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CB Richard Ellis Group Inc. (NYSE:CBG)

Q4 2010 Earnings Call Transcript

February 4, 2011 10:30 am ET

Executives

Nick Kormeluk – SVP, IR

Brett White – CEO

Gil Borok – CFO

Analysts

Sloan Bohlen – Goldman Sachs

Anthony Paolone – JPMorgan

Bose George – KBW

Will Marks – JMP Securities

David Ridley-Lane – BOA Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the CB Richard Ellis Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to our host, Mr. Nick Kormeluk. Please go ahead sir.

Nick Kormeluk

Welcome to CB Richard Ellis Fourth-Quarter 2010 Earnings Conference Call. Last night we issued a press release announcing our financial results. This release is available on the home page of our Web site at www.cbre.com. This conference call is being webcast live, and is available on the Investor Relations section of our Web site.

Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio of the webcast, a transcript, and a PDF version of the slide presentation will be posted to the Web site 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 future growth momentum, operations, financial performance, and our business outlook.

These statements should be considered as estimates only and 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 Fourth-Quarter Earnings report filed on Form 8-K and our current Annual Report on Form 10-K and current quarterly report on Form 10-Q, in particular any discussion of risk factors or forward-looking statements which are filed with the SEC and available at the SEC’s Web site 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 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 GAAP measures, which are attached hereto within the appendix.

Please turn to slide #3; our management team members participating with me today are Brett White, our Chief Executive Officer; and Gil Borok, our Chief Financial Officer.

I’ll now hand the call off to Brett.

Brett White

Thank you, Nick. As dire as things appeared two years ago, they now seem equally positive and exciting. We’re at that point in the cycle when all fundamentals are positive and rapidly improving and when everything seems possible. On today’s call, we will discuss our very strong results for Q4 and full-year 2010.

It was undoubtedly one of the best years in CBRE’s 100-plus year history and at the moment our near-term future looks even brighter. I’m equally sure many of you would like us to comment on our current M&A activities. Like you, we have read the press speculation and heard the market rumors. However, we have had a longstanding policy not to discuss rumors and speculation on this topic. Accordingly, M&A is not a subject we can or will address today. In fairness to you, I want to make this statement upfront.

So, please turn to slide #4, for the fourth-quarter of 2010, we posted very strong revenue and earnings growth in our business. In fact, normalized EBITDA for Q4 2010 and for the full-year 2010 were the second best ever in company’s history. This performance was driven by the continued recovery of the commercial real estate services industry, combined with strong execution and our proven discipline in managing the return of related expenses.

Our fourth-quarter total revenue was $1.7 billion, a 27% increase over the fourth-quarter of 2009. As was the case, for most of 2010, our revenue growth was led by three lines of business.

Investment sales where revenues were up 40% in Q4 2010 with all regions posting double-digit growth, leasing revenue, which increased 35% led by activity in the Americas and Asia Pacific, and outsourcing, which posted a 10% revenue increase led by the Americas.

Total company normalized EBITDA was $253 million, a 27% increase over the fourth-quarter of 2009. This translated into a normalized EBITDA margin of 15.3% in the fourth-quarter of 2010. Diluted earnings per share for the fourth-quarter of 2010 increased 29% to $0.36 versus $0.28 in Q4 2009.

As we entered 2010, given our concerns around the economy and its impact on the performance of our business, we significantly reduced target bonus levels and 401(k) matching for 2010. Throughout the year, we did not restore these expenses even as our performance improved.

However, based on our performance this past quarter and full year performance, which significantly exceeded our original planning, in the fourth-quarter we substantially restored bonus target levels and also reinstated a partial 401(k) match for our employees retroactively for the full-year 2010. These actions resulted in additional expense of approximately $30.0 million or $0.06 per share in the fourth-quarter.

We believe that in light of the company’s superb financial performance this year, these actions were absolutely appropriate and necessary for our business and our employees who made significant personal sacrifices through the downturn to help us reduce $600 million of costs.

Many of the individuals benefited by bonus restoration are the same people who received no incentive compensation in 2008 and 50% of their target incentive compensation in 2009. Even with these actions, the company exceeded its financial goals for 2010 and increased its industry leading normalized EBITDA margin by 240 basis points for the full year.

I want to also note that our 2010 bonus expense was outsized, because our financial performance significantly exceeded plan due to the unanticipated rate of recovery for our business.

For 2011, we believe, US bonus expense is likely to be materially less than 2010 as bonus targets will take into account the anticipated improved financial performance of the business in a more hospitable environment. The amount of additional US bonus expense for 2010 due to over-performance was approximately $25.0 million.

On past calls we noted that as we felt more confident in the commercial real estate recovery, we would likely reinstate 20% to 25% of the $600 million in cost cuts we implemented through the downturn, including the bonus and benefit costs, which we brought back in the fourth-quarter, we have now restored about $1.0 million of the anticipated $120 million to $150 million of such costs.

Although we believe we’ll be prudent to reinstate the remaining $20.0 million to $50.0 million of these costs in order to drive our business, we will continue to control expenses commensurate with revenue growth to ensure we meet our financial goal of industry-leading EBITDA margins.

We are very pleased to be able to show such strong EBITDA and EPS performance for the fourth-quarter and the full-year 2010, while also being able to reward our employees for their terrific 2010 results and their dedication in bringing us out of the downturn a much stronger company.

Our strong performance in 2010 and the underlying momentum in the business increases our confidence that we are in the early days of what ought to be a protracted and healthy recovery an expansion cycle in commercial real estate. This firm, the preeminent firm in our industry, has never been positioned better to exploit a recovering marketplace.

Some of the more noteworthy transactions we completed during or immediately following the quarter are listed on slide #5. As usual I’ll not go through them individually, but we have included them to show some key business wins.

With that I’ll now turn the call over to Gil to go over our financial results in detail. Gil?

Gil Borok

Thank you, Brett. Please advance to slide #6. Revenue was $1.7 billion for the fourth-quarter of 2010, up 27% from last year, excluding discontinued operations. This increase resulted from improvements in sales, leasing, outsourcing, appraisal and valuation, and commercial mortgage brokerage activities. Normalized EBITDA was also up 27% to $253.1 million in the quarter from a $199 million in the fourth-quarter of 2009, delivering a normalized EBITDA margin of 15.3% for the fourth-quarter of 2010.

Our cost of services as a percentage of revenue was up 80 basis points to 56.4% in the fourth-quarter of 2010 versus 55.6% in the fourth-quarter of last year. This increase mainly resulted from the full restoration of commission rates and salaries to pre-recession levels at the beginning of the third-quarter as well as selected hiring of key professionals as business improved.

In the fourth-quarter of 2010, operating expenses as a percent of total revenue dropped slightly by 10 basis points to 31.6% versus 31.7% in the fourth-quarter of 2009 despite the bonus and 401(k) restoration of approximately $30.0 million and carried interest compensation expense related to future periods of $13.8 million.

Fourth quarter 2010 GAAP diluted earnings per share was $0.30 versus $0.21 last year. Adjusted diluted earnings per share was $0.36, up 29% versus $0.28 in the fourth-quarter of 2009. Our fourth-quarter 2010 tax rate was 38%, driven by unanticipated true ups upon filing of certain state tax returns in the US and foreign statutory audit settlements.

Please turn to slide #7; leasing was our largest service line in the fourth-quarter of 2010 posting a 35% increase versus the fourth-quarter of 2009. It represented 37% of total company revenue in the current year quarter. Property and facilities management was our second largest service line in the fourth-quarter of 2010 representing 29% of total revenue in the quarter.

Sales revenue rose 40% in the fourth-quarter of 2010 versus a year ago following a strong increase posted in the fourth-quarter of 2009 of 24%. The continued strength of Class A property sales coupled with volume increases in other property classes fueled growth in the current year fourth-quarter.

Appraisal and valuation revenue was up 19% in the fourth-quarter of 2010 as compared to the fourth-quarter of 2009. This was driven by strong capital market’s activities in the quarter.

Commercial mortgage brokerage posted an increase of 233%, driven by loan originations and strong US government sponsored entity activity as well as improvement on the part of traditional and conduit lenders.

Global Investment Management revenue increased 87% year-over-year driven by all sources of revenue in that business including management fees, acquisition fees, and carried interest. Development services revenue was down 23%.

Revenue from property and facilities management, fees for assets under management, loan servicing fees, and leasing commissions from existing clients are all largely recurring. This revenue represented approximately 50% of total revenue for the fourth-quarter of 2010.

Please turn to slide #8; the outsourcing business grew nicely in the fourth-quarter, with revenue rising 10%. This was driven by the strong new account growth and client expansion we experienced throughout 2010. In the fourth-quarter, we signed contracts with 18 new accounts. We renewed nine contracts and we expanded our service offering for seven existing outsourcing clients.

Our performance this quarter was led by the Americas, which posted its strongest growth rate in the last nine quarters. The total of 34 contracts again matches our strongest quarter ever for most contracts signed in a quarter, which was the second-quarter of 2010.

For the full year 2010, 121 total contracts were signed, up 38% from the 88 contracts signed in 2009. This included a record 62 new clients for the full year of 2010.

Overall, our global portfolio of commercial property and corporate facilities under management totaled 2.6 billion square feet at the end of the fourth-quarter, an increase of 18% for the full year 2010.

Slide #9 demonstrates the stabilizing or improving vacancy rates and absorption in 2010 and our forecasted improvements for 2011 and 2012. Average national cap rates improved meaningfully in 2010 driven by high profile and Class A property sales mostly in larger markets.

These top-tier assets are trading actively at cap rates between 4.75% and 6% and financing is available at attractive rates. This strength is also spreading to other property classes as invested appetite for yield has increased.

Please turn to slide #10, the recovery of the US sales market continued in the fourth-quarter of 2010 as our Americas sales revenue for the quarter increased 66% on a year-over-year basis.

Our market share totaled 14.8% of all activity for the full year 2010 which gave us the top position for the tenth year in a row according to real capital analytics.

Our Americas leasing revenue posted a tremendous 45% increase in the fourth-quarter of 2010 as compared to the fourth-quarter of 2009, increasing to $419 million. Nationally, the office vacancy rate decreased by 20 basis points to 16.4%. Net absorption in US office product was positive for the third straight quarter.

Please turn to slide #11, our investment sales revenue in EMEA increased by 19% in the fourth-quarter of 2010 as compared to the fourth-quarter of 2009. This increase comes on top of a 29% investment sales increase from the fourth-quarter of 2008 to the fourth-quarter of 2009. Actively here was led by the U.K. and France.

CBRE’s revenue from leasing in EMEA grew 6% in the fourth-quarter of 2010 versus the fourth-quarter of 2009. This is consistent with relatively modest economic growth in the euro zone in the fourth-quarter. Activity here was led by the U.K.

Please turn to slide #12, CBRE sales revenue in Asia Pacific increased by 12% in the fourth-quarter of 2010 versus the fourth-quarter of 2009. The increase was notable, given it was made on top of an 88% increase from the fourth-quarter of 2009 versus the fourth-quarter of 2008. CBRE’s leasing revenue in Asia Pacific grew 34% in the fourth-quarter versus the fourth-quarter of 2009. The strongest growth came from Australia, China, India, and Japan.

Please turn to slide #13; revenue for the Development Services segment was $19.6 million in the fourth-quarter of 2010 versus $24.5 million in the fourth-quarter of 2009, partially due to lower rental revenues resulting from asset dispositions.

Operating results for the fourth-quarter of 2010 for this segment included normalized EBITDA of $8.6 million and a meaningful improvement over the fourth-quarter of 2009 normalized EBITDA of $6.3 million. This improvement in normalized EBITDA was driven by gains from property sales.

At December 31, 2010, in-process development totaled $4.9 billion even with the $4.9 billion at September 30, 2010, and up slightly from $4.7 billion at year-end 2009.

The pipeline at December 31, 2010, totaled $1.2 billion, up from $1.1 billion at September 30, 2010, and $900 million at year-end 2009. The combined total of $6.1 billion is up 9% from year-end 2009. At the end of the fourth-quarter, our equity co-investments in the Development Services business totaled $62 million.

Please turn to slide #14; Global Investment Management revenue was up 106% to $79.8 million in the fourth-quarter of 2010 from $38.7 million in the fourth-quarter of 2009.

The company realized $19.9 million of carried interest revenue in the fourth-quarter from a liquidating fund versus no carried interest revenue in the fourth-quarter of 2009. Higher acquisition fees and fees for assets under management also contributed to the revenue increase.

Assets under management totaled $37.6 billion at the end of the fourth-quarter 2010, which was up 8% compared to the fourth-quarter 2009 and 5% versus the third-quarter of 2010.

During the fourth-quarter, we completed $1.3 billion of acquisitions, $0.5 billion of portfolio takeovers, and approximately $1.1 billion of dispositions globally. Currency fluctuations decreased the portfolio by $200 million.

Year-to-date 2010, we have raised new capital of approximately $4.8 billion and had approximately $2 billion of capital to deploy at the end of the quarter. Our current investments in this business at the end of the quarter totaled $99 million.

Our Global Investment Management EBITDA reconciliation detail is shown on slide #15. In the fourth-quarter of 2010, we wrote down only $1.2 million of investments.

In the fourth-quarter of 2010 we recognized $19.8 million of carried interest expense of which $6 million pertain to the fund that liquidated during the quarter with the remainder relating to future periods. In the fourth-quarter of 2009, we reversed a net $200 million of carried interest compensation expense accrual, that’s $200,000 of carried interest compensation expense accrual.

As of December 31, 2010, the company maintained a cumulative accrual of carried interest compensation expense of approximately $20 million, which pertains to anticipated future carried interest revenue.

EBITDA was positively impacted by carried interest revenue, higher acquisitions fees, and fees for assets under management, a reverse provision for doubtful accounts related to a specific fund as well as approximately $7.6 million associated with the consolidation of several properties due to a change in accounting regulations effective January 1, 2010, which had no bottom-line impact. This business operated at a normalized EBITDA margin of 52% for the fourth-quarter of 2010 and 32% for the full year of 2010.

Please turn to slide #16; the left side of slide #16 shows our amortization and debt maturity schedule for the period ended September 30, 2010. The right side of the slide illustrates our outstanding debt following our debt refinancing in the fourth-quarter.

During the fourth-quarter we retired all prior outstanding term loans using new term loans A due in 2015 and term loans B due in 2016 totaling $650 million, $350 million of senior and secured noted maturing in 2020, and approximately $475 million of cash. We also increased the revolving credit facility to $700 million and extended its maturity to May 2015.

Please turn to slide #17, excluding our non-recourse real estate loans and mortgage brokerage warehouse facility, our total net debt at the end of 2010 was $943 million. This represents a reduction of 33% or $461 million since December 31, 2009.

At December 31, 2010, our weighted average interest rate was approximately 6.5%, which came down from approximately 7% at the end of the third-quarter benefiting from our refinancing activities during the fourth-quarter.

Our leverage ratio on a covenant basis now stands at 0.94 times at the end of the fourth-quarter of 2010. Our total company net debt-to-EBITDA stood at 1.37 times, which remains below our current target of two times.

I’ll now turn the call back over to Brett.

Brett White

Thank you, Gil. Please turn to slide #18. We believe we are in the early stages of recovery in the commercial real estate cycle. It is reasonable to expect meaningful growth in 2011, although we do not expect growth rates comparable to those experienced in 2010 as we bounced off an abnormally little bottom in this cycle.

Investment sales and leasing should continue to show year-over-year improvements, although comparisons of course will be a bit tougher. Outsourcing growth trends and our accelerated contract win rate leads us quite optimistic for 2011. We are now more optimistic regarding our expectations for Global Investment Management.

Based on the rate at which we brought back cost in 2010, we expect the growth in cost to be much slower in 2011. We are committed to managing cost commensurate with revenue growth to ensure we maintained industry leading margins.

We know there is significant operating leverage in our business and still believe getting to our goal of 20% EBITDA margins at the peak of the cycle, is quite achievable. We intend to actively manage the business to get there.

Taking all this into account, for the full-year 2011, the second year of what we expect to be a multi-year recovery, we expect earnings to be in the range of $0.95 to $1.05 per share.

And operator, with that we’ll now open for questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from the line of Sloan Bohlen with Goldman Sachs. Please go ahead.

Sloan Bohlen - Goldman Sachs

Hi, good morning. First, just a question on margin expectations for 2011. Thank you for the color on what costs have come back to-date, but with the guidance range for earnings that you set, can you maybe give us a sense of what you’re expecting in terms of either revenue growth or where you think the operating leverage could kind of kick in and where margins could end up next year?

Brett White

Let me just give you a general response to that and then, Gil, I’ll ask you to go as deep in that as you’d like to. I think way to think about 2011 is that we are in our opinion firmly in the early days of what we believe is going to be a protracted and strong recovery cycle in commercial real estate.

All the fundamentals that you and I watched are certainly pointing now strong positive and we’ll get even more indications from the business everyday that this business is really in a pretty terrific place right now, so, that should without any extraneous negative impacts on the business should allow us to accrete margins fairly handsomely year-over-year through the cycle and that would be our expectation for 2011.

We mentioned in our deck that we had some items come through in Q4, which brought down margins a bit, notwithstanding, of course, I know it’s not lost on our collars, we continue both in the down market over the last four years and the up market the last year and a half to have industry leading margins by quite a distance, something that we intend to hold on for a long time. So, Gil, would you like to speak any of the specifics that Sloan mentioned?

Gil Borok

Yes, sure, Brett. Hi, Sloan. I’m not going to comment specifically on where margin might come from revenue cost EBITDA margin because the guidance that we give is EPS guidance and you got to take it from there. What I will say just following on from what Brett said is, obviously, given the one time or the out of period add backs in the fourth-quarter to the extent you’re going to do work in that area. I would obviously concentrate on full year ‘10 margins and do your work off a bat.

Sloan Bohlen - Goldman Sachs

Fair enough. Just then maybe a question on competition and market share, if we focus maybe on just investment sales and we look at what real capital analytics showed in the US for growth and volume year-over-year, it appear maybe that your numbers were a little less and I wonder maybe if you can comment on whether you are finding some weaker competitors are now ramping up business or have done some strategic hiring?

Brett White

In terms of the investment property market, both here and the States and in Europe and Asia, we’re a leader in all those markets and we’re a leader in those subsets of the markets that we think we have the best opportunity to create profits. So we look at real capital analytics there are components of what they track we just don’t participate in or don’t participate in very deeply. But those segments that we do participate in, we believe and the number show that we actually increased our distance in share year-over-year, and we intend to continue to do so.

On the investment property side, this is the business that has gone through a historic and I think once in a life time unraveling. And really as we all saw, that business went from a peak activity that was astounding to really zero activity two years later.

And the onboarding of costs in that business fortunately for us will come as a direct result of the onboarding of revenues. During that down cycle we didn’t release any of our investment property producers. I don’t think any of them left. They’re also here working way real hard. They just didn’t make a lot of money during the downturn.

Now, as the property markets pick up, the capacity that those (inaudible) have to onboard revenue is very, very significant, and I don’t think you’re going to see us doing much to add new personnel to add to those businesses around the world, we really don’t need them. And at this point, it’s really just a matter of riding the market backup and continue to take share where we can.

Really unlike our other property business lines, this is the business that has some really terrific what I’d describe as niche competitors and in the states clearly, those are Eastdil Secured and Holliday Fenoglio Fowler, those are our two big competitors in the state, they are fantastic firms, this is all they do. That’s where the battles are, it’s those two firms and us and we like that battle. We’re holding our own, they’re holding their own, but I like our position and don’t expect us to be slipping backward any time soon.

Sloan Bohlen - Goldman Sachs

And then maybe just one last one, Brett, for you on the strategy and obviously maybe you can’t comment specifically to rumored transactions, but areas of the business that you’d like to grow going forward, may be you can talk about where you see the best opportunity to add, I guess, little growth beyond what you think can happen from just a market recovery?

Brett White

What I’ll do is I’m just going to go right back to the comments I made last quarter and just remind everybody what we said then. We believe there are lots of opportunities in the market place right now. Let me start, Sloan, by just reminding, you know this but don’t mind those callers who may have forgotten.

Probably, the most important thing we did in the fourth-quarter was, refinancing of our balance sheet. That refinancing, which we believe was market setting. It substantially improved our covenants in terms of maturities and flexibility. We got the first non-investment grade revolver without a floor in this sector this year or last year.

We had the first term B in any sector with any credit without a floor last year. And we have the first-ever (inaudible) expandable reusable accordion. The reason that so important and I know you appreciate this is it gave us enormous amount of capacity to make acquisitions and to take advantage of this marketplace.

And as I said last quarter, those opportunities will come two ways. The first is there will simply be firm like in any year that has made a decision they’re trying to compete against the global multinationals. It’s just too hard a road to slog and they’ll look to a roll up of some sort, and we’ll be looking at those firms as we always do as good opportunities if priced right and if we think we can integrate them.

But as I also mentioned last quarter, this market down cycle has brought to the market once in a life time opportunities that frankly I don’t know that we’ll ever see again. Those once in a life time opportunities come in a couple flavors; first and foremost is the investment management space and we talked about that last quarter.

There have been a number of investment management platforms in the pension fund advisory business that have gone to market either through very public auctions or very quite one-off trades. That isn’t going to happen again likely in my life time. And so, we are keenly interested in watching those opportunities as they come through the marketplace, and we’re positioned and poised to go after any of them we think are good for our business and suitable for the business.

We’ll also see those once in a life time opportunities come through, we believe, in some of the more traditional multi-service platforms in the commercial real estate service space. This downturn wreaked a lot of havoc and a lot of pain on some of the smaller firms.

I think that it’s very clear to us that some of those firms as good as they are have just come to the conclusion that being a tweener in this industry is just not a good place to be. And some of those firms also are now, we’re finding interested in having discussions they’ve never been interested in having before.

So, I think the right answer to your question is, this is a very, very unique time. We went through a lot of work in the last 18 months to get this company ready for coming out of this downturn so that we could make strategic acquisitions.

Our balance sheet has never been healthier, in better shape, and more flexible than it is now. We’re aggressively looking throughout the marketplace for these once in a life time opportunities, I’m hopeful that we’ll be able to bring some of them to closure.

Sloan Bohlen - Goldman Sachs

Great, thank you, guys. Appreciate it.

Operator

And our next question is from the line of Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone - JPMorgan

Thanks. A question on your growth in leasing revenues. It was pretty strong and I was wondering if you can tell us how much of that came from perhaps market share gains versus just strength in the commercial real estate market fundamentals more broadly and also by regions?

Brett White

Anthony, let me give you some data points to start with and then I’ll answer your more subjective question, if you don’t mind. I think this will be helpful. If you look at US leasing and I use office as a proxy for the market, I think that’s a fair proxy. Velocity are number of transactions was up 18% in the fourth-quarter over prior and 20% for the year. Lease term barely moved. It was up 2% for the fourth-quarter and 6% for the year. Square footage also barely moved. It was up 1% for the fourth-quarter and 4% for the year. Average commission per transaction, however, was up quite strong. It was up 11% for the quarter and 19% for the full-year, and of course those two numbers relate to the harder compare you’re going to get to later in 2010. Now, what all that tells us is you’re seeing a lot more transactions come to the marketplace at a higher price, which is, of course, indicative of a recovering marketplace.

In the leasing business, both here in Europe, in Asia, we are the dominant player in that brokerage work out in the marketplace and because of that we do tend to accrete more share in a recovering marketplace we believe than do our competitors. I believe that the numbers are showing that’s indeed what happened in 2010 and what I’d expect to happen in 2011.

For our business this is a very, very good time for our leasing professionals. For really 2.5 years, they’ve been working with companies as they went down into the bunker and stayed in the bunker and they’re now working with those same companies as their CFOs and Treasurers and CEOs become much more optimistic about their future are now working on what we’d consider to be much more traditional or normal business plans as it pertains to taking on new space.

The price differential you saw here, average commission difference that you saw year-over-year is also indicative of the quality of space that tenants are now going after. Average rents didn’t go up as much as the numbers I gave you. What that means is that there’s less leasing occurring in the, what I would call, sublet or shadow space market and a lot more leasing incurring in high quality product, again, very indicative of a recovering market and that bodes very, very well for our leasing business.

These are the transactions where our margins are quite strong. It’s transactions where our producers and our leasing businesses tend to do very, very well. So that business line perhaps as much as any other we have right now isn’t one we’re probably most excited about as we came out of 2010.

Anthony Paolone - JPMorgan

I guess then to somewhat paraphrase, it’s kind of the faster recovery that we’ve seen in the major cities like New York or D.C. or London driving that?

Brett White

It’s a much faster recovery than we expected, Anthony. And here is what I think we’re seeing we talked about this last quarter. If you look at the broad economic data, you would be very puzzled by these numbers, because as good as these numbers are, it really is hard to define any strength in the overall US or global economy. It’s really a very anemic recovery from that respect and certainly in terms of job growth.

But what these numbers tell us and we talked about this last quarter as well, our clients, the folks who are occupying space on the marketplace, frankly at the moment, are not very interested in the current economic numbers and indicators. What they are doing is they are making decisions on their view of the mid-term and long-term right now.

I would say across the board, if you were to pull the top 100 or 200 space occupiers in the States or in Europe, you would find that the vast majority of them, probably over 90% of them believe that the prospects for their business were strongly more positive looking forward than they’ve been. That’s what they are using to make their space decisions.

And so, all that to say that the occupier market is a bit ahead of the economic recovery and that makes sense. They are taking the space they need to hire. They need to do that before they hire the bodies and our expectation is, by the way, from these numbers is the job growth is right around the corner. Certainly, what our clients were telling us is that they believe they will be expanding their businesses, they believe they will be hiring and therefore, they need more space.

Anthony Paolone - JPMorgan

Thanks for that. Question on the outsourcing revenues, up 10% in the quarter, but square footage actually grew about 18%, how do we tie this two together?

Brett White

Unfortunately, and I wish they did, they don’t directly correlate. The revenue growth comes, of course, as we are either reimbursed for employees or we put on these accounts where we earn fees its management contract or incentive fees or project fees around the contract.

We can on board a lot of square footage and in fact we did the last three years without a lot of incremental margin or profitability and that’s fairly typical for a difficult marketplace for these large corporate customers are not particularly active in the market. There’s no question there’s been fee pressures throughout that business the last three years on the downside of the economy, yet, fee pressure still exist, although my expectation is it will loosen up a bit in 2011 and 2012.

But for us, the way we think about that business, Anthony, is the growth of that business starts with the onboarding of the contract and the onboarding of square footage. That gives us control of the business. Now, as the markets improve and as those customers become more active again, we now have them as a captive customer, and we will onboard those revenues as they become more active.

So, we like the statistics, we like the fact that that business is growing in terms of number of clients and square footage managed, and we’re patient, but, of course, expecting for transaction fees and incentive fees and other fees to come through those contracts as the economy improves.

The big outsourcing customers are probably the most conservative customers we have in terms of moving forward with an optimistic view. These are big, big companies who outsource for cost efficiency and they tend to be a bit more conservative around taking new space and expanding their capital budget, but they will. And I think what you will find and certainly what we expect is, the onboarding of square footage we’ve done in the last few years as the market continues to improve will pay big dividend.

Anthony Paolone - JPMorgan

Okay, thank you.

Operator

And we have a question from the line of Bose George with KBW. Please go ahead.

Bose George - KBW

Hey, good morning. I think you had made a comment earlier on the 4Q tax rate, which I missed. But I was just wondering what drove the tax rate to somewhat higher than we’d expected. And in terms of next year, should we look for a tax rate kind of back in the high-30s?

Brett White

Good question. I’ll let Gil answer that.

Gil Borok

Hi, Bose. The tax rate for the fourth-quarter was 38% on a normalized basis, so, it’s quite complicated. When you look at our press release first of all if you just calculate the tax rate, it’s only on the continuing operations and on a GAAP basis in the Development business we had some discontinued operations that actually had a tax benefit.

So if you’ll take my word, on a normalized basis, it was 38% in the fourth-quarter. We did have some foreign audit, small but they affected rates, small audit settlements in a couple of countries. We also had some true-ups with state taxes in the US. So that did impact the rate in the quarter a little bit, they were discrete to the quarter.

I think mostly importantly is what do we think the tax rate will be next year, and I’m going to tell you, I think it’s going to be around 38%, 39%. If revenue shift to the US, which it may well do in 2011 a little bit then that would impact the tax rate by having it go up a little, so, I’m going to go with 38% to 39% on a normalized basis for ‘11.

Bose George - KBW

Okay, great. Thanks for that. And then just wanted to touch on the commercial brokerage. You’d mentioned a strong GSE activity and just with all the multi-family activity, which I think is probably picking up with a lot of maturities, do you think that strengthens further into 2011 and ‘12?

Brett White

It’s a good question. Certainly, that has been big story in that market space through the downturn in the last year and half of recovery. I expect that it’s going to continue to be a big part of story. However, I think what’s going to happen here is the other segments of the capital markets will continue to come back to the marketplace. Multi-family won’t be the only story out there, and certainly right now it isn’t, we’re seeing increased activity, in fact quite increased activity across all product types now.

So, as the markets recover and as we get back to a more normal operating environment for all product types, I think the GSE and the multi-family story will take their rightful place as an important story, but not the story. But certainly, I don’t see it as a declining business, I certainly see it as very good, very core business for us that will continue to be so.

Bose George - KBW

Great, thanks a lot.

Operator

We have a question from the line of Will Marks with JMP Securities. Please go ahead.

Will Marks - JMP Securities

Thanks. Good morning, Brett, good morning, Gilt Fund.

Gil Borok

Hi, Will.

Will Marks - JMP Securities

Hello. A few questions here. I guess, first of all on the net debt position right now, it look like for the full year the reduction was in the neighborhood of $300 million, is that correct if you can confirm.

Gil Borok

The net debt if you go to slide #17, it’s actually on the cap table. The net debt was down $460 million year-over-year. The gross debt close to $700 million, which what that tells you is we used cash to pay down debt, which is true, and you can also see that on the cap table, cash went down $235 million.

Will Marks - JMP Securities

Do you think that $461 million is a pretty good indicator of what your true cash flow was?

Gil Borok

That’s a different question. I think the question is cash flow from operations. It turns out and it’s probably pretty close. Yes, lot of our cash flow from operations went to pay down debt, and, of course, cash is fungible, so there were a lot of other reasons that cash was used or came in. But, yes, when all is said and done, that’s a pretty good proxy.

Will Marks - JMP Securities

Thanks. And then in the first-quarter sometimes I think there is a bump from the actual cash bonus payments. Should we expect an increase during the first-quarter in terms of net debt?

Gil Borok

In a normal course, yes, there will be some revolver borrowings in the first-quarter. If you would have looked at this time last year, we were in a net cash position. We were sitting on quite a bit of cash waiting to determine what we would do and what refinancings we would do, so you didn’t see that normal spike.

But what I would tell you is given that we’ve used cash, domestic cash in particular, and we have to differentiate between foreign and domestic, domestic being more readily available vis-à-vis the credit line, then, yes, it makes sense and best use of cash will be to pay down debt as we’ve done, use the credit line to cover the seasonal working capital need and then pay it back down when the cash come in later in the year. So yes, there will be some borrowings on the revolver in the first-quarter to cover bonuses in the US

Will Marks - JMP Securities

And then on a related note to the debt position is, can you give us a range of maybe the interest expense figure that we should be assuming for 2011?

Gil Borok

I’m going to tell you on a quarterly basis, it will be between $35 million and $40 million.

Will Marks - JMP Securities

And then a couple big picture questions. One, actually on the broker count, would you say in the US your sales on leasing brokerage headcount increased, stayed flat, what happened in 2010?

Brett White

There’s a lot of ins and outs there, but I’d say, generally, it stayed flat. What we’re doing with our brokerage sales force is the same thing we’ve been doing fortunately for us for some time. We have a footprint in the states that is complete. We don’t have any gaps in the market.

As you know, we have no gaps in the market. We’re the dominant player in virtually every city. So what we deal with is attrition, the retirement, and the way we deal with that is to on board new recruits primarily out of college, sometimes from competitors to backfill those folks that attrition out through primarily retirement, that’s generally a net zero. It goes up or down a couple percentage points, but it’s generally a net zero.

I think we’ve talked about this before, Will, we believe by far the longest tenure of our sales folks in the industry. People don’t leave here when they get here. So, our issue is really are not needing to go out to the competitive marketplace and hire folks.

We do that very, very selectively, but really more to bring in young people, get them trained up in our firm and then slowly inculcate into the market to replace those folks that are leaving for retirement. We have no initiatives of any real size to speak of right now to bulk up fee earners anywhere in world.

Although, we do have initiatives to target specific professional at some specific competitors that we think would do better under our platform than they are under theirs and folks that we think could be additive to the mix, but those are very targeted. They will not move the needle on overall brokerage headcount.

Will Marks - JMP Securities

A couple of other things. Brett, the $0.06 figure you gave in your prepared comments that was including that $30 million plus 401(k). Can you just, sorry to ask you to repeat that.

Brett White

Let me let Gil repeat as I don’t trip up on the numbers, but Gil –

Gil Borok

The $30 million is inclusive of both, that was the bonus and 401(k) add back and it did translate into about $0.06 in the quarter, yes.

Brett White

I just want to add something to that. The point we tried to make in the deck and it may not be entirely clear is, in addition to that there was this issue of over-performance in our bonus plans. I think, as you know, in the US the management bonuses are based on an EBITDA target number, so, beginning of the year, we set a budget. That budget number becomes an EBITDA target.

Our management will pay the bonus based on if they miss or beat that target. Because of the way 2010 played out, it maxed out all the bonus plans. In fact, it was a highest percentage bonuses paid to many of our managers ever, at least it won’t happen probably for a long time. So that overage which I believe Gil characterized is $25 million is unlikely to be seen again in 2011 in those bonus plans, so you only have the impact of two things there.

You had some reinstatement of cost, but you also have this once in a long time event where our managers actually received a very outsized bonus. God knows they deserved it. But the way our programs work, it’s highly, highly unlikely they would repeat that in the near-term.

Will Marks - JMP Securities

Is that all in the operating industry of another line?

Gil Borok

Well, let me just clarify. When Brett quoted the $25 million, that’s over-performance for the year, the $30 million add-back is in the fourth-quarter, combination of reinstatement and over-performance.

Will Marks - JMP Securities

Got it. I’m sure it really has spread out all over. I mean when I look at the increased expense in the quarter, it really looks to be mostly in industry of another line in terms of certainly where I missed my number and I don’t know about anyone else. But I would assume that it’s in that line but you’re saying it is spread all over.

Gil Borok

You’re correct. It’s more heavily weighted to OpEx.

Will Marks - JMP Securities

Okay. And then just lastly, related to all this and you give plenty of color on the whole expense issue, if we look at 2011, and does this make the fourth-quarter the easiest comp or we’re going to have some of this issue in the first three quarters, how should we be thinking about it?

Brett White

I’d never answer that question. There is no such thing as an easy comp, but I would say this that certainly some of those items that came through for the year in the quarter, some will be repeated, some won’t. But I think the main point here we would want our investors and analysts to take away from this is, first of all, we certainly understand the questions, because I think comp expenses we put through Q4 surprised you and that’s never appreciated by our investors and analysts.

The point we’re trying to make, however, is first of all, that in the broad scheme of things it doesn’t really matter. I’d remind you and all of our callers that our margins, it really is an amazing thing, our margins through the down cycle and now through the recovery cycle were markedly better than any other major player in this industry.

Our current margin is over almost 200 basis points higher than next largest competitor. This is the company that has a proven and unique ability to convert revenue to profit. And we’re going to continue to do that. And we are not going to onboard expense as a determent of our margins. In this case, we’re able to do something we felt was appropriate and actually morally correct for employees and still preserve a wide delta on our operating profitabilities from those we compete against and that is a main story.

Will Marks - JMP Securities

Okay, thanks a lot.

Brett White

You bet.

Operator

And we have a question from the line of David Ridley-Lane with BOA Merrill Lynch. Please go ahead.

David Ridley-Lane - BOA Merrill Lynch

Yes, hi. Bit of a scenario question for you. Would another shock to the financial system such as, say, a further downturn in the US residential housing market or foreclosure related issues there or perhaps a repeat of the euro sovereign debt issues, how much do you think that would really impact investment sales given the fundamentals that you’re seeing out there in the market? How much confidence do you have in your forecast given the continued uncertainty on the financial side of things, not necessarily, on the real estate side of things?

Brett White

It’s a really good question. It’s something we think about quite a bit. Here’s the answer we would have or we do have today. First, keep in mind that the damage done to the capital markets from all the things that has happened in the last four years, not just the sovereign debt issues, but also really disappearance of the capital markets for a period of time and the problem with lenders. That damage to the financial system has not been repaired, not even remotely been repaired. And the activity you see in the capital markets is in spite of that.

In other words, the fuel behind our capital markets business right now is not the robust return to commercial lending. In fact, there isn’t. Notwithstanding what all our great client banks tell us how actively they are lending, we don’t see it. The underwriting criteria being used by the banks today is severe and really beyond the reach of most traditional investors.

So the activity we see in the marketplace today is being done around that problem rather than be done because those problems been fixed and I say all that because another shock to the financial system I don’t think would have a significant impact on the overall capital markets business.

What’s fueling that investment property business, the capital markets business right now is a desire by capital to be invested in the asset class and the ability of capital to find new sources of lending to get those transactions done. It’s not being done because your firm or other great clients we have, have rushed back into the commercial property sector, in fact, that’s (technical difficulty) the opposite.

So that gives some comfort that if we see a sovereign debt issue in Europe or we see a further deterioration in the US residential market they will not have as large an impact on that business as they typically would because that impact has already worked in to the system.

So, as we think about our forecast going forward, we feel pretty good about them. I think the risks to the forecast really are around jobs and job growth. I think that, if in all 2011 we see no job growth, which is where installed the last 18 months, I think there is some risk to these forecasts. The market that we’re dealing with, the occupiers that we are dealing with anticipate job growth. And something that would shut that down would be a more real risk factor I think to the forecast than a shock to the financial system.

David Ridley-Lane - BOA Merrill Lynch

That’s great color. This might be too nit-picky, but the gain on sale of real estate line is always tough to predict. It was about $7 million in 2010. I know this is tough, but should we just pencil in something similar for 2011 or would you expect it to be higher or is there some sort of pipeline that you’re looking at that would help us?

Brett White

Gil?

Gil Borok

The best thing I would tell you to do is, if you look at the slide #13, which is Development Services that tells you what the pipeline is. That line item is by and large driven by that business.

But to give you further specific commentary is difficult to do because, as you know, that business is dependent and that line item in particularly is dependent on sales activity, and it depends what type of sales we have. If we have a sale of a joint venture than the ‘gain’ which show up through equity earnings, if we have a consolidated sale of the consolidated property it shows through that line. So, to analyze that line is pretty tough. I think you’ve got to look at the development business as a whole and make some assumptions, each and all of our assumptions will be different as to what is a consolidated sale, what we’re predicting what it’s going to be versus equity earnings. So, I agree with you. It’s very tough and therefore I’m not able to put a prediction on what exactly would flow through that line. And again, I would refer you to the business in total.

Operator

And we have no further questions in queue at this time. Please continue with any closing remarks.

Brett White

Thanks, everyone for your time on the call. We’ll be speaking to you again soon. Thanks a lot.

Gil Borok

Thank you.

Operator

Ladies and gentlemen, that does conclude our teleconference call for this morning. Thank you very much for your participation. You may now disconnect.

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