CB Richard Ellis Group Q2 2009 Earnings Transcript

Jul.30.09 | About: CB Richard (CBG)

CB Richard Ellis Group, Inc. (NYSE:CBG)

Q2 2009 Earnings Call

July 30, 2009 10:30 AM ET

Executives

Nick Kormeluk - Senior Vice President

Brett White - President and Chief Executive Officer

Bob Sulentic - Group President and Chief Financial Officer

Jim Groch - Chief Investment Officer, CB Richard Ellis, Group, Inc. and Chief Investment Officer, Development Services

Analysts

Anthony Paolone - JP Morgan

Sloan Bohlen - Goldman Sachs

Will Marks - JMP Securities

Brandon Dobell - William Blair & Company

Operator

Ladies and gentlemen, thank you for standing by today. And welcome to the CB Richard Ellis Second Quarter Earnings Conference Call. As you may know, all participants are in a listen-only mode for this conference.

So, when we will conduct a question-and-answer session, we will give you instructions at that time. (Operator Instructions) As a reminder, the call is being recorded. And with that, we turn the call over to our host, Nick Kormeluk. Please go ahead sir.

Nick Kormeluk

Thank you. Good morning and welcome to the second quarter 2009 earnings conference call. Last night, we issued a press release announcing our financial results. This release is available on our homepage of our website at www.cbre.com. This conference call is being webcast live and is available on the Investor Relations section of our website. Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio webcast of the web -- an audio of the webcast, the transcript and a PDF version of slide presentation will be posted to the website, later today. Please turn to the slide labeled forward-looking statements.

This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 including statements regarding our momentum in 2009, future operations and future financial performance. These statements should be considered as estimates only and our actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today.

Please refer to our Annual Report on Form 10-K and our current quarterly Form 10-Q, in particular any discussion of risk factors which are filed with the SEC and available at the SEC's web site at www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

We may make certain statements during the course of this presentation which also include references to non-GAAP financial measures as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable -- most directly comparable GAAP measures which are attached hereto within the appendix.

Please turn to slide 3, our management team members participating today are Brett White, our President and Chief Executive Officer and Bob Sulentic, our Group President and Chief Financial Officer. Also with us today for the question and answer session are Gil Borok, our Chief Accounting Officer and CFO of the Americas and Jim Groch, our Chief Investment Officer. I will now hand the call up to Brett.

Brett White

Thank you Nick and good morning everyone. Please turn to slide four. Before I turn the call over to Bob for a detailed review of our second quarter results. I want to make some brief remarks regarding the progress we have made on several key initiatives most of which we discussed in the past. First, we have continued to focus on providing superior service to our customers and increasing our market share throughout this industry's cyclical down turn.

Our outsourcing business continues to perform well. In the current operating environment, many new clients are embarrassing the concept of outsourcing as a means to save on real estate operating cost and are focusing their attention on the higher quality platforms when choosing their service provider. As a result, global RFP activity has been very strong and new account wins are up 25 %, versus second quarter 2008.

These same concerns about cost management and service quality are also creating many opportunities to expand our relationships with existing outsourcing customers. Square footage growth under management improved for this part of our business during the quarter. This was highlighted by our Bank of America account expansion, in the EMEA and Asia-Pacific.

In addition, in investment sales, for the first half of 2009, we once again captured the number one position in the US with a share of 18.6% as compared to 17% in the same period last year according to Real Capital Analytics. I am particularly pleased to report on our progress in managing operating expenses.

We are now targeting a run rate reduction of 575 to $600 million in operating expenses, compared to our 2007 base year. An increase of $100 million over the previously reported range of 475 million to $500 million. As we have previously discussed this target excludes the very significant reduction in certain variable expenses including commission and other incentive compensation expenses, that automatically occurs as a result of the company's reduced revenues and profitability.

The impact of our cost cutting efforts on the company's current financial results is profound. While the company's quarterly revenues have declined by 27% compared to 2008, our operating expenses have decreased 30% over the same period. The result is that although we currently are operating in one of the worse downturns, our history has seen the company has actually increased its normalized EBITDA margins to 9.5% in the second quarter of 2009 from 8.7% in the second quarter of 2008.

We believe that these efforts to mange our cost structure have created tremendous operating leverage in our business, which should allow us to accelerate earnings growth, when the markets recover. As long as the environment remains difficult, we will continue to be diligent and seeking out opportunities to cut costs even further, while maintaining the high levels of service, that our customers have come to expect.

I should also mention that although we have implemented a very rigorous cost cutting program, it has been executed without eliminating or significantly impacting any of our geographies or business lines. In fact as I mentioned earlier, we have continued to build our business. Our efforts to strengthen our balance sheet also continued in the second quarter. Since November 2008, we have raised approximately $800 million in capital. In June, we issued $150 million in common stock at an average price of $7.84 per share which compares quite favorably to our price of $4.48 per share at the beginning of the year.

During the quarter, we also raised approximately $450 million in a private placement offering of subordinated debt within a year maturity. Paulson & Company elected to purchase $100 million of our equity and $100 million of this subordinated debt in these offerings. Given John's reputation, as one of the world's savviest investors we were especially pleased that he believed it to be a prudent time to invest in our industry and that he chose CBRE as the company he wanted to bet on.

We have prepaid $195 million of bank debt amortization and have significantly extended the weighted average maturity of our outstanding debt. We have also launched a loan modification program for our revolver and portions of our term loans to further spread out amortization and extend maturities.

Bob will give additional details on this program in a moment. But I wanted to note that we have only received preliminary commitments to modify approximately $425 million of the targeted debt. We are pleased that the market seems to have faith in the actions we have taken in this regard. Since the beginning of the year, our equity market cap increased from $1.1 billion to $2.7 billion, at the end of the second quarter. The markets have responded favorably with our term debt training up from approximately 55% of par value to approximately 95% of par value.

We are very pleased with the progress made in implementing these strategy initiatives and are excited about CBRE's position to take advantage of opportunities that present that themselves as the market recovers. Even though market challenges persisted, slide five provided examples to demonstrate that there was in fact, activity in the marketplace and some of them was meaningful in size.

That concludes my introductory remarks, I'll will now turn the call over to Bob to provide a detailed review of our results for the quarter. Bob?

Bob Sulentic

Thank you Brett. And good morning everyone. Please advance to slide six.

Revenue was $955.7 million for the second quarter, down 27% from last year. Driven predominantly by weak sales and leasing activity. Normalized EBITDA came in at $90.9 million for normalized EBITDA margin of 9.5% which was a marked improvement from the second quarter 2008 margin of 8.7%. This is of course, very difficult to accomplish in a declining revenue environment.

Our cost of services was down materially, but as a percentage of revenue, rose to 59.3% from 56.1% in the second quarter last year, primarily driven by the large decrease in overall revenues and a shift in mix of revenues with outsourcing including reimbursables comprising of materially greater portion of the total than in the prior year quarter.

Second quarter 2009 operating expenses up $328.7 million declined by 30% versus the second quarter 2008, a reduction of $140.2 million. This decline was obviously greater than the decline in revenue on a percentage basis. These reductions will provide very substantial operating leverage when market conditions improve.

Please turn to slide seven. Revenues from property and facilities management, fees for assets under management, loan servicing fees and leasing commissions from existing clients, all of which are largely recurring represented approximately 65% of total revenues for the second quarter. Our property and facilities management business accounted for 42% of total revenues, which was a little lower than the 44% in the first quarter, due to a seasonal improvement in sales and leasing revenues.

However, this was up materially from the 32% of revenues outsourcing we accounted for, in the second quarter of 2008. Leasing declined 31% in the quarter versus the second quarter of 2008. This decline was similar to the decline in the first quarter of this year. Sales revenue dropped $98.2 million or 61% versus a year ago. A large decline but less than 66% year-over-year decline, we experienced in the first quarter.

The appraisal and valuation business declined by 24% in second quarter, also less than the first quarter decline and comprised 7% of total revenues in the second quarter. Global investment management revenue was down 30% year-over-year while development services revenue was down 29%. And the commercial brokerage business was down 42% as the challenges in the credit market continue. Please turn to slide eight.

Outsourcing revenue for the quarter declined 5% on a year-over-year basis. This decline was driven by lower corporate spending, a rise in vacancy rates and client consolidations. As you can see from the slide, many fundamental aspects of this business continued to perform very well. Most noteworthy is the fact that new client contracts, we signed, are up 25%. The total number of customers is up. Square footage under management is growing and we won seven new accounts, expanded six client relationship and signed nine renewals during the second quarter.

Although, I will not run through the details, we've attached slide nine which provides certain US market statistics to illustrate just how challenging vacancy and absorption trends have been and are projected to be through the rest of this year.

Now, please turn to slide 10. The US commercial property investment market remains weak. The nation wide sales volume in the first half decreased 78% compared with the same period in 2008 according to Real Capital Analytics. We again hold the leading market share position and investment sales in the US with an 18.6% share on the first half of 2009 versus a 17% share in the same period, last year.

Our Americas sales revenue for the second quarter declined 59% on year-over-year basis, which was improvement from the 70% decline in the first quarter this year. The number of distressed assets continues to rise. A Real Capital Analytic's report, earlier this month, identified $108 billion worth of commercial property in default, bankruptcy or foreclosure, double the level that year end 2008. Distress sales were expected to account for lion's shares of transaction in the second half of 2009 and well in 2010.

We are extremely well positioned to capture a significant share of this opportunity and are currently marketing over $2.25 billion of distressed properties for sale. Looking at our Americas leasing business revenue declined 30% in the second quarter versus prior year, slightly better than the 32% decline we experienced in the first quarter. U.S. office vacancy rates increased by 80 basis points in the second quarter of 2009 versus the first quarter of this year to 15.5%.

Now please turn to slide 11. Our investment sales activity in EMEA declined 71% in the second quarter of 2009, relative to the second quarter of last year. This compares to a 52% sales decline in the first quarter of 2009. While the rate of decline in the UK has remained fairly stable, the remain of decline the rate of decline elsewhere in Europe, particularly in Central and Eastern Europe its still worsening. As was the case in the first quarter, foreign currency exchange rate changes also negatively impacted Q2 2009 versus Q2 2008.

CBRE's revenue from leasing in the EMEA declined 39% in the second quarter of 2009 versus the same quarter in 2008. This compares to a 33% leasing decline for the first quarter of 2009. These leasing results are highly correlated to economic performance in the region.

Please turn to slide 12. CBRE sales revenues in the Asia-Pacific region fell 42% in the second quarter versus the prior year second quarter. This is a meaningful improvement from the 69% sales decline for the first quarter this year, driven by actual growth in Australia, New Zealand that we believe may not yet be indicative of a trend.

CBRE's leasing revenue in Asia Pacific fell 25 % in the second quarter versus the prior year second quarter, fueled by improved performance in China. This compares favorably to a 33 % decrease in the first quarter.

Please turn to slide 13. Revenue from the development services segment was down 29% to 22.2 million in the second quarter this year. Operating results for the second quarter of 2009 showed improvement due to cost savings efforts. Results for the quarter included $800, 000 of cost containment expenses and $1.2 million of net write-downs of impaired assets.

At June 30, 2009 in-process development totaled $5.2 billion, which was down approximately 16 % from year ago levels. The pipeline at June 30, totaled 1.5 billion which was down almost 60% from the year ago levels. The combined total of 6.7 billion of in-process and pipeline activity is down about a third from year-ago-levels of $9.9 billion.

At the end of the second quarter, our equity co-investments in the development services business totaled $88 million. We continue to expect a very low level of activity in this business, at least for the remainder of this year.

Please turn to slide 14. Our global investment management revenues were $32.6 million for the second quarter as compared to $42.7 million for last year's second quarter. The decline resulted from the reduction in asset management and acquisition fees as compared to the second quarter of 2008.

Asset management fees were down for the quarter to $29.4 million versus $33.6 million in the first quarter this year. And down from $36 million in the second quarter of last year driven primarily by downward pressure on certain asset management fee structures and foreign currency exchange rate changes.

Assets under management totaled $36.4 billion at the end of the second quarter this year. This total was up slightly from the $36 billion level at March 31, of last year but down slightly -- excuse me, at March 31 of this year but down slightly from the $43.7 billion at the end of the second quarter last year. Our core investments at the end of the quarter totaled $85.2 million.

Our global investment management EBITDA reconciliation detail is shown on slide 15. Second quarter 2009 EBITDA was impacted by a net non-cash write-down of investments of 2.6 million attributable to decreased property evaluations. In the second quarter of 2009, we did not realize any carried interest revenue and we reversed $300,000 of previously accrued carried interest compensation expense, as compared to the second quarter of 2008 in which we accrued $2.6 million of carried interest compensation expense.

As of June 30, 2009 the company still maintains a cumulative accrual of carried interest compensation expense of approximately $20 million. Which pertains to anticipated future carried interest revenue. The segments EBITDA margin in the second quarter of 2009 improved as a result of significant cost cutting efforts. Now, please turn to page 16.

We have continued to aggressively remove expenses from our business. We completed all actions relative to our previously announced savings plans and we are now raising our target by approximately 100 million to achieve between 575 million and 600 million in total annual savings versus base year 2007.

Of this amount, roughly 550 million will flow through our income statement this year. To be clear, these are changes to operating cost that are in addition to variable expenses such as commissions and declines that result from lower revenues. To achieve these savings we incurred $17 million of one time cost containment expenses in the second quarter of this year, 25 million for the six months of 2009, that just ended and 52 million cumulative one-time expenses over the last 12 months. Our CapEx spending target for this year continues to be approximately $30 million which is unchanged from the first quarter target.

Please turn to slide 17. We continue to make significant progress with our balance sheet. Our goals have been to number one de-lever, number two; reduce reliance on bank debt. And number three extend debt maturities. Following the credit agreement amendment announced last quarter we raised $150 million of the equity capital as Brett described earlier, led by a $100 million investment from Paulson & Company and we augmented that with a $50 million ATM program, the combined average price for these two actions were $7.84 of share. We raised $450 million of 11 and 58% senior subordinated notes again, led by a $100 million investment from Paulson & Company.

We prepaid a substantial portion of our debt and most recently, we initiated a long modification program for participants in our credit agreement. This program was launched with preliminary commitments of approximately $425 million from a handful of our largest banks.

We expect to close on this program in the third quarter. Please turn to slide 18. Excluding our mortgage brokerage warehouse facility and non-recurred, course real statements, our total net debt at the end of the second quarter was just under $2 billion. During the second quarter, we paid approximately $150 million of bonuses and incentive compensation related to last year.

Taking into account these payments as can seen in the table, actions taken during the quarter supported our objectives of delevering and reducing our reliance on bank debt. Following the completion of our financing activities during the quarter, our weighted average interest rate at the end of the second quarter of 2009 was 6.8% as compared to 5.6% at the end of the first quarter both before the effective interest rate swaps.

On slide 19, we've illustrated our financial ratio covenant requirements and remaining debt maturity schedule through 2010. You can see that our leverage ratio net debt to EBITDA at the end of the second quarter provided us even more room, under the new maximum ratio permitted of 4.25 times, than we had at the end of the first quarter. And this leverage ratio at June 30, of 2.47 times, compared favorably to the December 31, 2008 ratio of 3.28 times.

Our trailing 12 month interest coverage ratio was 5.36 times, well in excess of the required minimum of two times. The total amount of covenant EBITDA add-backs to normalized EBITDA related to our credit agreement was approximately $200 million for the trailing 12 month calculation in the June 30, 2009.

I will now turn the call back over to Brett.

Brett White

Thanks Bob and please turn to slide 20. I want to provide some brief summary remarks regarding our expectations. Market conditions continue to create a variety of challenges for our business. They do not seem to have changed significantly since the end of the first quarter. And it relates to macro trends that will impact results for the remainder of 2009. And we believe that for investment sales, while we continue to have lower expectations for the remainder of 2009, distress sales may pickup towards the end of the year.

Leasing activity will stay weak until we start to see recovery in economic performance and meaningful job growth. Our outsourcing business will continue to see growth in our client base and the square footage we manage for our clients, but continue to be challenged by downward pressure on corporate spending.

We also continue to believe the global investment management and the development services business will have neutral results until investment sales pick up and asset values increase. Given these expectations our strategy remains consistent. We will focus on providing great service to our clients. We will continue to aggressively attack cost for the duration of the downturn. We will continue to focus on improving our balance sheet.

We will continue to aggressively compete for market share. We of course know that the commercial real estate market will turn and when it does the actions that we have taken preserve our geographic presence in services offered together with the operating leverage we have created in our business will enable us to disproportionately grow market share and earnings versus the rest of the industry.

For many years we have told you that our culture and management focus allows us to attack cost and protect margins in a manner unique in our industry. This quarter's results once again prove out this claim. We take great pride in this and are committed to maintaining our superior financial performance throughout this down cycle and to leverage this highly efficient cost structure aggressively when revenue growth returns to the sector.

And with that operator, we will now take the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay we have first have question from the line of Anthony Paolone with JP Morgan.

Anthony Paolone - JP Morgan

Thank you and good morning. A number of reports out there have shown just a pickup in activity both transaction and in leasing totally a pretty strong June. Do you think that is something that you expect to continue, did you think that was maybe some pent up demand from activity being so dried up earlier in the year?

Brett White

Anthony this is Brett. And frankly, I wouldn't characterize June as a strong month and I wouldn't characterize the market place has haven't seen any particularly strong activity in the back portion of the second quarter.

I do know and this maybe answer what you were referring to, I do know that in New York, which is a valuable market. There was a sense that transaction activity, leasing activity picked up a bit in the second quarter.

But, I would say that globally or perhaps more importantly to our investors, the larger markets around the world, the leasing business remains very much depressed and more abound and the sales market is just in a very-very similar condition as it was in the first quarter.

Anthony Paolone - JP Morgan

Okay that's helpful. In terms of your margins, your gross margin, it picked up from the first quarter but it still seems a bit on the low side. Why is that?

Brett White

Bob?

Bob Sulentic

Well, first of all, Anthony if you -- the thing I'd recall your attention to is our year-over-year EBITDA margin which went up by almost a full point. Reflective of normal job of controlling cost but also reflective of the fact that we've kept our platform intact and we are generating revenues in all of our business lines around the system. And in particular, our outsourcing business has, which is our most stable base of revenue has grown to be 42% of the business in the second quarter. So we, while we certainly would love the return to the days of new double digit margins. We're not in those days now.

Revenues are off, as we reported by 27 %. So what we're trying to do is extract the best possible margins from those depressed revenues and frankly we're satisfied with the margins we generate in this environment.

Brett White

And Anthony I would just I would add to that a comment that Bob made last quarter which I think is important for the context. At the high 9 % range from EBITDA margin in a very-very depressed environment and in our second quarter which seasonally is a lower margin quarter. That margin is higher than some of our largest competitors ever achieved in the peak of the hot market of 2004, '05 and '06. So it's a high 9% margins are very, very respectful margin in a good market. It frankly is a sounding in this market to me.

Anthony Paolone - JP Morgan

Okay. Fair enough and then just another question just thinking, you made comment about potential reducing broker commission. I just wondering how you think about that in terms of competitive landscape, in terms of retaining folks and so forth?

Brett White

I didn't make that comment.

Anthony Paolone - JP Morgan

I think it was in the may be, in the press release you talked about.

Brett White

Anthony you must no, not in this quarter. Last quarter, I think I referred to it, last quarter we mentioned on the call that in early 2009, ourselves and a number of other large firms had marginally reduced commission rate in the US. And so just hearkened back to that. I think that's what you are referring to Anthony. So, what we said back in the first quarter was that commission rates had moved -- for our brokers had move down although, a very small amount a percent or two. Commission rates in the industry being paid by our clients to us, really haven't moved much this downturn. If its anything what you ought to expect through a downturn like this is commission rates paid to us by our clients will modestly move up, as clients who have vacancies in buildings or clients that need to sell buildings, instant brokerage firms a bit more, to get those jobs done in a tough environment.

Anthony Paolone - JP Morgan

Okay, so you are not talking like you commented in the press release about substantially reduced variable commissions that's just timed to the revenues not the commission rates?

Brett White

Oh, Anthony I understand your question. Right. What we're about there Anthony is that, remember that when we talked about expense reductions, we talked about five to $600 million of OpEx, that doesn't count in equal or frankly greater amount of expense that is eliminated from our P&L by commissions being reduced and bonuses being reduced by the decline in revenues.

Anthony Paolone - JP Morgan

Okay.

Brett White

That's automatic and ratable and its not something we do. So, we don't take credit for it.

Anthony Paolone - JP Morgan

Okay. Just wanted to understand that. And then just my last question on the loan modification program of the $425 million that sounds like you have got teed up there, do you anticipate a big change in the rate? What are the big terms that are likely to change?

Brett White

Bob.

Bob Sulentic

Anthony we haven't talked publicly about the changed terms. I will tell you that the big pieces are that we are going differ maturities. Of course that's the whole motivation to do it. We expect it will pay some incremental interest rate as price for extending those maturities but it wont be dramatic.

And secondly there will likely be some fees associated with it. But again not dramatic. We think the price we paid for the extended maturities will be a very-very fair price relative to the benefit it delivers for us. But we haven't talked publicly about what those numbers are.

Anthony Paolone - JP Morgan

Okay. Thank you.

Bob Sulentic

Thank you Anthony.

Operator

And our next question from the line of Sloan Bohlen with Goldman Sachs. Go ahead please.

Sloan Bohlen - Goldman Sachs

Good morning guys. Hi, first question just on the cost cutting to go back to that. It sounds like the strategy its pretty much the cut cost somewhat commentarial with what you see in revenue declines going forward. Do you think about an overall level of cost cutting at which you are starting to dig into whether it's a platform market you may have to cut, or tying that to Tony's question about talent retention and which producers you keep or how do you think about that?

Bob Sulentic

Yeah it's a good question and I'll give you a response that we have been giving for a while now, which is first in a services business like ours, there is a very-very significant amount of cost that can be extracted from the business for a while. With that affecting (ph) the on-boarded back on either through the downturn or when revenues return.

I would say we're a long way away, from extracting cost that impacts the business in a material way. So, we're neither there now, right now nor do I believe we're even close to bumping up against that. It's just a fact of these type of business is that there's awful lot of expense out there that in normal environment, you'd would like to have, you'd like to invest in new things, but in constrained environment, you can without for while.

And were the market to become materially worse. There's a pretty significant amount we could go after in addition to what we have. Secondly, on your question regarding producers. We don't cut -- in the United States, we don't cut any revenue producer because there is -- it's all variable expense. Now in Europe and to a lesser extent in Asia Pacific where some producer are on salaries, they do get cut if they're not producing. But the folks that cut in a downturn like this are not profitable folks. So, people that are generating little revenues and that the cost that we are having to invest or support, those people is not balanced by adequate revenues.

So, the way I think about it Sloan is, this is the business that can withstand as you have seen pretty significant cost cutting without any material diminish in the business. And the support evidence I gave you there which I know Sloan you are very aware of, is just look at the market share statistics. We are gaining share and out pacing cost reductions by the end of firms in our business by magnitude, two, three times that our cost comes out from other firms.

So, I think that the evidence that we can cut, we know where to cut, we know how to cut. We've all been through this unfortunately a number of times before as you know Sloan, we have talked to your folks for years about the fact that there is just a culture here around cost that is intense and I think that the results speak for themselves. Gaining market share, terrific margins and an increasing target on top production.

Sloan Bohlen - Goldman Sachs

Okay Thank you that's helpful and then Brett just to stay on the market share topic. On that that theme, have you seen any smaller niche players dropping out of the market, is that where you are picking up share and how do you think about an inflection about when volumes maybe pickup. There are acquisitions and merger opportunities that you think you'd look at?

Brett White

Yeah, first on the share side. I suppose -- perhaps a small piece of this is smaller firms dropping out. I think on the investment property side there is really a, a clearly simple explanation and I wish it were like you said, it isn't.

Investment property side in the states, our largest competitor by far in this business was a boutique firm that specialized in very-very large transactions. By the way, a terrific firm. That firm has seen a disproportionate decline in share and revenues, because those transactions are exactly the ones that have completely disappeared.

So, if you look at these, I think what happened is that component of the numerator of the market itself is just to be operated, there was a large competitor that did a lot of that work. And so we've all benefited ourselves and perhaps one or two other firms have benefited from that. Add to that -- anyway that's in property side that in a normal market and we've not had a normal market for nine years or in a depressed market, like we are in now, our model, our platform out competes on the investment property side because -- I don't mean to be long winded about this, but in the very hot market, the model from investment property sales is auctioned.

And I hate to admit it but any firm can win an auction. In a tough market or in normal market which required to successfully extract the highest possible sales price for investment properties it's the ability to underwrite assets and to convince buyers that you have a very deep knowledge of that asset and the assets that's surrounded. And so our platform, our services platform of property management, mortgage, finance, leasing brokers we're able to provide a more comprehensive view into the asset class. I think a better view of the asset class then can the competitors.

So that's the share issue. On the leasing side, we just -- we just have a dominant leasing platform globally, end of story. We should expect to have accrete share, there generally every year. On the M&A side, there are some very interesting opportunities in the marketplace right now, because of the depressed values. We're not in the M&A business at the moment. I suspect that when the market recovers, values will go back up and it will be back to a more normal time for us where we still need to be very-very careful around the M&A. But certainly, we look forward to those days and if good opportunities are still present in the marketplace as we've done in the last 12 years, we intend to be an aggressive acquirer.

Sloan Bohlen - Goldman Sachs

Okay, great. And then, one last question for Bob if I may. Just on the loan modification, are you targeting a particular set of the term loans?

Brett White

Sloan on the line with us is Jim Groch, our Chief Investment Officer who's quarter backing -- frankly, he's quarterbacked all these moves. He did the covenant amendment. He led the strategy with the bonds and the equity sale for Paulson and so forth. And he's on point for this and I'm going to ask him to comment on that.

Jim Groch

Okay Bob. This is Jim. From the we are targeting we are starting to target some early renewal of our revolver and we know that for almost two years. But as we have said in the past we are trying to get ahead of this season. Be very proactive. We are targeting branch that tend to have more amortization over the next few years. But we are also even targeting in extension of some of our turn that definitely come up for 4.5 year. To push out, to push a chunk of that out for another couple of years, just to extend maturities in general across the balance sheet and to have less reliance on the bank debt.

Sloan Bohlen - Goldman Sachs

Okay. And then Jim right now the anticipation that this is this determine rate in terms of new terms not any restriction on CapEx or acquisition or like that

Jim Groch

Correct, yes.

Sloan Bohlen - Goldman Sachs

Okay great thank you very much.

Jim Groch

Sure.

Operator

Next question from the line of Will Marks with JMP Securities. Go ahead.

Will Marks - JMP Securities

Thank you and good morning. Few questions here. One can you just address the tax rate. We should be expecting it for full year, this year and if there be a change next year?

Bob Sulentic

38%. Well, and we don't expect a material change.

Will Marks - JMP Securities

And then how about the run rate of interest expense. I know you made some comments that would help drive that but, how should we be thinking about in terms of second quarter number, looking ahead?

Bob Sulentic

We expect our weighted average interest expense to be about 6.8% for the balance of this year.

Will Marks - JMP Securities

Okay and assuming stable rates in the market. Would that continue next year?

Bob Sulentic

That's correct

Will Marks - JMP Securities

Okay. In terms of -- back to the whole margin ratio and I realized that you've done, was a great improvement year-over-year. I'm wondering more on the expense ratio that's related to that, and that is the comp expense ratio which has been going up. And I believe it's tightened more because you're getting more revenues from lower margin business management, outsourcing. Can you comment on that, and what we should expect to see. That ratio has been running about 61%, I think in the last two years. And if you can help us understand where should we going from here?

Bob Sulentic

Well, if things play out the way we all hope they do, we'll -- you'll see two circumstances. Number one, you'll continue to see steady expansion of our outsourcing business which of course, does have a bigger component of labor in it than other revenue streams. But the other thing you should see is that our leasing and investment properties businesses rebound pretty substantially. Obviously they are going to be rebound and is not going to be long term growth, its going to be a cyclical bounce back which will be at some point precipitous, right.

So, even though the long term trend is for the stable outsourcing business to contribute a bigger portion of our revenues and it has historically. We are going to go through a period where that's not the case because you are going to see a bounce back in our transactional revenues, when you see that -- when you are in the middle of that bounce back you are going to see a move back towards a compensation expense being a lower percentage of our overall cost.

But the long term trend is for the stable outsourcing business to be a bigger part of our revenue stream and its embedded with a little larger labor cost. It's also embedded unfortunately with a lot more stability and so we are very accepting that.

Will Marks - JMP Securities

Okay, great Thank you. And moving on to a different topic of leasing. And we now have nine months of about 30% revenue declines and as we look ahead particularly the fourth quarter, has a very call it an easy comp. I am wondering, what we are hearing is that a lot of leasing is taking place, is renewals and short term expansions and it appears that, if that's the case if business can't be much worst than the fourth quarter wouldn't be down as much as the first and second quarters in particular. Can you just comment on the nature of that easy comp?

Bob Sulentic

Sure. Well, I wish it were an easy comp, but I'd be very cautious about trying that conclusion. The challenge Will, that both you and I have been thinking about that question, is there a number of contradictory or competing dynamics that play in the market and let me just describe it for you.

First of all your description is spot on, so what you are seeing in the market place right now generally, is that amount of -- first of all, amount leasing were getting done out there. It's pretty much structural, especially it is they are happy they've worked on. There's not a lot of opportunistic leasing getting done at the moment. And those folks that are in the market, the general rule right now because we thought that was for years.

Ironically in a downturn when leasing rates a bit better, anecdotally (ph) our clients are in the bunker and so rather than take advantage of those slower lease rates and perhaps the landlord are going to give us a few more concession, most of our clients, don't do that and they've signed shorter term leases. Because they are worried about their own future and they are also by the way it takes, the new amount of space they can possible take.

Now, that is kind of balanced a bit by more what I would describe as perhaps a bit smarter clientele or a bit more opportunistic clientele that really does take advantage of a marketplace like this and goes out. And you saw this on the net journal yesterday, that all from the New York it goes out so has a very long terms lease in this market take advantage of a terrific terms available in marketplace. But that right now is the minority component of the client side.

The challenge I am looking forward in doing the fourth quarter as an easy comp is this, if you believe that rental rates have bottomed then you are correct. What you would expect to see then is that at some point clients are beginning to get a bit more opportunistic, sign more traditional leases with a longer term, little bit more space.

However, but that implies that rental rates have bottomed and I am not sure that's right. So, if you believe that rental rate have not bottomed and that rental rates we will continue to decline 5%, 10% more, 3% more pick whatever number you want, that just goes into your mathematical model and will impact your view on revenues in the leasing space in Q3 and Q4.

What we said about all that this year is, first it's impossible to give discrete guidance around leasing or sale revenues this year. However, directionally this down 30% range, we talk about that kind of number a year ago.

As what we would see this year, it's playing out generally along those lines. And I think that we're generally near that bottom level. But, it could get worse. Our leasing rates could continue to decline. On the other hand, there is no question that there is a lot more optimism in the marketplace today, than it was six months ago. And if that level of optimism continues or increases, it's not unlikely that we are going to see a higher percentage of tenants in the marketplace taking more traditional lease terms and more space than we did, in the first two quarters and that could help the comp. It's just very difficult to tell.

Will Marks - JMP Securities

Okay. That's really helpful. I guess that, one, one follow up to that is, if we see pick up in activity given much lower rents, how important is that to commissions? You mentioned earlier how our people, landlords are incentivized to either sell property may be, to lease property. Is it all about activity or is the rental rates that important or is it 75% - 25%? I'll let you comment.

Brett White

Right. Well it's, as you know Will -- and it's a good question. I think a lot of callers don't. This is leasing commission is just a, it's a mathematical formula. A times, B times, C times D and that's rate times, terms times, commission rates times square footage. And so, each of those, variables; A, B, C and D, you do the math yourself. They all matter.

And I think the bet way to answer your question is use history as your guide. And if you go back and you look at the downturn, leasing downturn of 2001 to 2004, what you saw then at least for our firm and we were anomalous in the market place. The other firms didn't behave this way, but in our firm, during that downturn, our leasing revenues began to pick fairly significantly, ahead of the bottoming of the leasing of rental rates. And the reason for that is what you are alluding to. Well -- is that as the market became comfortable may be the wrong word; as the market digested where things where and that rental rates were really at abnormal lows, you began to get more and more tenants, getting into the marketplace to lease greater amount of space for longer term.

And so, our revenues picked up well in advance of the bottoming of rental rates. I suspect the same thing will happen here. The question is when. And I don't want to point a pin that as late 2009 because there's no way to tell. But that is how I think, it will play out. As you'll see our leasing revenues and the leasing revenues of other firms, pick up in advance of the bottoming of rental rates.

Will Marks - JMP Securities

Okay. Thank you very much.

Operator

Thank you. (Operator Instructions) We do have a question here for the line of Vance Edle -- I'm sorry Edelson with Morgan Stanley. Go ahead.

Unidentified Analyst

Hi thanks. This is Vikram in for Vance. I just had a quick question on Asia. You mentioned China, a little better results seen from China. Could you give is little more color on what's sort of driving results there in. And in conjunction of China and India, we've been seeing and hearing a lot of IT companies wanting to shift a lot more work offshore, to the lower cost locations. Is it that part of the reason and do you see that sort of offshore demand continue to reduce and remain one of these, positive point?

Brett White

Well, let me give you -- let me answer the -- I think that the question, you want an answer but then I, I want to condition it with a couple of things.

First, when you look at China, at this point in time, what you see is a country that has injected a massive amount of Stimulus into the economy, in a very-very quick fashion. And there's no question that if you and I were sitting in Beijing or Shanghai of Guangzhou today, the attitude and sentiment in those market is very bullish. And the residential prices have been moving up now, since the first of the year. There's lots of capital flowing around system and that's we're picking up some of that. And I think that in China, so in that business, that would explain a lot of what you are seeing to the China numbers.

In India, a very big market and little likely in on India positive and negative and certainly, that trend of outsourcing of different -- what I describe as white collar activity, to that country continues. But, I do need -- I need to condition this with the bigger point, which is; good or bad, the India and China markets, as a contributor of overall profits to the firm and revenues are immaterial.

They are not large and so, as much I would like to get excited about what's happening in China and India. They are very markets to us. They are very important to our clients, but where those markets go, plus or minus, month-to-month, I -- don't hugely move the needle. But certainly, we were very pleased to see that those markets did better in the second quarter. But, as Bob, I think mentioned in his comment I wouldn't read a lot into that right now.

Unidentified Analyst

And thanks. And then you mentioned on the investment management side there was some pressure on fee structures, could you give us a little more color over there?

Bob Sulentic

Yeah. Vikram the pressure was spotty, there were a couple places in our portfolio where there were some downward pressure on our fees due to unique circumstances within individual funds and as you know as everybody on the phone knows, there is a lot of pressure on investment properties of all types everywhere in the world.

And we had certain circumstances where that resulted in some downward pressure. We had some evaluations come down and that resulted in diminution of some of those fees. So we were seeing some of that in different places in our portfolio, other then to say that values are generally down and new opportunities are slow in the current environment. I wouldn't generalize.

Brett White

Yeah, and let me just add to that and Bob I think makes a right point. Vikram keep in mind our protocols. The clients in our investment management business don't have the ability to renegotiate these within these funds. What Bob is referring to is the, fees go down if the overall value of the funds declined because we paid a percent of the value so, and the management fees.

So, and you've got to be because go down as there is the profit most funds decline, but I just want to be clear that the recent pressure on the fees from declines in the funds, the other fact (ph) of contractual,, they don't change. There is pressure on the fees because of the markets.

Unidentified Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question is from the line of Robert Riggs with William Blair & Company. Go ahead.

Brandon Dobell - William Blair & Company

Hi, it's Brandon for Rob actually. Brett wanted to see if I can get a little more color on, I guess your level of comfort with the idea that the stress selling will pick up from the context of a couple of things. One; if you guys are having success pushing out the amortization and things like that, with your bank group, is that going to be a kind of the way things work with banks that are exposed to commercial properties? They just kind of want to keep pushing things out in the hopes rather leasing revenue gets better. So, therefore the performance looks okay or can I get more transparency on the cost of capitals.

So you can pull over that property larger than you would have thought and does that I guess relieve some of the pressure from the distress selling part and then the other subside of it is, if a lot of stress properties come out in our and kind of run by actions perhaps if they aren't that difficult to get down or just big portfolios, do you think, that you have a same kind of revenue opportunity as you would in kind of a single sale, difficult transaction kind of scenario?

Brett White

Right. Okay, three good questions in there. And let me hit all of them. First, there are real differences, I believe in the way in which vendors look at operating companies and their debt. And the way that vendors look at assets and the debt against those assets.

One of the obvious differences is, on a building, you have a value that can be impeded fairly easily against an asset. So, when you have a building value, that is significantly less than the mortgage, I think it's more difficult for the lender to deal with that issue, but isn't a services company, that's producing trailing 12 or $600 million of EBITDA. And it's a business that produces income and cash flow at a pretty significant level.

Our situation, I think is fairly straightforward and most fairly, easily dealt with by Jim and others. But when you're on a building and you've got a $750 billion mortgage on the with $500 million. That's a tough conversation. And the bank I think, that has mortgage in that building is really in a tough position.

They have to deal with that mark-to-market. They've got to make a decision around what to do with asset, do they take it back. Do they rework the mortgage. But in almost any of them on an asset, that lender is going to be looking for some infusion of equity into that capital stack, if they are going to do something with -- rework the loan.

And so I think what you are -- I think what all that means is that, you are going to see a pick up in distressed selling as we move through the cycle. Now, let me condition that by saying so far, what we have seen is a preponderance of work out. We haven't seen a lot of distressed selling go to the system. But, I think that you are going to see that pick up in the coming months and in coming quarters as these buildings are really forced into a corner, and have to make some fundamental decisions about what to do with these assets, and the folks that are the owners of these buildings have to make some fundamental decisions about whether or not they are going to put equity in to cure some of these issues.

Some will, some won't. As it pertains to the volume of that business flowing to the services business, and what we should expect from that, I do believe that we will capture a disproportionate share of those types of sale opportunities, just due the nature of our platform, and the fact that it's dominant, permanent business where the easy first choice to handle those types of tough situations, we have deeper and better relationships with the largest lenders, we've been in it for a long time.

We have a lot of expertise around these types of sales and we have a very large business that is right now focused on distressed selling. So I think distress sales provides us a real opportunity for revenue growth, and have and will in the future quarters. Comparing a distress sale to a typical one off discreet asset sale, there's probably some validity (ph) in what you said which is I suppose that we could sell every asset discretely from a different owner on every asset we might really better fee than if we take a portfolio of billion dollars of assets. I think that definitionally true. But we will take it how we can get it and the market is bring us right now some pretty interesting opportunities on bulk properties to be sold.

Brandon Dobell - William Blair & Company

Okay. And do you have enough although historically that's going back, five or 10 years or just in a last couple of quarters, to give you any sense of whether there is kind of a knock-on effect from handling a distressed sale, other portfolio discreet asset, from the perspective are they getting the property management business or getting or retaining the leasing business on that property? So, is there a cross-sell that becomes a little bit easier if the distressed selling manager, to put it that way?

Brett White

The answer is yes. Certainly, in our business what we want is to be in that decision cycle as early as possible. So, when a owner gets control of a property, however they get control of it we'd like to be there in the early days to talk to them about the various things we can do for them to add value to property. So, if we are looking on the sale of a property, and we are introduced to a buyer that way, I would expect that buyer will probably talk to us about how we might increase value on that asset through property management, or leasing or other things we can do.

Brandon Dobell - William Blair & Company

Okay. And...

Brett White

Its only better than the alternative being on the outside watching someone else do it.

Brandon Dobell - William Blair & Company

Right-right really. Shifting a bit to investment management, how much money is there to put to work within the various funds, are you talking to minimal buying power that you guys need to or dry powder that you have to put to work. And if there is a decent chunk there, is it US focused, international focused, how do you think about the growth in assets under management exclusive of any kind of mark-to-market?

Brett White

Roughly at, right at $2 billion of whole dry powder, most of it in US but we have the ability to do something's in other parts of the world. We are also pursuing some strategies raise new capital. And we are giving some early returns to suggest that we're going to meet with some success there. Certainly, a much different environment. Now, raising capital that was historically but we think we get some new capital raise this year. But to manage that dry powder we have available immediately is about $2 billion. Of course that will be we're able to lever that.

Brandon Dobell - William Blair & Company

Okay. And that's next question. And then final, into relations to that. In terms of your exposure on the co-invest going forward and where does that stand? As many push backs from the guys who could deal with in terms of want me to put more money on the table, to take some of the risks, those kind of things.

Brett White

Well, yes. A couple of things there. Co-investment exposure and I guess, new co-investment. We've got, today we've got about $85 million of co-investment and as you know we've -- each quarter, we thoroughly examine the value of those portfolios and we have taken some significant write-downs. So, we think we are in pretty good shape there. Although, that all depends on how values go from here on out. And the answer is yes. There is, as you go out to raise capital in this environment, there is a desire on the part of limited partners to see more co-investment. But that's not moving radically at this point. That's moving slowly and because the pace of raising the capital has been relatively slow, I think the market still kind of been feeling out stage as to where that's going to land.

Brandon Dobell - William Blair & Company

Right. And one more follow up with related to that, given where the balance sheet is right now, you have to balance how much capital you think you can go out and raise with the expectation that you got to protect the balance sheet little bit. So, you can't co-investment a whole lot of money or is co-invest -- even the current requirements or current thought process just not going to make a difference in turns of how your balance sheet looks.

Brett White

We have been ultra careful about every dollar we spend and in the expense sense and we are being ultra careful about every dollar we invest in an investment sense. And yes the status of our balance sheet is something that we are very, very cognizant of as we consider new co-investment opportunities. But we have budget as we in doing intend to do some co-investment.

Brandon Dobell - William Blair & Company

All right. Great thanks a lot.

Operator

Thank you and next question from line of Will Marks with JMP Securities. Go ahead.

Will Marks - JMP Securities

Hi. Thanks, Bob on the balance sheet can you explain you guys raised money during the quarter did that net debt level did go up I believe its from the payment of bonuses can you may be quantify that and then confirm that did you'd expect in it -- that level to decline throughout the year?

Bob Sulentic

Well we did obviously raised a $150 million of equity and we paid bonuses of about that amount, so in the second quarter, so that was an offset. Our expectation is that we will generate, we will generate some cash in the second quarter from operations that will be -- we're not, as you know giving specific guidance on that but I can just tell you directionally we expect to generate some cash from operations and we expect that to be a benefit to our balance sheet.

Will Marks - JMP Securities

And is, the fact that net debt number did go up by 200 million or so during the quarter or even after the capital raise. Is that typical in terms of second quarter, negative operating cash flows if that's the case?

Bob Sulentic

Well, the second quarter is not a strong quarter for operating cash flow and we did have the bonuses, they created a circumstance but our actual net debt was down by $42 million.

Will Marks - JMP Securities

Oh, was it during the quarter, okay.

Bob Sulentic

Yeah, if you would, if you look Will, the slide deck, page 18 or slide 18.

Will Marks - JMP Securities

Okay.

Bob Sulentic

You can see our total net debt went from 1.955 billion -- excuse me, 1.997 million down to 1.995 million or a positive move of $42 million.

Will Marks - JMP Securities

Okay.

Bob Sulentic

Which is about right, and let me tell to why that is. The equity we raised about off set bonuses and the second quarter and the environment where you don't expect to generate much cash flow.

Will Marks - JMP Securities

Right, okay that makes sense. And, I guess one final comment on -- I've been reading a lot about BOA and I know you guys, do a lot of their business and can you explain how this, the branch reduction, helps or hurts you and if you are working on this?

Brett White

Will, with the bank, they have asked and we very much respect that we not comment about any of their strategies or work around their strategies. The only comment, I would make is that we were very pleased to be awarded the EMEA and Asia Pacific, Latin America portfolio. But, that's really the only thing I want to say about the bank account. That they are understandably -- want us to just remain silent on their activities and our work with them. I apologize for that. I certainly appreciate and understand their position on this.

Will Marks - JMP Securities

Fair enough. Okay, thanks guys.

Operator

Thank you. And no further questions in queue. Please go ahead, sir's.

Brett White

Well, thanks everyone for your time. We will talk to you in the quarter.

Operator

Thank you, and ladies and gentlemen, that does conclude the conference for today. Thanks for your participation. You can now disconnect.

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