Jones Lang LaSalle Inc (JLL) 2008 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2008 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, and 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, 2007 and in our other reports filed 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 business days of this call. A Web audio replay will also be available for download within 24 hours of the call. Information and the link can be found on the Company's website. 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, and good morning, ladies and gentlemen. Thank you all for joining us for this review of our first-quarter 2008 results. With me today is Lauralee Martin, our Chief Operating and Financial Officer.

Before we begin I want just to take a moment to acknowledge the loss of Sir Derek Higgs, who was a valued member of our Board of Directors where he had been a member since 1999 and who died suddenly in London on Monday. Sir Derek was Chairman of the UK Bank Alliance in Leicester and, among many other things, an expert on corporate governance. He made a tremendous contribution to the growth of our firm as Chairman of our audit committee and in his work on governance and as a friend and trusted advisor. We're going to miss Derek's insights and wisdom and our thoughts are very much with his family at this sad time.

Moving along to our results for the quarter, summarizing those results. Revenues for the quarter totaled $564 million which was a 15% increase from the first quarter a year ago with all business segments recording year-over-year growth. Operating income totaled $7.9 million compared to first-quarter 2007 operating income of $36.5 million. Net income for the quarter was $2.8 million or $0.09 per share compared to $27.3 million or $0.81 a share in the first quarter of 2007.

Finally, our Board of Directors has declared a semiannual dividend of $0.50 per share of our common stock and that will be paid on June 13th to holders of record at the close of business on May 15th.

A few observations to put these numbers into context. Firstly, we continued to achieve solid revenue growth in the quarter with all of our business segments contributing year-on-year growth, and overall we continue to take marketshare across a broad sweep of service lines and geographies.

However, our Capital Markets business, which includes Jones Lang LaSalle Hotels, was understandably affected by debt market conditions. Total transaction volumes were down sharply in the quarter with market volumes decreasing 80% in the U.S. and 38% in Europe compared to a year ago. However, our Capital Markets business suffered less than the market as a whole.

Secondly, given the seasonality of our business quarter one is typically the slowest part of our year where historically we have often posted a small profit or loss which is offset in subsequent quarters. We did have a profitable first quarter and the diversity of our geographic and service lines partly compensated for Capital Markets pressures.

And thirdly, we continue to invest in growth. The 13 acquisitions which we completed last year have begun to contribute to revenues, but did not yet in aggregate contribute to quarter one profits. We have also completed seven additional acquisitions this year and more opportunities are likely to surface in the current market environment. We will consider them carefully and, when appropriate, take those opportunities.

Finally, we are responding directly to current market conditions with cost control activities across the firm. These are designed to closely manage variable expenses in ways that will not affect our client service capabilities or impact the benefits of our acquisitions and other growth investments. With that let me now turn the call over to Lauralee.

Thank you, Colin, and good morning to everyone on the call. Colin has described the challenges impacting current operations which arise from the liquidity issues and related asset repricing within the general marketplace that have impacted our Capital Markets businesses globally.

However, during the quarter the remainder of our core businesses continues to provide solid performance. I will focus my comments on three areas in particular that are demonstrating strength in this uncertain environment. First, LaSalle Investment Management; second, our regional and local service leasing businesses around the globe; and third, growth in developing markets. I'll start with LaSalle Investment Management.

LaSalle's research driven approach together with its successful execution with acquired assets has driven growth in assets under management and the accompanying advisory fees that provide an annuity revenue stream. Advisory fees grew 34% in the first quarter over the prior year. The continued growth in the business was driven by year-over-year increases in committed capital and in assets under management which were up $6 billion from a year ago and are currently $50 billion.

We continue to generate healthy performance for our clients compared to the benchmark indices. 80% of our assets under management delivered performance in excess of benchmarks, including global securities mandates during the first quarter of 2008.

In addition to building a portfolio of assets under management that generates a strong base of annuity income, our performance from those assets provides us with an opportunity to earn incentive fees. Incentive fees were $13 million during the first quarter of 2008 and we have the potential for earning ongoing incentive fees with several funds fully invested and in liquidation status.

As a reminder, the amount and timing of incentive fees are dependent upon the contractual timing of the measurement periods, the liquidation of funds and investment performance. As a result, incentive fees will continue to be highly variable from one reporting period to the next.

Institutional capital is still available in the private equities sector for products sponsored by established firms with excellent track records as we have demonstrated by recent capital raised activity in the U.S. for our next flagship series fund, Income & Growth V. The most recent capital raise for this fund was approximately $750 million which was 50% greater than the capital raised for its predecessor fund, Income & Growth IV.

The public sector continues to attract significant amounts of capital, although at levels below the recent historical highs, demonstrating interest continues to exist for global programs and allocation to real estate.

In the quarter we announced a joint venture with LaSalle Hotel Properties, a leading multi-operator real estate investment trust, in response to market opportunity created by the current Capital Markets distress. This joint venture is the seed deal for a new fund, LaSalle Strategic Capital Fund I, and builds upon the platform investments we've made in recent years, most notably the acquisition of CenterPoint Properties Trust on behalf of us CalPERS.

We had a small equity loss from coinvestment activity in the quarter; this reflects our share of ongoing operating expenses incurred while properties are under development or in transition. Typically these losses are offset by sales activity with coinvestment capital assets and their related equity gains. The quarter did not have sales which resulted in a modest net could equity loss. No asset impairments were recorded.

Despite this small equity loss and lower incentive fees in the quarter compared to 2007, LaSalle Investment Management still delivered higher operating income resulting from the increasingly profitable annuity stream generated from advisory fees.

The second business strength I'd like to discuss today is our local and regional leasing businesses. The Jones Lang LaSalle Global Clock, which you can find on our investor presentation posted on our website, continues to reflect stable real estate property fundamentals with rental rates still growing, though at slower rates, in many of the major markets around the world.

Leasing revenue in the Americas increased nearly 40% in the first quarter of 2008 compared with 2007 as we benefited from expanded market coverage, the product of our investing in new hires and in acquisitions. The strongest contributions to the year-over-year increase were our Western United States region and the Chicago marketplace. The acquisitions completed in New Jersey and North Carolina at the end of 2007 also contributed to the strong year-over-year leasing growth.

In EMEA leasing revenue increased nearly 30% year-over-year. Russia had very strong revenue growth in the quarter, as did Central and Eastern Europe, Holland and Germany. In Asia year-over-year revenue from the leasing businesses increased over 60% with the majority of the growth driven by major markets including Australia, Hong Kong, China and India.

Our third business strength is our geographic diversification, we call it our G1, our Growth One or our Global One, including our growth in high potential developing markets that expand our global footprint. In addition to the acquisitions Colin mentioned in his introduction, we have actively increased our presence across the world by hiring teams of professionals and by opening new offices to position ourselves for growth.

We are reaping the benefits of the investments that we've made over the last couple of years. For example, in the first quarter of 2008 overall revenue in EMEA's markets of Russia, Turkey, Dubai, Spain, Italy and the Nordics was up more than 75% year-over-year. Additionally, in Asia year-over-year combined revenue for the markets of India, China, and Japan were up nearly 50%.

Offsetting strength in these three areas was the slowdown in Capital Markets activities. Our research has predicted significant overall global market transaction declines from 2007 levels, particularly in the U.S., UK and developed Europe. As a result we have said that we would also feel this slowdown in our results, but at a softer level than the market due to increases in market share.

The impact of the credit markets in Asia Pacific has been predicted to be milder as subprime issues have been more limited. However, with international lenders currently taking a more conservative profile in the region with their overall issues, the local banks are also adjusting. As a result financing is taking longer to close, buyers and sellers are still agreeing to terms and prices, but transactions are now carrying financing contingencies as bank quotes often contain market flex language.

We as a result experienced more deal slippage and delays in the first quarter than we expected. Against this we have a most extraordinary pipeline of mandates for prime properties from sellers that need to sell to meet liquidity needs. We are seeing interest from core buyers who do not need financing or we're seeing some buyers spotting purchase opportunities who are willing to close with equity and source their financing after the close. The weight of the capital committed to this region is very high and time pressures should soon start to force increased activity.

In closing my comments, we have called this a tactical execution year while we remain committed to our long-term growth strategy. We are aggressively managing discretionary expenses, we're minimizing staff additions, we're leveraging our support staff as we make acquisitions and we are redeploying resources to developing markets and/or to businesses with strong growth. We will be using the current environment of stress to take actions to be a stronger growth company as the markets settle. Let me now turn the call back to Colin.

Thank you, Lauralee. Before reviewing our recent investments in growth and commenting on key business wins around the world, I would like to summarize our view of the global economic and market conditions. According to both the IMS and the economist intelligence units, world GDP growth is expected to be down to 2.6% this year in current market currency terms. During previous downturns world GDP growth has dropped below 2% per annum. Let me first talk about the implications for Capital Markets.

As Lauralee has discussed, the contraction of global credit markets continued during the first quarter, leading to further sharp reductions in transaction volumes. Additionally, pricing for commercial real estate has moved down. As a rule of thumb, since early 2007 prime offices in Europe have moved down on the order of 15 to 20%, the U.S. 10 to 15% and 5 to 10% in Asia Pacific. Predictably too, the bid/ask spread on proposed transactions has widened.

In contrast large reservoirs of equity continue to wait on debt availability and price stability to re-enter real estate markets. Our pipelines, as Lauralee said, of available transactions everywhere is very healthy, but actual transactions will remain at subdued levels until confidence and liquidity return to credit markets. On a positive note, while global real estate securities markets have been volatile, they recovered from a sharp fall in January and February to end the quarter up slightly.

Turning to rental markets, despite economic and financial market uncertainty in the first quarter, occupancy rates and rent levels have held steady in most of our major markets. Early signs of declining demand for office space are now appearing in major European and American financial centers, but Asian and Australian financial centers have been much less affected to date. Technology driven markets -- office markets around the world also remain strong.

Net absorption or take up will very likely continue to grow in the BRIC countries and other emerging markets like Mexico, Thailand, Turkey, the Gulf states and the Commonwealth of Independent States. Overall market demand for commercial real estate in developed countries is slowing from 2007 levels with the exception of commodity driven economies like Western Canada, Australia and Scandinavia. As Lauralee described, we have been showing healthy growth in our U.S. and European leasing businesses.

Gross take up in the European office sector first quarter totaled more than 34 million square feet which was a 7% decrease compared to the same quarter a year ago. Healthy demand and moderate new supply caused the European average vacancy rate to fall by a further 20 basis points to 7.1% and prime rental increases, however, were limited in the first quarter with only six European cities reporting rental growth lead by Milan with a 14% plus growth rate and Warsaw with 10%.

Conditions for office occupiers are mixed in Asia Pacific. An influx of new supply in India has rebalanced the market to a fair weighting between landlords and tenants. In Australia limited supply and low vacancy rates have led to rental increases and a landlord favorable market. China, Shanghai and Hangzhou are suffering a shifting to be more balanced markets as new supply comes online, while the Olympics driven supply into Beijing's office market has made it more tenant favorable.

Relative to past down cycles, the amount of new construction in the pipeline across the world's major commercial markets is modest as lenders have tightened construction finance. So even with moderately declining demand we expect rental income generating power of office, retail and logistics space around the world will be generally maintained.

Looking ahead through the short-term issues in current short-term market movements to the longer-term trends, it is important to remember that the long-term secular growth in the real estate service market remains intact and the trends of globalization and industry consolidation around strong international real estate service companies is also firmly intact. A major driver for our targeted growth investments in recent years has been to capitalize on these long-term trends while maintaining diversity in our operations, both geographically and in terms of our client and service offerings.

So as you know, we've focused our investments on five areas -- strengthening our local and regional service operations; expanding our three global service delivery lines; Global Corporate Solutions; Global Capital Markets and LaSalle Investment Management; and finally, establishing the world's standard for client service delivery.

Reviewing these in turn -- first, we continue to strengthen our local and regional operations. In the Americas we acquired the leading retail transaction firm, The Standard Group, in January. This was the first of four retail transactions we have completed around the world to date in 2008 with a fifth expected to close in the coming weeks.

We also expanded our Capital Markets capabilities, launching a new practice that assists healthcare providers and we added a dedicated seniors housing expert as part of this growth in healthcare finance platforms. During the quarter we completed the sale of 801 K Street in Sacramento, a 336,000 square foot landmark office.

In Boston our real estate investment banking team secured a $190 million construction loan for the development of the new W Hotel in Boston's theater district. We negotiated a major sale and leaseback transaction for Sun Microsystems completing the sale and leaseback -- completed also the sale and leaseback of the landmark LaSalle Bank building in Chicago for Bank of America and closed three sale and leaseback transactions on behalf of General Motors.

Our relationship with General Motors was further underscored this week when we received the GM 2007 Supplier of the Year award for contributions to GM's overall global performance.

Turning to EMEA, we have completed two transactions to date in -- sorry, two acquisitions to date in 2008 and anticipate closing a third this month. Creevy, a Scotland-based hotels and leisure consultancy and two German retail businesses, the Dusseldorf-based Brune Consulting and Kempers Group, the German market leader in resale Capital Markets and resale leasing transactions which will close shortly.

We formalized an exclusive strategic linkage with Alkas Consulting in Turkey for project development and leasing and management of Turkey's leading shopping centers. In France we completed, in transaction terms, the 650,000 square foot location of LCL bank, formally Credit Lyonnais, and advised French pharmaceutical company, [Solvay] on relocating its 600,000 square foot headquarters.

In Poland Skanska recently appointed our Warsaw leading team to lease its new 200,000 square foot office development in the Polish capital. Our UK city investment team acquired One London Wall for Hansainvest for EUR178 million and we provided acquisition advice for resolution for the purchase of a prominent 130,000 square foot office and retail block in London's West End.

Moving to Asia Pacific, we have acquired four companies so far this year, Shore Industrial in Sydney Australia and [Krea] in New Castle, Australia; Sallmanns, a company that specializes in IPO offerings, mergers and acquisitions and financial valuations in Hong Kong and greater China; and Leechiu Associates, the leading local agency and business process outsourcing operation in the Philippines.

We also entered in Asia Pacific into a joint venture with Australia's Colonial First State Property Management to create Sandalwood, which will be the first integrated retail development and management service provider to operate across the whole of Asia.

In transactions in Asia Pacific, we've been appointed by Australia's Allco Finance Group, the Record Realty Trust to dispose of a portfolio of more than 30 office buildings in the U.S., Germany and Australia. The portfolio is valued at approximately AUD1.7 billion. Our Asia Capital Markets Group acted on behalf of NewStar Asset Management in the SGD100 million acquisition of One Philip Street in Singapore.

Citibank chose us to provide facilities management services for a 2.5 million square foot Pan India portfolio and securing our first assignment with Perot Systems; we have project management and consultancy on base building construction and fit out of the first phase of Perot's new campus building in India. This building will be LEED certified and it will be our third green building project in the Indian subcontinent.

Our second priority is to continue to build our global Corporate Solutions business. During the quarter we became the preferred service provider for Nokia for variable project management assignments in its 16 million square foot global portfolio.

Lenovo, the global technology company, named us sole real estate alliance partner to provide lease administration, project management and transaction management services for its growing 2 million square foot global portfolio. This will include facility management of the Company's 700,000 square foot headquarters in Beijing and that will be Lenovo's first outsourcing assignment in China.

Finally, we entered into a strategic alliance with Boston scientific, a world leader in medical devices, for the Company's 11 million square foot portfolio in the Americas, EMEA and Asia Pacific.

Our third growth priority is to build a truly global Capital Markets service line and in a tough market we've continued to complete cross-border transactions. Some examples of those -- in April we sold 2099 Pennsylvania Avenue in Washington D.C. on behalf of Germany's Wealth Management Capital Holdings, GmbH. Vico Capital of Ireland purchased the 200,000 square foot office for a record $172 million.

To identify prospective buyers our DC team visited Ireland, the UK, Germany and France while our international capital group sourced potential buyers in Europe, the Middle East, Australia, Asia-Pacific and Latin America.

Earlier this year our German Capital Markets team completed the sale of the EUR1.7 billion [Charlotto] Portfolio for Allianz Immobilien purchased by Whitehall Funds. The portfolio encompasses 190 properties, primarily offices, in locations across Germany.

In Finland's our Helsinki Capital Markets team advised the Carlyle Group on the cross-border acquisition of a 1.5 million square portfolio of 30 properties in Finland for EUR216 million, while our pan-European retail Capital Markets team advised Apollo Real Estate and Multi Turkmall on the purchase of a shopping center development in Instanbul for EUR267 million. Jones Lang LaSalle Hotels was retained by Russia-based Central European Hotel Investments to source a suitable European hotel firm for acquisition leading to the acquisition of the Austrian Hotel Company with 20 hotels in 17 cities in Austria, Germany and the Czech Republic.

So we are finding that in markets where deals are harder and take longer to complete our unique global Capital Markets team is now able to add real value to sales and purchase mandates.

Our fourth strategic priority is to grow the value for clients at LaSalle Investment Management and, as Lauralee has covered in some detail in her remarks, LaSalle has been consistently a strong performer for our company. LaSalle raised approximately $1.4 million of equity since the start of 2008 with global securities mandates accounting for about three-quarters of the total.

During the quarter LaSalle launched LaSalle European Venture Fund III, a closed end opportunistic fund, which will invest across Europe. With leverage the fund will have buying power between EUR4 billion and EUR5 billion. That in addition to the U.S. Income Growth Fund V, which Lauralee mentioned, we continue to invest and divest properties selectively across the range of LaSalle funds and geographies and LaSalle's business is, as Lauralee referred, to now well diversify globally with approximately one-third of its revenue and profits generated from each of the three geographical regions.

This allows us to seamlessly invest capital into any region as opportunities arise and enables us to be well positioned to take advantage on clients' behalf of asset repricing in any region.

Our fifth strategic priority is to develop the world's standard business delivery platform in our business. During the quarter we continued to introduce client facing technologies that enhance our performance and service delivery capabilities and we remain on schedule and on budget to complete the global introduction of integrated financial and human resources systems by the end of this year.

So to sum up, while the current credit environment slowed our Capital Markets transactions worldwide during the quarter, we continued to grow our revenue thanks to solid performance from the rest of our broad geographic and client service platform. In this environment we remain focused on actively managing our cost base while we also continue to deliver real value to our clients and invest to build our strong market positions globally.

So with that we would now like to open up the call to your questions. Operator, if you would please explain the process at this point.

(OPERATOR INSTRUCTIONS). Edward Yruma, JPMorgan.

Good morning and thanks for taking my question. In terms of the current market environment, how does that impair or perhaps even enable you to liquidate your funds at LaSalle? Is it more difficult to liquidate given the tough environment?

LaSalle, first of all, operates, as we said in our comments, not on our behalf but on behalf of its clients. So it's constantly taking judgments and the asset-by-asset level within its funds as to whether to continue to hold, to further develop or to realize the value of any asset. Those judgments obviously are taken again considerations of the maturity of a fund, in other words how long it has to run before its promised liquidation date, but also critically on the current very local market conditions.

So if you consider the broad sweep of the geography of LaSalle's investment across, as we said, evenly one-third U.S., one-third Europe, one-third Asia-Pacific, market conditions across those geographies will vary considerably and so the judgments on what's appropriate in terms of hold, develop or sell will very by geography and by asset.

In general at this point I would say that the comments are that in the Americas good assets are very salable. Generally the clients or the purchases are fewer than they might have been a year and a half ago, they're typically better capitalized and lower leveraged, but good assets are salable.

Got you. And I know you touched upon --

Just one additional comment. We did book $13 million worth of incentive fees, which means obviously we are selling assets and we're selling assets with a lot of profits. So we have given guidance, we've got a number of funds that are at the liquidation stage, and still feel very comfortable with those.

I know you talked about some extra scrutiny in this tough market environment from a cost perspective. Are you examining your compensation plans and is there an opportunity to provide more flexibility should this market downturn persist? Thank you.

We have, as we've done more acquisitions, particularly in the U.S., been moving our transaction compensation plans to -- not to a commission model but with more commission characteristics. So we are starting to do some of that and we'll continue to move that forward as we blend sort of the best practices of those that come into our organization with our own.

So it's a healthy mix. Once we get outside of the U.S. there is less flexibility though, even in those markets. Our transactions people are barely highly incentivized for performance versus their base compensation. But I think you're comment is particularly relevant to the first quarter because we do not run a complete commission shop. With the decline in revenues we do have a floor level of base compensation that still comes through.

And so, one of the things that you see in the results, the impact to the Capital Markets in fact gets exaggerated with leverage in the first quarter that will moderate itself as we move through the year and the revenues come through against what would be the base compensation and then the flex in the variable compensation will play through after that.

Great. Thank you very much.

David Gold, Sidoti.

Good morning. A couple of questions. One, just as a follow-up, aside from making some shifts, at least domestically, in the commission model, can you talk about other initiatives or things that we're sort of looking at from as far as from a cost perspective?

I think the biggest thing and I had mentioned it just at a high level is we have a number of parts of our business that are growing very rapidly. And particularly if you think about in the European base there are still opportunities with Capital Markets in Eastern Europe, the Middle East and Russia. So we've seen strong interest by some of our Capital Markets people to go to those markets; it means that they can continue to have financial rewards if there's a slowdown, for example, in the UK.

So we're redeploying resources. If we look at different businesses in other parts of the world, the growth in our corporate business allows us to have real estate experts come in and support accounts and even if we look at our hotels business, which is obviously a Capital Markets-based business, they see that there are the newer markets where hotels and the advice on hotels will be strongly needed and we'll be redeploying resources to those.

And where we see markets that are currently in a flat phase in terms of growth, we're obviously doing the obvious things you do do in those sorts of environments in terms of containment of travel expenses, looking at any incremental hires and replacement hires closely and so on. So the normal things you do in a cost control environment. As Lauralee said, there's an overall sense we're growing, we have growth momentum and we're very pleased with that. We don't want to lose it. To an extent we need to continue to build the platform underneath that to support the growth.

Got you. And that actually brings us to get a question too. If you can talk a little bit about -- get some of those growth plans, presumably acquisitions, would be curious if you can add some color on, A, acquisition contribution in the first quarter and anticipated for the year from the -- I think it was eight closed in the quarter?

And then two, what you're sort of seeing out there, if pricing has come in any? And also presumably I would guess, but I'd ask for comment on them, if you're structuring these with earnouts just to sort of protect yourself -- to protect yourselves on the pricing? A lot of questions.

I'll try to take a bite at each of those, David. The area where we've obviously been the most active with acquisitions has been in Europe. And we did a significant number in 2007 though on a year-over-year basis. We didn't have them in the first quarter of last year, they are now in our results.

If we look at our expense increase in Europe we can actually explain almost the majority of our expense increase from the additions of acquisitions. We're done a very good job of both flexing the variable pay as well as managing cost there and it's the acquisitions that are driving the increase.

That being said, the contributions of those at this point is modest because there is purchase accounting. So they only add just a little bit less than $2 million to what would be an operating income contribution. The ones around the rest of the world are not as significant as what we've had in Europe. The most recent ones that we've done that are of substance have been in Asia and I'm excluding our Indian operation because you can pretty much track that through the minority interest. But the balance of them have been in Australia and our acquisition in Hong Kong.

At this point, because they're new, they are modestly negative in terms of their contributions because of the purchase accounting. We do expect that we will be into positive territory on all of these as we move through the part of the year.

In terms of your third question, David, what are we seeing in terms of what's out there. I'd say there's been no real change in the rhythm of discussions. We've been underway with acquisitions, as we've described before, decentrally around the regions. We allow the regions to service these opportunities and we evaluate them with the regions from the center of the business. Many of the ongoing dialogues that we've had continue.

But I would say in terms of new things coming up there is something of a bid/ask cap as we've seen actually in real estate itself. In other words sellers having a fewer of the ask price and argue what the bid price should be has got some gap in it. So I suspect there will be perhaps a bit of a hiatus in terms of flow of possible acquisitions that come to fruition whilst buyers and sellers, in our case we are the buyer and the potential sellers get our pricing into line.

But generally, we expect, as we said, the market for process of consolidation in our industry around a few strong international players to continue and, as we've said repeatedly for the long-term, that is one of the sources of growth that we intend to continue to capitalize on.

And then just lastly on that, if there is a number for expected acquisition contribution for the deals we closed in the first quarter?

The total was less than $1 million.

Okay, relatively small.

Yes.

This year because of the acquisition accounting process.

Perfect. Thank you both.

Will Marks, JMP Securities.

I first wanted to ask you on the asset management side, I knew you grew year-over-year. Is your expectation to take the 50 billion up in the current calendar year?

Remember how much capital we have committed, it all needs to go to work. So absolutely; it's our intent that the assets under management would grow. Now, as that is done not all of that will translate into advisory fees because we're already booking advisory fees on much of that Asia committed capital. But where we grow it in the U.S. and it's not committed, I mentioned the new capital we've raised for our next flagship fund in the U.S., the joint venture that we have with LaSalle Hotels, the continued growth in Europe. Those will be contributing advisory fees. But yes, we do expect healthy growth in assets under management with the committed capital that we have.

To sort of turn around the question that David asked on the sell side -- I'm sorry, ed asked on the sell side earlier on. On the buy side, of course LaSalle is being equally cautious whilst we have many billions of dollars of capital to commit to the market. The transparency on pricing is not evenly -- is not the same everywhere and particularly in markets which have suddenly become very thin it's often difficult to price an asset with confidence on the buy side as well. So on behalf of its clients LIM is being cautious on the buy side as well as the sell side.

Okay, great. Now moving on to costs because I'm still a little confused. So the numbers -- the revenue growth was -- seemed to be exceptional and a lot of your comments were on the different areas and the diversification of your model, but the 15% revenue growth was offset by I think it was 23% expense growth. And is there -- are we going to see those two numbers aligned later in the year or how should we really think about this? It's so hard to model your company. I know you're not giving guidance per se, but is there any way we can think about the margin not dropping below a certain level or can you help us a little bit there?

I think the biggest challenge for the first quarter, Will, really came from the Capital Markets activity, and normally there would be I think more consistency in looking at a seasonal pattern in margins if we exclude last year's first quarter which obviously was probably -- many considered an extraordinary quarter in terms of Capital Markets activity. It really was a flow over from the fourth quarter of the year before.

What we saw, and let me use just the U.S. as an example, is almost a 100% (technical difficulty) revenue into a drop in operating income margin because of the fact that we currently are paying what is the modest base level of compensation on that business in the first quarter while we did not yet have the revenues. It's a highly variable compensation model where the total comp would be three to four times that number. However, given the extreme drop in Capital Markets activities, if we had some 50% in the U.S. Capital Markets business and when we put hotels with it in the U.S. it jumps to a little over a 60% drop, that just fell straight through.

As we moved through the year and that compensation model hits way through against revenues, we would expect to move to more normal margins depending upon how slowly the liquidity comes back into -- or how quickly the liquidity comes back into that marketplace.

Remember too, Will, that as compared to quarter one last year we've significantly changed the structure of the platform. We've added transactors, we've made acquisitions. And if you want to sort of think about the rest of the year in terms of operating and admin costs, have a look at the quarter four last year to quarter one this year number and you'll see there's just a very slight increase.

So that operating admin line has grown deliberately year on year as we've added platforms to -- and added revenue indeed, to justify and help service -- and add cost to service that revenue growth. But the quarter-on-quarter growth is much more restrained reflecting our reading of the current market positions.

So correct me if I'm wrong, it seems like the two biggest factors impacting the expense line are the fixed costs mostly associated with salaries for Capital Markets professionals and the costs associated with acquisitions before revenues really kick in? Are there others and are those the two largest factors?

Let's just back up to where you specifically said Capital Markets. It would be the cost of compensation for our staff around the world. What I was describing in Capital Markets is that it transitions to a more normal margin level as the revenues come in across the year. But it is the base of the business that is built to produce for the entire year. And the acquisitions which we put on we say are modest in the first year, they have purchase accounting and as that burns off it automatically produces profits for the firm. And we've been adding those and they'll start to contribute.

Okay. And one final question. Is there an impact also from just the cost of marketing deals for your investment sales professionals? Those costs -- the spreads have widened, is it costing more?

No, other than the deals are taking longer to market. As we said, we've got our pipeline, not all of that pipeline is currently highly active because many sellers are saying we want to sell but we'll just hold back in the market for a while. But where transactions go to market, the cost of setting up the documentation, the cost of reaching out to potential buyers has not changed markedly.

Perhaps two things that are different are, as we said, the length of time that a property remains on the market has gone out some, so that could just, in terms of the cost of time, can add some expense. But the other item is that in some properties, as I described in my comments, we're doing quite considerable international marketing activity now so that has a small incremental cost as well. But overall that's not a needle moving item on the expense base.

Okay, great. Thank you very much.

Vance Edelson, Morgan Stanley.

I've got just one follow-up on the planned cost reductions. If the acquisitions have been a major driver of increased cost, is it safe to say that despite efforts to reduce cost elsewhere, as long as the new acquisition opportunities are likely to surface, as you said, we could continue to see a higher cost level for the foreseeable future? And isn't that then a driver of the cost for the next couple quarters?

Yes, because the balance of the business is basically constrained in terms of additions other than to serve clients around wins.

You use the words "cost cuts", Vance; I don't think that's quite right. There are certainly areas where growth has gone cyclically flat and we are containing costs there and we are restraining any additional costs. But we've not at this point embarked on a wholesale cost cutting exercise. Again, the overall growth in revenues and our need to access that available growth and capitalize on the growth momentum we have say that we should contain costs but not at this point in time.

All right, thanks. And a related question, could you provide color on what your parameters are when deciding to move forward on an acquisition? And considering the goal to increase margins have those parameters, when deciding on an acquisition have those parameters changed at all?

Well, let's start with, if you want, the Jones Lang LaSalle playbook on acquisitions. We could be here for a little while, but the first item which we always look at is the fit of the organization in a couple of ways. First of all, is it matching the strategic goals we have? Is it in line with our overall direction so we're not constantly starting on new paths and new activities? That's one test.

Secondly, does the business fit culturally with our organization? Are we going to be able to integrate those colleagues and have them lead indeed parts of our business? Because we view acquisitions in a financial sense, we view them as mergers on the ground and operationally.

And frequently, as in Holland for example, as in India, have the leaders of the acquired company takeover leadership of our business as well. And so we're adding extra caliber and DNA to our organization. The financial measures, Lauralee has said very often that we want businesses to be accretive -- sorry, marginally accretive, possibly in the first year. But accretion is our major driver when we're looking at the financial side of an acquisition.

Okay. And could you provide your thinking on the merits of dividends versus share buybacks considering the strength of the balance sheet? How do you think about one versus the other?

We have a commitment right now with the dividend. Strategically we put that in place a couple years ago. We in fact have an investor base that is broader than the U.S. and in the European markets a modest dividend is important to their being able to think about us as an investment alternative.

What we've said continuously on share buybacks is that our Board has to approve it, we have capabilities to do share buybacks. Our first choice is always growing our business which has been acquisitions. And because we do produce strong cash flows we consistently use the excess cash flow to buy back our stock and we'll continue to do that.

All right, thanks. And one last question for you, Lauralee. Are there any efforts to hedge the risk on foreign exchange which thus far has been providing a lift?

We hedge all our intercompany debt and we also, with our borrowings, have the ability to borrow in different currencies which gives us basically a built in hedge. We do not hedge earnings which is really I think at the heart of your question because that's not really hedgeable. That would be taking a position on currencies and we believe we're in the real estate business, not in the hedging business. So we will continue to use our built in hedges as much as we can and maximize those positions.

Okay, thanks a lot.

Brandon Dobell, William Blair.

Thanks. Maybe I'll hit the cost question from one different angle. I'm sure you're getting sick of it, but I'll throw one out there for you. Would it be fair to assume that on the operating and admin lines that that would be kind of more of a sequentially driven line? Comparing the quarter-on-quarter moves would be more accurate in looking at that line on a seasonal or compared to a revenue basis?

And then I guess contrasting that, the compensation and benefits line, that would seem to me to be still tied to revenue growth or the dollar revenue number as well as a bit of seasonality. Just trying to get some sort of color on how we should think about the progression of those two lines relative to the revenues?

I think you've got it about right, Brandon.

Okay, thank you. On the leasing side of the business, given the strength in Q1, any sense that there was any push of deals from Q4 last year into Q1 as people delayed -- maybe corporates delayed a little bit? Or is it really just continued momentum no matter what's going on in the economy, there's just enough business to be done there?

A little bit of that. One of the things in New York where we had a couple of deals come into the first quarter, which we had originally expected to be in Q4 last year, and they actually came in quite late in the quarter in a couple of cases. That's the financial capitals point that I made in the comments whereas the financial industry which has been most affected to date at least in the acquisition of new space or its willingness to acquire new space.

In general we're seeing corporates delaying a little bit, thinking more about their expansion plans. But you've got to remember that the decision to take space, whilst impacted in a sort of confident sense by short-term market conditions, those decisions are medium-term decisions for most companies. And they're having to think out, particularly busy city centers with relatively high levels of occupancy and low vacancy rates, they're having to think out two to four years, in other words think through the cycle and act accordingly.

So those decisions are not as instantly impacted as, for example, investment sales in the Capital Markets areas. We in addition have been investing in transactors. U.S. for example we've had 20% more transactors in our lease and tenant representation activities this year as compared to a year ago and we've been building in Europe and Asia-Pacific as well.

So we've been sensibly selectively acquiring good transactors to build our leasing and tenant rev franchises. And as a result of that we've seen significant gains in market share and Lauralee described those in some detail. So despite leasing markets, which in the mature economies of the U.S. are down between 8 and 17%, we have been picking up sales, picking up activity both in terms of footage and overall revenue.

Okay, thanks. And one final question. You made some earlier comments about the pace of new development relative to financing. Asking that question from a different perspective, have you seen a change in the pace of either approvals or disapprovals of new projects? I guess I'm just trying to gauge -- in general people think there is going to be a falloff in construction, but is it more or less than you may have thought three or six months ago -- looking out the next let's call it two years or so?

The pace of development of new real estate, in particularly the central business district, as I've said and we said continuously for the last year or so, despite the very healthy Capital Markets that we've seen and the very strong leasing markets, the pace of development has been very restrained.

And our impression as to why that is is that development lending is typically something which has not been securitized because it hasn't had a cash flow against it which could be securitized. And therefore right through the strong part of the cycle it's stayed on the balance sheet of the funding institutions or was syndicated amongst other funding institutions, but it stayed on balance sheet.

And so relatively speaking, the level of development activity was constrained and has not lead to date, and we don't think it will lead, to a kind of systemic worldwide glut which we have seen at the end of previous cycles. Having said that, even those balance sheet lenders, to Lauralee's point about Asia-Pacific, have become more conservative, they're taking longer to complete their underwriting, they're being more stringent in the terms and conditions which they'll put into term sheets.

So, yes, there is probably a slowing in development, but albeit from a relatively restrained level of activity. In terms of the way the market goes for leasing, for example, that's not unhealthy, it keeps markets relatively tight and stops rental rates from declining significantly which means that the tenant acquisition of space stays healthy, there remains a dynamic in that market, but it equally underpins any capital erosion in the investment sales markets.

And then final question. If you look back to late last year or so when your internal research folks were looking out at let's call it the next two or three quarters, anything in Q1 that really stuck out as a surprise, either good or bad, relative to what maybe your internal research expectations were?

I would say it's just consistent with my comments. I think the slowdown in Asia-Pacific has been a little bit more than expected. The impact of the financing markets -- which, to be honest, there's a lot of capital chasing transactions in that part of the world and it had been a frenzy. And I think buyers now get an opportunity to think more carefully about their choices. They're not going away, it just isn't quite at the pace.

Thanks a lot.

(OPERATOR INSTRUCTIONS). Josh Kuntz, O.S.S. Capital.

I just wanted to ask a quick question. Is there any way you can break out how much of the revenue growth was organic versus acquisitions or teams that were acquired?

Yes. Our acquisitions contributed on a global basis about 9% of our growth and organic was about 6%. The organic growth obviously in places like leasing was significantly higher than that, but when you throw the negatives of the Capital Markets against it that nets it down to the 6%.

Right. And is that organic growth? Does that include when you hire a whole team in a region?

It includes the eventual production from hiring a team. But teams typically take between nine and 15 months to begin to cover the cost and come on stream.

Okay. And is it possible to break --?

The costs are in there, but the revenue has a lag on it.

Right, right. Is it possible to break out the growth by region, organic and from acquisition?

What I can say is that the acquisition contribution in the Americas is very modest. The largest contribution comes from Europe --.

We could do that sum and take another question and just come back to you on that one.

Okay, great. Thanks a lot.

Will Marks, JMP Securities.

Thanks. Your last comment you started to make about acquisition contribution in the Americas is modest, you had mentioned that you have 20% more U.S. transactors. And I guess that implies that you have hired a lot of people from places like Trammell Crow and others. Is that accurate?

That's correct. We do not put those in acquisitions. Acquisitions to us are when we've actually acquired a legal entity, a partnership versus individuals or even teams. If they come over as teams and they're hired into Jones Lang LaSalle they are organic.

But Will, we're not talking thousands or even hundreds of people here, it's on the order of magnitude of 100.

Right, okay. I understand. And then on -- I guess on the cost issue one more time, are you -- you don't seem that concerned about costs and is it safe to say you're ramping up because you are -- ramping is maybe too strong -- but you expect future growth and this was not a huge surprise to you?

I would not characterize our attitude has not concerned, Will. We are very attentive to costs, but the word we used was actively managing costs and that's really an accurate reflection of what we're doing. We, apart from the Capital Markets area, are not seeing revenue declines anywhere. We're seeing the opposite; we're seeing continued healthy growth and you've heard the order of magnitude of 20 to 40% in some service lines in some market areas. And against that sort of growth you don't cut back in those market areas.

Capital Markets issue is something else. We believe that it's appropriate at this point to hold our teams together. We think that there is a useful chance, a good chance, that the debt markets will begin to sort themselves out at some point in the course of this year. We can't predict when. And as I think we've implied, it's not a real estate issue initially, it's a financial markets issue. So we're watching from our leading indicators the developments of -- in the Capital Markets as a whole.

But one of our priorities at this point is to make sure that those teams that we've built -- and remember, we've been very selective -- but our teams in the Capital Markets area are held together so that as markets turn and that will happen we're at a very low base at this point and at some point it will turn, we have the teams in place to benefit from improved market conditions.

And so what you do in those circumstances, we have flex compensation plans, which Lauralee has referred to. They help to a significant extent. But also, so does the way in which we apply those flexible compensation plans. And in regions where we have discretion we ensure that our best transactors, our best and strongest performers see the most attractive compensation and the reverse for the less stellar performers.

Okay, thank you.

Back to the question on growth from acquisitions in EMEA. It was about 13%. So what you can see is we obviously have the negative impact of the Capital Markets.

Just one more comment on what Colin has just covered. Yes, we have expense increases from acquisitions, but they are paying their way, they are not a negative on an operating income basis to the firm. They're neutral to modestly accretive. The power of what they will ultimately deliver to the firm in terms of once the purchase accounting burns off as well as the increase in market share we think is incredibly important. So that expense increased, although, yes, it doesn't help margins, it has not hurt profits.

And relative to the total firm's expenses, actually acquisitions are about 9% of the expense growth and in that I'm excluding India because that would be -- we merged that into our operations. No, actually I do have India in there, so I'm sorry. So that's about 9% of our expense growth comes from acquisitions which are just slightly above neutral on a contribution on a bottom-line basis -- if that's helpful.

At this time there are no further questions.

Operator, since there are no more questions we'll draw this call to a close. I'd like to thank everybody for participating today. I'd like to thank you for your continued interest in Jones Lang LaSalle. We'll be back again talking to you after the second-quarter results. Have a good day, everyone.

Thank you for participating in today's conference. You may now disconnect.