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Executives

Donald Zhang – Co-founder, Chairman and CEO

Harry Lu – Co-founder, Vice Chairman and President

Kevin Wei – CFO

Martin Reidy – IR, Brunswick Group

Analysts

Cai Liping – William Blair

Ella Ji – Oppenheimer

IFM Investments Ltd. (CTC) Q4 2011 Earnings Call March 15, 2012 8:00 AM ET

Martin Reidy - Brunswick Group

Thank you, everyone for joining us for Century 21 China Real Estate's fourth quarter 2011 earnings call.

With us today are Donald Zhang, co-founder, chairman and chief executive officer, Harry Lu, co-founder, vice chairman and president, and Kevin Wei, the company’s chief financial officer.

Before we continue please allow me to read you IFM Investments' Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. IFM Investments Limited does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast until March 22 on our corporate website at www.century21cn.com/english. At this point, I would like to turn the call over to Mr. Donald Zhang.

Donald Zhang

Thank you. Good day to everyone and thank you for joining us on this call.

Policy restrictions continued to keep transaction volumes at artificially low levels in the fourth quarter. However, we are cautiously optimistic that we are approaching the bottom of the market in terms of transaction volumes.

Both in top tier cities and in smaller cities policy restrictions are putting the downward pressure on housing prices that the government wants to see. For example, in December our leading price index of 335 key residential properties that we track in Beijing was down 3.4% year-on-year, and down 10% since the peak in July of last year - although we still see homes in central areas of major cities commanding a high premium.

That said - in the near term at least, we don’t expect to see any major changes in the policy environment. But we are encouraged to see that transaction volumes appear to have stabilized. Through October, November and December, transaction volumes in our three largest markets were far below normal levels but - importantly - were relatively stable. December in Beijing was an exception, when we saw a major surge in purchasing activity in the first 10 days of the month as buyers rushed to close deals before the introduction of more stringent tax appraisal processes for secondary homes.

In light of this stability, we are relatively hopeful that we are approaching the bottom of the market. Though visibility remains extremely poor, since February we have seen some encouraging indicators. January was slow, which we expected. However, in February we saw an uptick in transactions in both the primary and secondary markets across Beijing, Shanghai and Shenzhen.

While it’s much too early to call this a recovery, I do want to note that there are no major policy or lending changes driving this activity, although we have seen indications that the mortgage application process for qualified first-time buyers has become a little easier. So the modest improvement in transactions may indicate that some buyers believe prices have bottomed and have decided to re-enter the market. We believe that there is huge suppressed demand in the market, and that many of those who have postponed house purchases will quickly return to the market when they believe that the market has bottomed out.

While we are heartened by these trends, we also recognize that market conditions remain extremely challenging and there is no guarantee of a sustained recovery. However, we are executing well on our strategy to navigate the current market turbulence, and that strategy is driving results. We believe that we are well positioned to benefit when the market picks up.

I’d now like to turn the call over to Harry, who will provide you with more details on our performance in the last quarter and strategy for the quarters ahead. Thank you.

Harry Lu

Thank you, Donald.

We faced very challenging market conditions in the fourth quarter. But we are encouraged that our strategy to deal with the current market downturn continues to have an impact. Our results for the fourth quarter improved thanks to our revenue diversification efforts and cost control measures, and we are confident that we are now well-positioned to see through the current challenges and benefit when the market recovers.

In the fourth quarter, we continued to make progress on diversifying our revenue streams.

In particular, I want to highlight the great progress we’ve made in selling primary units through our secondary-focused company-owned store network. Primary home sales through our company owned stores actually accounted for 50% of revenues from our company owned brokerage services in Q4. And in Shanghai, for example, we are one of the top sellers of primary homes in the city.

As I mentioned in previous quarters, we offer an attractive proposition to property developers, who are increasingly relying on Century 21 to drive quick and effective sales results. The breadth and depth of our store network and the quality of our sales teams are crucial differentiators here and are helping us attract more developers and drive more sales. This is reflected in the very competitive commission rates we were able to charge. In Q4, our average commission rate from primary sales exceeded 2% in both Shanghai and Beijing with incentive targets achieved, versus a market standard of around 1%. So we see strong potential to grow this business practice in the future, and expect to benefit from the potential synergy with our primary and commercial sales units.

In terms of our pure-play primary and commercial sales business, we continue to gain traction here, with revenues growing steadily in Q4 to 14.9 million RMB, an increase of 14.6% quarter-on-quarter. That’s approximately 10.5% of net revenues, compared to 8.3% in the third quarter. Having said that, sales through our primary agency business in Q4 were slower than we expected, as some developers have been reluctant to reduce prices.

Nevertheless, we’re encouraged by the progress we’ve made in this new segment within a relatively short space of time, and we believe we should be able to expand further into 2012 by completing more new sales and consulting projects for developers.

Though revenues declined sequentially by around 9.1% to 142 million RMB, we reduced net losses by 14.1% to 78.8 million RMB as our stringent cost management strategy began to have a direct impact on our bottom line. As you know, since the second quarter we have been focused on shutting underperforming stores. We started closing more stores in the latter half of 2011 and into the beginning of this year. So, as a result, fixed costs such as rental and store operating costs will be much lower in 2012 than in 2011.

As Donald mentioned, we are hopeful that we are reaching the bottom of the market so assuming transaction volumes remain stable in the coming months we should be able to reduce losses further.

Throughout last year and particularly in the second half of 2011, we have streamlined the number of sales offices as we have focused our resources on our best performing stores with our strongest sales teams in the most important marketplaces. We remain confident this approach will enable us to continue to improve productivity across the company owned brokerage network.

As a result of these optimization efforts, we have retained a very strong store network in key neighborhoods in our major markets. At the same time, we have observed that many of our smaller competitors have not survived the tough environment. So in many key neighborhoods, despite reducing our store presence we have been able to maintain – or even slightly increase – our market share.

I’d also like to mention that in March 2012, we successfully negotiated to take back the Century 21 franchise rights for Tianjin city. We have no immediate plan to resell the franchise rights for Tianjin and Guangzhou which are the remaining two of the top five metropolises in China. During the fourth quarter of 2011, we had an average of 1,237 sales offices in operation including 406 company owned offices. In 2012, we will continue to grow our franchise network further in tier two and tier three cities.

2011 was an extremely challenging year for our industry, the most challenging since Century 21 China Real Estate was founded. But we reacted quickly and effectively to these challenges. We slimmed down our operations, while minimizing the impact on our competitiveness. We diversified our revenue streams and business models, and leveraged our strengths in the secondary housing market to move into new areas like primary and commercial sales. And we managed our cash as prudently and effectively as possible, using our resources in the most efficient way in support of our long term growth goals.

As we move into 2012, we are very realistic about the challenges ahead. But we are confident that we have the strategy in place to sustain and grow our business for the long term.

With that, I will now turn over to Kevin Wei, our CFO, for a detailed discussion of our fourth quarter financial performance.

Kevin Wei

Thank you Harry. Now I would like to share with you our full year and fourth quarter 2011 unaudited financial results.

The Company’s total consolidated net revenue for fiscal year 2011 was 604.6 million RMB, representing a 13.9% year over year increase from 530.8 million RMB.

Revenue from company-owned brokerage services for full year 2011 was 513.4 million RMB, representing 84.9% of total net revenue, a 6.4% increase from 482.4 million RMB in fiscal year 2010. The increase was mainly due to slightly higher sales and purchase transaction volumes completed in 2011 and higher commission rate from new homes sales. Specifically, we completed 13,380 sales & purchase transactions during year 2011 versus 13,054 transactions in 2010. Among the 13,380 sales and purchase transactions, new homes sales transactions accounted for approximately 23% in 2011, a significant increase from 5% in 2010. This increase is mainly due to stronger sales alliance programs with the developers by our Shanghai, Shenzhen, and Beijing company-owned sales networks, which became particularly strong during the second half of 2011. The average commission rate recognized for these new home sales through our company owned brokerage offices in these three cities ranged from approximately 1.9% to 2.5% after achieving certain incentive targets in 2011. In addition, total rental commission accounted for approximately 16% of company-owned brokerage services revenue, through 30,161 rental transaction completed in 2011, representing a 70.3% increase from year 2010.

In 2011, the average number of sales offices in operation increased to 517 from 451 in 2010. In 2011, we also had an average number of 24 sales offices that were temporarily closed. As we have disclosed previously, we have closed down a significant number of unprofitable sales offices since the second quarter of 2011, and as of the second week of March, we have 340 company-owned sales offices in operations and 21 temporarily-closed offices. Based on actual number of sales offices in operation, our average monthly net revenues per operating sales office decreased slightly to approximately 82,700 RMB in 2011 comparing to 89,100 RMB in 2010. Having said that, the average monthly net revenue per operating sales office has been increasing during the last four quarters as we have scaled down on the sales offices.

Revenue from primary and commercial services for fiscal year 2011 was 44.7 million RMB, or 7.4% of total net revenue, which represent a five folds increase from 2010 and now is our second largest business segment in term of revenue. Total GFA sold was approximately 224,400 square meters, while the newly acquired Beijing ShangGu business unit sold close to 148,400 square meters GFA. In 2011 for our primary brokerage services, the weighted average ASP was 6,100 RMB per square meter, with weighted average commission rate at around 2.4% from the developers.

Although we have experienced some delays in some of these primary agency projects in 2011, we have been continuing to build up our pipeline of primary residential and commercial projects to around 2.3 million GFA at the end of 2011. And we remain hopeful to generate more significant commission revenue from primary and commercial business segment going into 2012.

Revenue from mortgage management services in 2011 was 22.9 million RMB, or 3.8% of total net revenue, representing a 6.1% decrease from RMB24.4 million for fiscal year 2010. This overall decrease was primarily due to lower mortgage loan volume brokered by the Company in 2011. We provided 2.3 billion RMB mortgages to our customers in 2011, as compared with 3.7 billion RMB in 2010. In the meantime, we have been increasing our revenue from servicing home equity loans and offering consumer loans with property pledge directly to borrowers in 2011. The percentage of revenue from advising consumers for home equity loans and service fees and interest revenue earned from consumer loans accounted for 54% of total mortgage service segment revenue in 2011. As of December 31, 2011, our total outstanding consumer loans receivable was 37.5 million RMB, with average LTV ratio of approximately 50%.

Revenue from franchise services for fiscal year 2011 was approximately 23.5 million RMB, which accounts for 3.9% of total net revenue, a 38.2% increase from RMB17 million for fiscal year 2010. The year-over-year increase was primarily due to the initial franchise fees recognized in 2011 as the company granted licenses to two new regional sub-franchisors in the second quarter of 2011.

On the cost side, Commissions and other agent-related costs for fiscal year 2011 were 428.9 million RMB, representing a 34.5 % year-over-year increase. This increase was mainly due to increases in base salaries and benefit costs in the company-owned brokerage segment as a result of an increase in headcount for sales staff. As to the variable costs, our consolidated commission expenses, as a percentage of total consolidated net revenue for the full year 2011 declined to 27.6% from 28.9% in 2010.

Operating costs for fiscal year in 2011 were 296.7 million RMB, representing a 48.6% year-over-year increase. We have incurred approximately 34.3 million RMB write-off charges in sales office closing related costs such as unamortized leasehold improvement and forfeited rental deposits etc. in 2011. In addition, the year-over-year increase were also due to 31.1 million RMB increase in rental costs and 27.6 million RMB increase in other store related costs as a result of overall higher number of sales offices. Total depreciation and amortization expenses for year 2011 were 34.6 million RMB.

Our total SGA expenses in 2011 were 218.1 million RMB, representing a 23.7% year over year increase. The increase was largely due to increases in non-sales payroll as the result of more non-sales staff hired throughout all business segments and higher marketing expenses in 2011.

Net loss attributable to IFM Investments Limited in 2011 was 336.5 million RMB, compared to a net loss of 162.2 million in 2010. Excluding share based compensation expenses, Goodwill impairment losses and Net change in fair value of contingent consideration, Non-GAAP net loss attributable to IFM Investments Limited in 2011 was 328.4 million RMB, compared to a non-GAAP net loss of 145.4 million RMB last year.

Net cash used in operating activities for fiscal year 2011 was 315 million RMB mainly due to operating losses. Cash used by investing activities for fiscal year 2011 was mainly comprised of an initial payment of 25 million RMB for the acquisition of ShangGu subsidiary, net consumer loans of 25 million RMB provided during the year, and the purchase of property, plant and equipment of 37.8 million RMB, and was offset by matured time deposits of 120 million RMB.

The Company’s total consolidated net revenue in the fourth quarter of 2011 was 142.3 million RMB, representing a 9.1% sequential decrease from 156.5 million RMB, and a year-over-year decrease of 16.2% from 169.9 million RMB.

Revenue from company-owned brokerage services was approximately 117.6 million RMB, representing a 13.3% sequential decrease, and a 23.6% year over year decrease. The sequential decrease was mainly due to lower sales and purchase transaction volumes completed in Q4 of 2011. Specifically, we completed 2,963 sales & purchase transactions during Q4 versus 3,416 transactions in Q3 of 2011, a 13% decrease. Among the 2,963 sales and purchase transactions, new homes sales transactions accounted for 47% during Q4 of 2011, a significant increase from 30% during Q3 of 2011 for the reasons just mentioned.

The average number of sales offices in operation decreased to 406 in Q4 from 479 in Q3 of 2011, as a result of our permanent and temporary store closings. During Q4, we also had an average number of 22 stores that were temporarily closed. Our average monthly net revenues per operating sales office increased to 96,600 RMB for Q4 from 94,400 RMB in Q3 of 2011, excluding temporarily closed sales offices.

The year-over-year decrease in quarterly revenues from the company-owned brokerage service was mainly due to lower sales and purchase transactions volume of 2,963 transactions for the fourth quarter of 2011 versus 4,495 transactions for the same period of 2010. We have decreased the average number of company-owned sales offices to 406 in the fourth quarter 2011 from 572 in the same period 2010. Because of these factors, our average monthly net revenues per operating sales office for the fourth quarter of 2011 increased to 96,600 RMB from 89,000 RMB for the fourth quarter 2010.

Revenue from the primary and commercial business segment in Q4 of 2011 was approximately 14.9 million RMB, or 10.5% of total net revenue. This 14.6% sequential increase was mainly due to the sales of approximately 62,700 square meters GFA of new homes and consulting fees earned on advising developers on some new commercial real estate projects. The Beijing ShangGu business unit during the fourth quarter of 2011 sold approximately 45,900 square meters GFA. For Q4 of 2011, the weighted average ASP was 8,300 RMB per square meter, with weighted average commission rate at around 1.8% from the developers.

Revenue from mortgage management services in Q4 of 2011 was 5.8 million RMB, or 4.1% of total net revenue, representing a 23.4% sequential increase and a 3.3% year-over-year decrease. The sequential increase was mainly due to higher revenues from consumer loans. The year over year decrease was mainly due to a decline in the total volume of mortgage loans, from 824 million RMB in the fourth quarter of 2010 to 409 million RMB in the fourth quarter of 2011. The percentage of revenue from advising consumers for home equity loans and services fees and interests earned from consumer loans accounted for 68% of total mortgage service segment revenue in the fourth quarter of 2011, vs. 43% in the fourth quarter of 2010.

Revenue from franchise services in the fourth quarter of 2011 was approximately 4.1 million RMB, which accounts for 2.9% of total net revenue, representing a 32.3% sequential increase, and a 20.6% year-over-year increase. The sequential increase was primarily due to the year-end adjustment of business tax reductions relating to intercompany royalty payments.

On the cost side, our commission and other agent-related costs in Q4 of 2011 were 99.5 million RMB, representing a 9 % sequential decrease and a 2.9% year-over-year decrease. The sequential decrease was primarily due to approximately 4.2 million RMB cost reductions in sales staff base salary and benefit expenses in Q4 from Q3 of 2011. This reduction is a direct result of having an average sales staff number of 6,700 in company-owned brokerage segment in Q4, as compared to 7,800 in Q3 of 2011. As to the variable costs, our commission expenses as a percentage of total consolidated revenue for Q4 of 2011 was 27.0%, compared with 28.2% for Q3 of 2011. The year over year decrease was mainly due to the lower commission expenses as a result of lower commission revenue.

Total consolidated operating costs for the fourth quarter of 2011 were 68.1 million RMB, representing a 16.1% sequential decrease, and a 10.7% year-over-year increase. During the fourth quarter this year, we have incurred approximately 11.4 million RMB write-off charges in sales office closing related costs. Without considering such sales office closure-related costs in both Q4 and Q3 of 2011, total operating costs were reduced by approximately 9.1 million RMB in Q4 from Q3 2011, mainly due to the savings in store rental and other store related expenses along with our sequential store reductions. For the similar reason, without considering sales office closure, total operating costs reduced by approximately 4.8 million RMB in Q4 2011 from Q4 2010 Total depreciation and amortization expenses for Q4 of 2011 were 8.7 million RMB.

Our total SGA expenses in the fourth quarter of 2011 were 53.7 million RMB, representing a 6.6% sequential decrease, and a 1.9% year over year increase. The sequential decrease was mainly due to lower marketing expenses because of less marketing activities as a result of less sales offices.

Net loss attributable to IFM Investments Limited in Q4 of 2011 was 78.8 million RMB, compared to a net loss of 91.7 million RMB in Q3 of 2011 and 45.6 million RMB in Q4 of 2010. Excluding share based compensation expenses, Goodwill impairment losses and Net change in fair value of contingent consideration, Non-GAAP net loss attributable to IFM Investments Limited for Q4 of 2011 was 73.4 million RMB, compared to a non-GAAP net loss of 91 million RMB in Q3 of 2011 and 43.1 million RMB in Q4 of last year.

On the balance sheet items, we had 235.5 million RMB in cash as of December 31, 2011, as compared to 296.2 million RMB as of September 30, 2011. Including 37.5 million RMB of short-term loan receivables outstanding as of December 31, 2011, we would have 273 million RMB or 43.4 million USD equivalents in cash and cash equivalents.

Our net accounts receivable balance as of December 31, 2011 was 97.1 million RMB, increased from 72.4 million RMB as of September 30, 2011. This increase is mainly due to more commission revenue from new homes sales which have a longer receivable cycle from the developers. Our average AR turnover day is approximately 56 days for the fourth quarter of 2011.

Regarding guidance for the first quarter of 2012,

Based on the current market conditions that we detailed earlier, we are estimating our total net revenue for the first quarter of 2012 will be in the range of 110 million to 119 million RMB. This forecast reflects our current and preliminary view, which is subject to change.

Finally, regarding company’s talks with E-House.…

We remain interested in resuming discussions with E-House on the proposed transaction, pending a resolution between Century 21 China Real Estate’s founders and GL Asia Mauritius II Cayman Islands in relation to the petition filed by GLA in the Grand Court of the Cayman Islands.

This concludes our prepared remarks. Operator, we are now ready for questions. Please begin with your first question.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Cai Liping from William Blair. Please go ahead.

Cai Liping – William Blair

Hi good evening everyone. The first question is regarding the pricing change you are seeing for secondary properties. Are you seeing our service are being more willing to lower price and is that a main reason more transactions you are seeing following the Chinese New Year?

Harry Lu

Actually what we see, you know, the data we show actually is for the end of last year. But right after the Chinese New Year – but right now after the Chinese New Year we’ve just seen our transaction volume actually pick up and you know, because you know, the price is still remain in a relatively low level.

But at this stage we don’t see that further down of the price at least for in our recent period. You know see that the price is also being stabilized at this moment. That’s for secondary market. But we’ve just seen some of the developers are pretty lower price tag, try to, you know attract more buyers to sell the party. But in secondary, the transaction volume pick up and the price has been stable for a while.

Cai Liping – William Blair

Okay, I see. And from your – from CTC’s perspective, are margins similar if you do new home transactions from your store versus secondary property transactions?

Harry Lu

Yeah, it’s pretty similar.

Cai Liping – William Blair

Okay. And then, for 2012, do you see the potential to further lower your store-count from the current level or do you expect to maintain the current 300 something stores?

Harry Lu

At this moment when we look at the market, the whole market developer, we believe our store-count will remain pretty stable.

Cai Liping – William Blair

Okay, all right, all right, thank you.

Operator

Thank you. And your next question comes from the line of Ella Ji, Oppenheimer. Please go ahead.

Ella Ji – Oppenheimer

Hi good evening. A quick follow-up prior question, in terms of the commission expenses that you pay for your sales people are they similar for primary transactions versus secondary?

Harry Lu

At this moment.

Kevin Wei

Sorry Harry, go ahead, go ahead, yeah.

Harry Lu

Yeah. At this moment for the business the commission will collect by provided service to serve new home through our existing secondary network, the commission in our structure is pretty similar.

Ella Ji – Oppenheimer

Okay, great. And also it’s very impressive to see that you have made a good cost to savings in this quarter. So, going forward, will you continue closing underperforming stores or are you pretty much happy with your network at this moment?

Harry Lu

That will really depend on the home market development, but the firm at this moment from where we stand here probably our store-count will be pretty stable right now.

Ella Ji – Oppenheimer

Okay.

Harry Lu

So, yeah, we’re probably going to remain, you know, pretty much in the same level of store-count. Yeah, I mean, for – the numbers were definitely lower than what you see that for the – by the end of last year. Kevin, do we just quote the store-count recently right now?

Kevin Wei

Yes 340 is the second wheel of this year.

Harry Lu

Okay.

Ella Ji – Oppenheimer

Okay, great. That’s helpful. And then, in terms of those transactions you made since February, the purpose of those purchases are these mostly for own residence or for investments?

Harry Lu

Actually majority of them are still is, like you know, people will purchase home for themselves. You know, especially in the early stage of this rebound, with majority of home buyer is, like new home buyer buying smaller units. But recently we do see some buyers buying some, you know, relatively large units as well.

Ella Ji – Oppenheimer

Okay, thank you. And lastly, would you give us an update in terms of E-Houses transaction? And also, you know, if we assumed the transaction is successfully completed, could you comment you know, how do you plan to do the primary businesses in the, you know, Beijing area, you know, E-House is also a primary agency in the same market.

Harry Lu

I think for E-House, basically you know, we already disclosed have the list of press release talking about after we signed these term sheet. You know, we did have this discussion and then, you know, we are pending you know a discussion between founder and the avenue capital (inaudible) settlement talk. You know, once we you know, finish this settlement talk we’re going to resume this negotiation within this discussion.

But talking about in future, we believe you know, we already kind of set the model right now to sell the new home through our existing secondary network which is quite different compared with what E-House has right now. You can look at the commission we collect from developer is more than 2% and but you know typical commission they get from developer is 1%.

We are more like, you know, the using our precision network to kind of bring our own customer to please the developer to have them move their products and that’s a big difference. We’re going to keep doing that in the future. So, I think that that model would be quite different with existing primary agency business.

Ella Ji – Oppenheimer

(Inaudible) transfer you to cooperate with E-House, meaning you know, you will help them sell their business via your own stores in the future?

Harry Lu

At this moment we did cooperate with some of new home sales agents, not on the E-House but also some other brand names to help them to sell that – the property. Actually the developers are willing to pay us actual commission. We know, that’s one in our project, they already have a new home agency, right. The developers have promised us they’ll pay the guy and the same commission but they are willing to pay us actual commission because we can bring customer to their sales side.

That’s the reason why we can’t work with the existing new home agency right now, kind of more corporate in the same project. You know we kind of didn’t tweak their commission but you know, to use our (inaudible) convince developer to pay actual commission for us to bring them our customer.

Ella Ji – Oppenheimer

I see, that’s very helpful information. Thank you.

Harry Lu

Thank you.

Operator

Thank you. (Operator Instructions). I think we are now approaching the end of the conference call. I will now turn the call over to the CFO of Century 21 China Real Estate Mr. Kevin Wei for his closing remarks.

Kevin Wei

Thank you, everyone, for joining us for our earnings call today. We’re looking forward to speaking to everyone again soon. And thank you and have a good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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