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Jones Lang Lasalle (NYSE:JLL)

Q2 2011 Earnings Call

July 27, 2011 9:00 am ET

Executives

Lauralee Martin - Chief Operating Officer, Chief Financial Officer, Executive Vice President, Director, Chairman of Global Operating Committee, Member of the Global Executive Steering Committee and Member of Global Executive Committee

Colin Dyer - Global Chief Executive Officer, President, Director and Chairman of Global Executive Committee

Analysts

Brandon Dobell - William Blair & Company L.L.C.

Sloan Bohlen - Goldman Sachs Group Inc.

David Gold - Sidoti & Company, LLC

David Ridley-Lane - BofA Merrill Lynch

Eric Glover - Canaccord Genuity

Joseph Dazio - JP Morgan Chase & Co

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc.

William Marks - JMP Securities LLC

Operator

Good day, and welcome to Second -- the Second Quarter 2011 Earnings Release Conference Call for Jones Lang LaSalle Inc. Today's call is being recorded. Any statement made about future results and performance or about plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those included in the forward-looking statements as a result of factors discussed in the company's annual report on Form 10-K for the year ended December 31, 2010, and in our other reports filed with the SEC. The company disclaims any undertaking to update or revise any forward-looking statements. A transcript of this call will be posted and available on the company's website. A web audio replay will also be available for download. Information and the link can be found on the company's website. At this time, I would like to turn the call over to Mr. Colin Dyer, Chief Executive Officer, for opening remarks. Please go ahead, sir.

Colin Dyer

Thank you, operator, and hello to everybody joining us for this review of our results for the second quarter and first half of 2011. With me today on the call is Lauralee Martin, our Chief Operating and Financial Officer, and Lauralee will review our performance in detail in a few minutes.

To summarize our results, we were encouraged by another successful quarter of strong revenue growth. Second quarter revenue totaled $845 million, up 24% in U.S. dollars and 17% in local currency terms compared to the second quarter of 2010. Year-to-date revenue was $1.5 billion, an increase of 22% over the first half of 2010 or 17% in local currency terms.

We reported net income of $44 million or $0.99 per share for the quarter, up from $32 million, $0.72 per share for the second quarter of 2010. Adjusting for restructuring charges and other acquisition costs, net income was $50 million, or $1.12 per share. First half net income was $45 million or $1.02 a share compared to $32 million, $0.73 a share one year ago. Adjusted for net -- adjusted net income was $51 million or $1.15 per share.

The highlight in the quarter was our successful completion of the merger with King Sturge, the highly regarded international property consulting firm, and joining forces with King Sturge makes us the clear industry leader in the U.K. and continental Europe, greatly enhancing our platform and our ability to provide clients with the best service in the region. In doing this, we welcome more than 1,600 new colleagues to our combined firm and look forward to what we'll be able to achieve together going forward.

Before Lauralee discusses our results in detail, I'd like to put them in context by looking at conditions in both the global economy and in real estate markets around the world. According to IHS Global Insight's latest projections, the global economy is expected to grow at 3.3% in 2011, and that is down marginally from earlier estimates. Growth in advanced countries is projected to average 2.2%, while most emerging economies continue to be strong and their growth is expected to average 6.5% this year. So broadly speaking, the multispeed global recovery continues. However, we have seen confidence weaken recently amongst both our corporate and investor clients, as concerns about government finances in a number of countries, job growth stagnation in certain economies, and political tensions in the Middle East have affected the mood of both businesses and consumers.

To give you a sense of conditions in global real estate markets, we posted slides in the Investor Relations section of our website, that's at joneslanglasalle.com. Slide 3 shows the Jones Lang LaSalle investment sales clock, which we update each quarter and which is a picture of conditions in major markets around the world at different stages of the real estate cycle. You can see that in the second quarter of 2010, some investment sales markets we still find in the bottom of the cycle, while more had begun to reflect rising capital values. One year later, values are rising now in most markets and only a few major markets remain at the bottom of the cycle.

Global direct commercial investments totaled more than $100 billion in the first quarter -- second quarter, 50% higher than the second quarter of 2010. All these regions -- all 3 regions registered dollar growth in market volumes compared to a year ago, led by the Americas with a gain of 128% to $49 billion, although that was obviously from a low base, while in Europe, year-on-year market volumes were up 18% in U.S. dollar terms to $36 billion, but that meant they were flat in euro terms. Volumes increased 11% in Asia, to $19 billion, but were also flat in local currency terms.

Compared to the first quarter of the year, Americas volumes increased by 56%, but EMEA and Asia Pacific investment volumes were both down by 2% and 32%, respectively. This is an unusual picture, because the normal seasonal pattern is for Q2 volumes to exceed Q1, and it reflects the pausing sentiment that I referred to a moment ago.

Capital values for prime assets continue to grow strongly in many top tier office markets, increasing at an annual rate of 20% across 23 major markets worldwide. The pace of growth is slowing however, but here, compression disappears in most advanced markets with a notable exception of the U.S.

Turning to Slide 4, you'll see a snapshot of conditions in leasing markets worldwide. It tells a similar story. The movements here continue to lag the recovery in global investment sales. The strongest office leasing markets continue to be in Asia Pacific, where the highest gross leasing volumes were in greater China and India, however, both Hong Kong and Sydney volumes were down by more than 50% from the second quarter one year ago. In Europe, quarter 2 leasing volumes were up 4% from a year ago, with 29 million square feet of take up. Gross absorption in Jones Lang LaSalle U.S. target markets was up 18% to 12 million square feet.

Office vacancy rates continued to trend down gradually from their third quarter 2010 peak. Our provisional global office vacancy rate across 94 major world cities now stands at 14%, down 1/2 of a percent from the peak in the third quarter of 2010. Vacancy rates are falling in all 3 regions to 17.2% in the U.S. and to just over 10% in both Asia Pacific and Europe.

Rental growth on prime assets in top markets is at its strongest since the first quarter of 2008, averaging $0.11 year-over-year across 23 major world markets. The strongest growth has been in the BRICs, in Moscow, Beijing, São Paulo, where rental -- and rental growth is also becoming entrenched broadly across Asia Pacific, in the U.S. gateway cities and in selected European markets.

So with that broad market background, I'll now turn the call over to Lauralee.

Lauralee Martin

Thank you, Colin, and good morning to everyone on the call. Similar to prior quarters, I will focus on providing additional details of our quarterly performance and business highlights beyond what is covered in the press release.

As Colin mentioned, we are very pleased to report another quarter of very solid revenue growth and performance across the vast majority of our service lines and geographies and resulting in 24% consolidated revenue growth. In the Americas region, quarterly revenue increased 18% to $348 million, led by leasing and capital markets. Leasing was up 13% in the quarter, 22% year-to-date. In the second quarter, our prior year revenue was a tough comparable, due to several large leasing transactions that were completed. As a result, the 13% growth in the quarter is impressive, after factoring in last year's strong performance.

While our overall revenue performance in the region was strong, our public institutions business line is experiencing softening revenue. This business has been driven by U.S. government contracts, where decisions are being delayed or taking much longer to conclude given the budget and funding uncertainties that exist at the federal government level. We expect cost pressures in the federal government to continue although other public sector clients, such as state and local governments, universities and nonprofits, should provide business growth to offset these pressures. We have added sales and delivery teams into our local markets to better access this business.

We previously advised we anticipated flat year-over-year margins in the Americas, as we pursued market share expansion. In the quarter, operating margins declined year-over-year in the Americas, as we absorbed business wins and aggressive sales -- and continued our aggressive sales activity. We anticipate the margins for the total year to continue to improve as we move through the second half of 2011 and be within 1% of what we achieved in 2010.

Concluding on a positive note, revenue in our capital markets and our hotels businesses in the Americas more than doubled to $32 million from $14 million in the second quarter of 2010. We've been pleased that the expansion of our capital markets platform in the Americas was well timed to match the market's recovery. We are also encouraged by our recent business wins and, in particular, by the performance of the new hires who have joined our firm over the last 12 to 18 months.

Turning to EMEA. Leasing revenue performance across the region was positive, with an increase of 29% in the quarter to $61 million, while also picking up momentum from quarter 1. As we've noted previously, recovery across the region continues to vary by country.

Revenue growth in capital markets across the region was soft. Confidence, as well as the availability of financing, continues to be impacted by the euro zone debt uncertainty. Capital markets and hotels revenue was up 5% in local currency for the quarter, consistent with our year-to-date performance.

We do have good work-in-hands in many of our markets and are cautiously optimistic that the transaction levels will pick up in the second half of the year. Project & Development Services or PDS revenue was $46 million in the quarter, up 67%, another strong quarter revenue growth across this business line, which includes our fit-out business.

As a reminder, the fit-out business revenue includes subcontractor costs, which we account for on a gross basis, with offsetting amounts running through the region's operating expenses. In the second quarter, these gross [indiscernible] have increased more than $10 million over the prior year.

Finally, in EMEA, as Colin said earlier, we are delighted to report the successful completion of the King Sturge merger this quarter. The transaction was completed on May 31 for $319 million, with half paid upfront and the remainder to be paid over 5 years. King Sturge adds approximately 1,600 employees, 13 of whom are based in the U.K. The combined firm is the largest real estate service provider across the EMEA region, and there are a number of complementary service offerings that will be -- allow us to bring significant benefits to our clients. We are off to a very good start in the hard work of integrating our 2 platforms, and we want to recognize our colleagues across the region who are committed to making this transaction a success.

Regarding the integration costs of King Sturge, we recognized about $6 million in the second quarter for transaction costs, such as legal and professional fees, as well as staff retention. We estimate there will be about $25 million of integration costs, the majority of which will be recognized in the first 12 months as we transition IT and combine our offices.

We also project $25 million of retention payments to King Sturge non-equity partners to be paid over 12 to 24 months. Although the King Sturge equity partners agreed to allocate this amount of their purchase price to their colleagues, the accounting will show up as compensation expense on the Jones Lang LaSalle income statement. The expense of these payments will be spread roughly 2/3 over the upcoming 12 months and 1/3 over the following 12-month period.

We have not yet finalized intangible valuations, but we recognized nearly $2 million of amortization in the second quarter, which negatively impacted EMEA margins by approximately 75 basis points. Adjusting for the $2 million of amortization, our operating income margin in EMEA would have improved on a year-over-year basis. We anticipate a total remaining amortization of approximately $30 million. We will recognize half of this over the next 12 months, and then we'll run about $2 million annually after that. We will continue to separate these acquisition-related expenses out as we report our results.

The Asia Pacific region delivered outstanding performance in the quarter, in both revenue and profit growth. Revenue across the region was up 39%, 26% in local currency, while operating income nearly doubled to $22 million compared with the prior year. Performance was driven by Greater China, India and Australia. We demonstrated our brand strength and delivered capabilities, winning significant new business in the quarter and expanding relationships with domestic corporates, particularly in India and China.

On a business line basis, performance was largely driven by improved transactional revenues. Capital markets & hotel revenue nearly doubled to $34 million from just over $17 million in the second quarter of last year. Leasing also significantly -- increased significantly to $49 million from $36 million last year. Moreover, the region's annuity revenue stream from property & facility management continue to show strong improvement and was up 25% in U.S. dollars to $89 million compared with last year.

We're also pleased with the solid quarterly performance from LaSalle Investment Management. Advisory fees increased to $65 million in the quarter, up from $56 million in the second quarter of 2010, principally as a result of higher assets under management in the public securities business. Fundraising activity was again strong, as LaSalle raised $2.3 billion of net equity in the second quarter, $1.9 billion in the public securities business.

We recently announced the acquisition of Trinity Funds Management in Australia for approximately AUD $9 million. Trinity will add AUD $690 million of assets under management and will give LaSalle instant credibility in Australia, which is a significant targeted market for us. In addition to the purchase price, Trinity holds approximately AUD $20 million of co-investment alongside its clients, which we will purchase as part of the transaction. We expect to close this transaction in the third quarter.

Looking forward, we anticipate LaSalle will realize incentive fees in the second half of this year, driven by property sales and maturing funds that take advantage of the Asian market recovery. The timing and amount of these fees are difficult to forecast, but this is definitely a positive for our clients and our business.

In summary, we are very satisfied with our performance this quarter. We've had another strong quarter of revenue growth. We have solid pipelines in hand, and we reported significantly improved net income with the second quarter of last year. We're encouraged by the opportunities that will result from our recent acquisitions in both EMEA and LaSalle and are upbeat about our potentials for the second half of 2011, while still mindful of the uncertainties all global businesses are facing due to the inconsistent market recoveries and the unclear government responses.

I will now turn the call back to Colin.

Colin Dyer

Thank you, Lauralee. So now to give you a sense of our continued success in the second quarter. Slide 5 shows a few examples of recent business wins.

Starting with our global corporate outsourcing business, we won 20 new assignments during the quarter, renewed 5 contracts and expanded our relationships with another 12 clients. These numbers do not include activity in our local market-level Corporate Solutions business, which focuses on mid-market corporate occupiers. There, we continued to gain momentum in a growth segment where we won 30 assignments, totaling 75 million square feet of space to date this year.

Corporate Solutions wins, including the Americas, retention by the Apollo Group, a leading company in for-profit higher education, to provide them a range of services for their 8.5-million-square-foot North American portfolio. In Europe, Doosan Power Systems, a leading provider of green technology products and services, selected us as exclusive provider of real estate services for their 2.5-million-square-foot global portfolio. And in Australia, we won a 3-year extension from the Department of Innovation, Industry, Science and Research to provide services for its 1-million-square-foot portfolio.

Turning to first quarter investment sales activity. In the U.S., we represented Pinchal & Company in the $240-million sale of a 19-building industrial portfolio. In London, we advised on the GBP 288-million purchase of the Aviva Tower. And Australia's largest agency-negotiated real estate transaction to date this year, we completed the USD $481 million sale of a 50% interest in Melbourne's Northland's Shopping Centre [Northland Shopping Centre].

You can also see examples of growing momentum in our global hotels business, where transactions completed during the quarter included the sale of Morgans and Royalton Hotels in New York and the Ayers Rock Resort in Australia.

The quarter's major leasing and tenant representation transactions and management assignments included representing Skadden Arps in Washington, where we helped the law firm consolidate its presence by transacting lease extensions in 3 buildings and reducing its occupancy to 400,000 square feet from 450,000 square feet. In Germany, we won the leasing assignment for the 1.1-million-square-foot Businesspark Kienberg in Berlin's new Brandenburg Airport. In Tokyo, Morgan Stanley awarded us its 350,000-square-foot tenant representation mandate, cementing our #1 tenant reposition in the large Tokyo market. In Singapore, we completed a 300,000-square-foot lease for Credit Suisse, consolidating 3 locations into 1. And in Australia, we were appointed to manage the Rialto complex, the largest office tower in Melbourne.

Turning to LaSalle Investment Management. To date this year, LaSalle has raised $3.8 billion in new equity, a figure which includes $2.4 million (sic) [$2.3 billion] of public equity capital. As Lauralee mentioned in her remarks, in mid-July, we entered into a definitive agreement to acquire Australia's Trinity Funds Management, a profitable and highly respected investment manager based in Brisbane, Australia, with about $690 million of assets under management. That will strengthen LaSalle's competitive position in a country where we see strong growth opportunities, both for investing domestic capital within the country and for exporting Australian capital to global real estate investment.

Around the world, LaSalle's clients are maintaining their long-term allocations to real estate, as LaSalle continues to focus on delivering excellent performance. This is reflected in the outperformance which shows against many of the benchmarks against which LaSalle is measured.

So let's now look ahead and to turn the near-term prospects in real estate markets. First, in global capital markets. Despite the quarter-on-quarter slowdown, which we saw in Europe and Asia Pacific, we are now forecasting full year 2011 investment volumes to exceed our original projection of $440 billion.

Within this total, the pattern of growth in the capital markets has shifted from earlier this year. The recovery in U.S. capital markets has been very strong. The momentum there is still building. This, in addition to improving debt markets -- this, in addition to improving debt market liquidity and continued attractive spreads, at least until very recently, suggests that the second half will be even stronger than the first 6 months of this year. So we've upgraded our full year forecast for the Americas from $155 million of transactions to $175 billion, an 80% increase on 2010 levels.

In Europe, by contrast, Q1 momentum was not maintained in the second quarter in some key markets. And across the continent, the sovereign debt crisis is impacting investor appetite for risk. It's taking longer for larger deals to close, and so while we continue to expect growth in European volumes in the second half, we've lowered our full year forecast from 35% -- 30% gross -- growth to 25% growth year-on-year.

As noted earlier, the pace of growth in capital values for prime assets is slowing, with yield compression disappearing in most markets. And in this environment, we expect that additional capital appreciation this year will largely be driven by rental growth.

In global leasing markets, with new deliveries at a cyclical low, we expect global vacancy rates to continue to decline by a further 50 basis points to 13.5% at the year end. Despite economic concerns, rental growth prospects remain good in the top tier office markets, with double-digit increases expected in many markets where the balance is shifting in favor of landlords.

In the funds management sector, investors are cautious about taking on high levels of leverage and are moving back into real estate, primarily through the core and core plus strategies or through REIT investments. The investment management industry continues to consolidate in the aftermath of the financial crisis, but managers like LaSalle who demonstrated the ability to manage risks well and to be totally transparent with clients during the downturn are gaining share, as investment performance continues to recover.

To close our remarks, however, we'd like to mention some of the awards which we received, which reflect our commitment to superior client service and our position as leader in real estate services and investment management. We won numerous awards at the 2011 Asia Property Awards (sic) [Asia Pacific Property Awards]. First and foremost, we were named Best Property Consultant in the entire Asia Pacific region. At the country level, we won Best Property Consultancy awards for 6 Asia Pacific countries and received highly commendable positions for another 4 markets. We were the first company in the program's history to win so many awards in a single year.

Early in July, LaSalle Investment Management was named Property Management -- Manager of the Year in the European Pensions Awards. And in the U.S., we won Best Places to Work awards in Florida and in Los Angeles, Orange County and San Diego. And finally in April, we won Office Agency Team of the Year honors at the 2011 Property Week Awards in the U.K., and I think that's particularly appropriate and a great illustration of the strategic rationale behind our merger that King Sturge was named Investment Agency Team of the Year at the same event.

So with that, let's move to questions. Operator, could you please explain the Q&A process?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs Group Inc.

First, just a question on the investment sales volume. In the U.S., can you maybe give a little bit more color with regard to the strength there? Is it a matter of the amount of capital that's on the demand side of the equation, or are you seeing an increase in supply of what's available for sale? And where is that market meeting itself?

Colin Dyer

I think all of the above. The Asian and European investment sales markets, as you would've noticed from earlier quarterly calls which we've held, we covered ahead of the U.S. unusually. And for whatever reason you saw, the major cities in Europe and in Asia, all picking up ahead of the major gateway European cities. So the U.S. recovery was later, and we're still in that early bout stage in the U.S. of markets recovering rapidly from the extraordinary low positions that they had at the end of 2009. So that's the first effect. There is a lot of equity capital available in the U.S. and both domestic and international capital coming into the country. So the equity side is strong. As I mentioned in my remarks, the debt markets have been easing, and the CMBS markets have been opening up again. And we've seen $25-plus billion of CMBS issued so far this year. Spreads have been coming down so -- and loans have been available after we saw 70% loan-to-value ratio levels again. So you've seen both the equity and the debt side easing up. And then on the supply side, the constraint which we saw throughout 2010 in many markets, including the U.S., that's also now easing. We're seeing more product coming to market, both willingly but also increasingly in foreclosures and just sorting out of distressed financing structures around real estate. So all of those things are combining in the U.S. to move the market forward strongly. And as we certainly expect that picture to continue for the short-term, the immediate sort of question mark around that picture would be "What happens to the sovereign debt issue in Europe?" It has a minor impact in the U.S., but certainly the U.S. government discussions that are ongoing this week could cause a significant slowdown if it's not resolved.

Sloan Bohlen - Goldman Sachs Group Inc.

Okay. And Colin, just maybe one more question on that topic. You commented about spreads maybe not compressing much more for a lot of the core assets. Can you reconcile that with where we should expect the incremental transaction volumes to come from, meaning, should we expect secondary cities to be the area where we see some more transactions going forward?

Colin Dyer

Well, cap rates, we said, in the major cities are back in the 5s in the U.S. So you talk -- the east to west coast cities. And what we're saying is "that's not likely to move down very much". So you won't expect to see much capital appreciation through that effect. But what is -- but that's pricing. What you're referring to, I think, is transaction volumes, and we're expecting transaction volumes to step up, in line with the effect that I described earlier on. And that'll be in the major cities and core assets. So that markets, we've got a huge amount of demand in it and relatively limited product supply. But you can expect the recovery continues to see the market spreading into the secondary cities and the suburban areas of the major cities. So the usual kind of cyclical recovery process.

Sloan Bohlen - Goldman Sachs Group Inc.

Okay. And then one question for Lauralee, and I'm -- I apologize if you guys commented on this earlier. I had to jump on late. But with regards to the timing of expenses versus where we should see kind of the operating leverage in the business sort of kick in. A lot of the expense growth you guys talked about was set up for -- to reap its gains in the second half of the year. Is that what we should expect -- I don't know if you commented on what your margin expectations are throughout the full year, but at what point can we start to see those expense growth slow?

Lauralee Martin

We had modest margin increase in Europe, as we sort of seen that market selectively continue to improve. That's adjusting for the amortization piece of the King Sturge. So we had a modest increase year-over-year in Europe. We had a very significant increase in Asia. And so, really, the overall margin of the firm was impacted by the Americas. We had said at the start of the year "we were not choosing to have our margin grow in the Americas this year, because we thought our best opportunity was to take advantage of this window of being able to grab talent, grab market share and so forth. And that would translate into better performance for us this year and, more importantly, longer term". So the long-term margin target for the U.S. operating income margin is 12% to 14%. We were just under that last year. So we were very close, which is why we said we were comfortable going for market share versus pushing hard on margin. We have, in fact, been aggressively taking advantage of that window. We've added 60 net new leasing brokers. We've added, I think, 25 capital markets brokers. We've added in hotels. And we've also done some acquisitions, and that -- some of that amortization of their pipelines run through our margin as well. So we have had some year-over-year decline in the Americas. But that window, being able to get the talent as the market picks up, is closing. So we're happy with our decision to get it early in the year, to get it in that window. It will be harder and harder now to sort of grab that talent as they get pipelines and, particularly, going into the end of the year. So we haven't changed our margin targets. But what I said is "we could be as much as 1% less on our margin in the U.S. than we were last year". We actually hope we can close that if all the production comes through, but we haven't changed our overall targets at all.

Operator

The next question comes from the line of Joseph Dazio with JPMorgan.

Joseph Dazio - JP Morgan Chase & Co

Couple of questions for Lauralee. First, do you have offhand the contribution to EBITDA from King Sturge this quarter?

Lauralee Martin

The operating contribution, because obviously with the onetime charges, it was negative on a GAAP basis, was pretty close to neutral. I can tell you it was modestly positive, but not enough. You can say it kicked into an earnings per share piece of it. They are a business that last year did about $260 million worth of revenue. Their year-end on their books was the end of April, so their seasonal last quarter actually was very similar to our seasonal last quarter. So that occurred right before our acquisition. So we're actually coming into their low period as they build that back up. We will not be changing their compensation programs this year. We will just have a cutoff period that is shorter. That could change some year-end thinking and how that cycle works, though at the moment, we're not anticipating that. And then we will have new structures together going forward next year, which will probably put them more on a seasonal pattern similar to ours. So their revenue contribution, in the month that we have them, was only about $15 million. But we expect this year, that you'll probably take that $260 million and at least, the way we look at it, you'd probably do a straight line unless seasonality comes into it more strongly because of the change in behavior.

Joseph Dazio - JP Morgan Chase & Co

Great. Also, one other question. The facilities management business, I think, in EMEA was down a bit year-over-year. Was there anything specific driving that?

Lauralee Martin

We don't report that separately, so I'm not -- Oh, I see. But you're talking about in terms of the -- that's a combination of property management and facility management. And sometimes, we will look at contracts and not be as pleased with looking at them on a renewal basis, so I would not take that as a negative. It's not just facility management. That includes our also very large property management businesses in the U.K., as well as Germany and some modest property management elsewhere.

Colin Dyer

In fact, part of the King Sturge business mix is a very robust property management business. So expect that to be one of the lines which sees a kick up [indiscernible] in King Sturge.

Joseph Dazio - JP Morgan Chase & Co

Okay. And then one last question for Colin. In your closing remarks, you provided a lot of good detail on what you guys are now expecting for investment sale volumes in the U.S. and EMEA. Wondering if you could go into a little bit more detail on Asia Pacific and, in particular, focus a bit on Japan. I don't know if it's a fair statement to say that the second quarter for that region was negatively impacted by everything that went on there, and if you expect that could tick up a little bit in the back half of the year? Or are you expecting the trend to be similar to EMEA?

Colin Dyer

Well, Asia Pacific is a region which has always been extraordinarily sensitive to sentiment. It's sentiment driven which is why it's so very cyclical in its business patterns. The influences on -- and you will have seen from our remarks that the Q in -- Q2 in Asia Pacific was down both on Q1 and on last year. When we talked with our regional people on that, they gave us a number of reasons for it. The major one is sentiment, because the Asians are looking at Europe and the U.S. and they are concerned at the impact of all of the government debt issues, which the 2 developed regions are dealing with. They're having their concerns on the impact that that's going to have on global capital markets and, therefore, in Asia. So that's one impact. The second impact is that India and China have both got significant inflationary pressures. And you've seen the Indian government raise interest rates 15x since March last year. The Chinese government's rate -- raised its interest rates 6 to 7x to try to choke off inflation in the commodity sector, but it's also having an effect of dampening the availability of capital and the price of capital into investment sales activity. You've got Australia doing the same thing to dampen it. So part of it's economy. So the local market inflationary pressures which are also having an impact. And then when you move specifically to Japan, the investment sales market in Japan was quite strong in Q1. It was actually the momentum from deals which were negotiated last year continued. It's got very flat in Q2, because those deals would have been originated in the back end of Q1, when activity slowed very significantly because of the tsunami. What we are hearing from our hotels group and our capital markets group in Japan is that activity is now picking up, the pipeline is filling again and the pipeline coming for -- through domestic offers of buildings and interest in purchasing from both domestic and international capitals. So we expect that pipeline to pick up in the course of Q3 and Q4.

Lauralee Martin

And just one clarification on Jones Lang LaSalle in Japan, we talked about this when the tsunami did occur. The majority of our revenue is strongly annuity based. We have a large facility management contracts with significant Japanese corporates there. We have LaSalle Investment Management, who has their logistics funds there, and we also do a fair amount of property management. So we're -- we have a good annuity base there, and we're the leader in tenant representation. A lot of the capital markets activity actually done in Japan is controlled by the trust banks. And then, as Colin said, we were able to influence the international monies that come to Japan. And clearly, we'd like to see the confidence of those investors into that marketplace pick up.

Operator

The next question comes from the line of Will Marks with JPMorgan Securities.

William Marks - JMP Securities LLC

It's Will Marks from JMP. Just to follow up on the last question. I'm sorry, did you give an APAC forecast for capital markets growth?

Colin Dyer

We did. We said it would be up year-on-year. From memory, 20%. We'll check it out.

Lauralee Martin

And our G&P is coming out here shortly that will cover all the markets.

William Marks - JMP Securities LLC

Okay, great. In terms of the margin, could you give a little bit of an indication of what would happen in the Americas? And I'm wondering if EMEA and APAC in investment management, I believe, are trending better in terms of growth. Could we see offsetting margins there? So the overall margin actually grows in 2011?

Lauralee Martin

That's a little more specific guidance than we normally give. But clearly, we are pushing those other parts of the world to do both growth and margin, given they're below the targets. And we'll continue to -- unless the confidence dramatically changes in Asia, the momentum is quite good.

William Marks - JMP Securities LLC

Okay, great. Colin, you talked about, in your opening remarks, some weakness from clients, I think, on the leasing side, and Lauralee, you mentioned the government, in general. I'm wondering if you can be a little more specific on maybe markets. Because your clocks don't really show -- aside from a few markets, London and some APAC markets, we're not really seeing any slowing in leasing, but yet there's chatter out there about New York and maybe some other Americas markets, where you're seeing slower leasing growth. So maybe you can be more specific?

Colin Dyer

Yes. I think the way of thinking forward on the remarks you made, largely based on the -- on an environment where the U.S. sorts out the budgetary challenge and Europe gets to grips with and deals with the sort of big economy issues as well. In -- first off all, resolving and complete it, but at least, in a way that settles the capital markets down. If either of those events don't happen, in other words, if we get a situation in the U.S. where the budget's receiving is breached or there's no agreement, then you can expect capital markets to get skittish and business confidence to be impacted as a result. And it's quite hard to predict how that will be or how that will come through. At this point, we're saying those are things which still have to happen, and we are thinking forward on the basis of business as usual. Out of those circumstances, what you're seeing in leasing market demands worldwide pretty much reflects what you know about economies. So within Asia Pacific, it's India and China where demand is booming. And as I said in my remarks, we're seeing Hong Kong and Australia activity levels actually declined a little. In Europe, the direct demand in France and Germany is still quite robust. It's been slowing significantly in Britain, which has got the economic issues, which have been well publicized. Across the U.S., we're seeing continued steady demand. It's stronger in -- still in the gateway cities than the secondary cities, and it's still, in our mind, in a recovery mode.

William Marks - JMP Securities LLC

Okay, great. Couple of other quick things. First, any update on CapEx, maybe what second half spending should be?

Lauralee Martin

For the total year, we had given you guidance of about $75 million. With the King Sturge, we'll add probably another $10 million to that. So for the total year, about $85 million and -- one second, I'll get you what we've spent, the year-to-date. Year-to-date, we've spent about $37 million.

William Marks - JMP Securities LLC

Okay, great. And final question on cash flow. You gave in your slide deck A figure that shows flat operating cash flow year-to-date with last year roughly up slightly. And any comments on that? Is -- can we attribute that to what you said about just spending in advance of good revenue growth?

Lauralee Martin

Hold on a second.

William Marks - JMP Securities LLC

Sure.

Lauralee Martin

Give me give one second, we'll check that. Well, there's 2 pieces. One is working capital. We did pay more bonuses, so you do have the impact of the bonuses. But I think actually what you're talking about is total cash available. We did have some deferred acquisitions that we paid out in the second quarter. So for example, we increased our ownership position of what we bought in India, and we also had some modest other acquisitional pieces. So if we look at it, our CapEx was a little higher than last year. Our acquisitions, obviously, were up significantly. Dividends, modestly. And then the balance would be working capital with bonuses.

William Marks - JMP Securities LLC

Okay, that's helpful. But the -- I was more referring to the specific line on Slide 12, cash from earnings was $123 million versus $120 million a year ago, and...

Lauralee Martin

Yes. You are going to have the -- some of the acquisition cash. Remember our GAAP number versus our adjusted number? So if you think about that, included in the GAAP, it's going to the onetime cost relative to closing the King Sturge.

William Marks - JMP Securities LLC

And that will fall into cash from earnings?

Lauralee Martin

Yes, it will, because the cash from earnings is a GAAP basis. So if you look at the way we reported the adjusted differential, that would get you the explanation for that. And if you want to take it offline with us, we can walk you through it in greater detail.

Operator

The next question comes from the line of David Ridley-Lane with Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch

Yes. So last quarter, you detailed roughly a $15 million nonrecurring cost. And I'm just wondering was the increase that we saw x those costs sequentially in the second quarter, is that all recurring SG&A increase? Because it's a pretty big sequential increase, or are there some additional nonrecurring costs in the second quarter?

Colin Dyer

You're referring to the total dollar value of costs?

David Ridley-Lane - BofA Merrill Lynch

Yes.

Colin Dyer

Yes. They would step up quarter-on-quarter as we're adding people to our business, in the way that Lauralee described, and that'll be across the entire business space, but particularly in the U.S. There'll also be additions, as some of the smaller acquisitions which we did in the past 12 months click into our cost basis.

Lauralee Martin

Can I just clarify your question? Are you referring to in the first quarter, we highlighted $9 million of unusual items that we said are not nonrecurring? Is that what you're referencing?

David Ridley-Lane - BofA Merrill Lynch

Yes. I mean, I'm referring to sort of onetime cost in the first quarter, backing those out and then looking kind of the sequential increase there, and it's a pretty big step up.

Lauralee Martin

No. The $9 million was not in nonrecurring. We highlighted it as unusual expenses that could not be carved out for nonrecurring. The nonrecurring in the second quarter are legitimate nonrecurring items that relate specifically to the merger with King Sturge, a very different item. And relative to that $9 million, I can tell you we did not have any significant unusual items in the second quarter that would be in any way, shape, or form comparable to the first.

David Ridley-Lane - BofA Merrill Lynch

All right. And can you give us maybe some primaries around interest expense next quarter, given the additional data and the renegotiations of the loans?

Lauralee Martin

Well, that -- the balance that we have right now has covered the interest for the King Sturge first payment, the half payment. We'll have deferred payments, which we accrete interest on. In this month, we will be paying another installment to -- for the Staubach acquisition, which we'll transfer that out of deferred obligations where we accrete interest, noncash interest, and put that into our bank line, where we will pay cash interest. So we will have some movements back and forth in that. So our cash interest will go up very modestly, maybe $0.5 million and our noncash interest, which we accrete, will go down about equivalent amount.

David Ridley-Lane - BofA Merrill Lynch

And net-net on the income statement, net interest expense should be about where it was in the second --

Lauralee Martin

There's not much different.

David Ridley-Lane - BofA Merrill Lynch

Not much different. All right.

Operator

The next question comes from the line of David Gold with Sidoti.

David Gold - Sidoti & Company, LLC

Just a couple of questions. One, on King Sturge, couple of months in, and presumably I guess about a quarter of the integration charges that you've sort of pointed to. Can you give us an update as to where we are there, integration-wise?

Colin Dyer

Sure. Broadly speaking, across Europe, and that's where the bulk of the people are in King Sturge, you have to respect the national laws around the integration process of individuals. So these are labor laws. And in general, they require periods of consultation of 60 to 90 days, during which you're limited to just to the amount of true integration you can do, both in terms of sighting but also people and roles and responsibilities and so forth. And so we're seeing that phase of respecting the national labor laws. And so as those periods burn off during the course of this summer, we'll begin to move offices together. In fact, the first one, the first regional office move has taken place. We'll begin to consolidate national teams. We've got compensation systems, responsibilities and roles largely worked out in our own minds, and we'll begin to execute on those. In general, as I've observed, the groups working together, the teams are very compatible. As we always do, we've made a very strong -- we did a lot of research around the cultural affinity of the 2 groups, because for us, that's a very strong motivator for doing an acquisition. And if cultural alignment is not there, it's a demotivator, and we don't do them. So we've got 2 groups that work well together. There's a great deal of professional respect on both sides, and so we believe that will help with the integration process. And there's a general sense of excitement with the teams when they get together, can achieve more together than they can separately, as both groups have -- both sets of clients can be exposed to the other company's services, and we can cross-sell services to the market as a whole. So broadly speaking, positive, no loss of people so far, and we don't expect to, indeed, to see much of that. So at this point, nothing other than very comfortable with what's happening.

David Gold - Sidoti & Company, LLC

Okay. And then one broader question. I mean, you brought up comments in the release. Obviously, you sort of highlight the caution in some of the geographies from economic growth and government finances, but there's some offset there, presumably, from -- of course, some optimism with the cyclical recovery. Just broadly speaking, at what point do you -- or should we be nervous of -- that the slowdown in economic growth will hinder or impinge more broadly on the overall real estate cycle? And so at what point do those 2 sort of connect? And does it start to make you nervous?

Colin Dyer

Well, our basic view of the market, as I said right at the beginning, is that this global cyclical recovery which normally runs sort of 3, 4 years, 5 years in some cycles is only about 18 months, 24 months old. So we're still -- that recovery process is still intact. And it's the impact of the uncertainty around government activity, which is just causing some lack of confidence in both investor and corporate clients. But the underlying tone is positive. As far as we're concerned, we're taking share. We're trading very well, and we are confident that we can -- unless it's a full-blown recession, we can continue to show growth on the revenue line and the profitability line through pretty much anything that these current market conditions throw at us. So that means, broadly based global recovery, some attenuation around the confidence issue around government debt. But at this point, we can see no signs of there being any trip in the real estate markets into a double-dip recession.

Lauralee Martin

David, I think the -- we said it a couple of times and maybe it didn't come through. If we just look at our pipeline, we would feel really good. It's just the concern that if something happens in the broader market, do -- does that lack of confidence mean that, that pipeline won't convert. So we -- that's why we're optimistic but then have to put a little caution on it because we've seen what happens when confidence gets disrupted.

David Gold - Sidoti & Company, LLC

And I guess presumably, there were are also some signs that not just [ph] confidence, to your point, there's some pausing, so to speak.

Colin Dyer

In certain areas, there's some. But again, to Lauralee's point, the business we're seeing coming in, the pipelines we have in progress are robust. So funny sort of market dynamic at the moment. The numbers you can see are very good. We've got good forward-looking pictures in our pipelines, but there's this broad-based concern amongst both investors and corporate clients around what is happening to government finance. And it has become stronger over the last 3 months.

Operator

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

Brandon Dobell - William Blair & Company L.L.C.

Maybe you could update us on how you think about the back half for LIM? I know in the past quarters, you talked about some other funds being reset in terms of fees, capital given back. And then obviously you've raised a decent amount of money here, but potentially, at a lower fee structure, given public securities. How should we think about the -- I guess, back half of the year and little longer term with where all those things are starting to converge.

Colin Dyer

Well, the nice thing about public securities is that you invested instantly in instant fee flow, which is very nice. We're seeing actually a good -- an interesting flow of funds in from new sources. We're seeing some significant opportunities with government wealth funds, government funds. We're seeing high net worth family, offices coming with sums to invest in real estate. We are taking -- continue to take on business from existing clients, including, for example, a $400-million sterling allocation just this week from an existing client in London. We're seeing continued business flowing from U.S. teachers funds, and the public securities money is coming in from a nice spread of geographies. So broadly speaking, we're seeing good funds flow in. We talked to you about some of the funds which begin to run off, at least in the investment phase, over the next few quarters. But broadly speaking, for the second half of the year, if you put all that together in the mix, we're expecting continued steady performance from LaSalle.

Brandon Dobell - William Blair & Company L.L.C.

Okay. And then, Lauralee, you, I think threw out a couple of kind of headcount data points within the U.S. business. A couple of questions there. One, I guess, trying to figure out if that -- those were year-over-year, kind of quarter-on-quarter. And maybe some sort of sense of scale where you guys are now, especially in capital markets in the U.S., from the headcount point of view, if you compare it now to, I don't know, maybe where you were in '07 or where you were at the bottom. Just so we can get a sense of potential opportunity as that business recovers.

Lauralee Martin

Okay. For the year, in capital markets, we've added about 25 producers, which -- that's net. So some out, some in, but net new. We added 40 last year. So that would, say, year-over-year, we're up about 65 in capital markets. Leasing, in the quarter, we added about 20, which brings us to 60 for the year. We added 75 last year. Our goal is to add -- to get another 30 by year end. And then in hotels, which is also capital markets, we've added globally, but specifically, we've added 12 in the U.S. So that would mean, if we put them together with the capital markets, we'd be up just under 80 year-over-year.

David Gold - Sidoti & Company, LLC

Okay, that's definitely helpful. In terms of the leasing pipeline. And I guess maybe kind of more of a qualitative question. In the U.S., given what's kind of been a lackluster couple of months for job creation, is the pipeline, I guess, dependent on companies thinking that they're going to see a recovery in hiring? Does it not matter that much, just given that nobody turned anything for a couple of years, so there's still demand even without kind of major job creation? I guess I'm trying to figure out how you look at the next 2 to 4 quarters if jobs remain lackluster in the U.S. Do you see that pipeline not converting in leasing, or is it not going to be as tied as one might suspect?

Lauralee Martin

Well, the pipeline we have today are things that need to happen. I mean, you can have some extension in that, where we might try to do -- you don't have to -- maybe after you probably have 12 months, 18 months flex on that. But these are where the client has already made a decision or is definitely considering a decision to do something, we believe, by the end of the year. So that would not require job creation in those decisions. Now I guess if they totally lost confidence, they would delay that decision and say, "Gee, I need to think about my existing employee base." But we haven't heard any indication that companies are talking about going backwards. It's just a question of their confidence about forward. So for this year, we remain, I would say, reasonably confident that things will get converted unless there is a disruption. Your longer-term question is around job creation. I think when you get into next year beyond, because we're dealing today with the normal lease terms of market consolidation decisions, portfolio repositioning, taking advantage of things, such as Colin described in his comment about a major client, reducing the amount of space that they have, making those kind of decisions, but that doesn't impact this year, that's a longer impact.

Operator

Your next question comes from the line of Eric Glover with Canaccord.

Eric Glover - Canaccord Genuity

I just wondered about the King Sturge acquisition. Can you talk about why you think the transaction will be accretive to the higher end of your EMEA operating -- target range?

Lauralee Martin

Two things. Number one, the margin that the business ran when they were independent, and the fact that there should be some benefits of scale as we're just bigger. So combination of the 2 of that, feels pretty good to us. Yes.

Colin Dyer

Cost synergies turn in. [ph]

Eric Glover - Canaccord Genuity

Okay. Can you provide some more color on those potential cost synergies?

Colin Dyer

Well, not large. But they'll be around back-office, sort of back-office support functions, certainly not in the producer area.

Eric Glover - Canaccord Genuity

And when should we expect to see the transaction actually be accretive? Would that be after the first year?

Lauralee Martin

Yes, it could be modestly accretive in the first year, but definitely in the second year. But we're -- we are targeting a modest accretion, hopefully even this year, depending on how the seasonality of the business works. So again -- and that's carving out the onetime charges, so -- which we did. And I commented on them on the call, but I just thought it might be helpful because I know I went through them rather fast. The appendix pages of our deck that -- with our earnings release, on Page 19 in the bottom, we give the specifics of about what I mentioned. So there's a fair number of onetime charges that definitely come through on the first 12 months, still a fair amount into the first 24 months, but those are nonrecurring. And the underlying business will be accretive as we -- which we think about next year for sure.

Eric Glover - Canaccord Genuity

Okay. And finally, just so I understand the seasonality of their business, you think will be similar to yours in 2012. However, for the remainder of this year, should we just assume that's roughly half of what their annual revenue will be -- will fall in the second half of your year?

Lauralee Martin

Yes. If we compare it to the Staubach merger, Staubach ended their year, in the middle of the year, and clearly, the -- our second quarter was their largest quarter with their year end. They came onto our structures in the first year. They picked up a little bit of seasonality. I guess it sort of naturally happens because the teams integrate. And clearly, by the second year, we're fully on a seasonality that looks like Jones Lang LaSalle. We're expecting that will be very similar to the King Sturge. Clearly, we have to experience it. But at this point in time, I think considering about a half contribution of revenue is reasonable, if not modestly conservative.

Operator

Our final question comes from the line of Bose George with KBW.

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc.

This is actually is Ryan O'Steen on for Bose George. Just one quick one. Could you give any detail on the $4 million of equity earnings that you took this quarter? And then just kind of your outlook for that line item?

Lauralee Martin

Yes. Two things. We normally have in the underlying equity portfolio because it had principally been co-investment into our funds, which had been largely value add or opportunistic. The operating expenses on that tend to run at a modest negative, sort of $1.5 million to $2 million a quarter. And then with normal property sales, we can get that back to a neutral or a positive. We, in fact, have -- those portfolios are maturing, so they're looking to be more income producing, and then they actually move into having less of an operating cost carried. So that was one piece of it. And then we're also starting to see properties actually being sold, particularly in Asia, with gains coming in. So we, in fact, had a property sale which had about a $2.8 million gain, which then got offset by still marks and the other operating expenses, which gave us the positive in the quarter. I think you're referencing the swing to last year, which actually was the negative. So the year-over-year change was in fact in that $4 million range, but the actual number in the quarter was just a touch over $2 million. And we would expect going forward, that until we put more co-investment capital into value add or opportunity, a lot of it right now will go into core product. So I mentioned, the $20 million that will go into Trinity as co-investment capital. That is principally core product. And so there will be that contribution, as well as we do expect as we -- I mentioned incentive fees potentially in the second half. That will come from liquidating portfolios, where we also think there could be some equity gains.

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc.

Great. And do you have the dollar amount of write-downs or impairments this quarter?

Lauralee Martin

I think it was about $800,000.

Colin Dyer

[indiscernible]

Operator

And there are no further questions.

Colin Dyer

Good. Well, thank you, operator. Thank you, everybody, for listening in to today's call and for your interest in Jones Lang LaSalle. We look forward to speaking with you again following the third quarter results shortly. Thank you very much.

Operator

This concludes today's presentation. You may now disconnect.

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