CB Richard Ellis Group's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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CB Richard Ellis Group, Inc. (NYSE:CBG)

Q2 2012 Earnings Call

July 31, 2012, 05:00 pm ET

Executives

Nick Kormeluk - IR

Brett White - CEO

Bob Sulentic - President

Gil Borok - CFO

Analysts

Anthony Paolone - JPMorgan

Brandon Dobell - William Blair

Will Marks - JMP Securities

David Ridley-Lane - Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CBRE Q2 earnings conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Nick Kormeluk. Please go ahead sir.

Nick Kormeluk

Thank you and welcome to CBRE’s second quarter 2012 earnings conference call. About an hour ago, we issued a press release announcing our Q2 financial results. This release is available on the home page of our website at www.cbre.com. This conference call is being webcast and is available on the Investor Relations section of our website. Also available is the presentation slide deck which you can use to follow along with our prepared remarks. An archive audio of the webcast and a PDF version of the slide presentation will be posted to the website later today and a transcript of our call will be posted tomorrow.

Please turn to the slide labeled Forward-Looking Statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future growth momentum, operations, financial performance, business outlook and our ability to integrate the ING REIM businesses. These statements should be considered as estimates only and actual results may ultimately differ from these estimates.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our second quarter earnings report filed on Form 8-K, our current Annual Report on Form 10-K and our current quarterly report on Form 10-Q, in particular any discussion of risk factors or forward-looking statements, which are filed with the SEC and available on the SEC’s website at sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

We may make certain statements during the course of this presentation, which includes references to non-GAAP financial measures, as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, which are attached hereto within the appendix.

Please turn to slide three. Participating with me today are Brett White, our Chief Executive Officer, Bob Sulentic, our President, who as you know will succeed Brett as CEO at the end of the year and Gil Borok, our Chief Financial Officer.

I will now turn the call over to Brett.

Brett White

Thanks, Nick and please turn to slide four. I am glad we have Bob joining our call today. Bob’s well known to most of you. I know you will enjoy interacting with him more regularly as he gears to assume the CEO duty at the end of the year.

We are very pleased with our results for the quarter. We grew our topline by double-digits, improved our bottomline by nearly 30% and increased our normalized EBITDA margin by 170 basis points. Our stronger performance reflects a broad well balanced global platform we have built over two decades. One of which strengthens and certain the compliance in markets, compensates weaknesses in others. It also demonstrates our ability to control costs while executing on our growth strategy.

Right now the Americas is experiencing the best of all our region. Our permanent position in markets across the U.S. Canada and Latin America has enabled us to sustain double-digit revenue and profit growth despite the lack of meaningful job creation. Asia-Pacific achieved solid growth in the second quarter as well; notwithstanding China’s economic slowdown. As expected, EMEA saw softer results as it continue to fight formidable headwind related to both the Euro zone’s ongoing economic and debt issues and notable negative currency effects.

Benefits continue to accrue from our acquisition of the ING REIM businesses last year. We believe that the blending of ING REIM’s professional talent with our own has forged a new industry leader in real estate investment management and have certainly given us an enhanced stream of stable revenue at higher margins than most of our other businesses.

The 25% normalized EBITDA margin that this business achieved during the quarter served us particularly well in a choppy market environment and we expect positive contributions from the ING REIM acquisition to continue.

Our global outsourcing business continue to make strong gains with double-digit revenue growth for the seventh consecutive quarter. We signed 54 total contracts including 24 with new outsourcing customers, staying a company record for new wins in a quarter. This business continues to exhibit good momentum for reasons we will discuss later.

Our capital markets business has also performed well. Although a small component of total company revenue, mortgage brokerage had robust revenue growth of 36% as loan origination volumes and related servicing demand continue to rise.

While still a relatively moderate portion of overall revenue, property sales moved higher in all regions paced by the Americas, reflecting generally soft occupier market condition particular in Europe, property leasing edged up slightly on a global basis. The Americas and Asia-Pacific accounted for the increase.

While the global market recovery progresses, macro challenges continue to limit it's strength. Nonetheless, CBRE continues to be in an advantageous position. Our unique combination of people, brand and mature global platform gives us the ability to perform well for clients and shareholders and to build market spirit across our spectrum of services.

So on here, on slide five, our noble transactions we completed during or immediately following the quarter. As usual, I'll not go through them individually, but we've included them for your review.

And with that, Gil, I'll turn the call over to you to go through the financial deck.

Gil Borok

Thank you, Brett. Please advance to slide six. Total revenue was approximately $1.6 billion for the second quarter of 2012, up 12% from last year or 13% when excluding discontinued operations. This increase was driven by growth in outsourcing, investment sales, investment management and commercial mortgage brokerage.

Normalized EBITDA improved at more than twice the pace of revenue, rising 28% to $220.9 million in the second quarter of 2012 from $172.4 million in the second quarter of 2011 and our normalized EBITDA margin expanded by 170 basis points to 13.8%.

Cost of services felled 240 basis points to 56.7% of total revenue in the second quarter of 2012 versus 59.1% in the second quarter of 2011. This reduction was primarily driven by the fact that all costs associated with ING REIM, which were not present in the second quarter of 2011, drove through the operating expense line as opposed to cost of services. Despite the inclusion of all of ING REIM’s costs in operating expenses, this line was essentially flat as a percentage of revenue compared to the second quarter of 2011 indicating effective cost management.

In the Americas and Asia-Pacific consistent with historical patterns, positive operating leverage was readily apparent. Due to the more fixed nature of costs in many parts of Europe and the rapid declining leasing revenues in EMEA during the quarter such operating leverage was not yet as evident in this region.

Interest expense increased by $10.2 million in the quarter as compared to the second quarter of 2011, primarily due to the full impact from the financing of ING REIM and the Sterling denominated term loan A1 facility that we were not present in the second quarter of 2011.

Our second quarter 2012 tax rate was approximately 40% and we expect the full year 2012 tax rate to be a little below this. Second quarter 2012 GAAP diluted earnings per share was $0.23 versus $0.19 last year and adjusted diluted earnings per share was $0.27 versus $0.21 in the second quarter of 2011 an increase of almost 30%.

Please turn to slide seven. Property and facilities management was our largest service line in the second quarter of 2012 representing 34% of total revenue in the quarter with a 10% increase over the second quarter of 2011.

Leasing was our second largest service line representing 30% of total revenue in the second quarter of 2012 with increases in the Americas and Asia-Pacific.

Investment sales accelerated to a growth rate of 16% in the second quarter of 2012 driven by the Americas with positive contributions from EMEA and Asia-Pacific as well. It represented 16% of total revenues in the second quarter of 2012.

Global investment and management revenue more than doubled again quarter-over-quarter driven by increases in asset management fees attributable to the ING REIM businesses.

Appraisal and valuation revenue increased 6% to $95.2 million led by business in Asia-Pacific that was acquired late in the second quarter of 2011.

Commercial mortgage brokerage revenue grew 36% year-over-year driven by continued capital availability, generally low interest rates, competitive spreads and investors continued search for yield.

Development services revenue was up slightly to $15.5 million.

Revenue from property and facilities management, fees for assets under management, loan servicing fees and leasing commissions from existing clients are all largely recurring. This revenue comprised approximately 57% of total revenue for the second quarter of 2012.

Although not our typical sequence, I will briefly cover our debt maturity and capitalization table before handing the call over to Bob. Slide eight shows the amortization and debt maturity schedule for all outstanding debt. This is virtually unchanged from the first quarter of 2012. With considerable liquidity and cash flow we remain very comfortable with our debt maturity schedule and the flexibility it provides.

Please turn to slide nine. Excluding cash within consolidated funds and other entities, not available for company use and excluding our non-recourse real estate loans and our mortgage brokerage warehouse facilities, our total net debt at the end of the second quarter of 2012 was approximately $1.9 billion. This is flat as compared to the end of first quarter of 2012 and up versus the end of 2011 due to bonuses and other incentive compensation payments made in the first half of the year. Consistent with historical trends, our net debt is expected to decrease as the year progresses.

At the end of the second quarter of 2012, our weighted average interest rate was approximately 5.7% when including interest rate swaps similar to the end of the first quarter of 2012. Our leverage ratio on a covenant basis now stands at 1.76 times at the end of the second quarter of 2012 on a trailing 12 month basis. Our total company net debt to trailing 12 month EBITDA stood at 2.19 times. I will now turn the call over to Bob who will cover business line performance.

Bob Sulentic

Thanks Gill, I am glad to once again to be joining these calls on a regular basis. Please turn to slide 10. Our outsourcing business continued its pattern of consistent growth driven by record new account additions. In the second quarter of this year, we signed 54 contracts, the second highest total in company history.

We landed 24 new accounts, the most ever for a single quarter, 21 renewals and 9 expansions. All of this contract activity in the second quarter and for many prior quarters suggests very strong underlying momentum in our outsourcing business and we expect that momentum to continue well into the future.

The outsourcing trend is being propelled by globalization and the desire by occupiers of all sizes and across industries to increase efficiency and improve all our overall performance particularly in light of the global economic slowdown. For this reason, this business has significant headroom for growth. We believe there is as much as $50 billion to $60 billion in total market potential.

We are poised to capture a significant percentage in this opportunity by delivering services to more space users and establish outsourcing markets as well as newer markets. For example, we see big potential among midcap companies which accounted for more than a third of our total contracts in the second quarter.

We also continue to add customers in the government and healthcare sectors where cost pressures are especially acute. We saw evidence of this in the second quarter with three new contracts in the government sector and three new contracts plus a client expansion in the healthcare sector.

In addition, four large corporations selected us to provide various services to their properties in Latin America and we were hired by Sony to handle transaction management and lease administration in Asia Pacific and EMEA.

Please turn to slide 11, which demonstrates steadily decreasing vacancy rates and positive absorption in all three market sectors depicted along with forecasted improvement over the next two years. Average national cap rates were slightly down in the second quarter versus both the first quarter of this year and the second quarter of last year primarily due to continued strength in core and Class A property sales.

Please turn to slide 12; the Americas posted very good growth in property sales revenue in the second quarter which continued to be driven by activity in core markets with modest improvement in secondary markets.

Our position as a market leader across asset sectors, office, industrial, retail and multifamily and our ability to provide integrated equity and debt solutions are clearly a distinct advantage. Our CA data shows that we improved market share by 230 basis points from a year ago to 16.2% in the second quarter of this year, once again the highest in the industry.

Leasing markets generally showed some improvement in the second quarter with vacancy rates declining modestly. During the quarter, the US office vacancy rates fell 30 basis points to 15.7% compared to the first quarter of this year, indicating that our office market recovery remains intact. Market fundamentals continue to be helped by very low levels of new construction, occupier demand however remains modest. In light of this, second quarter leasing revenue increase of 5% is a good result and inline with our expectations.

This growth reflects our premier position in key business centers such as New York City, where we negotiated four of the five largest leased transactions in the first half of this year. Our Americas' outsourcing business grew by a strong 13% in the second quarter.

Please turn to slide 13. In EMEA, property sales provided a positive surprise, despite almost daily headlines about the Euro Zone debt crisis and heightened investor anxiety. Our EMEA sales revenue rose 3% in the second quarter excluding the notable impact of negative foreign currency movement. EMEA sales revenue grew by 11%.

We’re especially pleased with this outcome given the property sales activity across most of the EMEA as weak. Recent performance show greater effects from the flat lining economies across Europe. While average rents across the region have remained relatively stable, occupiers have been hesitant to make commitments in the current environment.

As a result, EMEA leasing revenue decreased 17% in the second quarter of 2012 versus the same quarter in 2011. Excluding the impact of foreign exchange, leasing declined 10% in the second quarter versus second quarter last year.

Consistent with our first quarter results, France in particular had a very negative comparison against a strong second quarter in 2011. The EMEA outsourcing revenue was flat in the second quarter as compared to the second quarter of last year.

This was primarily driven by negative foreign currency movements excluding the impact of foreign currency outsourcing revenue grew 9%. Our total revenue in EMEA declined 5%. However, when excluding the impact of foreign exchange it grew 3%.

Please turn to slide 14. Asia-Pacific generated solid growth in all three major business lines during the second quarter. We saw excellent performance in Japan as the economy there continue to recover from last year’s natural disaster and the related investment in infrastructure continued.

Investors increasingly proceed towards Japan as a safe heaven and a near integral part of any overall Asia investment strategy. Australia, India and Singapore all performed well despite moderating global economic activity. Property sales revenue advanced 4% in the second quarter led by activity in Japan, excluding the impact of negative foreign currency movements the increase was 8%.

Leasing revenue in Asia Pacific grew 6% with growth evident in almost all geographies excluding the impact of foreign exchange growth was 9%. Outsourcing revenue improved by 5% in the second quarter versus the second quarter last year and excluding the impact of foreign exchange outsourcing revenue grew 13%. Our total revenue growth in Asia Pacific was 11% when excluding the impact of foreign exchange.

Please turn to slide 15. Revenue for the development of services segment totaled $17.8 million in the second quarter versus $17.2 million in the second quarter last year. Second quarter EBITDA declined by $6.6 million from the second quarter of last year due to higher profits from property sales in the prior year quarter. At the end of the second quarter, in process development totaled $4.7 billion and the pipeline totaled $1.4 billion. Our equity core investments at the end of the second quarter in development services totaled $89.2 million and our recourse debt stood at only $15 million.

Please turn to slide 16, second quarter 2012 global investment management revenue increased to $119.7 million from $58.9 million in the second quarter of last year. The increase resulted from higher asset management fees largely stemming from the inclusion of ING REIM which contributed approximately $7 million revenue in the second quarter.

Assets under management or AUM totaled $91.2 billion at the end of the second quarter down from $95.9 billion at the end of the first quarter this year. $2.8 billion of the draft was due to a non-traded reach board's decision to internalize its management. In addition, AUM declined in the current quarter by $1.8 billion due to currency fluctuations and $500 million due to declines in asset values primarily in Europe.

And $400 million due to dispositions while acquisitions added $800 million to our assets under the management. Included in the $91.2 billion of AUM at the end of the second quarter was $21.4 billion of listed securities. Net outflows combined with changes in market valuation in this portfolio decreased AUM by $300 million dollars versus the end of first quarter.

During the second quarter of this year, we raised new equity capital of approximately $700 million in the direct real estate business, and had approximately $2.6 billion of equity capital to deploy at the end of the quarter. Our core investments in this business at the end of the quarter totaled $215.1 million.

Please turn to slide 17. Our global investment management EBITDA reconciliation is shown here. In the second quarter of 2012, we incurred $9.1 million of expenses related to the ING REIM acquisition primarily for retention, severance, facilities and information technology.

As of June 30th this year, the company maintained accumulative accrual of carried interest compensation expense of approximately $40 million which pertains to anticipated future carried interest revenue. This reflects a reduction of $4 million from the end of the first quarter due to no income tax related distribution. This business operated at a pro forma normalized EBITDA margin of 25% for the second quarter of 2012.

Brett, I will now turn the call back over to you.

Brett White

Thanks, Bob and please turn to slide 18. The commercial real estate recovery continues to progress at a historically slow pace relative to prior recoveries with a high degree of inconsistency globally. We are pleased that CBRE continues to perform well and we continue to build our position as a market leader

Our views following the completion of the first half of 2012 are that outsourcing is expected to continue its strong consistent growth trend, leasing growth rates should be relatively modest, investment sales growth will vary widely depending on local and regional market dynamics and finally then investment management will benefit from a full year contribution from the acquired ING REIM businesses.

With the first half now behind us, we remain comfortable with our full year normalized EPS guidance at a $1.20 to $1.25 with higher normalized EBITDA margins than in 2011. However given the ongoing uncertainty regarding the global economic picture, we will take a close look at our guidance again at the conclusion of the third quarter which of course is our standard practice.

And with that operator, we’ll take now questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone - JPMorgan

The facilities management business, you mentioned 50 to 60 billion of potential revenue or potential in that business, first thing is that an annual revenue number that you're citing?

Brett White

That $50 billion to $60 billion potential tax revenue is an annual figure for the total outsourcing segment. So we believe like this is a very big market as you know. It's a market that’s very difficult to size, but if we extrapolate what we think is out there in terms of total firms that could outsource and all of the services that could be outsourced, you are going to get to a number we think generally in that range.

Anthony Paolone - JPMorgan

Okay, so this is potentially folks that would outsource, not necessary that they're outsourcing now and you just haven’t [thought]?

Brett White

That’s right, this is total potential market.

Anthony Paolone - JPMorgan

Okay, what's been sort of the conversion over the past, I don't know two or three years to an outsourcing model. Trying to get a sense as to you know, have you been driving it from share, has the market just expanding very quickly? Is there anyway to put some parameters around that?

Brett White

Well, I think you know, first Anthony, if you just observe that the two firms that are doing most of this work are ourselves and our good competitor back east. We both have been reporting very strong growth rates in this business and I think that’s a combination of two things. The first is the market is clearly expanding more quickly or has been expanding more quickly the last three, four years than it has in prior years.

So the business is maturing and more and more firms are coming to market with outsourcing contracts. The second dynamic though that greatly supports our firm is the movement of outsourcing work away from niche [boutique] and regional players over to true global firms, and so that trend which has been extinct for quite sometime, as you know Anthony, is a big benefiting dynamic to ourselves and to one other firm in the industry.

Anthony Paolone - JPMorgan

In Europe, is Europe getting better or worse from the point of view of just seeing some what of a normal flow of either leasing and/or sales transactions, I guess what I am asking is are people becoming more constricted or are they adapting to this environment?

Brett White

Right, well I think it's fair to say that Europe is a very unsettled region and it's a region that has not been given the opportunity to take a pause, catch their breath and deal with the trends that are extinct in their market place. There seems to be a new issue as you know Anthony, in Europe, every week, every month.

So the market place in Europe is troubled and when you have a market place like that, what tends to happen is people freeze on making decisions around dispositions of real estate, acquisitions of real estate, expanding their business' footprint, contracting their business' footprint. Everybody take the time out until they can digest what is going on in their market place and this market is – Europe market is very dynamic.

I don't think anybody in Europe at the moment, we certainly can’t predict with any uncertainty what that marketplace is going to look like a month from now, much less a year from now and until that sort of view is available in the marketplace, until large customers of ours can look forward for a few quarters, may have some comfort around what that marketplace is going to be bring them, this market is going to remain troubled as you saw in the leasing volumes and you saw in the sales volumes. I do want to ask Bob who is on the line to add his commentary to this. Europe reports to Bob and he is much more closer to that situation than I am. Bob what would you like to add to that.

Bob Sulentic

Well first of all, I agree with all of it Brett. I think that’s a very good description of what’s going on. Obviously we saw a different circumstance with investment properties than we did with leasing in the last quarter and I think the explanation for that is in core markets and there certainly are some important core markets there, most notably London.

People are going to invest in real estate because they think they can get some yield. It’s so hard to get yield on anything you invest in today that there is going to be investment in core solid properties and we saw some of that. The flip side is for leasing, businesses simply aren’t going to make decisions with this much uncertainty and we saw real pressure in the leasing market. So that’s really the only thing that I would add to what Brett said and generally I agree with the whole description.

Brett White

And Anthony, I would just add to Bob’s comments into my own. This is a sentiment issue. So at the moment as you know and all of our callers know, capital is very easy to obtain. Businesses if they choose to, can make investments with their own cash or through borrowed funds. This is a sentiment issue and if there is good news or a silver lining around this dark cloud in Europe, it is when sentiment changes, there is an enormous amount of pent-up demand that needs to be satisfied.

And we believe that of course this situation will at some point resolve and when it does, we should see some very good performance out of Europe and when that occurs, who knows.

Anthony Paolone - JPMorgan

In the press release you talked about just cost, discipline, is there anything just specifically any programs to actually cut cost at this point or is it just being mindful? What's happening there?

Brett White

Anthony, it's just status quo. So as you know and I hope everyone on the phone knows, it is simply part of our culture to be very mindful about margins. Once again, we are very proud this quarter with our performance at the margin side. We again have the leading margins in the industry. That comes from hard work, but also comes from our culture which is to mind costs while making smart long-term investments in the business.

We have no particular programs under way right now in terms of restructuring or the types of things I think you are referring to, but it's fair to say that in an environment like the one we are currently operating, everybody is very careful of the OpEx line. Let me ask Gill to add any comments he would like to that?

Gill Borok

Okay thanks. But, Anthony I think the reason that we highlighted it was, it is quite visible certainly in the Americas and in Asia Pacific as we've had some improvement in transaction revenues and idea was to remind folks that sometimes it does take a little while to see that leverage clearly. We are seeing it very well in Q2 in Americas and Asia Pac. Not as much in Europe, but when you delve with the cost as we do, it certainly is just a situation where revenue is down there and so you not seeing the leverage as much as you might in the other two regions.

Anthony Paolone - JPMorgan

And then just last question, Gill, the tax rate worked about 42 % in the quarter. What should we -- it just seems a little higher for six months versus last year. Any thoughts on what we should be looking at through the balance of the year, just how to think about the year in total?

Gill Borok

Yeah, I think we actually said it, but it’s slightly south of 40% for the year. You sometimes have the street items in the quarter in any particular quarter that on a quarterly basis can raise it a little bit or lower than little bit, but for the year I expect a little bit under 40%.

Operator

Thank you. The next question will come from the line of Brandon Dobell with William Blair. Please go ahead.

Brandon Dobell - William Blair

A couple of things, a couple of quarters ago you talked a little bit about, take a look at where your headcount was, I think it was on US on the leasing side of the business, it doesn't sound like if there's any updated thoughts there in terms of adding more headcount given how the markets are growing, but maybe you could address what the plans are going to be in the back half of the year in the US in particular?

Brett White

I think you are referring to comments we made last year regarding recruiting, is that what you are referring to?

Brandon Dobell - William Blair

Correct.

Brett White

So you know it’s a matter for standard course of business; we are always looking for talent in the industry. There's a normal attrition rate that we have to deal with every year and there's a certain amount of hiring we like to make every year on the competitive side.

I think the trend that we spoke about last year remains the same this year, which is there is a clear fundamental dynamic in the industry of high quality talent moving from where we described its kind of a regional or national players over to the global player and that's were the reasons that we referenced earlier on outsourcing growth. There's just more and more the larger high ticket clients are moving to these firms and so therefore so is the talent.

I also wanted to ask Bob to comment on this again, Americas reports to Bob and Bob this question is regarding our recruiting this year and whether or not we are seeing good things there or not.

Bob Sulentic

Well, I would bifurcate the question into two parts, our absolute recruiting and our net recruiting. In an absolute sense, we've done a good amount of recruiting and in the net sense its been much closer to flat. And the reason for that is that we are upgrading positions around our system in a very strategic way and with that plan in place to get that done, I suspect that that effort is going to play out and you are going to start to see an increase in headcount over the next year or so as we go from replacing some spots where we wanted to upgrade actually adding that headcount.

Brandon Dobell - William Blair

Okay, as you think about the pretty strong start to the year for six months in the property management business, the impact of onboarding those contracts in the back half of the year, should we expect margin pressure out of that part of the business or are you starting to get any benefit from the deals you guys onboarded last year and should outstrip the costs that will come on in the back half of this year?

Gil Borok

I think there will be some transition cost impact which we have seen, but I don't expect it to be as notable as what we saw last year, because you are right some of what we onboarded last year is now maturing and we are getting into more of a mature portfolio in that regard. The larger contact deals are more and more so I think its going to be apples-to-apples a lot more comparable.

Brandon Dobell - William Blair

And a final question from me, in the US run investment sales, as you work through the second quarter looking at secondary markets or kind of Class B property types; any further progress there in terms of maybe a quicker pace of recovery in those markets than you saw in the first quarter or is it still pretty lackluster?

Bob Sulentic

I would describe it Brandon this way, there is still a concentrated focus on core markets and core real estate. But that having been said there has been an awful lot of money raised in the past 24 months with a value add type hurdle to it and those returns are only available in the secondary and tertiary markets and we are seeing a decent amount of activity in those markets.

I discussed with the clients just the other day who bought a very large office asset in Orange County. It was 40% vacant. The yield on that building with the vacancy was north of 7%. That’s a true value-added transaction. They told me they bid against a number of buyers to get that building. So, you know, I would say, as this market continues to season, as it continues to mature, or you hear more and more of those stories and the core focus we’re seeing in the last two years will still be the element of the market but it won't be the only headline story.

Brandon Dobell - William Blair

Final one. Any large kind of single transactions last year in the third quarter either on leasing or sale side that we should be aware of from a year-on-year comparison basis?

Gill Borok

No, nothing to call out.

Operator

Thank you. The next question will come from the line of Will Marks with JMP Securities. Please go ahead.

Will Marks - JMP Securities

I wanted to just ask on, I guess first of all, any further ING integration cost are those all behind you?

Brett White

No, there are still more to come in Q3 and Q4.

Will Marks - JMP Securities

Approximately, how much can you give us?

Brett White

Well, there is some that will come at the EBITDA line and some that will come to amortization. In total, I think about 1,500 in each of Q3 and Q4.

Bob Sulentic

That’s 15 million.

Will Marks - JMP Securities

Second question on, we’ve read a lot of industry of course and then I don’t think I’ve seen you guys quote this but just on US industry leasing volumes being weaker than expected at the beginning of the year and definitely showing a decline for the full year and certainly year-to-date looks pretty good. I am wondering if the components of your guidance have changed at all for that anything else?

Brett White

No they haven’t and just to let me put a final point on your question. If you look at the second quarter in the US which is you talked about US market I will answer on US market. Number of transactions for us in the leasing business was basically flat. The length of lease in the second quarter was basically flat; it was actually down 1%.

But the average lease size was actually up 5% for the quarter, so those three dynamics which are the dynamics to give us revenue gives a 7% increase from reported leasing revenue for all product types in the second quarter of 2012 versus second quarter of 2011, that’s a decent number given this current market environment and there is nothing going on in that business that is materially different from what we forecast when we built our guidance for the year.

Will Marks - JMP Securities

Okay, I asked you actually to repeat that so, average lease size up 5% meaning the dollar value of the lease?

Brett White

Square foot per transaction.

Will Marks - JMP Securities

Square foot, okay. And then rental rate, did you say is flat?

Brett White

What I've said was that the number of transactions was down 1%.

Will Marks - JMP Securities

Right.

Brett White

The lease term was down 1%.

Will Marks - JMP Securities

Okay.

Brett White

And the square foot was up 5%. The rental rate increase year-over-year I am going to give you a rough number called 2.5% total rental will give you a little bit finer number to that but it’s a rough science. So I think 2.5% for them I would say it could be the right number.

Operator

(Operator Instructions) The next question comes from the line of David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.

David Ridley-Lane - Bank of America Merrill Lynch

Sure, so it's like I understood you right on the cost side it sounds like you are being mindful there but just to be clear and you don’t have any plans to take significant cost out of EMEA?

Brett White

What Gill said and I'll just underscore it is that EMEA along with Asia Pacific, Americas and our global business lines are all being mindful on cost. When we talk about taking material cost out, we'll talk about that when we are going to do something that likely fallen to restructuring charge and there is nothing going on in the business right now, that would lead us to talk about that at the moment.

But we are watching EMEA carefully obviously as you know, David but I'll look at the other callers I know as well, the cost structures in Europe are different than the Americas and Asia Pacific, and a lot of the cost that you have underpinning your business in Europe is more structural than it is, variable and its hard to get out in this another market.

So what tends to happen is it's in the [lack] of it in Europe on the cost side and I think the underscoring point that is important for our callers to understand is that as you saw in our performance for the quarter and for the first half of the year, we are paying a lot of attention to cost. And we are going to continue to pay a lot of attention to cost until these markets are stabilized in growing at a rate that we think indicates a good recovery. Gill, anything you want to add on cost issues in Europe.

Gill Borok

No, I think I've said what I was going to tell reiterated which that again because of the revenue situation there in the quarter and the decrease in leasing in particular, there is no leverage that to (inaudible) like it is in the Americas and Asia Pacific as far as we are paying attention to cost and obviously in all three regions and Europe is the most concerning at the moment given the results, but nothing particular to talk of.

Brett White

And maybe David to put another angle on, what you should not expect to see in Europe are large cost increases year-over-year and so in a market like Europe, where you are able to make the biggest impact on cost tends to be on deferring additional expenses of the business rather than say in Americas or Asia Pacific where it's fairly straightforward to reduce tens of millions of dollars of cost very quickly and very easily.

That's just not as easy to do in Europe. But yeah, as we mentioned in our script earlier, one of the great benefits of this firm is that we are so highly diversified on product line. We have so many businesses that we benefit from that the firm can absorb issues like Europe right now and still post industry-leading margins and industry-leading profits. That's by design and that allows us to be patient with Europe, not to make draconian cuts to their cost structure because our Europe business is a terrific business and we are very comfortable with where they stand at the moment on their cost side, although we are concerned as Gill said on the revenue side.

David Ridley-Lane - Bank of America Merrill Lynch

And then in the fourth quarter you are going to have a full quarter anniversary of the ING acquisition. When you look at your full-year adjusted EBITDA margin, that's obviously benefiting from that, but would you expect year-over-year adjusted EBITDA margin expansion in the fourth quarter as you have that full quarter anniversary of ING?

Gill Borok

Yeah, David in isolation that's correct, but if you recall back to when we did our fourth quarter call back in February, and we gave our outlook for 2012 what essentially we said was is we called out certain development gains that -- I think I use the terminology outsized at the time. They were gains that certainly were normal course for development, but then they were those that were outside.

And so my comments were around the fact that in the principal businesses, whatever upside there was from investment management, which at the EPS line remember is reduced by things like interest expense, amortization that doesn’t get normalized and so forth. When you look at the net income or EPS line, whatever favorability we had would more or less be offset by absence of development gains.

And so that's how I think you ought to -- at this point, I still would affirm that's how you ought to think about the fourth quarter and the year, so that the upside and the expansion in margin will come from the services business which is exactly how we ended up when we gave the outlook at the beginning of the year.

Operator

And next we’ll go to a follow up from Anthony Paolone with JPMorgan. Please go ahead

Anthony Paolone - JPMorgan

I think you mentioned maybe it was $2.6 billion of equity that still needs to be deployed in investment management and I was wondering is A, do you correct fees on that currently or is that kind of a revenue backlog if you will and B, is there anything like on the flipside for instance where you have an exit [cue] on any of your funds that are of size?

Bob Sulentic

Anthony, in terms of the fees, we collect fees when we deploy the capital and in terms of exits, we announced the single biggest exit we anticipate for the year which is the non-traded REIT that we were the manager for, where the management has been internalized. So we wouldn’t expect to see anything of major significance like that between now and the end of the year.

Anthony Paolone - JPMorgan

It was that -- just to get a sense, is there something we should pull out of numbers like did that happen late in the quarter? Is it that material in terms of the internalization of the manager there with a non-traded REIT?

Gill Borok

Yes, it was announced and I forget the exact time. I think it was probably late May or early June and I just say that there is no single fund in the US or no single venture in the US that is going to impact the fees, fees for assets under management in a material way and the business of this size. You might get a little more of that in Europe where those core funds, the fees are based in large part on market valuations, but again core funds don’t fluctuate the way a value add does. So short answer, I guess is no, we don’t expect a material impact.

Operator

Thank you and I will now turn it back for closing remarks. Please continue.

Brett White

Thanks everyone. We are very pleased with our quarter and we look forward to continued good results for the year.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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