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CBRE Group Inc. (NYSE:CBG)

Q2 2014 Earnings Conference Call

July 29, 2014 5:00 p.m. ET

Executives

Steve Iaco – Investor Relations

Bob Sulentic – President and Chief Executive Officer

Jim Groch – Chief Financial Officer

Gil Borok – Deputy Chief Financial Officer

Analysts

Anthony Paolone – JPMorgan

Brad Burke – Goldman Sachs

Brandon Dobell – William Blair

David Ridley-Lane – Bank of America Merrill Lynch

Mitch Germain – JMP Securities

Todd Lukasik – Morningstar

Operator

Greetings and welcome to the CBRE Second Quarter 2014 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Iaco. Please begin, sir.

Steve Iaco

Thank you, and welcome to CBRE’s second quarter 2014 earnings conference call. About an hour ago, we issued a press release announcing our Q2 2014 financial results. This release is available on the homepage of our website at www.cbre.com.

This conference call is being webcast 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 audio archive of the webcast and PDF version of the slide presentation will be posted on the website later today and a transcript of our call will be posted tomorrow.

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. These include statements regarding CBRE’s future growth momentum, operations, financial performance, business outlook and ability to successfully integrate businesses we have acquired with our existing operations. These statements should be considered to be estimates only and actual results may ultimately differ from these estimates. Except to the extent required by securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements you may hear today. For a full discussion of the risks and other factors that may impact any estimates that you may hear today, please refer to our second quarter earnings report filed on Form 8-K, our current Annual Report on Form 10-K, and our recent quarterly report on Form 10-Q. These reports are filed with the SEC and are available at the SEC’s website.

During the course of this presentation, we may make certain statements that refer to non-GAAP financial measures as defined by SEC regulations. Where required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, those reconciliations can be found within the appendix of this presentation.

Please turn to Slide 3. Participating with me today are Bob Sulentic, our President and Chief Executive Officer; Jim Groch, our Chief Financial Officer and Global Director of Corporate Development; and Gil Borok, our Deputy Chief Financial Officer and Chief Accounting Officer, who will join us for the Q&A period.

Please turn to Slide 4, as I turn the call over to Bob.

Bob Sulentic

Thank you, Steve. Our strong performance in 2014 continued in the second quarter. We again turned in double-digit growth in global revenue even without our acquisition of Norland Managed Services and a 16% increase in adjusted earnings per share. Overall results were in-line with anticipated trajectory for a business and reflect our success in driving meaningful growth while continuing to make investments that support our professional enhanced client service and will sustain our long-term performance. Before Jim takes you to the quarter in detail, I’ll cover some highlights starting with our global region.

EMEA once again produced outstanding results. We continue to benefit from an improved macro environment region and Norland’s first rate building technical engineering capabilities, which are now part of our integrated suite of occupier outsourcing services. While Norland was a major contributor during the quarter, we also produced solid organic growth from our existing businesses.

The Americas, our largest business segment showed strong growth. Property leasing and occupier outsourcing were key catalyst. In leasing, we registered our strongest revenue growth in three years driven by market share gains. Asia-Pacific faced dual challenges of a sluggish macro environment and continued currency weakness. However, revenue rose 9% in local currency paced by Australia. We augmented our Asia-Pacific business at the end of the second quarter by acquiring our long-time affiliate in Thailand and established well-run domestic business.

We continue to see strategic well-structured M&A as an effective use of capital and have announced six acquisitions thus far in 2014 including three in the past two weeks.

Now, I’ll turn to our global business line highlights on Slide 5. As mentioned, particularly notable was property leasing, which generated double-digit growth for the fourth consecutive quarter. This increase was driven mainly by the U.S. while we’re reaping the benefit of improved occupier sentiment and continued focus on market share gains. Asia-Pacific grew solidly in local currency. Occupier outsourcing which we called Global Corporate Services or GCS had an exceptional quarter. Globally, revenue rose 58% with the big boost from Norland. However, even without Norland this was our fastest growing business line with organic revenue up 17%. We continue to benefit significantly from the high quality depth in scale of the global integrated solutions that we deliver for larger occupiers. We also saw improved results in global investment management and the strong track record of our investment program drew significant new capital and generated higher performance base fees during the quarter. Property sales grew significantly in Europe but only increased modestly in the Americas as compared with robust revenue growth we delivered in the second quarter of 2014. Capital targeting U.S. real estate remains strong liquidity as plentiful and we believe our pipelines for the balance of the year are solid.

Commercial mortgage service revenue fell due to lower activity as expected with the government-sponsored enterprises. Overall and importantly, contractual revenue sources continue to rise accounting for 53% of total revenue during the period up from 47% in the second quarter of 2013 mostly reflecting the Norland contributions. Our long-running revenue makeshift toward more stable recurring revenue sources was a major factor in the credit rating upgrade we received during the quarter. We’re pleased with our performance in the first half of the year with growth of 24% in revenue and 30% in adjusted earnings per share. In the Americas, revenue increased 11% and EBITDA improved 9% for the first half despite the drag from lower GSE originations. Had GSE activity been flat versus last year’s first half, America’s EBITDA would have increased 14% for the first half of 2014 reflecting positive underlying operating leverage in the business. Overall, our results reflect the ability of our people to deliver premier globally integrated services that create superior value and are increasingly required by clients. This is an enduring strength that provides a competitive advantage to CBRE.

Now, Jim will review the quarter in more depth.

Jim Groch

Thank you, Bob. Please turn to Slide 6. Q2 2014 was another period of strong growth for CBRE. We achieved the 22% revenue increase on the strength of solid organic growth as well as contributions from our acquisition in Norland. Excluding Norland, consolidated revenue rose 11%. Normalized EBITDA in Q2 increased 8% over the prior year quarter. As previously forecasted during our Q1 earnings call, this quarter’s normalized EBITDA was impacted by lower GSE activity and the timing of development sales. Had these two items were flat versus same quarter last year, normalized EBITDA would have been up 13%. After adjusting for selected items EPS increased 16% to $0.36 in Q2. On a GAAP basis earnings per share rose 52% to $0.32,

In Q2 2014, we benefited from a $9.1 million decrease in interest expense primarily due to our refinancing activities last year. This benefit was offset by $10.6 million increase in normalized amortization and depreciation expense.

Our normalized tax rate fell to 37% for the quarter compared with 40% in Q2 ’13. For the full year, we continue to expect the normalized tax rate to be approximately 35%.

Now, discuss the performance of our regional business segments in local starting with the Americas on Slide 7. We continue to produce double-digit growth in the Americas. Overall revenue increased 12% for Q2 2014. This is the seventh consecutive quarter of double-digit revenue growth. Property sales which can be lumpy quarter-to-quarter grew 4% in the second quarter after tough compare. With the Americas, the U.S. experienced 38% growth during Q1 and only 2% growth in Q2. Q2 was against [ph] Q2 of 2013, that had grown 37% over Q2 2012. We anticipate mid teams growth in the second half of the year. Leasing was a standout performer with a 19% revenue increase. This was our highest growth rate since Q2 2011 as we benefited from investments in this core part of our business including continued strong recruiting. Market conditions are improving and CBRE econometric devisers forecast about a 4% rent increase for Q2 ’14 over Q2 2013 based on preliminary data. We continue to enhance our transaction professional’s ability to create competitive advantage for our clients. By example, our transaction professionals now draw off a considerable internal expertise in order to place solutions, logistics, budget management, investment banking and healthcare.

Global Corporate Services or GCS in the Americas grew revenue by 19% or 18% in dollars with strong new business wins. There is significant synergy in both directions between GCS and our leasing business as our large corporate customers are increasingly purchasing these services on an integrated multi-year contractual basis. Combined with Asset Services, GCS and Asset Services together grew by 14%.

Please turn to Slide 8 regarding EMEA. EMEA had revenue growth of 82% in Q2. Norland added $196 million of revenue during the period. Even without this contribution, EMEA revenue grew 9% or 16% in U.S. dollars. Norland bolstered our combined GCS and Asset Services growth. However, we achieved 20% revenue growth in local currency without revenue from Norland as our outsourcing business gained attraction in Europe with significant new business wins including a major facilities management contract with Credit Suisse. Property sales also remained strong with revenue up 14%. We continue to see increased activity in more countries including Ireland, the Netherlands and Sweden as well as ongoing strength in Germany. This compensated for lower revenue in the UK where Central London had a pause in activity with some expected Q2 deal activity likely slipped into Q3.

Leasing in EMEA declined 5% in local currency that was essentially flat in U.S. dollars.

Please turn to Slide 9 regarding Asia-Pacific. We achieve 9% revenue growth in Q2 2014. However, the growth rate was reduced to 3% when translated into U.S. dollars primarily due to the weak Australian dollar. GCS and Asset Services combine saw revenue increase 12%. Third-party real estate management is gaining a stronger foothold in Asia with Greater China, India and Japan providing significant contributions this quarter as did Australia.

Leasing revenue rose 9% driven by Australia, India and Greater China where we represented city group in the largest ever office transaction in Hong Kong. We are particularly pleased with this growth at a time when the region’s occupiers generally remain cautious about long-term space commitments. Property sales revenue rose 6%. Activity in Australia was especially robust, which compensated for sluggish performance in most of the rest of the region. Lower EBITDA and operating income for the region in Q2 was primarily due to a decline in high-margin property sales in Japan compared with a very strong second quarter 2013.

Please turn to Slide 10 regarding Global Corporate Services. In Q2, the International Association of Outsourcing Professionals once again ranked CBRE the number one real estate outsourcing firm. Even more noteworthy, CBRE was ranked the number three global outsourcing company among all industries. GCS growth is being propelled by a secular change in how multinational corporations and other large usage of space are contracting the real estate services. Corporations are increasingly putting a premium on strategic globally integrated solutions that help them operate more efficiently and enhance their ability to achieve their own strategic objectives and CBRE is particularly well positioned to deliver these solutions. While the outsourcing trend has been growing strongly in the U.S. for some time, this recently gained more attraction overseas and in newer vertical markets. We signed 32 contracts in EMEA and Asia-Pacific in the first half of 2014. In healthcare, an industry facing intense cost and regulatory pressure, we signed new contracts. We expanded our existing relationships with eight U.S. hospital systems in the first half of 2014. In Europe, our GCS offering has been materially strengthened by the Norland acquisition. It has not only given us a best-in-class building technical engineering capability, but has added real depth to our senior management ranks. During Q2, we appointed Norland’s CEO, Ian Entwisle to lead our entire GCS business in Europe. He is a talented executive for the record of driving strong growth for a new business and client retention.

Please turn to Slide 11 regarding Global Investment Management. Revenue grew 6% and normalized EBITDA increased 15% in Q2 or 9% and 17% respectively in U.S. dollars. This growth is notable following a year in which we sold $10 billion of assets for our clients and exited the management of a private REIT. We raised $3.2 billion of new equity in Q2 or $4.4 billion year to date, already nearly matching our total capital raised in all of last year. Our ability to attract fresh capital attached to the underlying strategy of the business. We have $6.6 billion of equity available to deploy.

AUM increased for the quarter to $92.8 billion up $4.6 billion from Q2 2013. Property acquisitions and dispositions each totaled a bit more than $1 million for the quarter. We now have increased AUM for three consecutive quarters. We generated over $7 million of carried interest revenue in Q2. Under the normalized accounting treatment, we adopted it beginning of last year. We matched the timing of related compensation expense, which was typically about half of the revenue. Our equity co-investment in the Global Investment Management business totaled $167.2 million at the end of Q2 2014.

Please turn to Slide 12, regarding our Development Services business. As expected, second quarter revenue and normalized EBITDA in this business declined from a year ago. This is due to timing. As discussed on our last quarterly call, we completed a major asset sale in Q1 which was earlier than expected and another major sale originally scheduled for Q2 will close later this year. This development business continues to ramp up as the economy improves. This can be seen in a larger deal pipeline, which is increased by $400 million since year end 2013 to $1.9 billion. Development projects in process totaled $4.8 billion at quarter end, down marginally from year end 2013. Our equity co-investments in the Development Services business totaled $96 million at the end of Q2, while our total recourse debt for this business stood at only $13 million.

Now I’ll turn the call back over to Bob for closing remarks.

Bob Sulentic

Thank you, Jim. Please turn to Slide 13. At the midpoint of the year, we’re pleased with the way 2014 is unfolding. While the macro environment is mixed globally, we are encouraged by signs of improved conditions in the U.S. and Europe. As important, our people on with the industry’s premier service offering and our increasingly strong platform are creating significant value for clients. Our balance sheet is strong and we recently achieved that in investment grade rating on our secured debt for the first time. First half property sales growth of 14% is in line with our expectations for a double-digit revenue increase for the full year. Property leasing growth of 12% in the first half is pacing ahead of our expectations of mid- to high-digit growth for the year fueled by share gains and an improving market. We expect global corporate services to continue its strong growth following the first half during which revenue was up 59% or 15% without Norland. We now expect GSE origination activity could be down modestly rather than flat for the full year. We also expect revenue in earnings, evaluation and appraisal services in the U.S. to be down for 2014. Our principal businesses, investment management and development services remain on track with some upside versus our initial expectations.

In light of our performance in the first half with adjusted EPS up 30% and our active pipeline, we now expect full-year earnings per share as adjusted to be in the $60 to $65 range, an increase of $0.05 per share from our initial guidance. This upside is driven largely by transactional activity, which we anticipate entirely in the fourth quarter. We believe this ranges in aggressive but achievable result for 2014. At the same time, we want to emphasize that we faced much more challenging earnings comparisons in the second half due to the nearly $90 million of EBITDA from carried interest we generated in last year second half. Further, the macro environment continues to present challenges underscored by heightened geopolitical tensions.

In closing, we remain positive about our outlook and the advantages afforded by our people globally integrated services offering and strong cash flow in balance sheet. With that, operator, we will open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is coming from Anthony Paolone from JPMorgan. Please proceed with your question.

Anthony Paolone – JPMorgan

Thanks and good afternoon. With regards to your comment about transactional activity in the fourth quarter driving up to guidance, can you be more specific as to what that is like? Is that promotes that you were previously assuming or is there something else?

Bob Sulentic

Anthony, this is Bob. What we mean to say there is that we think there is some upside combined in our principal businesses investment management and development and that’s transactionally driven. That will be from the sale of assets and potentially in our brokerage businesses, our investment properties business and our leasing business. So it’s various types of transactions.

Anthony Paolone – JPMorgan

But those items that could come out of like investor management if you sell assets like the carries and the carried interests in the promotes, do you now including a bit more that in the buck 60 to buck 65 or that would be on top of the buck 60 to buck 65?

Bob Sulentic

No, no. That would be unsighted. That would be a small amount from where we sit today.

Anthony Paolone – JPMorgan

Okay, but then the rest of the increase in the guidance also relates to just other businesses not just purely like promotes?

Bob Sulentic

Yes. Again transactionally oriented, so brokerage-oriented businesses investment sales leasing.

Anthony Paolone – JPMorgan

Okay. And then on leasing, you had good growth in that for several quarters now, but it seems like each time you’ve chalked it up to market share gains, just trying to understand a) how much more can you gain in share before you really need the market to kind of get behind you? And b) can you put any brackets around what you think a better leasing environment could deliver in terms of growth in that business segment?

Bob Sulentic

We wouldn’t. We’ve said that we expect growth in America’s leasing, for instance, which is our biggest leasing market by far to be in the 5% to 10% range. We really have modified our due on that. As it relates to our… That could go up with the economy got better, but based on what we’re saying in the economy now what’s being forecasted we think that’s a reasonable rate. As jobs are getting added, companies are also becoming more efficient in their use of space somewhat and so forth. We think we can continue to gain market share for a while. When you look at our business, there is none of our product lines including leasing that we have crossed the board [ph] more than about 10% mortgage share. Leasing in particular is a product line that’s moving in an account based direction sometimes just leasing accounts, so we will do all the leasing for a particular company across the United States or potentially beyond the United States. It may be integrated with GSE accounts, so as that part of the business moves in an account based direction we are advantaged. We’ve added a good number of producers over the last couple of years as we talked about that creates an opportunity for us to gain market share and we’ve done some work to get gain deeper knowledge in the local markets and with some markets we have good market share and then with some markets we have lesser market share and so we’re targeting those markets for the additional brokers and so forth.

Anthony Paolone – JPMorgan

Okay, And then just last question. You guys seemed to have done a number of.. Sorry. Talking on acquisitions, if you will, over the last several months, can you give us any color on the economics of those or contribution on a go-forward basis and also just what that pipeline works like as well in terms of doing more those?

Jim Groch

Yeah, Anthony. This is Jim Groch. We’ve closed six small east [ph] transactions and announced the seven and we historically said that our infill transactions are running between 5 and 6 generally averaging over the last several years at about 5 and half EBITDA multiple and we’re continuing, that record continues. We’re actually running at a little bit lower multiple. We are seeing quite discipline on the M&A front and then I would just note that including the announced deal that hasn’t closed yet, most of these have been recently in the last few weeks. We’ll be acquiring in the neighbourhood of $130 million of run-rate revenue.

Anthony Paolone – JPMorgan

And what is that pipeline look like in terms of other dealership might be contemplating? Did all of these just happen to occur at around the same or was there sort of a shift for you guys to just focus more on M&A?

Bob Sulentic

Well. If you look over the last 18 months, we have been on average closing a transaction about one transaction a month. We closed 11 deals last year and 6 closed in the first six months of this year. So with this period we’ve obviously increased the volume from prior periods, but let’s say, continues to run pretty steady. We may have a low for a couple of months as we’ve just had a crunch of deals coming through at close, but the pipeline continues to look pretty good.

Thank you.

Operator

Thank you. Our next question today is coming from Brad Burke from Goldman Sachs. Please proceed with your question.

Brad Burke – Goldman Sachs

Hi, good evening guys. When I touched on property sales and realized that the property sales can be lumpy quarter-to-quarter, but wanted to get a sense to whether the deceleration that you saw in terms of the growth from Q1 to Q2 particularly in Americas, if that’s consistent to what you’re seeing in the market or whether the quarter we’re just in usually choppy? And you’re still forecasting double-digit growth for the entire year, which would imply an acceleration from 2Q. So I was hoping you could elaborate that because the comps don’t appear to be getting any easier year-over-year as you get in the Q3 and Q4.

Bob Sulentic

Yeah, Brad. First of all, we had a really tough year-over-year comparing in terms of growth with the growth we had in the second quarter in 2013. We had a big quarter in Q1 as you know, which can suggest that some activity that could have closed in either the first or second quarter closed in the first quarter and frankly we didn’t have a lot of activity in the second quarter. It wasn’t a real active quarter for us at all as evidence by the numbers we turned in. We think that was just kind of a circumstance attributable to the lumpiness of the business a lot like we saw in the first quarter when we had the 30+% growth in the America. So we still based on everything our research people are telling us and our economists are telling us what we’re tracking in the market the backlogs we have, we still think mid teams growth in the second half of the year is reasonable. We keep close tapes as you know on what are producers have in their pipelines and that would suggest that those numbers make sense.

Brad Burke – Goldman Sachs

Okay, that’s helpful. And then on asset management, obviously a good quarter for the fund raising and it’s nice to see the AUM picked up. So I’m just curious what you’re seeing in the pipeline in terms of more appetite for fundraising and also a nice increase looks like in the base fee. So I’m just wondering whether or not we should expect that to continue, whether there was anything kind of unique in Q2 that drove the quarter-over-quarter increase?

Bob Sulentic

Yeah, we’re seeing good momentum around the world in asset, AUM and capital raising for the business and expect that to result in increases in AUM. That’s really particularly true in Europe and the Americas and we don’t see any reason for that to change through the end of the year. In terms of the question on the fee guild, can you answer that?

Jim Groch

Yeah. Hi, Brad. In terms of the fee, I think, what you’ve noticed is that the fees structures under management quarter-over-quarter are pretty flat and then there were some incentive and disposition fees that we received that were hired in prior year and that had to do obviously with disposition activity or largely with that and then there were some carried interests, that sort of the component.

Brad Burke – Goldman Sachs

Okay. And then just last one. The expectation for evaluation of appraisal will be down in 2014. What’s driving that?

Jim Groch

Hi, this is Jim, Brad. The evaluations business had done a lot of work over the years with lenders in particular working at loans, that activity is fallen off. And then we have also seen a little bit of a shift in what some folks are buying or looking to buy from that service line where they’re purchasing at lower costs. Some were level appraisals that we’ve seen a little bit of a shift in the fee structure and then the product as well.

Brad Burke – Goldman Sachs

Okay. I appreciate it. Thank you.

Jim Groch

Yeah.

Operator

Thank you. Our next question today is coming from Brandon Dobell from William Blair. Please proceed with your question.

Brandon Dobell – William Blair

Thanks. Good afternoon guys. Why you could address, I guess, the thought process at the management level thinking about flowing through some of the transactional upside versus pushing that back into the business and going out on hiring some more transaction professionals, I did guess I think about the trade-offs between those two, I guess, uses of margin points these days?

Bob Sulentic

Yeah, Brandon, we made the decision a couple of years ago that we were going to trade-off some current income for more certain long-term growth in a variety of ways. One of the ways was by additional recruiting in our various brokerage lines of business. Again as you know last few we had our best year in the decade recruiting. That has continued into this year. That strong recruiting momentum, we’ll see by the end of the year how it affects over the last year, but we’ve had good recruiting momentum this year. We also chose to make investment in what we called our operating platforms, so things like technology, research, etc. that support our market facing professionals. So we have a mindset and a strategy that is aimed at investing in the business to a rational degree in the short run to support long-term growth and long-term stability in the business. That will continue, that will continue with the acquisition of producers but it will also continue in the other ways I mentioned.

Brandon Dobell – William Blair

So it sounds like there is enough upside in I guess the flow of business that you can continue all those efforts at the pace as you thought you would be on, as you started the year but it doesn't sound like there was enough to say – all right, let’s step up the pace of either technology investment or producer recruiting, or are you satisfied with the pace of both those initiatives? Technology and producers?

Bob Sulentic

We are satisfied. We stepped that pace up some time ago. We haven’t backed off the pace but we’re not accelerating. We think we’re at about the right -- about the right place now.

Brandon Dobell – William Blair

And then focus on Norland for a second. Any material or noticeable seasonality in that business as we think about modeling its contribution in the back half of this year?

Jim Groch

Yeah, Brandon, this is Jim Groch. Norland’s historical strongest quarter is Q1, and the next strongest quarter is Q4 typically and then two and three are plus – have been plus or minus the same. So unlike a lot of our business, it’s actually slightly weighted to the first half of the year.

Brandon Dobell – William Blair

And then looking at the contracts that you guys signed in the quarter, where you had opportunities to perhaps bring Norland into those discussions, I guess, I am curious from two perspectives. One, are you able to go into existing contracts that either aren’t up for renewal or in a period where you are not talking too much about the next leg of the contract and inject Norland into the discussion, maybe to either displace an existing vendor or displace an in–house capability? And then secondly, in the contract negotiations where there is a renewal opportunity. Have you been able to put Norland into that discussion, as easily as you thought you could post the acquisition?

Bob Sulentic

With regard to our GCS business, which is where Norland primarily plays, they have been welcomed by our folks and by our clients in renewals in new contract pursued. So the answer to that is very definitely yes. And it has been viewed roundly as an upgrade to our offering, and rounding out of our offering in a big way in Europe, or particularly in the UK.

In terms of inserting them in ongoing contracts, we only do that at points where there is -- we only attempt to introduce them into a contract at a natural point where there's a renewal or there's a need for the particular service they offer to the bid. That's the right way to do that, and that’s the approach we take.

Brandon Dobell – William Blair

And then final question, the leasing markets, obviously some nice I guess gradual acceleration the past 10 quarters. In your discussions with corporates out there, I guess, occupiers in particular, how fast do you think they are moving towards this kind of contractual relationship or leasing as part of a broader – I guess a broader relationship with you guys, and is that – is there any specific type of company that’s making a faster push that way looking to integrate a whole lot of services with one provider? I am just trying to get a sense for how quickly market share drivers can change given that push towards kind of a more broad contractual relationship with you guys?

Jim Groch

Brandon, this is Jim. It has been kind of on a steady march along that path for the last few years. We estimate that about 30% of our tenant revenues are now coming from our large corporate outsourcing clients and roughly half of our corporate outsourcing assignments include transactions as part of the contract. So it’s become quite material over the last few years.

Operator

Thank you. Our next question today is coming from David Ridley-Lane from Bank of America.

David Ridley-Lane – Bank of America Merrill Lynch

Sure, I think we will start comping the lower GSC in the third quarter and just kind of curious – I know you are saying the originations would be down for the full year. But how much of that drag kind of goes away as we look into the second half of this year?

Gil Borok

Hi David, it’s Gil. If you will recall, original guidance [ph] that we thought for the full year would be flat, right, but the first half down, and the second half recovering. That was the original guidance and so what we are indicating is we just don't expect as much of a recovery in the second half. So it will be down slightly for the full year.

David Ridley-Lane – Bank of America Merrill Lynch

And is my math right around 12 million drag for the first half in terms of EBITDA?

Gil Borok

13 million.

David Ridley-Lane – Bank of America Merrill Lynch

And when you look at the drivers of leasing acceleration, are you seeing more sort on a square footage demand, is it the fact that rents are increasing, or terms going up, is there any sort of driver that stands out as improving significantly?

Jim Groch

The one thing we commented David – this is Jim – is that rent growth – our econometric advisors group has rent up about 4%. That’s a preliminary data, so it’s not all-in but that’s discipline disciplinary the this is not all and but that over 12 months, so that is starting to become more material impact on the leasing business. Otherwise no single factor that is material but on the margin the square footage get a little bit higher, we are even seeing a month or two more on term on occasion on average. So all the indicators are just moving slightly but the big moves I would say are rent and then market share.

David Ridley-Lane – Bank of America Merrill Lynch

And then if you had to look into your investment sales pipelines, are you seeing more activity in the tier 2, tier 3 cities or is it kind of evenly balanced in terms of growth between tier one and any other cities?

Bob Sulentic

We are seeing the smaller markets pick up on a relative basis, and it’s a direct link to the fact that capital is looking -- there's a lot of capital out there, a lot of it is already been aimed at the gateway markets etc. and it’s now moving into the second tier markets.

David Ridley-Lane – Bank of America Merrill Lynch

So when you look at the asset services pieces of the outsourcing business for additional owners, are you little bit more optimistic, there has been a couple of reports around increased allocation to real estate among some pension funds and some sovereign wealth funds, and do you see an opportunity for your business to increase there?

Jim Groch

This is Jim. I would say we’re not seeing much of that to be honest with you. That businesses is being impacted somewhat by just a very high churn rate, as asset – as the pace of sales have gone up. Let me just clarify that – are you talking investment management or property management?

David Ridley-Lane – Bank of America Merrill Lynch

I am talking about the asset services pieces of the outsourcing, so not GCS but for the institutional owners.

Jim Groch

The property management side, which falls under asset services, so we’re seeing a little bit of momentum – as net operating income in the buildings begins to improve with higher rental rates, that can flow through in fees but that business overall has a relatively slow growth rate still right now.

Operator

Our next question today is coming from Mitch Germain from JMP Securities.

Mitch Germain – JMP Securities

Bob, I am just trying to circle back to your on leasing, you are up 12% on the year, you guys are I think mid to high single-digit, you’re talking about transaction really is what's driving some of the upside to guidance. So is that now a double-digit growth, is that where you are expecting or should we expect a bit of a slowdown in the back half of the year versus the first half of the year as you -- given how much you’ve accelerated, so trying to understand how that plays out?

Bob Sulentic

We think we’ve had a really good rate of growth in leasing in the first half of the year. We don’t know if we will keep it at the level it's been at. We think we are going to take market share, we think we will outgrow market. But our comment on the upside that you are in, is we look at all of our transactional businesses, so as we said a little bit development, little bit investment management, little bit investment properties, little bit leasing and we see generally good activity -- good opportunities in those areas and we think that the cumulative effect of all that should provide the kind of upside that we’ve given you in our number by raising the range a nickel. It’s not something where we have budgeted that 5% out in detail and allocated it among those various pieces.

Mitch Germain – JMP Securities

And I just want to go back to one of Brian’s questions with regard to your hiring efforts. Is your foot – I guess what I am trying to characterize is your foot on the accelerator as fast as it was in ’13 or has it slowed down a bit?

Bob Sulentic

It’s comparable. It’s comparable. Our attitude toward recruiting is the same it was, we are trying to find the right people. When we find the right people in the right slots that we need, we go after them aggressively, but we don’t have an attitude that we have to hire a certain number of people. We have more of a view of our network and where there is opportunities to take market share on our network, and we go after the right people to fit those holes and our attitude toward that hasn’t changed in the last 18 months.

Mitch Germain – JMP Securities

Great, and the last question from me, you talked about some increased swings in Europe and in Asia. And I guess maybe I am curious, are they local – European local and Asia local companies or are they being – or effort being run out of the US and for the local European and Asia companies, is there some sort of theme, is there some sort of region, is it cost savings, is it trying to maximize efficiency at the real estate collaboration or whatever, what’s really driving them gaining increased adoption of outsourcing?

Bob Sulentic

Well, first of all, the trend on this for our outsourcing business and I think in general for businesses that outsource, whether they’re real estate or otherwise is that there is similarly adopters and others in the marketplace watching and if they see good results they start to adopt themselves and then the population of people that know how to do it within a sector grow. So right now we are seeing a trend little bit like we saw in the states, there were some early adopters in Europe and Asia and it’s becoming more and more accepted over there too, it’s growing. Almost always they are looking for a couple of things. Cost – they are looking for us to deliver cost savings, because we have a track record of being able to deliver cost at better rate than they can. We are more expert at than they are. They tend to be in other industries, we are in the real estate industry and so that’s helpful to us.

Secondly, they are looking for strategic advice. When we provide integrated outsourcing services, we are at the high end of this strategic pecking order so to speak. So we are doing facilities management, project management, transaction management advice, consulting advice. They are looking for strategic advice in real estate and then coupling that with these other services and that creates an advantage for them. And so those are two things that they are consistently looking for that we are able to deliver, and we have a demonstrated track record of doing that and it’s starting to be recognized in Europe and Asia as it was in the early days in the United States.

Operator

Thank you. Our next question today is coming from Todd Lukasik from Morningstar.

Todd Lukasik – Morningstar

I have a couple on the global corporate services business. First, I was wondering how you had described the pace of interest in this area. I know it’s been strong lately but have you noticed that accelerating at all? And then second, can you talk a little bit about the onboarding process for those new GCS clients a bit and in particular, I am wondering if there were a big uptick in client interest – are there any onboarding capacity constraints to accelerating the growth in that area from your perspective.

Bob Sulentic

We haven’t had onboarding capacity constraints. It’s a lot of work when you land one of these accounts, and you have to have a deep bench of people, that’s one of the advantages we have. We have 300 of these accounts now, which provides a strong base of people we can use to bring on additional accounts. And again going back to the previous question, in the early days when there were only a small handful of accounts, there weren’t that many practised professionals out there so to speak. We have that now which is very helpful. I would say we have seen a consistent growth in interest in this part of our business over several years and that continues. And as we said it’s being helped by a couple of things now. Number one, the fact that it’s becoming more accepted in Europe and Asia and number two, the fact that there is some particular verticals in the United States and in our case, healthcare is a big one for us where there is growing interest. We had the eight new opportunities we signed in healthcare in the quarter. So the combination of those two things is driving growth and interest in that business for us.

Operator

Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to management for any further closing comments.

Bob Sulentic

That’s all the comments. We appreciate everybody’s questions and we look forward to talking to you again in 90 days.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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Source: CBRE Group's (CBG) CEO Bob Sulentic on Q2 2014 Results - Earnings Call Transcript

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