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Jones Lang LaSalle Inc. (NYSE:JLL)

Q4 2008 Earnings Call

February 4, 2009 9:00 am ET

Executives

Colin Dyer - President and CEO

Lauralee Martin - CFO and COO

Analysts

Mark Biffert - Oppenheimer

Vance Edelson - Morgan Stanley

Will Marks - JMP Securities

Michael Mueller - JPMorgan

David Gold - Sidoti & Company

Brandon Dobell - William Blair

Operator

Good morning. At this time, I would like to welcome everyone to the Jones Lang LaSalle fourth quarter Earnings Call.

Mr. Colin Dyer, you may begin your conference.

Colin Dyer

Thank you, Bradley. Well, good morning everybody and thank you all for joining us for this review of our results of the fourth quarter and of the full year for 2008.

Joining me on today's call from Chicago is Lauralee Martin, who as you know is our Chief Operating and Financial Officer. Lauralee is going to review our performance in detail in a few minutes, but to frame the discussion here are some highlights.

Our full year 2008 revenue was $2.7 billion equaling the 2007 total. Revenue for the fourth quarter was $797 million compared to $862 for the fourth quarter of 2007.

Net income was $84 million in 2008, or $2.44 per diluted share of common stock. Net income in 2007 was $256 million, or $7.64 per share and that figure in 2007 you'll remember included a significant advisory fee in our hotels business. Net income for the quarter totaled $41 million, or $1.17 per share. Net income for Q4 2007 was $105 million, or $3.16 per share.

Now we produce these results in a dismissal economic and global real estate market. In a quarter which saw major shocks to financial markets and to business confidence. The global economy contracted at an annualized rate of minus 2.9% in the quarter, the sharpest decline since the IMS started measuring global GDP in 1990.

The financial crisis has vastly reduced the availability of credit around the world and has had a negative impact on all asset prices including commercial real estate. Preliminary data from Real Capital Analytics indicates that the value of commercial real estate transactions fell 80% in the fourth quarter compared to the year prior and the total 2008 transaction volume was down 59% compared to 2007 levels.

Finally office markets around the world are experiencing higher vacancy rates, low leasing volumes, weak net absorption, and negative rental growth. In our US target markets gross absorption was down 14% from 2007 to 2008. In Europe 2008 gross pickup was 12% down on 2007 volumes and these declines accelerated throughout the year into the fourth quarter.

So faced with these challenges we nevertheless maintained our revenue levels in 2008, we delivered a profitable fourth quarter and full year and continue to take market share from competitors across our businesses in the corporate service, leasing, capital markets and investment management markets. We did this by focusing very closely on our clients and on their needs and benefiting from the markets move to quality suppliers in troubled times.

We have also been working to take new opportunities, which have been created by deteriorating markets. And finally, very importantly we have focused closely on collecting our receivables and on reducing our cost base aggressively. So with that introduction and to go into the detail of our performance by region, let me turn the call over to Lauralee.

Lauralee Martin

Thank you, Colin and good morning to everyone on the call. To provide more visibility into our results, we have posted slides on the Investor Relations section of our website www.joneslanglasalle.com for your use and reference. I will use the slides just a framework to discuss our results.

As covered by Colin, our 2008 GAAP net income was $84 million, or $2.44 per share. Slide 2, provides a bridge from our reported GAAP earnings to our adjusted net income for 2008 of $127 million, or $3.71 per share. We discussed in our third quarter call purchase accounting rules for the Staubach acquisition, prevent us from recognizing certain revenues related to what is referred to in the industry as second half lease commissions.

For the year this totaled an exclusion of $21.6 million of revenues, which would have contributed $7.3 million of net income. We did receive the cash from these commissions, which benefited our debt pay down activity. We remain very pleased with the financial and operating benefits of this acquisition.

On a like-to-like basis, including the 11 days of the second half of 2008, the Staubach was not in our results, as well as including the second half lease commissions, the Staubach organization achieved flat revenues year-over-year. This was accomplished despite the energy of the acquisition, transition, as well as the current more challenging market environment. Commencing in 2009, we will no longer be reporting Staubach revenues separately.

In the fourth quarter, we accelerated our staffing actions in response to the significant slowing global economy. For the year, we have taken $23 million in severance costs and continued to achieve an expected payback period of six to nine months, depending upon global occasions. These savings will benefit our 2009 performance.

Total restructuring charges in 2008 of $30.4 million on a pre-tax basis, or $22.8 million after-tax, included these severance costs, as well as $7 million of integration charges for the Staubach and Kemper's acquisitions.

Intangible amortization related to the Staubach and Kemper's acquisitions totaled approximately $18 million in the year or $13.2 million of net income, the majority of which related to Staubach transaction. We project approximately $8 million of amortization from these two transactions in Q1 2009, $4 million in quarter two and less than $1 million per quarter in quarter three and beyond.

Slide 3 is the comparable bridge reconciliation I have just discussed, but for the fourth quarter's reconciliation.

Turning now to slide 4 and 5, Colin covered our full year consolidated revenue. So, let me talk for a moment about the three geographical segments on slide 4 and 5, as well as LaSalle Investment Management in detail on slide 10 and 11.

In the Americas, revenue was up 22% for the year and 26% in the quarter, principally due to the addition of Staubach and the continued strength and growth of our Corporate Solutions business. Corporate Solutions revenues increased 29% for the year and Colin will be highlighting some of the exciting new business win shortly.

Within this 29% growth, it is the performance of our Integrated Facilities Management business, which was up 61% over 2007. The financial benefit of this business is its consistent annuity core revenue. We also had very strong growth, up 19% in our Public Institutions business, which serves government and higher education entities.

This is also a business where we expect continued strong growth in 2009, as the anticipated government stimulus programs develop. We also had solid growth in our local markets business, up 10% where we added product and staffing desk and are taking market share.

In both EMEA and Asia Pacific, full year revenues were adversely impacted, not only by lower transaction levels, but also by a dramatic weakening in the foreign currencies against the US dollar in the fourth quarter.

In EMEA, revenue was down 6% for the year, 5% in local currency, but down a dramatic 26% in the fourth quarter, although half of that or 13%, if we look at it in local currency. In Asia Pacific, revenues were down 11% for the year, 14% in local currency and then 15% in the fourth quarter, but only 4% in local currency.

Aside from currency, the decline in capital markets transaction levels was the primary driver of results in both regions, which is illustrated on slide 6 and 7.

To offset capital market declines in Asia Pacific, we have been building our property management and facility management portfolios in the Asia Pacific region to have a stronger base of annuity revenues against market decline. Property management was up 14% for the year and facility management revenues were up 28%.

Looking at slide 6 and 7, capital markets and hotels remained down for the fourth quarter, resulting in significantly lower revenues in each segment for the year. In addition to the lack of financing for most of 2008, investors have become extremely cautious about determining value, which slowed transaction volumes even further in the fourth quarter.

Against this challenging environment, we have taken a number of actions. On the cost side we've taken aggressive reductions in our staffing levels, which I'll cover in more detail in a few minutes and on the revenue side, we are focusing on energies and client needs, building a value recovery service offer, portfolio asset management capabilities in our hotel business and strong corporate finance capabilities in our capital markets groups which Colin will cover shortly.

Moving to leasing on slide 8 and 9, in the Americas as I mentioned, we were pleased with the Staubach integration and performance since the transaction closed in July 2008. The addition of Staubach is driving not only our local market performance but also contributing to new wins in our corporate solutions business in the Americas and Globally.

Americas leasing revenues excluding Staubach were up 9% for the year. Our leasing bonds for the year were up 22% in our tenant representation offers and 6% in HMC. Both services decline in the fourth quarter as renewal decisions by tenant dropped dramatically.

We have concerns over the rapid changing sentiment, but our focused on new client wins, the potential created by client consolidations, and the need to assists clients in portfolios subleasing and portfolio rationalization. As a cost buffer, we have also completed our conversion to full permissions for leasing staff in 2009.

Outside of the Americas, the slowdown in leasing also began to show in the fourth quarter, but it appeared worse than the underlying performance due to the dramatic and sudden strength of the US dollar.

In EMEA, leasing revenues were down 17% for the quarter in US dollars, but only 8% in local currency. Additionally this 8% decrease compared favorably to the overall market kick up in EMEA which was down 41% indicating that we continue to gain market share. Asia Pacific leasing revenues were down 15% in local currency in the fourth quarter, reflecting dramatic rental rates adjustments in market such as Tokyo, Singapore, Hong Kong and Sydney.

Most of these markets continue to have relatively strong property fundamentals in terms of occupancy, but the previous rapid space cost and price increases have dramatically reversed directions with occupier uncertainty.

Slide 10 and 11 covering LaSalle Investment Management where advisory and transaction fees increased 9% for the year, those revenues decreased in the fourth quarter reflective of declining values in the public securities business, while valuations have decreased in the securities business, a [gigantic] sales by nearly all equity money mangers, we have had no net redemptions in our business, which speaks to the quality of the team we have in place and their long-term track record.

Advisory fees will be under pressure in 2009, as portfolio values fall. To offset this, we expect our solid track record and reputation to provide performance -- to appeal to investors that are evaluating their existing asset manager's capability and performance.

We are seeing early signs measured by our fee request that we will benefit from a flight to quality. We were also pleased with $59 million in incentive fees in 2008, $26 million in the fourth quarter, but we recognized that it will be challenging to earn incentive fees in 2009 as values of property fall globally and transaction activity remains limited.

In our equity portfolio, we had $5 million of impairment charges for the year, however reflecting the size and the diversification of these investments. This charge would spread across 10 assets. $4 million of these charges was recognized in the fourth quarter.

Turning to slide 12, we have taken a number of measures to right size the business with the changing economic environment including taking $23 million in severance charges across the business, $15 million of these charges were recognized in the fourth quarter. These charges were incurred primarily in EMEA, where we have our largest capital markets positions and where the transaction level decline came first, and hardest.

To date, we have completed the following staffing actions. Americas has reduced their capital market staff by 20%. With the strong growth in our corporate business, the Americas has also been able to redeploy over 60 professionals to staff new account wins.

EMEA started staff reductions in the third quarter and has now reduced staff levels by 10% across the region, however varying by country and service lines. For example a 16% reduction in capital market staff and 12% in leasing.

Asia-Pacific has reduced staffing levels by 7% across the region, 8% across their capital markets team. Additionally selected markets in Asia have chosen to take salary reduction and do the staffing cuts.

Hotels reduced staff by 12% worldwide, driven by a 30% reduction in the mature markets of the US, UK and Australia offset by growth in staff for their annuity asset management service capability. Since year-end, LaSalle Investment Management has now also taken actions to reduce its staffing levels by 7%. These severance costs will be incurred in the first quarter.

Reducing staffing levels is always a very difficult decision that we do not take lightly. We evaluate these decisions in the context of making sure we maintain our ongoing client service delivery capabilities at the necessary levels.

And finally on slide 13, our debt covenants. We already announced that we amended our credit agreements during the fourth quarter to create improved business flexibility and among other things to allow for the exclusion of severance charges from our calculated ratios.

As you can see on slide 13, we increased our maximum allowable leverage ratio to 3.5 times. However our calculated ratio at December 31 was significantly below that level at 2.24 times a very positive outcome. Our cash interest coverage is a healthy 3.69 times against a minimum of two times.

While we didn't need to take this step with our banks, we wanted to maintain confidence with our clients and investors. We were pleased to have 100% consent from our bank group for amendments and a very timely response to our request.

We recognize, 2009 will be a year of challenge, but we also expect it will bring opportunities for which we are well positioned. So, let me now turn the call back to Colin, to discuss these in more detail.

Colin Dyer

Thanks, Lauralee. And as Lauralee, said despite the challenging market environment we continue to identify new opportunities and secure new clients. And I want to give you flavors and examples of that.

We have seen the greatest positive impact in our global corporate solutions business as corporate occupiers around the world have sort to reduce costs by out sourcing real estate activities to professional specialists.

In 2008, we signed contracts with 43 new clients representing 360 million square feet of space. We expanded existing relationships with 46 clients for 300 million square feet and we renewed contracts with another 22 clients for 130 million square feet.

In December IMS Health the world leader in market intelligence to the Pharma and Healthcare industries retained us for project management, tenant representation, lease administration, and consulting services for their 1.75 million feet global portfolio.

In Asia Pacific, we renewed and expanded our out sourcing contract with EMC to cover transaction services, integrated facilities management, and lease administration across the region. And then Philips Electronics we will provide facilities management services for its 12 million square feet office and industrial portfolio in the USA.

We are also taking market share from competitors. In the US the combination of our new Staubach colleagues and our previous investment in local markets has generated substantial share gains in our tenant representation business.

The one recent example, the Staubach relationship supported by the credibility of our hotels business, led to Hilton hotels asking us to relocate their headquarters from Los Angeles to the greater Washington D.C. area and that is parallel to previous assignment, where we moved Volkswagen, US head office to Washington D.C. also.

The acquisition of Kemper's in Germany and Churston Heard in the UK have significantly expanded our share of European retail market, with indications that alludes investment sales in retail assets are down, the consumer recession is creating leasing churn and that is to our benefit.

We are also developing new products and services to address the evolving needs of our clients in tough markets. At LaSalle Investment management, we are seeing some institutional investors, who are dissatisfied with their current managers inviting LaSalle to bid for their business. LaSalle is also seeing interest from banks to advice on a strategic positioning of repossessed portfolios.

Within our capital markets business, we are providing a range of new value recovery services to clients around the world. We are advising a major a US financial institution, for example, our strategy and the subsequent disposition of $1.3 billion loan portfolio and we are selling $250 million portfolio of notes backed by US assets, which are now owned by our European financial institution.

We worked with UK bank, have accounts to complete the successful restructuring of the large property investment group and we have also given property advice to the administrative of a major bank for the extensive property portfolio in the UK and Continental Europe.

In Asia, we are helping an insurance firm with due diligence for the acquisition of a property portfolio and are working with a Turnaround Management firm to review a portfolio of distressed assets in Thailand. In the US we are providing receivership, management and leasing services for 14 retail assets spread across seven states, while Jones Lang LaSalle Australia has been working through the sale of a troubled portfolio of shopping centers throughout 2008.

Our corporate capital markets professionals are seeing growing demand from corporate clients to raise capital through sale and leaseback transactions across the world. And as hotel owners and operator struggle in the economic downturn, Jones Lang LaSalle Hotels is helping improve values with asset management services.

So that was a short series of examples of the way and which we're targeting our services to emerging demand and new clients. Looking forward to 2009, the IMF is predicting world economic growth of only 0.5 or 1 percentage point. And that will mean several quarters of recession in the major developed economies.

So one month into the year, our plans anticipate no immediate improvement in economic and real estate market conditions.

We expect, for example, that leasing market volumes will trend downwards in line with the continued erosion of employment and broader business activity. And we expect the capital markets activity for most of the year to be in line with the low level seen in quarter four of 2008.

However, the worldwide re-pricing of real estate is beginning to attract capital into the asset class again. This re-pricing process is furthest along in the UK, where pricing has fallen even to below replacement values and we expected to pick up in other countries in 2009.

The process will be accelerated 2009's maturing debt forces seller motivation. We're expecting to see continued strong demand for corporate real estate outsourcing, new investment activity among LaSalle's institutional plans, however will be limited in the short term and driven partly by perceived opportunities relative to other asset classes.

In these markets, we, as a company, are going to major on two priorities. First, we will focus even more closely on current and prospective clients and on their changing needs which we've described. We will also redeploy people to meet those needs.

We will continue to adapt our service offerings and develop additional new products and services to serve existing clients and establish new relationships. For LaSalle Investment Management, this client focus will also include very rigorous management of client's assets.

Secondly, we will continue the aggressive cost reductions which Lauralee has talked through where the guiding policy is to save our business to reflect market realities and to realign operations to meet new market opportunities.

2009 is going to be a challenging year for our industry and it would be more important than even for us to operate in line with our key three core values. Those are, working always in our client's best interest, collaborating internally to get the best results for our clients and doing everything we do with unquestioned integrity.

In hard times, we believe the clients will migrate to these values and that certainly going to contribute to building our competitive position throughout this downturn.

So with that overview, we would now like to open the call up to your questions. So, Bradley, would you please explain the process to everybody.

Question-and-Answer Session

Operator

Your first question comes from the line of Mark Biffert of Oppenheimer.

Mark Biffert - Oppenheimer

Good morning. Colin, questions for you on the advisory business that you talked about, we've been hearing a lot about banks or lenders offering extensions on loans and instead of taking back assets. And I am wondering what you are hearing from your clients that you are dealing with and how does that delay your business and what are the opportunities of the catalyst that would drive the advisory as well as the outsourcing business as we look into 2009?

Colin Dyer

Good question, Mark. Thank you. There is a broad range of responses from banks and financiers around the world. Let me give you a flavor. I talked about that shopping center portfolio in Australia which we've been trying to settle here. That was an early foreclosure by banks against non-performing loans, or rather loans which could not be refinanced. And I think what the banks have learned and the entire market learned was that it's just very tough to sell assets into this market and it's very tough to sell them at anything like prices people would hope to achieve.

So what we've seen is a general prudence on the part of lending institutions to over hasty foreclosure and liquidation of assets. What you see is a range of activity that (inaudible) banks first in general where loans are being serviced, in another word, where the interest costs are being covered from the cash flow of an asset or a portfolio of assets, the banks are very reluctant to foreclose on the basis of any other breaches in covenants. So as long as there is cash flowing, they are generally happy.

And what we are seeing is the banks being very tolerant and letting their clients to borrow to extend loan terms to loosen covenants where appropriate, and to be generally accommodating in order not to go down the route of putting assets into distress markets.

Having said that, the rate of breach of covenants has been relatively slow in 2008 and that process could accelerate into 2009 and beyond, as will the phenomenon of debt needing to be rolled over and loans needed to be renewed and those are likely to be obviously break points, which will cause lenders and borrowers to have to get together and work through new arrangements on loans.

So, it's a long answer but the summary is lenders are being generally accommodating particularly when cash flow is still intact. They are very reluctant to push assets out into distressed markets. However, we are seeing, obviously will see in 2009 an uptick in that phenomenon of foreclosure on distressed assets.

Mark Biffert - Oppenheimer

Okay. And then in regards to that the restructuring charges you had talked about and how you are aggressively cutting back to make sure you are right size for the current market. I am wondering Lauralee, if you could provide some color in terms of additional cost that you expect to incur over the next few quarters.

And then on the other side, where are you reallocating people to where may be the services or for the debt advisory or the outsourcing services businesses that you can provide? How much of that can you move people into and save on?

Lauralee Martin

We have completed pretty much most of our efforts in Europe, which came in early and in Asia Pacific. As I mentioned LaSalle's management did announce just this last week, the actions that they have taken. So we will have a charge against that in the first quarter. In the Americas, we have continued to have a tremendous performance through the end of the year and business against our clients. So as long as we have client win, we are going to be matching up against those opportunities.

So for example referencing those 60 professionals that we were able to redeploy. So I think that the answer is what will come is going to be very much based on the economic environment that we are in. And we, we know we are going to need to be flexible about that.

Relative to redeployment, what we have done in our capital market's business is size them as Colin said to the economic environment, we think is going to be here, not a lot of activity at the beginning of the year and hopefully a pick up in the second. And for those that are here they are very aggressive into advising clients with all the other services.

So we have a group of professionals that know value, they know how to work with, who are the best buyers and where those buyers are going to come from and all of that I think is very appealing to those who have problems that need to solved. And so, our people are pretty flexible and adaptable in order to be able to respond to that.

Mark Biffert - Oppenheimer

Okay. And then lastly related to investment opportunities around the globe, Colin you had mentioned that in the UK you are certain to see pricing below replacement cost, what type of returns are your professionals targeting when they look at investing over the next six to twelve months?

Colin Dyer

Well, our investors in LaSalle Investment Management, who are the only people who actively make investments on behalf of clients are being very cautious. Last year's investment levels were half of 2008, down to $4 billion and the run rate currently is very much lower than that. But, they are deploying money on behalf of clients and in the funds where they see exceptional opportunities.

One example of that was a very high classed asset. Again in this English market, which seems to be opening up slightly early or is corrected, price-wise slightly earlier than others. As I said, one particular asset that I can think of, which could have traded two or three years ago, at cap rates or yields of below fives, was traded at a yield of 8.25. And that figure of getting yield to cap rates above eight seems to, it's a very distressed level by recent marketing comparison, so down to a lot of willing sellers in that level.

But we do seem to be able to buy buyers for caliber assets in deep markets of those mid-sevens to mid-eight levels. Those are not available yet, in the US so that the correction as we refer to has been faster in Britain and just parts of Europe, than in the US. But we would expect as market prices continue to slide in the US, we would expect to see rate in the sevens for quality assets in North America too.

Mark Biffert - Oppenheimer

Okay. Thank you.

Operator

Your next question comes from Vance Edelson of Morgan Stanley.

Vance Edelson - Morgan Stanley

Hi. Thanks a lot. Could you just update us on your progress realigning the capital market seemed to have some members focus on the distressed market. How was that going? Do you think you're taking share there? And what your activity levels look like in the distressed market, if you could just provide a little bit more color there.

Colin Dyer

Well, the distressed market is sort of stable market, its obviously coming. But, so far it has not been very rich, although you could argue that practically any transactions done in current markets have got some element of distress to them. We try to provide you with a flavor of the focusing we've been doing and so if you reprised the script, after which you'll see examples of that.

But it's a pretty new market in this cycle. So it's probably no more than six months older and hasn't got sufficient volume yet for us to talk about market shares and draw trends or even see who the major competitors are between, investment banks who have been active with a lot of these portfolios on the way up, to other replies your businesses in real estate specialization.

We said that it is growing; we've got all the necessary contacts into the major accountancy firms. We obviously, know a lot of the banks, because we were helping to arrange loans in the up markets and so we know of them, and we know the people there. So we've build the necessary contacts and as Lauralee has described, our capital markets people are pretty flexible. And so we've been able to switch the necessary numbers across though this small, but growing market.

Lauralee Martin

I might just add to Colin's comment, I think some of these institutions have taken very quick cost actions. And maybe are going to sort of wake up and realize that some of those cost actions, they now don't have the staffing and talent that they need, in order to resolve some of their problems. Even in some of the investment banks, which have looked at real estate, it's going to be a while for them to be back in the transactional business, eliminated whole departments and all of a sudden, how do I get the work done.

So, I think, what will be unique about this period of time is, that a lot of, what would have been solved on their own will end up being outsourced in that capability. So to Colin's point, what we have now is, place holders where we're helping people sort their problems. But then very quickly, can we do the property management, can we do the leasing, can we do the capital markets, because they are going to need to create value if they can't sell it or at least maintain value if they can't sell it and its that cycle of positioning that we want to get ourselves in the middle of it.

Colin Dyer

And these comments can be repeated for another group of lenders, because by some calculations, 50% of the debt provided in 2005, '06 and '07 to finance capital market transactions worldwide came from CNBS market. And the special services to those markets are very small operations in terms of the numbers of the people involved and they certainly don't have the skills to work through these sorts of issues.

So as the refinancing of those asset-backed securities in the real estate market begins to come through in volume in 2010, '11 and '12, we're going to see potentially a lot of activity with that market as well. And we're interested to see how those special services are going to respond, when borrowers of the original CNBS, are unable to repay the loans and unable or finding difficulty enrolling them into other forms of finance.

So it is a sort of a big question mark, coming down the track as to how those, CNBS holders will respond and this is certainly a very healthy market for us there to assist them in their thinking.

Vance Edelson - Morgan Stanley

Okay, got it. And in terms of the Corporate Solutions business, you mentioned you're taking share there. What does the competitive landscape look like? Is it a pricing game or is it strictly a matter of your capabilities and resources, what do you say?

Colin Dyer

Pricing is one element of a multi-faceted selection process and typically these RFPs run with advisors, run with procurement departments within organizations and they will have a scorecard of 10 to 1000s of factors, which they take into consideration and weight one of which is priced. But very importantly in the whole consideration is how do they feel they match corporately and culturally with the organization that they are dealing with?

Do they believe the organization will be viable, over a five-year plus, surprisingly these are five-year contracts and they don't want to get involved with people who are not going to be around in five years.

And they're also obviously, whether international corporations looking at our international spread, our ability to service them across the world, and I mean the biggest example we had last year of them, while they and extension of the relationship with some Procter & Gamble who extended our facilities management work which we have been doing with them for five years to transaction and lease administration. And that was a reflection of how they viewed our performance against those criteria that I just listed for you.

Vance Edelson - Morgan Stanley

Okay. I appreciate it.

Colin Dyer

Thank you.

Operator

Your next question comes from Will Marks of JMP Securities.

Will Marks - JMP Securities

Thank you. Good morning, Colin, and good morning, Lauralee.

Colin Dyer

Hi, Will.

Will Marks - JMP Securities

First a question on the asset management, can you give us a figure, maybe you did and I missed it, but what your AUM is right now?

Lauralee Martin

Our assets under management in the way that we reported in, and let me just clarify that we report our securities business current because it's obviously a public marketplace. And the separate accounts in the funds lagged quarter just because the way the industry is able to report that.

But we were at $46.2 billion at the end of the fourth quarter. That compared to $49.7 billion at the end of 2007. The most dramatic decline was in the public securities business that was $10.6 billion last year and is now at $4.7 billion.

As I said in my comments, we have not had net redemptions. This is clearly just a mark-to-market of what's happened in the rig world. I think we, like all of you, are hoping that that number has seen flooring, maybe have some opportunity in '09.

Will Marks - JMP Securities

Okay, great. And on the assets under management or, say I guess, equity yet to be invested, you typically given, maybe in the investor penetration, not the slideshow, the figure of how much money at the end of '07, I believe it was in the neighborhood of 20 billion of assets that it could be purchased with the money you've raised. Can you update on what happened with that money and where we stand now?

Lauralee Martin

Will, we will have that for you shortly, we are reworking that. The reason I say that is we have allowable leverage when we raised that equity money and that's how we reported buying power added, its original point.

We are realistic that allowable leverage isn't going to be realized in today's lending marketplace. So we are now going back and putting what do we think we could borrow if we were buying assets today and how much than can we buy and we will have that for you within about a week's time.

Will Marks - JMP Securities

Okay. Thank you.

Lauralee Martin

By the way we still are very pleased that we have a sizeable capability to put to work, but we are being patient.

Will Marks - JMP Securities

Okay. Another question, I guess, unrelated to asset management, on the G&A, I appreciate you've given all the detail on the job cuts or the job changes. And I'm trying to figure out how to model the two expense lines or the comp benefit and the operating expense line? And how should we think about the growth or decline as most of it tied to the operating expense line or any thoughts and how we should can look at those lines?

Lauralee Martin

It's compensation. I mean, yes, we've made good gains in our G&A, but again it's rent. Those are contractual, the places we can move, the G&A are travel and marketing and IT and even IT has some limitations because it's predominantly telecom and systems, but its compensation and bonus levels are down.

We have missed a variable comp in commissions and I think we put as much flexibility into our structures as we can. The places, we've given you the cost savings and the six to nine months. We are very pleased because that was accomplished in the European platform, which is much more difficult marketplaces we have articulated before to get savings quickly, but we were able to achieved 69 months paybacks on based compensation there. So we'll have lowered our base compensation and then we've also aggressively make sure that our variable compensation reflects the performance.

Will Marks - JMP Securities

The 23 million for example, is that would be the on the comp and benefit lines?

Lauralee Martin

That would be comp and ben, yes.

Will Marks - JMP Securities

So, I would think there would be opportunity on the operating expense line and there was a pretty significant growth in the fourth quarter, is that something that is yet to come?

Lauralee Martin

Well, if you actually go into the individual regions, the principal place that grew was in the US, because we added the Staubach organization. We actually were relatively flat in Asia, and that was after growing the platform significantly and we had decreases in Europe. So, again we have now absorbed all those acquisitions and pretty much flattened out our cost even with those units by taking cost actions elsewhere.

Will Marks - JMP Securities

Okay, great that's very helpful. And one other question on the interest expense line. Any thoughts on what we should be expecting this year given lower rates but your re-negotiated bank agreement?

Lauralee Martin

Will, we are currently on our bank agreement at LIBOR plus 300. We thought that's helpful. And then, we will have interest as you know coming into the P&L from the accretion of the Staubach deferred payments. They come in at 6% rate, they are non-cash, but they do come through the interest loans. And then, we also have modest amounts from some of the other acquisitions as well, and if we look at our interest this year for 2008, $20 million of it was cash and the balance of it was non-cash.

Will Marks - JMP Securities

Okay and that 6% from Staubach doesn't change.

Lauralee Martin

No.

Colin Dyer

Imputed are not paid.

Will Marks - JMP Securities

Okay that's all from me. Thank you.

Operator

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

Michael Mueller - JPMorgan

Regarding the AUM question- I know Lauralee said that the valuation will lag so, when Q1 is reported would all other things being equal, would it be a lower number than the $46 million or is that what the number will be factoring in the lag?

Lauralee Martin

That's a good question, Michael. I should have finished the story on all the components, and we will have it in our investor deck when we file that. If we go to our separate accounts at the end of the Q4 2007, they were $26.3. They declined to $23.3 at the end of 2008. They will have valuations that lag -- the valuations that we've seen have come principally from our positions in the UK, which adjusted pretty quickly. Generally speaking beyond that it goes much more slowly. I think the question on that is how do we get paid?

And it's not just to be against assets under management. We have some accounts that just have a, an absolute contractual number and then it varies by incentive fees, but we'll have the contractual number. We have others that are based on the property NOI.

So in many cases, values have come through because of what's happen in the market, but the actual property performance hasn't changed at all. So as long as the occupancy is there, and the leases are there, and we manage the expenses aggressively, we can, you know, we can buck that trend at any change in fees. Our funds business was $12.8 billion at the end of the last year, and we were at $18.2 billion at the end of Q4. In that business, we get our fees during the commitment period based on the committed amount and then when the commitment period expires, we get paid on the value that's there.

We're paid on the equities, so what we would really have in order for that amount to change, there would have to be an impairment on that equity. So again there is less of an impact in that line. As we've mentioned our growing it is more challenging, because we're already getting paid in many cases on commitment amount. So we will grow the assets under management, but won't get additional fees when that occurs. So for those that we get paid as we invested there will be an opportunity to earn more.

So we've got a fair amount more stickiness, if I summarize that in our separate accounts in our funds and the variability comes in securities business. We have to look to you whether you think we've hit the floor on that. But clearly that marketplace has been hit pretty hard on a global basis.

Michael Mueller - JPMorgan

Okay. The $62 million that you reported in the fourth quarter for the advisory fees, is that a full quarter impact of reflecting these valuations that you talked about for example does that just reflect partial valuations, so the Q1 run rate if you would is going to be lower. Is that a good proxy for the go forward run rate, all other things being equal?

Colin Dyer

While the rate at which the valuations adjustments come through, depends on the particular arrangement we have in a new won fund or with any one client. So in another words, some clients may have annual reevaluations, some funds maybe quarterly reevaluations. And therefore, the number you saw for Q4 last year will reflect some downgrades in pricing and some accounts or some funds and in others none at all yet and that would still come. So it's a rolling process and you can't take your last quarter's numbers as a guide to the first quarter rather than a point of departure.

Michael Mueller - JPMorgan

Okay. So, it does seem like it could trend down beyond where the Q4 level was?

Colin Dyer

As valuations come through lower levels and assuming we don't increase net,– they'll increase the funds under management by buying more and selling net less than yet then that will trend down as valuations come through.

Michael Mueller - JPMorgan

Okay. Two other questions here, Colin you mentioned in your comments capital markets business you expect it below Q4 levels to continue into 2009. Just want to make sure you were talking about the year-over-year percentage declines of those types?

Colin Dyer

Yes.

Michael Mueller - JPMorgan

Okay.

Colin Dyer

So to sort of seasonalize or deseasonalize the fourth quarter picture, which was down depending on market 60% to 80% from peak, from the large peaks that we saw in 2007, then you can expect, we were expecting those sorts of volumes levels to continue. There are some interesting dynamics there, because if you look at the English market where I was last week.

Why are the English business Q4 numbers within a percentage point identical in revenue terms to the prior year? Because they have already seen a major part of their correction in capital markets in particular come through in the last quarter of 2007. So, the comps -- conversely and to some extent will get easier as the year goes through.

Michael Mueller - JPMorgan

Okay, and then going to the prior question of expenses. Maybe if we can try to attack it differently. Lauralee, if we look at the margins, the bottom line that you report, looking at the comp, the G&A as a percentage of revenues. I mean, it looks like if we go from '06 to '07 to '08 and Q4 '07 to Q4 '08 pretty stable in the Americas.

When you go to EMEA, Asia and LIM it looks like the margins were up 600 to 1000 basis points year-over-year. I know you have talked about cost reductions. If we are thinking about it, this business from a margin perspective, what do you see happening as we move into 2009? Obviously, it's going to be partially a function of revenues, but I mean, should we expect these margins to come in to remain stagnant because all of a sudden the leasing trends are starting to drop off. How should we think about that expense margin?

Lauralee Martin

Let's take it in pieces. If we look at the US, one of the benefits that we've had at the most recent is that our capital markets business in the US is not of a size relatively to all the rest of the business that it can have that much of an impact on the margins. That being said, we had been holding our capabilities really until August on the premise that markets were starting to improve.

So we got a little bit surprised when the markets fell off, have actioned it since that period of time, but net-net because of that lost money in our capital markets business in the US, not a lot but somewhat in '08. We have now right sized to the levels that Colin talked about such that we can fix that margin drag. Now clearly its how we grow the corporate business and all the other aspects of it. And we will have a lot more capability from the Staubach addition, because we only have them for half the year in the margins that we will be working very hard to protect those margins.

EMEA is a big capital markets business for us. And to have a very high margin business fade away EMEA was quite impactful on the total markets without a strong of a corporate business to back that up.

That being said we did make money in our capital markets business in Europe and with the actions that we have taken we anticipate that we will have better margins in '09 with a reduced capability but we are much better matched against the marketplace and what's going to happen.

And likewise the story in Asia Pacific, we do have a much larger annuity business in Asia Pacific and property management and facility management and have been growing those. They don't have the same level of margin, but it does give us at least an annuity base to drive us through.

So that's not a good answer because there are a lot of market unknowns in there, but what we have done with our cost actions is basically say management is going to tell you what we think the revenue is and you need to size your business to this level of revenue rather than hoping revenues are going to be there and worry about sizing later. So our focus is on getting margins back, trying to get ahead of market trends, while we make sure that we at all times are able to service our clients.

Michael Mueller - JPMorgan

Okay. So I mean, if we were looking, just to try to frame this a little bit because the numbers can swing quite a bit. If we are looking at EMEA where in the past couple of years you have been 90%, 88% this year 94%; Asia has gone from 87% to 97%. Is there an ideal target that you would like to be at?

Colin Dyer

One of those.

Michael Mueller - JPMorgan

Yeah, and then also with LIM, I mean, how should we think about that, with AUM?

Lauralee Martin

Well, we had articulated before this decline what we want our long-term margins to be and clearly we would like Asia to be 10% and we would like EMEA to be 12% and we would like the US to be north of that. It's tougher when you lose a big chunk of your revenue stream against that. But we've got to get ourselves positioned as the markets come back that we can achieve those and hopefully more.

With LaSalle Investment Management's, we have positioned that business that it is a nice margin business on its annuity base, and the actions that LaSalle Investment Management's took this first quarter on its costing is to protect that margin on its annuity base.

We have always said that the incentive fees and the equity gains are gravy on top of that, which reward us as well as our clients and again we will be striving to take the uninvested capital and get that back to work to have that be an enhancement in the future. But, what do we take out in terms of cost, we are not able to raise as much capital, we are not able to buy as many properties.

All of those types of things to right size the business to have a margin. So the actions we've taken and that's why we went back to our banks to have the flexibility to do that is to make sure that we have strong profit margins and capabilities across the board and all our business.

Michael Mueller - JPMorgan

Okay. Thank you.

Colin Dyer

To be clear on the way, we are thinking about the future without putting numbers behind it. We've talked about taking the view of revenue going forward as we work with the businesses on forward plans. The view of revenue which is realistic, that to say, pessimistic, if you like, but from that driving costs, which are matched to those realistic revenue levels and at the same time holding as much as we can as with productive teams in place.

Why are we doing that? Because these markets will eventually turn. The capital markets will turn at the point when credit markets open up again. And there are early signs of credit markets being more robust than they were certainly in October when there was a danger of a major meltdown that we're seeing. Corporate credit market is coming back. We're seeing spreads coming in, for example, across Europe and US small of the trends are there.

When that happens and confidence begins to restore against the market, we used to stress selling. Capital market transactions will pick up, same with leasing, although the trend downwards, employment at the moment is clear. So come a point when that will produce activity for us as we start to restore, restack and disposal the space for clients and that will drive activity within our businesses. And the corporate market we believe at this point will continue to nurture ahead. So that's in a broad sense the way we're looking at the business going forward.

Operator

Your next question comes from David Gold of Sidoti.

David Gold - Sidoti & Company

Hi. Good morning. Colin, just a follow-up, in your comments you'd spoken about cost cuts to reflect the market realities. Do we think today that we are positioned for how you think the year is or is it more of an ongoing process and maybe quarter-to-quarter we continue to review that and cut for the cost if necessary?

Colin Dyer

Well, Lauralee has talked about the G&A area, the travelling and the telephones and the offices space and obviously we have measures in place to attack that. On the employment cost side, remember we have a significant sum which goes into bonuses and commissions and that obviously has got a dampening effect, it's a variable number. So that will dramatically correct part of our labor costs above and beyond headcount number reductions.

As far as staffing goes, staffing levels, Lauralee made the point that these are difficult decisions where people business, they were very careful about whether and how we make staffing reductions, but we nevertheless have taken action. We've taken action at individual levels. We've taken action with broader reductions in forces, for example, in our English and selected European business.

But I characterize it as a rolling process on ongoing process where we simply have to react to market realities and fate of the business accordingly.

David Gold - Sidoti & Company

That's more of my question. My question is, are we in front of it at this point or does it continue and sort of maybe reactive basis. In other words, do you think it's got enough for the environment?

Colin Dyer

We will continue with the process of rolling reductions to size the cost base to the market growth allow us. We believe we're not behind the curve. We think we're sort of about where we should be. Given the things we're trying to find ourselves, which is obviously maintaining our profitability, but also maintaining the teams, so that the fee generated in particular, we hope not to lose any key people, strength, or weaken the teams, to the point we are unable to operate in these markets, much less in recovering markets.

David Gold - Sidoti & Company

Perfect. And then one other question, I think one of you commented on maybe the stronger second half, I think one of the reports that came out from your research division said three to four quarters before you really see some recovery from capital markets. Is that consistent with what you're expecting or do you think it's sooner or later?

Lauralee Martin

I think David it's going to be different in different parts of the world. That's the piece I think you're reflecting on is the USP. If you were to go to the UK, they probably expected to be a little bit earlier. Already they've had a much more dramatic end market visibility into that dramatic adjustment in prices. So there's less issue around price discovery that you have in the market like the US where with no trading activity, it's very hard to decide what the right value is. So it will different in different parts of the world.

David Gold - Sidoti & Company

Okay. But I mean presumably sort of abruptly as you look at it, credit markets still remain pretty tight, is that something that you guys when you make your internal projections or expect them to pick up in one, two or three quarters?

Colin Dyer

Who knows that we don't? What we are doing is kind of as we set right sizing the business with current markets, waiting we're not anticipating a recovery, therefore holding low cost that we need to. We're not planning business on recovery; we are simply positioning ourselves for it. But the rules of the road in this sort of an environment ought to be as flexible as possible, flexible obviously in costs on the balance side, but also be ready to be flexible on the upside.

Someway, we'd like it to be soon, but it doesn't matter. We will continue to do the appropriate things around costs, around cash controls in the business, and we will manage the business for the environment we are in. And we will be ready for the pick-up when it comes.

David Gold - Sidoti & Company

Got you. Perfect. Thank you both.

Operator

Your next question comes from (inaudible).

Unidentified Analyst

Hi, good morning. What was the actual incentive fee for '08-- you report the revenues but what is the actual in terms of EBITDA and EPS contribution?

Lauralee Martin

Well, incentive fees generally track with our normal ratio of comp-to-revenue. So, you are going to have something like a 45% of that drop to the bottom line after various bonus pulls and so forth.

Unidentified Analyst

Okay. So 45% to EBITDA and then just tax effected to get to the EPS.

Lauralee Martin

Roughly.

Unidentified Analyst

Okay. And then, the accrued bonus fits on the balance sheet, or accrued compensation, is that mostly bonuses or is in the 487 million? Is that kind of bonuses and commissions that were at year end or when does that get paid, and is that due to cash flow in the first part of the year?

Lauralee Martin

It's going to be a mixture of base compensation, the result, is going to be a mixture of bonus and commission. So, if we have leasing brokers that have earned that money in the fourth quarter, that's going to be accrued because it hasn't yet been paid.

Unidentified Analyst

Right, okay. Do you have a breakdown? I guess it's all commissioned and accrued. I see what you are saying. Okay, so that's kind of a rolling number then.

Lauralee Martin

Yeah. It is.

Unidentified Analyst

You don't have this big lump at year end like some of your competitors do?

Colin Dyer

We had a large bonus accrual, which we payoff in the course of the first and second quarter of the year depending on the arrangements by country, and if you look back historically you can track that pattern in the balance sheet, which we published quarterly.

Unidentified Analyst

Okay. All right, and then did you give any sense of what I guess in terms of trends in the first quarter, you are saying the leasing trends are kind of similar to what we saw in the fourth quarter, is that a fair?

Lauralee Martin

I think its way too early to know. I think clearly the year end activity was very much impacted by the large number of layoffs that were announced for corporation to make decisions on even extending their existing space as they are determining how many people they are going to have. The firming of budgets will be very helpful I think as corporate get into what their decisions will be, but that will all happen here in this first quarter of the year.

Unidentified Analyst

Okay. So you're still seeing a lot of indecision and we'll just see how that works and so far as the year moves on?

Colin Dyer

Yeah. I mean quarter four last year was obviously a huge shock. It was worldwide, but particularly if the Americas rich, the corporate world had been less effective than the rest of the world, and we've seen less effect. The question is will that have been a shock when people recover and get on with business again. Well the general economic picture continues to decline, and we don't know that yet. As Lauralee said, we're one month into the quarter. We can't discern any trends other than obviously the general business sentiment remains, fairly negative.

Unidentified Analyst

Right, okay. All right, thanks very much.

Operator

Your next question comes from Brandon Dobell of William Blair.

Brandon Dobell - William Blair

Thank you. Just couple of quick ones. Lauralee, any expectation for capital spend in 2009 that we should think about?

Lauralee Martin

We'll have our CAPEX be about half of last years number. We're about 110 million in 2008, we'll probably be 60 million or so in 2009. We haven't yet finalized their budgets, but obviously it's only necessary that will happen. We had a large CAPEX in 2008, because of consolidations from our acquisitions and we also had some technology that we completed, which were very excited that is done a global IFM System, which we think is cutting edge for the industry and a project management skill capability that is also there, but they are complete an now bedded into our operations.

Our largest CAPEX will be in the US where we complete the final portion of the consolidation of Staubach offices and ours. Relative to the integration cost of that there won't be a great deal of that that actually runs into the P&L, most of it will be cash and through the balance sheet.

Brandon Dobell - William Blair

Thanks, it's fair. As you think about commission rates kind of on a real time or go forward basis, any changes you have seen from people, your customers, are they paying you more because they know you can go get a better tenant for example, are you seeing some of the newer lines over in capital markets maybe offer higher commission rates because there are more, maybe more complex than what you done historically. Just trying to get a sense of any changes directionally in commission trends if there are any?

Colin Dyer

Nothing consistent, it's various flavors. Some areas, when regular transactions competition can be intense and so prices are getting a bit down on the other hand. We talked about the move to quality and the fact that, many of our clients are looking for respecting the performance of organizations such as ourselves, who are able to perform in difficult markets, find tenants or find buyers for assets.

In those cases, we see rates holding or even improving competitive previous fees. The newer business we described around distressed assets and large portfolio sales that tends to be quite over remunerated because we are bringing special skills to special situations. Not like M&A world that tends to have a kind of license fee structure with them.

Brandon Dobell - William Blair

Okay. And jumping over to the expense side for a second. Maybe a different way to ask this question for the 15th time. Is anyway to scale the difference on the compensation line of the Americas given the move from the salary bonus structure to the commissions' structure? Is it any sense of as a percentage of the revenues or a dollar figure or scale it in someway relative to previous years, probably benefit to the Americas it's just tough a lot to get a handle on, how much the difference that's going to make for you guys?

Lauralee Martin

I think, Brandon the issue isn't that. When you get to the end of the year that comped revenue ratio is going to change. We always have said, we will market for our employees, it was really a question of the timing and the mix of that, because we would accrue it as bonus and there would be true ups.

Brandon Dobell - William Blair

Okay

Lauralee Martin

What you're going to get is a much better matching of revenues to win that is actually paid. We hope that will level out some of our margins. At the end of the year our expectation is it, it shouldn't change that because again we've always thought we paid at the same level just if the methodology was different. But, clearly that we also think that there is very good motivation that comes through when you've got that compensation that there is an urgency around every single month and every single quarter and that gets the energy into the sales force.

Colin Dyer

Okay. One thing we have noticed is some of our competitors lowering the commission rates they pay to their people. Early sign of that we have not considered that at this point.

Brandon Dobell - William Blair

Okay, great. Thanks a lot.

Operator

Your next question comes from Will Marks of JMP Securities.

Will Marks - JMP Securities

I'm actually answered. Thank you.

Colin Dyer

That was good, Will.

Operator

And there are no further questions at this time.

Colin Dyer

Okay. Well thank you very much everybody and as ever -- if you have questions, which you'd would like to address to us then you can get to either of the participants on the call or Gerah Manascut and you will know here in Chicago. I would like to thank you for joining us today in large numbers we have to say. And we'd also like to thank you for your interest in Jones Lang LaSalle. And we look forward to speaking you again -- to you again at the end of the first quarter.

Operator

Ladies and gentlemen this does conclude today's conference call.

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Source: Jones Lang LaSalle Inc. Q4 2008 Earnings Call Transcript
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