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Jones Lang LaSalle Incorporated (NYSE:JLL)

Q1 FY08 Earnings Call

April 30, 2008, 09:00 A.M. ET

Executives

Colin Dyer

Analysts

Edward Yruma - J.P. Morgan

David Gold - Sidoti & Company

William Marks - JMP Securities

Vance Edelson - Morgan Stanley

Brandon Dobell - William Blair & Company

President and Chief Executive Officer

Lauralee E. Martin - CFO and COO

Operator

Good day and welcome to the First Quarter 2008 Earnings Release Conference Call for Jones Lang LaSalle, Incorporated. Today's call is being recorded. Any statements 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 31st, 2007, and in our other reports filed with the SEC. The company disclaims any undertaking to update or revise any forward-looking statement. A transcript of this call will be posted and available on the company's website within two business days of this call. A web audio replay will also be available for download within 24 hours of the call. 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.

Colin Dyer - President and Chief Executive Officer

Thank you, operator and good morning, ladies and gentlemen. Thank you all for joining us for this review of our first quarter 2008 results. With me today is Lauralee Martin, our Chief Operating and Financial Officer.

Before we begin, I want just to take a moment to acknowledge the loss of Sir Derek Higgs, who was a valued member of our Board of Directors where he had been a member since 1999 and who sadly died suddenly in London on Monday. Sir Derek was Chairman of the UK bank Alliance & Leicester, and among many other things, an expert on corporate governance. He made a tremendous contribution to the growth of our firm as Chairman of our Audit Committee and his work on governance and as a friend and trusted advisor. We are going to miss Derek's insights and wisdom and our thoughts are very much with his family at this sad time.

Moving along to our results for the quarter, summarizing those results, revenues for the quarter totaled $564 million, which was a 15% increase from the first quarter a year ago with all business segments recording year-over-year growth.

Operating income totaled $7.9 million compared to first quarter 2007 operating income of $36.5 million. Net income for the quarter was $2.8 million or $0.09 per share compared to $27.3 million or $0.81 a share in the first quarter of 2007.

Finally, our Board of Directors has declared a semi-annual dividend of $0.50 per share of our common stock and that will paid on June 13th to holders of record at the close of business on May 15th.

A few observations to put these numbers into context. Firstly, we continue to achieve solid revenue growth in the quarter with all of our business segments contributing year-on-year growth and overall we continue to take market share across our broad suite of service lines and geographies. However, our Capital Markets business, which includes Jones Lang LaSalle Hotels, was understandably affected by dead market conditions. Total transaction volumes were down sharply in the quarter with market volumes decreasing 80% in the U.S. and 38% in Europe compared to year ago. However, our Capital Markets business suffered less than the market as a whole.

Secondly, given the seasonality of our business, quarter one is typically the slowest part of our year where historically we have often posted small profit or loss, which is offset in subsequent quarters. We did have a profitable first quarter and the diversity of our geographic and service lines partly compensated for Capital Markets pressures.

And thirdly, we continue to invest in growth. The 13 acquisitions, which we completed last year, have become to contribute to revenues but did not yet in aggregate contribute to quarter one profits. We have also completed seven additional acquisitions this year and more opportunities are likely surface in the current market environment and we will consider them carefully and when appropriate take those opportunities.

Finally, we are responding directly to current market conditions with cost control activities across the firm. These are designed to closely manage variable expenses in ways that will not affect our client service capabilities or impact the benefits of our acquisitions and other growth investments.

With that let me now turn the call over to Lauralee.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Thank you, Colin and good morning to everyone on the call. Colin has described the challenges impacting current operation, which arise from the liquidity issues and related asset repricing within the general marketplace that have impacted our Capital Markets businesses globally. However, during the quarter the remainder of our core businesses continues to provide solid performance. I will focus my comments on three areas in particular that are demonstrating strengths in this uncertain environment.

First, LaSalle Investment Management; second, our regional and local service leasing businesses around the globe and third growth in developing markets. I will start with LaSalle Investment Management. LaSalle's research-driven approach together with its successful execution with acquired assets has driven growth in assets under management and accompanying advisory fees that provide an annuity revenue stream. Advisory fees were 34% in the first quarter over the prior. The continued growth in the business was driven year-over-year increases and committed capital and assets under management, which were up $6 billion from the year ago and are currently $50 billion.

We continue to generate healthy performance for our clients compared to the benchmark indices. 80% of our assets under management delivered performance in excess to benchmark including global securities mandate during the first quarter of 2008. In addition to building a portfolio of assets under management that generates the strong base of annuity income, our performance from those assets provides us with an opportunity to earn incentive fees. Incentive fees were $13 million during the first quarter of 2008 and we have the potential for earning ongoing incentive fees with several funds fully invested and in liquidation status.

As a reminder, the amount and timing of incentive fees are dependent up on the contractual timing of the measurement period, the liquidation of funds and investment performance. As a result, incentive fees will continue to be highly variable from one reporting period to the next.

Institutional capital is still available in the private equity sector for products sponsored by established firms with excellent track records as we have demonstrated by recent capital rates activity in the U.S. for our next flagship series funds, income and growth funds. The most recent capital rates for this fund was approximately $750 million, which was 50% greater than the capital rate for its predecessor fund income and growth.

The public sector continues to attract significant amounts of capital, although at levels below the recent historical highs demonstrating interest, continues to exist the global programs and allocation to real estate.

In the quarter, we announced the joint venture with LaSalle Hotel Properties, a leading multi-operator real estate investment trust in response to market opportunity created by the current Capital Markets distress. This joint venture is the seed deal for a new fund LaSalle Strategic Capital Fund and builds upon the platform investments we've made in recent years, most notably, the acquisition of CenterPoint Properties Trust on behalf of CalPERS.

We had a small equity loss from co-investment activity in the quarter. This reflects our share of ongoing operating expenses incurred while properties are under development or in transition. Typically, these losses are offset by sales activity with co-investment capital assets and their related equity gain. The quarter did not have sales, which resulted in the modest net equity loss. No impairment... asset impairments were recorded. Despite this small equity loss and lower incentive fees in the quarter compared to 2007, LaSalle Investment Management still delivered higher operating income resulting from the increasingly profitable annuity stream generated from advisory fees.

The second business strength I'd like to discuss today is our local and regional leasing businesses. Jones Lang LaSalle global clock, which you can find on our investor presentation posted on our website, continues to reflect stable real estate property fundamental with rental rates still growing, though at slower rates, in many of the major markets around the world.

Leasing revenue in the Americas increased nearly 40% in the first quarter of 2008 compared with 2007 as we benefited from expanded market coverage, the product of our investing in new hires and in acquisition. The strongest contributions to the year-over-year increase were our Western United States region and the Chicago marketplace. The acquisitions completed in New Jersey and North Carolina at the end of 2007 also contributed to the strong year-over-year leasing growth.

In EMEA, leasing revenue increased nearly 30% year-over-year. Russia had very strong revenue growth in the quarter as did Central and Eastern Europe, Holland and Germany.

In Asia, year-over-year revenue from the leasing businesses increased over 60% with the majority of the growth driven by major markets including Australia, Hong Kong, China and India.

Our third business strength is our geographic diversification. We call it our G1 or Growth1 or Global1, including our growth in high potential developing markets that expand our global footprint. In addition to the acquisitions Colin mentioned in his introduction, we've actively increased our presence across the world by hiring teams of professionals and by opening new offices to position ourselves for growth. We are reaping the benefits of the investments that we've made over the last couple of years. For example, in the first quarter of 2008 overall revenue in EMEA's markets of Russia, Turkey, Dubai, Spain, Italy and the Nordics was up more than 75% year-over-year. Additionally in Asia, year-over-year combined revenues for the markets of India, China and Japan were nearly 50%. Offsetting strength in these three areas was the slowdown in Capital Markets activities.

Our research has predicted significant overall global market transaction declines from 2007 level, particularly in the U.S., U.K. and developed Europe. As a result, we've said that we would also feel this slowdown in our results but at a softer level than the market due to the increase of the market share.

The impact of the credit markets in Asia Pacific has been predicted to be milder as sub prime issues have been more limited. However, with international lenders currently taking a more conservative profile in the region with their overall issues, the local banks are also adjusting as a result financing is taking longer to close. Buyers and sellers are still agreeing to terms and prices but transactions are not carrying financing contingencies as bank quotes often contain market-flex language. We as a result experienced more deal slippage and delays in the first quarter than we expected. Against this, we have our most extraordinary pipeline of mandates for prime properties from sellers that need to sell to meet liquidity needs.

We are seeing interest from core buyers who do not need financing or we are seeing some buyers spotting purchase opportunities who are willing to close with equity and source their financing after the close. The weight of the capital committed to this region is very high and time pressures should soon start to force increased activity.

In closing my comment, we have called this a tactical execution year while we remain committed to our long-term growth strategy. We are aggressively managing discretionary expenses. We are minimizing staff addition. We are leveraging our support staff as we make acquisitions. And we are redeploying resources to developing markets and/or to businesses with strong growth.

We will be using the current environmental stress to take actions to be a stronger growth market... growth company as the market settles.

Let me now turn the call back to Colin.

Colin Dyer - President and Chief Executive Officer

Thank you, Lauralee. Before reviewing our recent investments in growth and commenting on key business wins around the world, I would like to summarize our view of the global economic and market conditions. According to both the IMS and the Economist Intelligence Unit, world GDP growth is expected to be down to 2.6% this year in current market currency terms. During previous downturns world GDP growth has dropped below 2% per annum.

Let me first talk about the implications for capital markets. As Lauralee has discussed the contraction of global credit markets continued during the first quarter leading to further sharp reductions in transaction volumes.

Additionally, pricing for commercial real estate has moved down. As a rule of thumb, since early 2007 prime offices in Europe have moved down of the order 15% to 20%; the U.S., 10% to 15%; and 5% to 10% in Asia Pacific. Predictably too the bid/asked spread on proposed transactions has widened. In contrast, large reservoirs of equity continue to wait on debt availability and price stability to re-enter real estate markets.

Our pipelines, as Lauralee said, of available transactions everywhere is very healthy but actual transactions will remain at subdued levels until confidence and liquidity return to credit markets. On a positive note, while global real estate securities markets have been volatile, they recovered from a sharp fall in January and February to end the quarter up slightly.

Turning to rental markets, despite economic and financial market uncertainty in the first quarter, occupancy rates and rent levels have held steady in most of our major markets. Early signs of declining demand for office space are now appearing in major European and American financial centers but Asian and Australian financial centers have been much less affected today. Technology driven office markets around the world also remain strong.

Net absorption or take-up will very likely continue to grow in the BRIC countries and other emerging land markets like Mexico, Thailand, Turkey, the Gulf States and the Commonwealth of Independent States. Overall market demand for commercial real estate in developed countries is slowing from 2007 levels with the exception of commodity-driven economies like Western Canada, Australia and Scandinavia. As Lauralee described, we have been showing healthy growth in our U.S. and European leasing businesses.

First take-up in the European office sector, first quarter totaled more than 34 million square feet, which was a 7% decrease compared to the same quarter a year ago. Healthy demand and moderate new supplies caused the European average vacancy rate to fall by a further 20 basis points to 7.1% and prime rental increases, however, were limited in the first quarter with only six European cities reporting rental growth lead by Milan with 14% plus growth rate and Warsaw with 10%.

Conditions for office occupies are mixed in Asia-Pacific and an influx of new supply in India has rebalanced the market to a fair waiting between landlords and tenants. In Australia, limited supply and low vacancy rates have lead to rental increases and a landlord favorable market.

In China, Shanghai and Guangzhou are suffering... are shifting to be more balanced markets as new supply comes online while the Olympics driven supply into Beijing's office market has made it more tenant favorable.

Relative to past down cycles, the amount of new construction in the pipeline across the world's major commercial markets is modest as lenders have tightened construction finance. So even with moderately declining demand, we expect rental income generating per our office, retail and logistics space around the world will be generally maintained.

Looking ahead through short-term issues in current short-term market movements to the longer-term trends, it is important to remember that the long-term secular growth in the real estate service market remains intact and the trends of globalization and industry growth consolidation around strong international real estate service companies is also firmly intact. A major driver for our targeted growth investments in recent years has been to capitalize on these long-term trends while remaining diversity... while maintaining diversity in our operations both geographically and in terms of our client and service offerings.

So, as you know, we've focused our investments on five areas, strengthening our local and regional service operations, expanding our three global service delivery lines, Global Corporate Solutions, Global Capital Markets and LaSalle Investment Management and finally establishing the world standard for client service delivery.

Reviewing these in turn, first, we continue to strengthen our local and regional operations. In the Americas, we acquired the leading retail transaction firm, The Standard Group in January. This was the first of four retail transactions we have completed around the world to date in 2008 with the fifth expected to close in the coming weeks.

We also expanded our capital markets capabilities, launching a new practice that assists healthcare providers and we added a dedicated senior housing expert as part of this growth in healthcare finance platforms.

During the quarter, we completed the sale of 801 K Street in Sacramento, a 336,000-square foot landmark office. In Boston, our Real Estate Investment Banking team secured a $190 million construction loan for the development of The New W Hotel in Boston, [inaudible] district. We negotiated a major sale and leaseback transaction for Sun Microsystems completing the sale and leaseback of the... completed also the sale and leaseback of the landmark LaSalle bank's building in Chicago for Bank of America and closed three sale and leaseback transactions on behalf of General Motors.

Our relationship with General Motors was further underscored this week when we received the GM 2007 Supplier of the Year Award for contributions to GM's overall global performance.

Turning to EMEA, we have completed two transactions to date in 2000, sorry, two acquisitions to date in 2008 and anticipate closings the third this month, Creevy, Scotland-based hotels and leisure consultancy and two general retail businesses, [inaudible] Consulting and Kemper's Group, the German market leader in retail capital markets and retail leasing transactions, which will close shortly. We formalized an exclusive strategic linkage with Alkas Consulting in Turkey for project development and leasing and management of Turkey's leading shopping centers.

In France, we completed in transaction terms the 650,000-square foot location of LCL Bank, formerly Crédit Lyonnais, and advised French pharmaceutical company Servier of relocating its 600,000-square foot headquarters. In Poland, [inaudible] recently appointed our Warsaw leading team to lease its new 200,000-square foot office development in the Polish capital. Our U.K. City investment team acquired One London Wall for Hansa Invest for €178 million and we provided acquisition advice for Revelation for the purchase of a prominent 130,000-square foot office and retail block in London's West End.

Moving to Asia-Pacific, we have acquired four companies so far this year, [inaudible] in Sydney, Australia and Creer in Newcastle, Australia. Sallmanns, a company that specializes in IPO offerings, mergers and acquisitions and financial valuations in Hong Kong and Greater China and Leechiu Associates, the leading local agency and business process outsourcing operation in the Philippines.

We also entered in Asia Pacific into a joint venture with Australia's Colonial First State Property Management to create sandalwood which will be the first integrated retail development and management service provider to operate across the whole of Asia.

In transactions in Asia-Pacific, we've been appointed by Australia's Allco Finance Group, the record reality trust to dispose their portfolio of more than 30 office buildings in the U.S., Germany and Australia. The portfolio is valued at approximately 1.7 billion Australian dollars. Our Asia capital markets group, acted on behalf of New Star Asset Management in 100 million Singapore dollar acquisition of One Philip Street in Singapore. Citibank choose us to provide facilities management services for 2.5 million-square foot Pan-India portfolio and securing our first assignment with Perot Systems, we have a project management and consultancy on base building construction and fit out of a first best phase of Perot's new campus building in India. This building will be lead certified and that will our third green building project in the Indian subcontinent.

Our second priority is to continue to build our global corporate solutions business. During the quarter, we became the preferred service provider for Nokia for variable project management assignments in a 16 million square foot global portfolio. Lenovo, the global technology company, named us sole real estate alliance partner to provide lease administration, project management and transaction management services for its growing 2 million square foot global portfolio. This will include facility management of the company's 700,000 square foot headquarters in Beijing and that will be Lenovo's first outsourcing assignment in China. Finally, we entered into a strategic alliance with Boston Scientific, a world leader in medical devices for the company's 11 million square foot portfolio in Americas, EMEA and Asia-Pacific.

Our third growth priority is to build a truly global capital market service line and in a tough market we continued to complete cross-border transactions. Some examples of those. In April, we sold 20 99 Pennsylvania Avenue in Washington D.C. on behalf of Germany's Wealth Management Capital Holdings GmbH; Vico Capital of Ireland purchased the 200,000-square feet office for a record $172 million. To identify prospective buyers our D.C. team visited Ireland, UK, Germany and France while our international capital group sourced potential buyers in Europe, the Middle East, Australia, Asia Pacific and Latin America.

Earlier this year our German Capital Markets team completed the sale of the €1.7 billion [inaudible] portfolio for Allianz Immobilien purchased by White Hold Funds portfolio, encompasses 190 properties, primarily offices in locations across Germany.

In Finland our Helsinki capital-markets team advised the Carlyle Group on the cross-border acquisition of a 1.5 million-square foot portfolio of 30 properties in Finland for €216 million, while our Pan European retail Capital Markets team advised to follow real estate and [inaudible] on the purchase of a shopping center development in Istanbul for €267 million.

John Lang Lasalle Hotels was retained by Russia based central European hotel investments to source suitable European hotel firm for acquisition, leading to the acquisition of the Austrian Hotel Company with 20 hotels in 17 cities in Austria, Germany and The Czech Republic. So we're finding that in markets where deals are harder and take longer to complete our unique global Capital Markets team is now able to add real value to sales and purchase mandates.

Our fourth strategic priority is to deliver the value for clients at Lasalle Investment Management and as Lauralee has covered in some detail in her remarks, Lasalle has been consistently a strong performer for our company. Lasalle raised approximately $1.4 million of equity since the start of 2008 with global securities mandates accounting for about three quarters of the total.

During the quarter Lasalle launched, Lasalle European Venture Fund III, a closed-end opportunistic fund, which will invest across Europe. This leveraged fund will have buying power between €4 billion and €5 billion that in addition to the U.S. Income & Growth Fund V, which Lauralee mentioned.

We continue to invest and divest properties selectively across the range of Lasalle funds and geographies and Lasalle's business is, as Lauralee referred to, now well diversified globally with approximately one-third of its revenue and profits generated from each of the three geographical regions. This allows us to seamlessly invest capital into any region as opportunities arise and enables us to be well positioned to take advantage on client's behalf of asset re-pricing in any region.

Our fifth strategic priority is to develop the world standard business delivery platform in our business. During the quarter, we continued to introduce client-facing technologies that enhanced our performance and service delivery capabilities and we remain on schedule and on budget to complete the global introduction of integrated financial and human resources systems by the end of this year.

So, to sum up, while the current credit environment slowed our capital markets transactions worldwide during the quarter, we continued to grow our revenue. Thanks to solid performance from the rest of our broad geographic and client service platform. In this environment we remain focused on actively managing our cost base while we also continued to deliver real value to our clients and invest to build our strong market positions globally.

So with that we would now like to open up the call to your questions. Operator, if you would please explain the process at this point.

Question and Answer

Operator

Your first question comes from the line of Edward Yruma of J.P. Morgan.

Edward Yruma - J.P. Morgan.

Hi, good morning. Thanks for taking my question. In terms of the current market environment, how does that impair or deprive you and enable you to liquidate your funds at LaSalle? Is it more difficult to liquidate given the tough environment?

Colin Dyer - President and Chief Executive Officer

Well, LaSalle first of all operates, as we said in our comments, not on our behalf but on behalf of its clients. And so it's comfortably taking judgments at the... asset-by-asset level within its funds as to whether to continue to hold, to further develop or to realize the value of any assets. Those judgments obviously are taken against considerations of the maturity of our fund in other words how long it has to run before its promised liquidation date but also critically on the current, very local market conditions. So if you consider the broad sweep of the geography of the LaSalle Investment across as we said evenly one-third U.S.; one-third, Europe; and one-third, Asia Pacific, market conditions across those geographies will vary considerably until the judgments on what's appropriate in terms of whole develop or sell will sell will vary by geography and by asset. In general at this point, I would say that the comments are that in the Americas good assets are very saleable, generally the clients saw the repurchases are fewer than they might have been a year and a half ago, that typically better capitalized and lower leveraged, but good assets are saleable.

Edward Yruma - J.P. Morgan.

Gotcha. And I know you touched upon on--

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

May I give just one additional comment?

Edward Yruma - J.P. Morgan.

Sure.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

We did book $30 million worth of incentive fees, which means obviously we are selling assets and we're selling assets with a lot of profits. So we have given guidance. We got a number of funds that are into liquidation stage and still feel very comfortable with those.

Edward Yruma - J.P. Morgan.

Gotcha. And I know you talked about some extra scrutiny in this tough market environment from a cost perspective. Are you examining your compensation plans and is there an opportunity to provide more flexibility should this market downturn persist? Thank you.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

We have, as we have done more acquisitions particularly in the U.S., in moving our transaction compensation plan to not to a commission model, but with more commission characteristics. So we're starting to do some of that and will continue to move that forward as we blend sort of the best practice of those that come into organization with our own. So it's a healthy mix. Once we get outside of the U.S., there is less flexibility though even in those markets, our transaction people are barely highly incentivized for performance versus their base compensation. But I think your comment is particularly relevant to the first quarter because we do not run a complete commission chop. With the decline in revenues, we do have a floor level of base compensation that still comes through. And so one of the things that you see in the results, the impact of the capital markets in fact gets exaggerated with leverage in the first quarter that will moderate itself as we move through the year and the revenues come through against what would be the base compensation and then the flex in the variable compensation will play through after that.

Edward Yruma - J.P. Morgan.

Great. Thank you very much.

Operator

Your next question comes from the line of David Gold of Sidoti.

David Gold - Sidoti & Company

Hi, good morning.

Colin Dyer - President and Chief Executive Officer

Hi, David.

David Gold - Sidoti & Company

Couple of questions. One, just as a follow-up, aside from making some shifts, at least domestically in the commission model, can you talk about other initiatives or things that were sort of looking at from wide as far from a cost perspective?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Well, I think the biggest thing and I had mentioned it just at a high level is, we have a number of parts of our business that are growing very rapidly and particularly if you think about in the European base, there are still opportunities for capital markets in Eastern Europe, the Middle East and Russia. So we have seen strong interest by some of our Capital Markets people to go to those markets. It means that they can continue to have financial rewards, if there is a slowdown, for example, in the UK. So we're redeploying resources. If we look at different businesses in other parts of the world, the growth in our corporate business allows us to have real estate experts come in and support accounts. And even if we look at our hotels business, which is obviously capital markets based business they see that there are the newer markets where hotels and the buy some hotels will be strongly needed and we'll be redeploying resources to those.

Colin Dyer - President and Chief Executive Officer

And while we see markets that are currently in a flat phase in terms of growth, we are obviously doing the obvious things you do in those sorts of environments in terms of containment of the travel and expenses, looking at any incremental hires and replacement hires closely and so on for the normal things you do in a cost control environment. As Lauralee said, in overall sense, we are growing. We have growth momentum, we're very pleased with that, we don't want to lose it and to an extent, we need to continue to build the platform underneath that to support the growth.

David Gold - Sidoti & Company

Gotcha. And that actually brings us to a question. If you can talk a little bit about some of those growth plans presumably acquisitions, we'd be curious if you can add some color on, A, acquisition contribution in the first quarter and can we anticipate it for the year from the, I think it was eight closed in the quarter? And then two, what you're sort of seeing out there as pricing coming and also presumably, I would guess but I'd ask for comment on them, restructuring these with earn outs just sort of protect yourselves on the pricing?

Colin Dyer - President and Chief Executive Officer

Lot of questions.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

I will try to take a bite at each of those statements.

David Gold - Sidoti & Company

Sorry.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

No, that's okay. The area where we've obviously been the most active with acquisitions has been in Europe. And we did a significant number in 2007 though on a year-over-year basis, we didn't have them in the first quarter of last year, they are now in our results. If we look at our expense increase in Europe, we can actually explain almost the majority of our expense increase from the additions of acquisition. So we've done a very good job of both flexing the variable pay as well as managing costs there in each of the acquisitions that are driving the increase. That being said, the contributions of those at this point is modest because there is purchase accounting. So they only add just a little bit less than $2 million to what would be an operating income contribution, the ones that around the rest of the world are not as significant as what we have in Europe. The most recent ones that we've done are... that are of substance have been enabling Asia and I'm excluding our Indian operation because you can pretty much track that through the minority interest but the balance of them have been in Australia and our acquisition in Hong Kong. At this point, because they are new, they're modestly negative in terms of their contributions because of the purchase accounting. We do expect that we will be into positive territory on all of these as we move through the part of the year.

Colin Dyer - President and Chief Executive Officer

In terms of your third question, David, what we're saying in terms of what's out there, I would say there's been no real change in the rhythm of discussions. We've been underway with acquisitions as we described before, decentrally around the regions, we allow the regions to surface these opportunities and we evaluate with the regions form the center of the business. Many of the ongoing dialogues that we've had continue. But I would say in terms of new things coming up, there is something of a bid/ask gap as we've seen actually in real estate itself. In other words, sellers having a few of the asked price and in our view what the bid price should be has got some gap in it. So I suspect there will be bit perhaps a bit of a hiatus in terms of flow of possible acquisitions that comes to fruition loss buyers and sellers. In our case, we are the buyer and the potential sellers get our pricing into line. But generally, we expect as we said the market for consolidate... there were purchases of consolidation in our industry around a few strong international players to continue and as we've said, repeatedly for the long-term that is one of the sources of growth that we intent to continue to capitalize on.

David Gold - Sidoti & Company

And then, just lastly on that, if there is a number for expected acquisition contribution from the deals we closed in the first quarter?

Colin Dyer - President and Chief Executive Officer

Lauralee?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

The total was less than $1 million.

David Gold - Sidoti & Company

Okay, relatively small.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Yes.

Colin Dyer - President and Chief Executive Officer

This year because of the acquisition accounting process.

David Gold - Sidoti & Company

Perfect. Thank you, both.

Colin Dyer - President and Chief Executive Officer

Thank you, David.

Operator

Your next question comes from the line of Will Marks of JPM Securities.

William Marks - JMP Securities

Will Marks of JMP. Hi, Lauralee. How are you, Colin?

Colin Dyer - President and Chief Executive Officer

Hi, Will.

William Marks - JMP Securities

I first wanted to ask you on the asset management side, I know you grew year-over-year. Is your expectation to take the $50 billion up in the current calendar year?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Remember how much capital we have committed with that bid all needs to go to work. So absolutely it's our intent that the assets under management would grow. Now, as that is done, not all of that will translate into advisory fees because we're already booking advisory fees on much of that Asia committed capital. But where we grow it in the U.S. and it's not committed, I mentioned the new capital we've raised for our next flagship fund in the U.S. The joint venture that we have with the LaSalle Hotel, the continued growth in Europe, those will be contributing advisory fees. But yes, we do expect healthy growth in assets under management with the committed capital that we have.

William Marks - JMP Securities

Then, just sort of turn around the question that David asked on the sell side... sorry, Ed asked on the sell side earlier on. On the buy side, of course, LaSalle is being equally cautious once we have many billions of dollars of capital to commit to the market. The transparency on pricing is not evenly... is not same everywhere and particularly in markets which has suddenly become very thin, it's often difficult to price an asset with confidence on the buy side as well. So, on behalf of its clients LIM is being cautious on the buy side as well as the sell side.

William Marks - JMP Securities

Great. Then moving on to cost. I'm still a little confused. The numbers, the revenue growth seems to be exceptional while your comments were on the different areas of diversification of your model. But the 15% revenue growth is offset by, I think, it was 23% expense growth and is there... are we going to see those two numbers aligned later in the year or how should we really think about this? It's still hard to model your company. I know you are not giving guidance for the same, but is there any way we can think about the margin not dropping below a certain level or can you help us a little bit there?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

I think the biggest challenge for the first quarter, Will, really came from the Capital Markets activity. And normally there would be, I think, more consistency in looking at a seasonal pattern in margins. If we exclude last year's first quarter which obviously was probably in many considered an extraordinary quarter in terms of capital markets activities that really was a flow over from that fourth quarter of the year before. What we saw, let me use just the U.S. as an example, is almost a 100% drop in revenue into dropping operating income margin because of the fact that we currently are paying the, what is the modest base level of compensation on that business in the first quarter while we did not yet have the revenue. It's a highly variable compensation model where the total confidence would be three to four times that number. However, given the extreme drop in capital markets activities, if we had some 50% in the U.S. Capital Markets business and when we put hotels with it in the U.S. it jumps to a little over 60% drop that just falls down straight through. As we move through the year and that compensation models that way through against revenue, we would expect to move to more normal margins depending upon how slowly the liquidity comes back into or how quickly the liquidity comes back into that marketplace.

Colin Dyer - President and Chief Executive Officer

Remember too Will that as compared to quarter one last year, we have significantly changed the structure of the platform. We've hired transactors, we made acquisitions and if you want to sort of think about the rest of the year in terms of operating and admin costs and have a look at quarter four of last year to quarter one this year, now you'll see that there is just a very slight increase. So that operating admin line has grown deliberately year-on-year as we've added platforms to... and added revenue indeed to justify and help service and add cost to service our revenue growth. But the quarter-on-quarter growth is much more restrained reflecting our reading of the current market positions.

William Marks - JMP Securities

Okay. So, correct me if I'm wrong, it seems like the two biggest factors impacting the expense line are the fixed cost mostly associated with salaries for Capital Markets professionals and the cost associated with acquisitions before revenues really kick in and there are others and are those the few largest packers?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Let's back up to where you specifically said Capital markets, it would be the cost of compensation for our staff around the world. What I was describing in Capital Markets is that it transitioned to a more normal margin level as the revenues come in across the year. But it is the base of the business that is still to produce for the entire year and the acquisitions, which we put on... we say are modest in the first year. They have purchase accounting in it that burns off. It automatically produces profits for the firm and we've been adding those and they'll start to contribute.

William Marks - JMP Securities

Okay. And one final question, is there an impact also from just the cost of marketing deals for investment sales professional, those cost... the spreads have widened, is it costing more?

Colin Dyer - President and Chief Executive Officer

No, other than that deals are taking longer term to market. I mean as we said we've got pipeline. Not all that pipeline is currently highly active because many sellers are saying we'll just... we want to sell but we will just hold back in the market for a while. But when a transaction go to market, the cost of setting up the documentation, the cost of reaching out to potential buyers has not changed markedly. Perhaps two things that are different out there. As I said, the length of time that a property remains on the market has gone out some. So that could just, in terms of the cost of time, can add some expense but the other item is that in some properties as I described in my comments, we're doing quite considerable international marketing activity now and so that has a small incremental cost as well. But overall that's not a needle-moving item on the expense base.

William Marks - JMP Securities

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Vance Edelson of Morgan Stanley.

Vance Edelson - Morgan Stanley

Hi, I have got just one follow-up on the plan cost reductions. If the acquisitions have been a major driver of increased cost, is it safe to say that despite efforts to reduce costs elsewhere as long as the new acquisition opportunities are likely to surface as you said we still continue to see a higher cost level for the foreseeable future and isn't that the main driver for cost for the next couple quarters?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Yes, because the balance of the businesses is basically constrained in terms of addition other than the served clients around wins.

Colin Dyer - President and Chief Executive Officer

You used the word cost cuts, Vance, I mean I don't think that's quite right. There are certainly areas where we have gone... where growth has gone cyclically flat and we are containing cost there and we're restraining any additional costs. But we've not, at this point, embarked on a wholesale cost-cutting exercise. Again, the overall growth in revenues and our need to access that available growth and capitalize on the growth momentum we have, I would say that we should contain cost but not at this point in time.

Vance Edelson - Morgan Stanley

All right, thanks. At a related question. Could you provide color on what's your parameters are when deciding to move forward on an acquisition and considering the goal to increase margins of those parameters when deciding on an acquisition? Have those parameters changed at all?

Colin Dyer - President and Chief Executive Officer

Well, let's start with the what the, the terms I am going to sell playbook on acquisitions, it could be here for a little while but the first item which we always looked is the fit of the organization in a couple of ways. First of all is it matching the strategic goals we have, is it in line with our overall directions so we're not constantly starting on new paths and new activities. That's one test. Secondly, does the business fit culturally with our organization, are we going to be able to integrate those colleagues and have them lead in the parts of our business, because we feel acquisitions, in a financial sense, we view them as mergers on the ground and operationally and frequently as in Holland, for example, as in India as the leaders of the acquired company take over the leadership of our business as well. And so, we are adding extra caliber in DNA to our organization. The financial measures, Lauralee has said very often that we want businesses to be accretive... sorry marginally accretive as it is possible in the first year. But it depreciation [ph] is our major driver when we are looking at the financial side of an acquisition.

Vance Edelson - Morgan Stanley

Okay. And could you provide your thinking on the merits of dividends versus share buybacks considering the strength of the balance sheet? How do you think about one versus the other?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

We have a commitment right now with the dividend. Strategically we put that in place a couple of years ago. We, in fact, have an investor base that is broader than the U.S. and in the European markets a modest dividend is important to their being able to think about us as an investment alternative. What we had said continually on share buybacks is that our Board has to approve it. We have capabilities to do share buybacks. Our first choice is always growing our business, which has been acquisition and because we do produce strong cash flows, we consistently use the excess cash flows to buy back our stock and we'll continue to that.

Vance Edelson - Morgan Stanley

All right. Thanks. One last question for you, Lauralee. Are there any efforts to hedge the risk on foreign exchange, which thus far has been providing a lift?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

We hedge all our inter-company debt and we also with our borrowings have the ability to borrow, in different currencies, which built... it gives us basically a built-in hedge. We do not hedge earnings which is really your, I think, at the heart of your question because that's not really hedgeable. That will be taking a position on currencies and we believe we are in the real estate business, not in the hedging business. So we will continue to use our built-in hedges as much as we can and maximize those positions.

Vance Edelson - Morgan Stanley

Okay. Thanks a lot.

Operator

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

Brandon Dobell - William Blair & Company

Thanks. Maybe ask question from one different angle, I'm sure you are getting sick of it with what went out there for you. If they are to assume that on the operating and admin lines that that would be kind of more of a sequentially driven line comparing the quarter-on-quarter moves would be more accurate than looking at that line on a seasonal or compared to a revenue basis and then I guess contrasting that the compensation and benefit lines that would seem to be still tied to revenue growth or the dollar revenue number as well as a bit of seasonality. I'm just trying to get some sort of color on how we should think about progression of those two lines related to revenues?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

I think you've got it about right, Brandon.

Brandon Dobell - William Blair & Company

Okay, thank you. And on the leasing side of the business given strength in Q1, any sense that there was any push of deals from Q1... sorry, from Q4 last year into Q1 as to put the laid... corporate to lay a little bit or is it really just continued momentum no matter what's going on the economy there is just enough business to be done there?

Colin Dyer - President and Chief Executive Officer

A little bit of that one thing in New York where we had couple of deals coming to the first quarter which we had originally expected to be in Q4 last year and it actually came in quite late in the quarter in couple of cases. That's the financial capitals point that I made in the comments whereas the financial industry, which is the most, affected to date, at least in the acquisition in new spaces. So, there is willingness to acquire new space. In general, we are seeing corporate is delaying a little bit thinking more about their expansion plans, but you got to remember that the decision to take place whilst it has impacted in a confidence sense by short-term loss conditions, those decisions are medium-term decisions for most companies and they're having to think out particularly of busy city centers with relatively high levels of occupancy and low vacancy rate. They're having to think out two to four years, in other words, think through the cycle and act accordingly. So those decisions are not... has instantly impacted us, for example, investment sales in the Capital Markets areas. We, in addition, have been investing in transactors, U.S., for example, we have had 20% transactors, our lease and tenant representation activities this year as compared to year ago and we've been building in Europe and Asia Pacific as well. So we've been sensibly, selectively acquiring good transactors to build our leasing and tenant rep franchises and as a result of that we're seeing significant gains in market share and Lauralee discussed those in some detail. So despite leasing markets switch in the matured economies of the U.S. are down between 8% and 17% we have been picking up sales, picking up activity both in terms of footage and overall revenue.

Brandon Dobell - William Blair & Company

Okay. Thanks. And one final question. You made some earlier comments about the pace of new development relative to financing. Asking that question from a different perspective, have you seen a change in the pace of either approvals or disapprovals of new projects? I guess I'm just trying to gauge... I think in general people think there's going to be a fall-off in construction but is it more or less than you may have thought three or six moths ago and also looking out to next, let's call, two years or so?

Colin Dyer - President and Chief Executive Officer

The pace of development in new real estate and particularly central business districts, as I said and we've said continuously for the last year or so, despite the very healthy Capital Markets that we've seen and the very strong leasing markets, the pace of development has been very restrained and our impression as to why that is that development lending is typically something which has not being securitized because it hasn't had cash flow against it, which could be securitized. And therefore, right through the strong part of the cycle, it's stayed on the balance sheets of the funding institutions what was syndicated amongst other funding institutions, but it stayed on balance sheets. And so, relatively speaking, the level of development activity was constrained and has not lead to date and we don't think it will lead to a kind of systemic worldwide glut to... have seen at the end of previous cycles. Having said that, even those balance sheet lenders, to Lauralee's point, but a specific have become more conservative. They're taking longer to complete their underwriting. They are being more stringent in the terms and conditions, which they will put into term sheets. And so, yes, there is probably a slowing in development, but it'll be a [inaudible] relatively restrained level of activity. In terms of the way the market goes for leasing, for example, that's unhealthy, keeps markets relatively tight. It stops rental rates from declining significantly, which means that the tenant acquisition pace stays healthy. There remains a dynamic in that market but it equally underpins any capital erosion in the investment and sales markets.

Brandon Dobell - William Blair & Company

And then final question, if you look back to, I mean, late last year or so when your internal research folks were looking out at for the next two or three quarters, anything in Q1 that really stuck out as a surprise either good or bad relative to what have your internal research expectations were?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

I would say, just consistent with my comments, I think the slowdown in Asia Pacific has been a little bit more than expected. The impact of the financing markets switch, to be honest there is a lot of capital chasing transactions in that part of the world and it had been a frenzy and I think buyers now get an opportunity to think more carefully about their choices. They're not going away. It's just isn't quite at the pace.

Brandon Dobell - William Blair & Company

Great, thanks a lot.

Operator

[Operator Instructions] Your next question comes from the line of Josh Kens [ph] of OSS Capital.

Unidentified Analyst

Hi, guys. I just wanted to ask a quick question. Is there any way you can break out how much of the revenue growth was organic versus acquisitions or teams that were required?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Yes. Our acquisitions contributed on a global basis of about 9% of our growth and organic was about 6%. The organic growth obviously in places like leasing was significantly higher than that, but when you throw the negatives of the Capital Markets against it that nets it down to the 6%.

Unidentified Analyst

Right. And is that an organic growth, I mean does that include when you hire a whole team in a region?

Colin Dyer - President and Chief Executive Officer

Well, it includes the eventual production from hiring a team, but teams typically take between nine months and 15 months to begin to recover that cost and come on stream.

Unidentified Analyst

Okay. And is it possible to break-- ?

Colin Dyer - President and Chief Executive Officer

The costs are in there, but the revenue has a lag on it.

Unidentified Analyst

Right, right. Is it possible to break out the growth by region, organic and from acquisition?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

What I can say is that the acquisition contribution in the Americas is very modest. The largest contribution comes from Europe and--

Colin Dyer - President and Chief Executive Officer

We can do that sum and take another question and just come back to you on that one.

Unidentified Analyst

Okay. Great. Thanks a lot.

Operator

And your next question comes from the line of Wills Marks of JMP Securities.

William Marks - JMP Securities

Thanks. Your last comment you started to make about acquisition contribution in Americas as modest. You had mentioned that you have 20% more U.S. transactors and I guess that implies you have hired a lot of people from places like Trammell Crow and others, is that accurate?

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

That's correct. We do not put those in acquisitions. Acquisitions to us are when we've actually acquired a legal entity of partnership versus individuals or even teams that they come over as teams and they are hired into Jones Lang LaSalle they are organic.

Colin Dyer - President and Chief Executive Officer

But we are not talking thousands or even a hundreds of people here but the order of magnitude of 100.

William Marks - JMP Securities

Right, okay. I understand. And then on, I guess, on the cost issue one more time, are you... you don't seeing that concerned about cost and is it safe to say you're ramping up because you are... rampings maybe too strong but you expect future growth and this was not a huge surprise to you?

Colin Dyer - President and Chief Executive Officer

I would not characterize our aptitude as not concerned. We are very attentive to costs. The word we use was actively managing costs and that's really an active reflection of what we're doing. We often in the capital markets area are not seeing revenue declines anywhere. We're seeing the opposite. We are seeing continued healthy growth and you have heard of the order of magnitude of 20% to 40% in some service lines and some market areas. And again that sort of growth you don't cut back in those market areas. Capital Markets issue is something else. We believe that it is appropriate at this point to hold our teams together. We think that there is a useful chance, a good chance that the debt markets will begin to sort themselves out at some point in the course of this year. We can't predict when. And as I have distinctly implied, it's not a real estate issue initially, it's a financial market issue. So we are watching from our leading indicators the developments in the investments in the Capital Markets as a whole. But one of our priorities at this point is to make sure that those teams will be built. And remember we think very selective but our teams in Capital Markets area are held together so that has markets turn, and that will happen. We are at a very low base at this point and at some point it would turn. We have the teams in place to benefit from improved market conditions. And so what you do in those circumstances, we have flex compensation plans, which, Lauralee has referred to, they help to a significant extent. But also so does the way in which we apply those flexible compensation plans and in regions where we have a discretion, we ensure that our best transactors and our best and strongest performers see the most attractive compensation and the reverse for the less stellar performance.

William Marks - JMP Securities

Okay, thank you.

Lauralee E. Martin - Chief Financial Officer and Chief Operating Officer

Back to the question on growth from acquisitions in EMEA, it was about 13%. So what you can see is we obviously have the negative impact of the Capital Markets. Just one more comment on what Colin has just covered. Yes, we have expense increases from acquisitions but they are paying their way, they are not a negative on an operating income basis to the firm. They are neutral to modestly accretive. The power of what they will ultimately deliver to the firm in terms of once the purchase accounting burns off as well as the increase in market share, we think is incredibly important. So that expense increase although, yes, it doesn't help margins, it has not hurt profits. And relative to total firm's expenses, actually, acquisitions are about 9% of the expense growth and in that I'm excluding India, because that would be... we merge that into our operations. No, I actually do have India in there. So, I'm sorry, so that's about 9% of our expense growth comes from acquisitions which are just a slightly above neutral on a contribution, on a bottom line basis, it that's helpful.

Operator

Okay, at this time there are no further questions.

Colin Dyer - President and Chief Executive Officer

Since there are no more questions we'll draw this call to a close. I would like to thank everybody for participating today. And I would like to thank you for your continued interest in Jones Lang LaSalle. We will be back again talking to you after the second quarter results. Have a good day, everyone.

Operator

Thank you for participating in today's conference. You may now disconnect.

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Source: Jones Lang LaSalle, Inc. Q1 2008 Earnings Call Transcript
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