Jones Lang LaSalle Inc (JLL) 2009 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2009 earnings release conference call for Jones Lang LaSalle Incorporated. Today's call is being recorded. Any statements made about future results and performance or about by plans, expectations, and objective 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 reports on Form 10-K for the year ended December 31, 2008. And in other reports filed with the SEC. The Company disclaims any undertakings to update or revise any forward-looking statements. A transcript of this call will be posted and available on the Company's website. A web auto replay will also be available for download. Information and a 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. Thank you. Hello everybody. Thanks for joining us for this review of our results for the fourth quarter and full year of 2009 and I will say up front I have a cold and I will apologize for any unusual noises on the line. With me today on the call is Lauralee Martin our Chief Operating and Financial Officer. And Lauralee will review our performance in detail in a few minutes.

To summarize, we are very pleased with our quarterly adjusted earnings per share of $1.44, and our fourth quarter revenues of $815 million compared to $797 million in 2008. For the full year, adjusted EPS was $1.75 per share while revenues were $2.5 billion. These results are due in large part to the range of actions which we have taken during the past two years to right size our Business during the great recession and the worst market conditions in memory. We have protected our Business, held onto our best people, grown our market positions and taken market share in virtually every area where we can measure it. We have cut costs substantially while continuing to attract talented new producers to our firm so we are well positioned to take advantage of the coming recovery. Finally, we have strengthened our balance sheet and we are particularly pleased to have only $175 million of outstanding debt at year end.

While institution investors remain cautious, LaSalle Investment Management has continued to raise investment capital, attracting over $4 billion of net new equity for the year 2009. Before we get to Lauralee's review of operations, I will spend a few minutes talking about quarter four market conditions. A year ago real estate markets were universally bad. Today the situation we see is stabilizing and we are even beginning to see signs of recovery in some areas. We do see a very mixed situation in markets worldwide from strong growth in Hong Kong to continued declines in Russia. With different markets at very different stages of the cycle, there is no simple description that covers all markets so we will try to describe some common themes to you. In general, investment sales are anticipating recovery while Leasing Markets driven by supply demand fundamentals are still lagging. We have posted slides on the Investor Relations section of our website www.Jones Lang LaSalle.com for your reference.

Slide three shows the Jones Lang LaSalle Investment sales clock which offers a snapshot of conditions in major markets at different stages of the cycle. As the graphic indicates in the fourth quarter of 2008 capital values were falling virtually uniformly in all major real estate markets. As a global rule of thumb, values decline from 40% to 50% from their 2007 peaks and transaction activity slowed by 70% to 90%. A year later in quarter four, 2009, declines in value were slowing in all markets and prices were beginning to recover in some, including Hong Kong, Shanghai, Beijing, London and Seoul, with additional markets nearing the bottom of the cycle. By the year end cap rates in London and Hong Kong had compressed by 200 to 300 basis points from their worst levels. Leading the European recovery, investment sales in London bounced hard and fast. This activity has been driven by foreign investors attracted by cheap assets and weak sterling in a historically liquid market.

In retrospect the market appears to have decided that the 50% fall from peak values was an over reaction, once investors started to anticipate recovery markets bounced back quickly to correct the over sold position. Beyond London, Asian cities in red on your graphic are generally leading the way back in pricing and activity followed by some European markets in blue with the US markets in black continuing to lag. The result is that world cities are in a vastly different stage from continued decline to selective recovery.

If you will turn to slide four you will see the situation is less encouraging in Leasing Markets worldwide. As another global rule of thumb, rents have fallen by roughly a third from their peaks and Leasing activity has also declined by around 33%. Rental rates and Leasing volumes continue to fall year on year in quarter four. Reviewed on a quarter to quarter basis, the rate of decline is now slowing. It is interesting that in general the same cities are leading the way back in Leasing activity as in the investment sales markets. The trends in investment sales and Leasing markets effect both our advisory transaction business and obviously also in the environment in which LaSalle Investment Management operates. Finally the Corporate Out Sourcing Market has continued to grow during the last half year and we have continued to gain share in that market across all regions.

So with that as market background, I will now turn the call over to Lauralee.

Thank you Coli and good morning to everyone on the call.

If you will refer to the slides Colin mentioned, we have provided both the fourth quarter and full year financial information in a similar format to past quarters. Instead of walking through each page, I would like to focus on our 2009 financial score card on slide five. Earlier this year we projected that we would reduce 2009 discretionary spending for the overall firm by $50 million in local currencies. We, in fact, over achieved that target and reduced these costs by more than $70 million. Calculated on a local currency basis these savings represent a 33% year-over-year reduction coming principally from travel and entertainment, professional fees, marketing and training expenses.

We took actions across all of our businesses in each region of the world and are proud of the focused efforts by our people to take action early and maintain that cost discipline throughout the year. The reduction in discretionary spending together with staff reductions globally reduced our cost base and allowed us to deliver an adjusted operating income margin of 6.6% for the year which was consistent with 2008 despite significant revenue declines in our higher margin transaction businesses. We are pleased with this profit performance for the year against the severe market deterioration we faced. I say pleased but not entirely satisfied which I will touch on with our 2010 priorities in a few moments.

In terms of revenue performance, our Corporate Solutions businesses capitalized on our market leading positions and delivered strong growth in annuity revenues. We secured over 75 new wins and expansions resulting in an additional 170 million square feet under Management. Colin will discuss a few of our recent Corporate Solution wins shortly.

Throughout the year we strengthen our financial position, our successful equity raised in June along with our strong cash generation and discipline capital spending contributed to a $334 million net bank debt reduction for the year. Despite the global economic downturn, we maintained our investment grade ratings. These ratings are important proof points to our clients who select us as long-term partners, our banks who continue to be great supporters of the firm and our employees who want to work for a financially strong Company.

If you will now turn to slide six, I will focus on some highlights in each of our reporting segments. Our America's Leasing results which include both agency and tenant representation transactions now reflect a complete year of the fully integrated Staubach merger. Leasing was up 20% in the fourth quarter demonstrating the strength and momentum of our combined organization as we capitalized on marketplace -- the marketplace adjusting leases to the new occupier needs in market rents. The Americas also completed its conversion to a full-commission Leasing model. With that flexible model they are successfully upgrading talent, adding market leading brokers, replacing less productive brokers, and adding brokers in new product capabilities such as industrial, for a net new add of 35 brokers. Our success in expanding our Corporate Out Sourcing business is proven by our Property and Facilities Management revenue being up 25% for the quarter, 15% for the year. Providing a solid and predictable annuity revenue base going forward.

On a less positive note, our Capital Markets business in the Americas suffered from record low market activity levels during the year. We have made significant cost cuts to right size the Business to current market conditions and to improve profit performance in 2010. In EMEA, 2009 was a financially challenging year due to the significantly reduced transaction activity in the marketplace. We took early decisive action to stabilize our business in developing markets such as Russia and Dubai, which proved most challenged by the economic downturn. Despite aggressive downsizing we have been able to maintain a dominant market presence while some of our competitors were forced to close share doors. As several of the mature markets look to have a slower recovery horizon we did take additional severance actions in the fourth quarter to be better positioned for 2010. Across the region we anticipate nearly 60 million in annualized based compensation savings while still achieving a seven month pay back on the restructuring costs we have incurred.

We have begun to see markets stabilize in select countries. In France, although over all not 2009, Capital Market volumes were down 40% compared to 2008, we are very proud of our Capital Market's team who doubled their market share to nearly 20% of volume transaction -- transacted and moved to a number one position from number three in 2008. We are also pleased to have market share gains in the UK where property values are beginning to show for signs of recovery, result resulting in a pickup in our Capital Markets activities. In Asia Pacific agressive Government Stimulus programs helped certain transactional markets recover late in the year. We leveraged our prior year's investments in China resulting in 20% year-over-year revenue growth in the countries. We successfully grew our annuity revenue across the region achieving a 50% revenue mix in 2009, up from approximately 40% in 2008. Our Property and Facility Management businesses grew 30% for the year, 16% in the fourth quarter. As a result of an expanded Corporate Out Sourcing presence and particularly good growth in Australia. Our focus on right sizing our cost based also contributed significantly to the improved profit performance for the year.

LaSalle Investment Management maintained its advisory revenue at $60 million for the quarter and continued to deliver a healthy margin on that annuity fee stream. Unfortunately their portfolio was not immune to worldwide valuation declines and we took nearly $50 million of impairments during the course of the year. We believe impairments are largely behind the business though we could experience some additional charges in 2010, as markets continue to correct themselves. In a very challenging year for raising real estate capital using their reputation for core and value investment performance, LaSalle successfully raised over $4 billion of net equity across their broad capabilities gaining commitments in separate accounts, funds and public securities. Investments; however, were limited during the year as LaSalle remained cautious in the mist of market uncertainty.

Turning to the next slide as we conclude 2009 and look ahead to 2010, we expect as Colin has covered, that economic recovery will vary country by country, market by market and even product by product. Against this outlook we are solidly position to react and capitalize as opportunities unfold. We will continue to focus on maintaining our cost discipline while selectively adding and upgrading talent to build our global capabilities and grow our market share. We will continue to build our annuity revenue growth momentum and expand our leadership position in the Corporate Solution space. We plan to leverage LaSalle Investment Management's global scale and buying power to grow our position in the market while delivering performance for our clients.

Let me now turn the call back to Colin to discuss some of our recent wins and accomplishments.

Thanks, Lauralee, to add to the point, Lauralee made about our number one position in Capital Markets in France, we heard this morning we gained that position in the UK market as well. A well done to our European Capital Market's team. To give you a sense of the opportunities in today's markets and to show how well our people are taking advantage of them, slide eight shows examples of recent business successes in our Corporate Solutions business. Highlighting a few of these wins, Cisco Systems renewed and expanded our global partnership. We also established new multi region relationships with JDS Uniphase, AstraZeneca, SAP. There was a landmark early in January when we were awarded our biggest ever Corporate win in Asia Pacific, Telstra, Australia lending telecom company awarded us a long-term contract to manage their portfolio of 27 million square feet across Australia.

Turning to investment sales on slide nine, in Asia Pacific we closed the year's largest transaction in Japan and probably the world with the acquisition of Pacific Century Place in Tokyo, we also advised on the largest transaction Australia in more than a decade the AUD685 million sale of RBS Tower at Aurora Place in Sydney. In Europe, we advised on the sale of the Silverburn Shopping Center in Glasgow for just under GBP300 million, our German and Pan European teams advised on the sale of the A10 Shopping Center south of Berlin and that was for EUR200 million. In the US during the fourth quarter we represented Brandywine Realty in the sale of two class A office buildings in New Jersey for $85 million. You may notice a reappearance of more and more sizable transactions than we have seen in previous quarters, a sign of market activity.

On slide 10 you will see highlights of our Leasing and Tenant Representation business including being appointed by the Metallurgical Corporation of China as sole Leasing Agent for its 600,000 square foot landmark office building in Beijing. We also valued MCC's portfolio when it was IPO'd last year. Our market leading India operation won more than 1.3 million square feet of tenant representation and project management work for clients including Deutsche Bank, Lenovo, Sony, Mercedes Benz and ExxonMobile. In EMEA our Czech office recently acted for PSJ in the countries largest deal of 2009, letting 390,000 square feet at Main Point in Karlin. In the US, two years after relocating United Airlines headquarters facility in Chicago we completed the largest relocation in Chicago history by relocating United's operation facility to 460,000 square feet in the Willis Tower, formerly the Sears Tower. In New York we represented the landlord as law firm Paul, Weiss renewed its lease at 1285 Avenue of the Americas. It was the largest lease transaction in Manhattan for class A office space for last year. So these are indications of our clients getting back to business again and spending to the limits of their budgets.

As we mentioned on our last call earlier in the fourth quarter LaSalle Investment Management launched the LaSalle Property Fund, an Institutional Open-Ended Fund that will invest in core assets in the US. Anchored by a major State Public Pension Plan the fund quickly raised $1.5 billion in equity. This same public pension plan also retained LaSalle in 2009 for a second mandate funded at $200 million to advise on a number of pension funds, special situation investments. We expect this fund, that is the open-ended fund to grow significantly over the coming years. For the first time in many quarters, we believe that the forward market picture offers some clarity. We will attempt to give you some indications of our market around the world. Starting with investment sales, currently there is plenty of equity in world markets and bank financing is beginning to be selectively available again, generally, investment sales continue to anticipate broader recovery in fundamentals by some 12 to 18 months.

Looking regionally, investment sentiment is fast improving in Asia Pacific, although 2010 transaction activity will still be below 2008 levels but cap rates will stabilize in 2010 with some markets already reached bottom and others doing so early in the year. Prices in mainland, China and Hong Kong are rebounding driven by global investors selling to local buyers and by freely available credit despite the Bank of China's recent tightening. Volume will rise everywhere in Asia except in Japan in 2010 and transaction levels could be up by 40%. In Europe, we have a two tier investment market in prospect this year. Cap rates will continue to compress with the best markets like London and Paris seeing continued movements in values due to lack of stock. Non-prime markets will remain relatively weak with pricing reflecting the weak fundamentals more accurately that in prime markets. In 2010 transaction volumes are expected to increase by at least 20% in Europe. There will be more limited, more transparency in the CMBS issuance than we saw in the end of 2009 and banks will be lending cautiously on core space. Recovery in the Americas is expected to follow the patent seen in other regions but just lagging by six to nine months. Indicators suggest that investment sales volume will begin to increase in leading US cities during the second quarter of 2010 with sales transaction activity overall expected to increase 50% for the full year. That is obviously off of a very low base. We anticipate a tentative return of conservatively based CMBS issuance helping real estate finance and refinance with volumes totaling less than $30 billion for the year. Cap rates should be firmer and prices more transparent as we progress through the first half.

Finally, continued dislocation in the US Banking System will continue to restrict real estate finance more than in other regions. In leasing Markets on the demand side, companies have liquidity, corporate confidence is recovery and companies are beginning to take decisions, again, supported by an improved operating environment and greater economic certainty corporate occupies will begin to take decisions on their space needs and they will likely spend to the limits of the capital and expense budgets in 2010. Employment is just beginning to bottom out worldwide. Net Leasing declines will continue in Europe with rents falling or at best holding in key markets as occupies remain in cost cutting mode. Exceptions to this will include firmer Leasing Market activity and pricing in West London and Paris. However, office vacant rates won't peak in will late 2010 at the earliest. Stabilization and a return to genuine demand growth in US Leasing Markets is not expected before 2011. The picture for Corporate Out Sourcing is encouraging, our pipeline of indicator is just as strong now as it was a year ago and we are pursuing the same number of opportunities. We also found that in 2009 average revenue for new business contract was nearly 60% higher than in 2008 , a further encouraging trend. In global investment markets we see institutional money flowing back into stable income producing core assets in most parts of the world, this is being driven by relatively attractive yields compared to other investment classes and by institutions maintaining their allocations to real estate. We give you that summary of world markets to give you a feel as to how we are thinking about the planning purposes of our business in 2010. Given how varied market conditions are, we have three operational priorities. Lauralee referred to these.

First, continued caution everywhere, second, as we described we will continue our approach to tailoring the Management of our business to conditions in individual sectors, geographic markets and product lines and finally, we will continue to take actions which will build our margins and market share.

In closing as always, I will talk about awards and recognition, just one this time but a very important one. In November, Procter and Gamble named us their supplier of the year. That's one of seven firms to win the honor out of their 80,000 suppliers worldwide. This is the second consecutive year we have received this distinction and it was also the second year in a row we were recognized with a Corporate Supplier Excellence Award by Procter and Gamble. So to conclude markets overall are finding a bottom and have definitely improved over quarter four 2008, we sense the tone shifting from defense to offense and we are ready for that. We will continue to focus on costs protecting the savings we generated through the downturn and using them to invest in select priorities during the recovery.

Finally this morning Lauralee and I would like to thank all of our people many of whom are listening to this call. We would like to thank them one more time for the terrific job they did last year. Through their contributions and sacrifices through the year, they have positioned our firm for a bright 2010. Now, let's move to questions. Operator could you explain the process

(Operator Instructions). You have a question from the line of Kevin Dougherty with Merrill Lynch.

Question on margins. The adjusted EBITDA margin contracted year-over-year with 2% revenue growth this quarter. If I look back on 3Q, margins actually expanded year-over-year on a 12% decline in revenue. I want to see if you can reconcile that and talk about how you can think about the leverage and the model going forward assuming we continue to see modest revenue growth over the rest of the year.

Kevin, that's an excellent question. I think one of the difficulties is that we are getting different rates of recovery across our lines of businesses and so you are not getting a complete expansion which would give you more of a predictable margin expansion so depending on which parts of the world that will come through very nicely or different product types, it will come through nicely as well. We did have parts of the world, particularly if you think about Asia where we saw very nice recovery in the fourth quarter where all of the sudden bonus pools that may have been fairly minimal will come into a funding capability and even some of those dynamics in Europe. You will get some movements that are not a normal quarterly progression. We still have parts of the world in that recovery where we had little to no improvement, Capital Markets, for example, we did not see improvement in the US. We have not even improvement in some of the developing worlds like Russia. There is a lot of mixed change in there. We do believe that as the world gets into a more stable and improving environment across the board, the leveraging will come through. We have worked hard on the cost models and moving our compensation structures as well such that the benefits of the market recovery will be showing in the financial results.

I appreciate that. Maybe just switching to the revenue which came in I think much stronger than the Street was looking for. Could you talk about what you viewed as being the biggest surprising relative to your internal expectations and how does that reconcile as you looks out over the rest of the year relative to maybe what you thought a quarter or two ago.

Kevin it is nice to be in the phase of our cycle and surprises are on the upside. That is an interesting indicator to what we have to where we actually are. The biggest surprise to us was the Asia number. I wouldn't use the word "shock" but it was close. It reflects the points we are making in the Market comments just how strong Asia is recovering and it feels like a V shape recovery in Asia, whatever it is in the rest of the world. If you talk to our businesses in India, China, across the region, Australia, we are seeing a strong bounce in confidence against the market where the banking system is in great shape and they are generating internal demand to add to a small bounce back in export demand from western companies. If the Asian region which surprised us most on the upside are pleased with the strength of the American business and the way it came through nicely in the fourth quarter.

And then maybe just the last question, can you talk about your comfort level with the leverage ratio of the Company as it stands right now and what would be your priorities for a continued debt repayment over the rest of the year?

We are very, very comfortable with where we are financially, we ended up with only our term debt at the end of the year, very strong pay down in the fourth quarter on a cash basis. We do pay our bonuses on the fourth quarter so our debt will go up again. We are extremely comfortable in our ratios. We did raise equity as you know in June because at that time the world seemed very, very uncertain. We are still very pleased that we did that but we would have been able to have stayed within our covenant ratios even without that which gives you an idea of the strength of where we are today and the investment grade ratings, we think that is an external statement of our financial strength as well.

Okay. Thanks for taking my questions.

Your next question comes from the line of Sloan Bohlen with Goldman Sachs.

Just a question I was hoping you could expand a little bit on our comment on growth in market share and specifically with the growth in the US Leasing, wondering if you can touch on how much of that was new business through the integration of the Staubach acquisition and how much of that was a pickup in activity?

Well, the market from memory me, the market overall is down by 20% in the regions we were present and we caught year-on-year we were up by a similar figure. We picked up significant share we believe. The markets clearly are not very active. You have to say the result of the benefit of the hard work of our people and we believe an increasing level of revenue synergies between the Staubach, they learn to work together and benefit from each other's skills.

Maybe switching gears, if you could talk a little bit about the fund raising environment for Investment Management. Can you talk a little bit about how co-investment levels or what investors are requiring has changed versus during the last cycle and where your balance sheet allows you to come and invest growing forward as you grow that business.

I think the capital that we raised this year we raised really across the boards. We raised in securities. That doesn't require co-investment capital. We raised in separate accounts. We, in fact, put co-investment against that. That's principally core asset classes we are doing. We did not have a difference in historical co-investment as we did that activity and then we have done a small amount of funds as well. Again, I would say the more typical co-investment that went against that. I think it is a little early to know how that marketplace is going to play through. I think probably more likely the pressure will be on fees and structures of how advisors get paid when the market becomes more robust. We were pleased that we raised $4 billion in a very difficult mess. That is a a net number. On a gross basis we raised more than that and in all three categories of which we have provided advisory advice.

Maybe just a broader comment about the equity that is out there looking for opportunities. Do you get the sense that most of it is chasing core product or maybe is there a split between those chasing core versus value add? Get a sense of how that can play out in the market.

Whether you are talking institutional investors or (inaudible) individual, people got so burned and shocked by what happened in the last 18 months and two years, where there is appetite for equity is towards the core lower end risk of the core, in general, that is the case of the institutional investors. To add to the point Lauralee made, who don't have a regular strong steady cash flow, currently are not looking to put money out in any asset classes because they have -- with their sort of limited overall pie, they are kind of recovering from what has happened over the last two years. Pension funds who have a steady inflow of cash, they have a need to place investments, there is a market there, they are being cautious on illiquid sectors and going for liquid sectors for preference our since is that real estate is holding its allocation and therefore what you will see is that money coming into real estate gradually finding its way back into the real estate sector.

Thank you.

Your next question comes from the line of Michael Mueller with JPMorgan.

Colin, first of all going back to your comments at the tail end when you were talking about the different regions and specifically the Capital Markets activities and the expectations for 2010, were those general transactional comments relating to the market or was that more focused towards JLL where we think revenues could be X.

They were market comments. We don't make specific forecasts about our own position. My point I also made that's the context in which we are thinking about our business.

Sure. Secondly, maybe translating that a little bit to Leasing, can you talk a little bit about the Leasing business? If we take a look at the comps and I know the Americas is a little different because of Staubach. If we take a look at what the year-over-year local currency comps were from Q3 to Q4, there was pretty significant improvement that you saw in Europe and Asia. Can you talk a little bit about what follow through you were seeing in 2010. Does it feel like those Q4 numbers were a little bit of a blimp or it was a pickup in business and not bumping against better comps.

The year on year numbers, 4Q last year to 4 Q2 2008 were down, the rates were declining slowly. The quarter numbers are up in deed. That you have to take with caution because those are regular annual seasonal trend that you see, fourth quarter in all of our activities always shows a strong or even storming up tick on Q3. You have to combine those two together and take a view through them. As to what was driving that, I made the comments on the market as a whole, our clients are regaining confidence. Whether it is undertaking decisions. We now see our forward picture. We know what space we will need. We can start to consolidate. We can start to lengthen leases. In some cases they are expanding. You see some major banks who have difficulties out looking for hundreds of thousands of square feet of space currently because they want to consolidate. I think that trend is going to continue, trend of more decision, more decisiveness, more action on the customer in this department and comment on the first 33 days of this year. Our sense is that trend as a broad market comment, as a broad cyclical trend, that trend is likely to continue through the year.

Just one more comment, if we look back on comparables, probably the two devastating quarters were the fourth quarter of last year and the first quarter of this year. So so the fourth quarter of '08 and the first quarter of '09 and the second half of the year has started to see the confidence that Colin is talking to. We have the seasonal piece in there and we have some abnormal quarters that we are comparing to and we will probably have one more of those until it starts to look like a -- a relatively normal sequence of marketplace events.

Switching gears for a second, the Facility Management Property, Management growth, can you talk a little bit about the drivers behind that and put numbers behind that and put some numbers out maybe an example, the 25% or 20% growth, today you have X number of combines compared to last year, was there a difference in pricing, put some parameters behind it in what is driving the growth.

What is the driving the growth is the same dynamics, companies are looking to lower their cost base by putting their facilities out to Professional Management, same logic as you see in information technology. That coupled with a trend towards the non US part of the market, Europe and Asia Pacific, also picking up these Corporate trends, we talked about Telstra win in Australia. We had several large new pieces of business across Asia Pacific, there with international banks and US multi nationals. We are seeing European companies, a couple of big Dutch companies I can talk about and French organizations looking to follow the same trend and professionalize the Management of their facilities. That's the general background in terms of numbers as Lauralee said, we secured more than 75 new wins and expansions last year and that gave us an additional 170 million square feet under Management and that ads to our total of 1.4 billion of total feet under Management.

Last question, can you talk a little bit about -- I guess when we take a look at by geographic region and segment and including Investment Management margin expectations for 2010 versus 2011 -- I know you don't put guidance out there and appreciate that -- are you operating under the scenario where you think the expense ratios are comparable or if we see the pickup in Capital Markets you are talking about maybe a good scenario is margins improve by a couple hundred basis points. Can you frame out what you think the base case is, high end and low end?

We are below the margins of our historical business and we are below the margins that we targeted for you in the past, particularly if you think about EMEA where we are significantly under historical margins. The answer to how those come back will be the pace of the market recovery. If we think about the US, we are very pleased with the dynamics happening in the Leasing markets and the annuity businesses but our Capital Markets business is not a contributor at this point in time. EMEA being strongly transactional both on Leasing and Capital Markets, definitely not performing on a normal trend line. You don't have to go back to the peak but on a normal trend line as well as having a couple of tough developing markets that we have identified throughout the year such as Russia where we have had fairly extensive losses and now because of right sizing it have brought it back to an operating expense level where we can perform at a break even or better even if the market doesn't improve. I would love to give you an answer, it is really the pace and it is the pace of where it happens which is really the message we are trying to say. This is not an even recovery. Globally, country, product line but each of our businesses have been charged that we have a good cost structure now and we expect as your markets come back to normal to get to historical margins if not better margins than what we have had in the past.

Appreciate it.

Your next question from the line of David Gold with Sidoti & Company.

Was hoping, Lauralee, you could frame out a little bit more than the cost cuts. Essentially between discretionary and non discretionary, we have about $170 million or so in '09. Wanted to get a better sense as business recovers, as revenue recovers, how much of that presumably needs to come back -- obviously scale is revenue comes back versus how much of it, cost cuts is being more efficient and having changed the model a little bit?

Well, everything has been lien down but there is no question that when business activity picks up, people travel more to go see clients. They entertain more because they can trance slate that entertainment into revenue more quickly. In LaSalle Investment Management as the lawyers prepare new fund documents and things like that. So it was taken out more dramatically than what it will come back but there is no question that you will want to see some increase in those expense lines because that is a good sign that in fact, there will be revenue growth and a leveraging of that business going forward.

So I guess is there -- is there a good way to think about that by way of in other words, 20% of it is you folks being more efficient and sort of the rest of it is a function of business coming back or can you give some sense of gates around that? I know it is hard.

We watch -- we watch our total compensation costs to revenue quite tightly and clearly we will be watching that very closely as we think about where we think about where we want to put people back in. So -- then people drive every part of our business. If you add a person, then you need technology support and there is some travel that goes with them. But there are parts of our business such as most of our facilities that, in fact, we will crowd people back in and get leveraging around that until it goes through. At the end of the day, we are a people business, David and we are going to watch the productivity of our people and manage that as aggressively as we can.

One other, positively surprised by the facilities side of EMEA between project development and Facilities Management, curious if you can comment if there is anything specific, any large projects in there?

There is. We made an acquisition in France which is a project and development business that has performed extraordinarily well and it is one of the contributors to the market share gains we talked about in France. We have successfully been integrating the products which is a theme of Jones Lang LaSalle I think in our uniqueness in going to market that we integrate the different services we have and the combination of those become more appealing to the marketplace. We have had a healthy growth in that business even though activity levels have been down even though we have been able to adapt to the owners as they want to make their space more attractive and as the occupier come in, be able to provide them the space.

Thank you.

Your next question comes from the line of with [Decram] [Mahocha] Morgan Stanley.

Colin, just one question looking at your priorities for 2010, you mention one of the priorities is to build annuity revenue. I'm wondering are there any particular regions you would like to focus? You mentioned Europe is transaction activity. Is that a region you are focusing onto build the annuity base.

Yes is the answer. We have a great job in Asia Pacific of building a corporate and annuity based business around our facility and management for investors and growing the facilities. That is a model which we are working on bolstering. We have activities in Europe. We are bolstering our Corporate business in Europe. We have been investing behind that.

And then just one follow-up, related to you have seen some strength in some of the Leasing Markets. I know it is still lagging. Would you -- would you like to see an impact on the project development side of out sourcing as things pick up especially in Q4? Over the next couple of quarters?

Couple of quarters maybe a little optimistic from the project development side. It does follow, obviously up tick in activity does drive some more project work. The delays could be up to a year is our sense.

Thanks. Thank you very much.

Your next question comes from the line of Will Marks with JMP Security.

I want to ask first on your comments regarding the Capital Market growth in 2010. I thought I heard you say activity could be up 40% but still below 2008 levels.

That was for Asia Pacific, I think.

In looking -- I know you are referring to the market in general -- but it seems to me 40% growth would put you well above -- JLL well above 2008 levels. Is it just that you performed so much above the market in 2009?

That comment was aimed at the Asia Pacific region. We think the rates of market will vary by market and the biggest jump by 50% in the US market. Our representation in the US is obviously very small. The critical thing for us is what happens in Europe. The market could move up 20%. There is a mixture of things there. What has happened in London the volumes have been quite strong and Paris. We picked up significant market share in those tough recovering markets. With the lack of available product to be sold in London in particular, but Paris as well, sellers wait for the market to recover even further, stabilize in those markets but then gradually the pickup spreading around Germany, Holland and other parts of northern Europe. There is a lot of moving pieces there and what we tried to do -- our researchers are saying we believe the total European market will be up. It will be of the order of 20% with the use of having gained market share in 2009.

Thank you. Next question was -- that I have is really on the operating expense line. I'm wondering, the one number that really stands out -- there were all sorts of great positive figures -- but the one that was surprising was the operating administrative and other line of $184 million for the fourth quarter. It was a big jump over the previous three quarters and a big jump over the fourth quarter 2008. I realize your revenues have turned the corner. Is there anything in that number that is one time or is this a run rate going forward?

Actually in that number, will, it is geography, as we normally do, we establish reserves for any form of bad debt. In our operations. The last two years actually, have been very abnormally challenging years in that area whether it is landlords that decide not to pay or can't pay or developing markets such as a Russia or the middle east where they can't pay or have a different view of debt obligations than other parts of the world. We did take additional reserves in the fourth quarter for that. On a year-over-year basis and we disclosed all of this in the K when you are able to see the schedules on our reserves but if we look at it fourth quarter over fourth quarter, that was about $9 million on a variance. It gets off set in compensation almost completely because unfortunately for our colleagues, -- if their revenues aren't collected, they don't get paid. It doesn't completely true up if you are in a country such as Russia where there is no compensation in terms of bonuses to get it become but most of it gets adjusted back. There is also a little bit of a percent improvement in the compensation in the fourth quarter that really shows that degree gaff if I can movement if that's helpful. We think at this point, these are receivables that were significantly earlier in the year and our people are extremely careful as they go forward because the pain it it puts in their personal pocketbook as to who they do business with and how quickly that money gets collected and we think this should not be a big issue going forward.

And if we think about -- (inaudible) this is bordering on guidance so answer it however you want -- the first three quarters -- getting back to the $184 million number, should we expect to see that in the first three quarters of next year or anything close to that?

Will, it is hard for me to give you that answer on a dollar basis even if we did give guidance. We tend to manage things on a relationship to revenue. That's how it correlates generally. You will have movement around things like travel and entertainment. You will probably not have as much movement around things like training. That will continue to be slow with us needing to do what we need to do but not excessive. There will be movements in it but we will be managing that line in totality very aggressively as both Colin and I have said in this call as we go forward and our instructions to our people worldwide is we really want to hold expenses very close to flat in those categories. We will revisit those as we see revenues take their course whether it is first quarter or second quarter and then determine where we have more confidence in terms of being able to commit to expanding those areas.

Let me just ask a couple of other quick questions. You mentioned you will have your normal increases in debt level in the first quarter. How should we think about that relative to the first quarter of '09 and I assume you paid bonuses a little later in '09 than normal. Will that happen in 2010.

No, we will be paying bonuses in the first quarter. You can see our accrued compensation on the balance sheet. You can see it is fairly comparable to last year. We will be paying off that compensation off set by normal receivable collections which will result in the net number. We will continue to be aggressive on our CapEx expenses we were just under $45 million this year. We plan to be about the same kind of number next year. Co- investment takes its course as LaSalle Investment Management invests but they have been cautious in that. Although we hope to see that money go out in the first quarter, it will probably be in the second half unless they see more opportunity coming through quickly.

There is a short-term liability, the deferred business obligation of 106 million. That's money you will pay from Staubach?

Yes, we have our first installment for the Staubach transaction that we hope to pay in July -- August. August.

One final question, on the discussion in [Trade Rags] about the [CalLee] portfolio can you quantify the size of that, I realize you are not probably willing to give that much information. If you can tell us a little bit about what is going on with calipers and Cal Lee?

Calipers has been very public that they are advising their large visors. We like the others are under review. They have also requested that their visors make no comment during the review about the review so therefore, we can't make a comment. Relative to Jones Lang LaSalle, however, on a financial basis. Unfortunately the valuation changes that have occurred in the portfolio have resulted in us already having lower advisory fees in our operating results for at least the second half of the year and historically this has been an account where our biggest opportunity was incentive fees. Relative to incentive fees across the board, we have advised we don't expect incentive fees in any magnitude in any accounts in period of time until we see marketplaces stabilize and improve. I guess that is a sort of a comment that says that financially, it is already hit -- the majority of it has already hit our financial results in what you are looking at.

Thanks, Lauralee.

Your next question comes from the line of Brandon Dobell with William Blair.

You talked a little bit about the out sourcing business relative to 2008 and the average of a new deal size being up 60%. Following on that comment, have you seen an increase or decrease, I guess, in terms of leveraging those out sourcing agreements into follow on business and transaction Management, either sales or Leasing or are you seeing a greater tie between different parts of the business and if you can compare that now to where you were in 2008 , that would be helpful

Thanks, Brandon. The trends we are seeing firstly, the overall size is going up. One of the reasons for that is global out sourcing away from regional or national out sourcing and the drivers of that are an increasing by companies that -- who are multi nationals, international businesses that if they go to get trouble without sourcing to save money. The ultimate way to save is to have a uniform provider giving standardization, easy comparability of results and a more even process throughout their business. It is a lot easier to deliver that when dealing with one global provider as opposed to two or three. The market gets quite small. There is a handful of players who are able to operate in a global way. We put that together with the other tests they apply around ethics where we score very highly. You may remember we have been named as the 100 most ethical companies on a world basis. They look at our financial position and as Lauralee said that is above reapproach. We think those are some of the drivers for the reasons we have been seeing such good trading in that area. We see no break in that trend or in our performance. As to the point you made about other services, whenever we go into a new account, we will go in for one service. Once we are there, we then work to expand the relationship with that client and we believe that to our interest, obviously and in the client's interest because we have great confidence in the quality of our services across the whole platform. Yes, we start to move it up and increase the number of we have in the boxes against that client. We will move from facilities to projects to transactions to lease Management to portfolio advice and we have no set pattern for that. It depends on how we start the decline.

Shifting gears a bit, fourth quarter Leasing, any sense of how much of the upper performers of the strength in the quarter either kind of a catch up or let's get things done before year end or is it a true shift in confidence that is driving a higher sustainable base level of activity?

I think all of the above.

Okay.

More confidence, higher base level. There was no urgency at the end of '08 to get anything done. Nobody was taking a decision in Capital Markets in Corporate Leasing space. We had a complete freeze of the markets in six months, Q4 '08 and Q4 '09. Now people are taking decisions. Results are coming through very well in sectors. They manage to get their liquidity sorted out and people are moving on and working out how to get back to normal business again. That enabled the usual year end pressure to come back into the market to get things done on the '09 budgets. Within that, we saw particularly in America, large transactions. That was responsible for Al healthy proportion of what we did in the US. That is encouraging too. That means the larger deals were also back in the market.

Finally, just a couple of housekeeping ones. Lauralee, how should we think about D&A and the tax rate for 2010? General comments there?

The depreciation level in the fourth quarter is fairly close to a run rate. At this point I think you are aware that the majority of the Staubach amortization fell off mid year. There is some that will run through. It is a modest number that runs through a period of time. The balance of the depreciation tends to be in our technology areas and we will have sort of a normal run rate there. The tax rate in the fourth quarter did increase to about a 23% level due to the nice rules in the fourth quarter, coupled with really a significant change in mix about where things happened. We have guided that -- a more normal run rate for us is in the 25% range. I would guess in 2010 we will run between a 20 and 25% run rate. It is still to be determined where we see our income around the world comes from and how that blends.

You will have trouble if you associate Lauralee with housekeeping.

Not a good way to put it.

Better choice of words next time.

Dully noted, Thank you.

Are there any more questions, operator?

There are no further questions.

Well, we will respect your time and draw the events to a close today. Thanks everybody for joining us on the call and for your interest in Jones Lang LaSalle and we look forward to speaking with you again at the end of the first quarter. Thank you, everyone.

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