

One of the statistics we quote in Europe is that there is for every dollar over euro transaction that has gone there are four euros seeking a home in real estate. So there is still a tremendous amount of money looking to purchase real estate. And on the availability side their continue to be transactions flowing through. It is obviously at this point the critical bottleneck. Finding stock and finding real estate, that's the biggest challenge, satisfying client needs.

But if you put the continued flow of equities into real estates with continued relatively benign interest rate climates, right across the world with long-term interest rate in 4 1/4 to 5 1/4 percentage point rate -- everywhere except Japan, that is -- then you've got a mix which we believe will continue to drive capital flows into real estate.

In terms of yield compression or cap rate compression we don't think there is a lot much -- a lot more of that to come, certainly not in the established mature markets of U.S. and Western Europe.

Thank you for that and, Lauralee, sorry to beat a dead horse. A little bit further clarification. Correct me if I am wrong. The flat or basically flat margin in '07 is due to, one, the hiring you have done to date but, also, this new opportunity to hire. Is that correct?

If you're specifically referencing the U.S., the answer is yes.

And the 1% margin is (indiscernible) U.S. plus additional 1% from Spaulding and Slye?

Yes. The amortization impact of Spaulding and Slye impacted the margin about 1%. That is an intangible amortization from the acquisition that starts falling off pretty quickly starting in '08 and then obviously we get the full benefit of the acquisition after that.

Then in some of your comments or in response to a question, I didn't quite understand. You mentioned a 20% figure U.S., 12% Europe. Is that headcount increases?

Yes. That was headcount. Professionals.

And so, I'm sorry -- in the past year you've increased 20% your headcount?

, Yes, that would include the Spaulding and Slye acquisition.

Right, okay, and then about (MULTIPLE SPEAKERS)

That includes all of our acquisitions actually.

And that's U.S. and then Europe was about 12%?

No, I gave you in total for the firm and what my comments, relative to Europe and Asia was, what they've done just since the middle of the year. So if we did the entire firm for the year which includes all staff other than on property sites, we were up 26%. If we actually go to the U.S., which does include Spaulding and Slye, we were up 33%.

Wow. Okay. And then my final question, just to keep it simple. Can you just give an example of how these extra costs work? I mean are you offering guarantees or is it just simply you are hiring people and it is taking them a while to get up to speed?

It's the latter point. It is the incremental cost of employing somebody in a period, in an initial period when their revenue production is negligible. Obviously, we hire good people so we expect them to ramp up pretty quickly, but we mention the 18-month plus period which we use as standard in our calculations in looking at the payback on bringing in new people.

If you were to hire a high-profile team from another organization, are there situations when you are given some upfront money?

The answer is what we do is we have incentive performance payments. So it stays -- they get amounts that they then have relative to future production.

So it is not something that would impact, necessarily impact the expense line in that way? Any cash payment you're making?

No. It's the fact that there is compensation for them while there is not yet revenue (MULTIPLE SPEAKERS) with them.

Right -- perfect. Okay. All right. That's all (MULTIPLE SPEAKERS)

Just to clarify. Generally speaking, these people are coming from competitors and just as our clients are very whetted to jump on LaSalle the clients that they may have been supporting are viewing that they were clients of those competitive firms. Clearly. we are hiring these people because they are, over the longer-term, there may be some persuasive power. We also think that there is a general location of business in our industry. So with our capabilities and platform we hope that with talented people and those factors, we get more than our fair share of where the next pieces of business come.

But they can't just walk out the door with their pieces of business because it -- those clients are with the firm. So there is a period of time.

As Colin said, one of the things that we like about acquisitions that in fact are private and that was -- if we look at Spaulding and Slye, Spaulding and Slye was immediately productive because they came over and all of their clients belong to the firm and, therefore, immediately belong to Jones Lang LaSalle. And very similar to the partnership that we brought over in the UK.

So in that case you get a quick hit on the ground in terms of productivity, but if in fact we are hiring teams or individuals from competitors, there is that ramp up period of time.

Thank you very much.

[Christopher Middleston] of Atlantic Equities.

The question was just on the situation in France and Germany and the rates of growth. Do you -- the scale of the improvement there. Is that because you are able to win more mark share in those areas or is it just the market coming back itself? I believe you kept people on the street there when times were tough but you have seen the benefits in that as things come back remarket share?

Let's take them in turn. The markets in Germany have been growing strongly over the last year. That is both the capital market for transactions and investment sales and the leasing markets.

Drivers are different. The capital market transactions are the result of the German market turning around 2004 and initially distressed sales being made out of large portfolios, (indiscernible) for example, which began to revive a market which has been very flat for investment sales for a number of years. That process of increasing volumes in transactions in Germany has accelerated and we certainly benefited from that. We also, as you may recall, hired a new manager in our German business who had been with a development bank and he has proven to the highly effective at hacking into that growth and therefore we have increased our market share on top of the growth rates.

He has also proven to be highly effective at pulling in new professionals into the German teams from our competitors.

Back in the capital market side in Germany, in the leasing markets the German recovery, which has been underway, is following one of the strongest recoveries in the larger European economies and has been underway for a couple of years. It is now started to produce genuine job growth and it is doing that in the major cities -- Stuttgart, Munich, Frankfurt, Berlin and Hamburg, where we are represented. So we are seeing an uptick in volumes of lease transactions and we are beginning to see rental increases right across Germany, even in Frankfurt which had one of the highest levels of vacancies through the downturn.

In France the leasing market have always been healthy. The capital markets too. The issue there has been availability of stock but despite that market has picked up in volume terms last year we also in France have been hiring and rebuilding our teams, our leasing team, we believe, picked up substantial market share.

(OPERATOR INSTRUCTIONS) Your next question comes from Jennifer Pinnick of Morgan Stanley.

Just one follow-up question. The industry activity has been fairly robust and the outlook remains strong, but the backdrop is inherently cyclical. How do you balance your growth needs through all of this hiring with the cyclical concerns?

Do you have (indiscernible), Jennifer?

No. That was it.

That was it. Well we've described what we do. Let's just take a step back and just restate what we believe in terms of global economy and the fundamentals. We believe the growth rates this year will still be in the 3% level globally. Global GNP growth. Maybe down a touch on last year, but we don't believe that any of the major economies are headed for a recession trend in either '06 -- sorry, for '07 or the early part of '08. But we believe for those 12 to 18 months planning horizon we are looking at robust economies, which is the real fundamental for what drives real estate market demand, both in the leasing and ultimately in the investment sales market.

The backdrop is positive. We obviously are watching carefully for signs of any change in that we can't see at the moment. Against that backdrop we believe it is prudent. It is also our job in terms of building shareholder value in the business, to grow the organization as quickly and as carefully as we can whilst maintaining and in the growing of our net income margin.

So our approach is to invest, make acquisitions as we've described into this positive market which we see around us. We are, as I said, watching the economic fundamentals. We are also watching the real estate indicators and we believe there are a number of meeting indicators which are proprietary; and we aren't not prepared to share but we are watching those carefully for signs of any change.

If there is a change we've thought through what we will do and how we will do it. And, indeed, we've prepared some of the ground already with the way in which we are managing the business, the high-performance standard and making higher demands of people within the organization of being less tolerant of poor performance, for example, all of which sets us up for appropriate reaction if markets concur.

We are watching carefully ahead but we are also proceeding with, we believe, confident -- a prudent level of confidence.

Jennifer, I might just add financially. And that is we continue to focus on diversification geographically such that we don't believe all the world would have the same impact at all one time. So that creates some level of protection. Additionally, we very strongly have grown the annuity aspect of the business. Particularly if you look at the advisory business for (indiscernible) management or the [fees are up] significantly and as you know those are very sticky over a long cycle. And we also continue to grow our corporate business.

Our facility management business has almost a bond-like characteristic to it. And although the work for corporate changes if there's a change in economic environment, it tends to continue. So it's the mix of the business to make sure we have strength in all areas that we also watch closely.

Thank you very much.

At this time there are no further questions.

Thank you. With no further questions, we will draw this call to a close. Thank you, everybody, for participating today and for your interest in our firm. We look forward to talking to you again at the end of the first quarter. Goodbye.

This concludes today's conference call. You may now disconnect.