Grubb & Ellis Company Q2 2008 Earnings Call Transcript

 |  About: Grubb & Ellis Company (GRBEQ)
by: SA Transcripts

Grubb & Ellis Company (GBE) Q2 2008 Earnings Call August 5, 2008 11:00 AM ET


Welcome to the second quarter 2008 Grubb & Ellis earnings conference call. (Operator Instructions)I would now like to turn the presentation over to your host for today's conference Mike Rispoli, Senior Vice President of Investor Relations.

Michael Rispoli

This morning we issued a press release announcing our financial results for the second quarter of 2008. This release is posted on our website at This call is being webcast live and will be archived and available for replay. The replay may be accessed from the Investor Relations section of our website. In just a moment we will provide commentary on our results and then we will open up the call for Q&A.

First, I would like to remind you that comments made during this call may include certain forward-looking statements. Actual results and the timing of certain events could materially differ from forward-looking information discussed on this call. Factors that may cause such results to differ are set forth in this morning's press release and the company's filings with the Securities and Exchange Commission. The merger between Grubb & Ellis and NNN Realty Advisors was completed on December 7th, 2007.

As required by Generally Accepted Accounting Principles, the transaction was accounted for as a reverse merger with NNN as the accounting acquirer. Accordingly, the company's results of operations commencing on and subsequent to December 7, 2007 include the operations of the combined entity. Results of operations prior to that date including second quarter 2007 results reflect only the operations of NNN.

In an effort to present a more complete financial and narrative description of the results of operations, the company has also provided non-GAAP financial measures. The non-GAAP financial measures are intended to reflect the company's results of operations on a combined basis exclusive of the total financial or accounting impact associated with the merger transaction, such as amortization associated with purchase price adjustments or identified intangible assets.

These financial measures also exclude the impact of non-cash stock-based compensation, rental related operations primarily with respect to certain assets held for investment, and other non-cash items. The non-GAAP combined results for the three months ended June 30, 2007 do not purport to show the results as if the companies were merged as of January 1, 2007 but rather represent an arithmetic combination of the results of the two companies. Results do not reflect the elimination of transactions between the companies and certain estimated synergies and expenses related to the combination for the periods presented.

As required by SEC regulations, we have provided reconciliations of these non-GAAP measures to what we believe are the most directly comparable GAAP measures in our earnings release and related 8-K filing. With that, I will turn the call over to Gary Hunt, our interim Chief Executive Officer for opening remarks.

Gary Hunt

Joining me in today's call is Rich Pehlke, our Chief Financial Officer and Jack Van Berkel, our Chief Operating Officer. Jeff Hanson, President of Grubb & Ellis Realty Investors is also here with us this morning and will be available to respond to any of your questions.

We are pleased to have the opportunity this morning to review our second quarter performance and update you on the progress achieved by Grubb & Ellis as we continue the post-merger integration process and leverage our expanded platform. As you know, I became the company's interim CEO on July 10 upon the resignation of Scott Peters. I would like to reaffirm that Scott has retained his roles as Chairman and Chief Executive Officer of the Grubb & Ellis Healthcare REIT and Executive Vice President of the Grubb & Ellis Apartment REIT, and we are very pleased to continue to have Scott's involvement and advice as we move forward.

Presently we are in the early stages of our search for a permanent CEO. In the interim, I am working closely with the executive management team to ensure that we continue to move forward with our merger integration process and execute on our overall growth strategy.

Today, my colleagues and I will discuss current market conditions, their impact on our businesses, and how we are responding to these conditions. Additionally, we will update you on our progress regarding the merger integration as well as our overall goal to make Grubb & Ellis a leading global real estate services and investment firm. First, I would like to highlight key quarterly financial results.

Grubb & Ellis reported second quarter 2008 revenue of $167 million compared with revenue of $182.7 million for the combined companies in the second quarter of 2007. The company posted a second quarter net loss of $5.1 million compared with net income of $11.3 million for the companies on a combined basis in the same period of 2007.

Adjusted EBITDA which excludes certain charges, specifically noncash stock compensation and the impact of assets held for sale, for the second quarter was $12.4 million compared with $27.4 million for the companies on a combined basis in the second quarter of 2007.

For the first six months of 2008, Grubb & Ellis generated revenue of $327.5 million compared with revenue of $331.2 million for the companies on a combined basis in the first six months of 2007. The company posted a net loss of $11 million for the first half of 2008 compared with net income of $11.8 million for the companies on a combined basis in the first half of 2007. Adjusted EBITDA was $20.1 million for the first half of 2008 compared with the combined companies' adjusted EBITDA of $34.1 million for the first half of 2007.

Let me pause for a moment and point out that it is extremely important to put these numbers into context in light of current market conditions. The economic slowdown and tightening credit conditions that have brought to capital markets to a virtual halt began one year ago. Prior to the slowdown, the commercial real estate industry was extremely healthy, and Grubb & Ellis and NNN Realty Advisors like its peers were benefiting from a robust capital markets and commercial real estate environment.

Given the significant headwinds that we are currently facing, we at Grubb believe that our results for the quarter and so far in 2008 are strong. They represent the resiliency and diversified nature of our business. Now I will spend a few minutes reviewing present market conditions.

Today, capital markets continue to struggle with nonissuance of CMBS. Loans are available from banks and insurance companies but many banks are focused on maintaining their capital reserves to guard against further losses in their residential loan portfolios, while insurance companies are said to be already bumping up against their annual allocations to commercial real estate.

Consequently, while capital for development and investment transactions remains available, it is more difficult to obtain with lower loan to value ratios and more onerous terms such as the return of recourse lending. As a result, commercial real estate investment volume was down 69% industry wide in the first half of 2008 versus the first half of 2007. Cap rates are experiencing upward pressure with analysts' estimates surprised the clients ranging from as low as 10% to as high as 30%.

Additionally, rising vacancies and softening rental rates are expected to result in some forced asset sales by investors, particularly those who purchased in the last couple of years with the help of higher leveraged and overly optimistic or aggressive performers. We expect the gap between the buyer and seller expectations to close slowly property by property as sales are consummated. More forced sales are likely to come to market and delinquency and foreclosure rates are expected to rise.

Although it my take capital markets longer to recover, there is a large amount of private and institutional capital waiting in the wings to scoop up those properties where the bargains finally began to appear, which could help to strive transactional volume sooner. The U.S. commercial real estate leasing markets also started to slow in the second quarter. Although the labor market is shedding jobs at a surprisingly gradual pace, job losses are nevertheless being felt in the leasing markets in the form of rising vacancy rates, moderate negative absorption, and more generous concession packages for tenants.

Though absorption activity is only modestly negative, a fair amount of space remains in the construction pipeline. As this space is delivered, it will push vacancy rates higher though at a pace we believe will be moderate and to levels that we also believe are expected to fall short of the peaks reached in the last soft cycle in 2001. Leasing market conditions are expected to soften for all property types at least through year end, with the greatest softening expected in the retail market followed by office, industrial and apartment.

As noted in our earnings release, Grubb & Ellis' second quarter 2008 results clearly benefited from the company's expanded platform. The diversification of our investment programs which produce stable annuity income attributed to a 41% increase in our equity raise year over year. Our tenant-in-common programs continue to source equity and make acquisitions on behalf of investors, albeit at a slower pace than last year.

The lower equity raise with respect to our TICK [ph] programs was offset by the increased equity flowing into our two non-public trade REITs and our recently introduced wealth management platform. During the first half of 2008, we entered into selling agreements for the Grubb & Ellis Healthcare REIT with LPL, NPH, and AIG; three of the five largest independent broker dealers in the country. These agreements considerably expand the distribution of our public and non-traded Healthcare REIT and will allow us to attract equity at a greater pace.

Another positive takeaway was the fact that assets under management also increased during the quarter to $6.5 billion from $6.1 billion at March 31, 2008. Since the beginning of the year, assets under management have grown by 12%. Like our investment business, our Management Services business produces stable annuity income. Management Services fees increased 15% during the quarter over the prior year period. Conversely, our Transaction Services business, which derives fees from brokerage sales and leasing, saw a 31% decrease in revenue year over year. Investment sales activity for this business segment was down by 52%.

Despite lower transaction velocity, the current environment is prompting many companies to cut costs, which is leading to a growth in outsourcing. This trend bodes well for our global client services business which is positioned to deliver record results in 2008. Through the first half of 2008, our global client services practice retained all of its major client relationships and in many cases expanded those relationships.

We recently renewed and expanded our scope of transaction and facilities management work for several key clients, including AJ Gallagher, Qwest, Safeco and United Stationers. In addition, we have added several new Fortune 1000 corporate clients since the start of the year, including a large multi-market engagement for a Fortune 50 financial services firm.

While current market conditions are challenging, Grubb & Ellis has been making progress against our stated objectives and seeing the benefits from the post merger expansion of our platform, which has diversified our revenue base. Additionally, we are continuing to realize the cost of revenue synergies created by the merger and are on track to achieve our integration goals.

Let me conclude by reiterating that our plan is to ensure that Grubb & Ellis is fully positioned to help our clients take advantage of the opportunities that exist both in the current market and as conditions begin to improve. We believe that we are taking the steps necessary to bring that plan to fruition. We have been navigating well through a challenging market by responding quickly to changing market conditions and remaining focused on servicing our clients.

With that, I would like to turn the call over to Rich Pehlke, our Chief Financial Officer.

Rich Pehlke

As Gary indicated, current market conditions are extremely difficult, and as a result, our 2008 results are being impacted. We do not anticipate conditions improving significantly in the near term. We continue to manage our business conservatively and taken a number of actions to respond to the current environment.

Second quarter revenue decreased approximately 8% year over year, which was primarily the result of lower Transaction Services fees as well as lower disposition fees associated with our investment program, both the direct result of the weak market conditions. The company reported a net loss of $5.1 million for the quarter. The loss was primarily due to a catch-up depreciation and amortization expense related to classifying five real estate properties as held for investment rather than held for sale.

This reclass resulted in a one-time non-cash pre-tax charge of $8.9 million for the quarter. Also during the quarter, we recorded $4.7 million of merger-related costs, $3.2 million of noncash stock-based compensation, $600,000 for amortization of certain intangible assets, and $1.5 million of recognized loss on marketable securities. These charges were partially offset by $4.9 million of rental related operations and other noncash items.

Based on approximately $63.6 million average shares outstanding during the quarter, the company reported a loss of $0.08 per share, again off of the $5.1 million net loss. EBITDA was $7.6 million for the quarter. Adjusted EBITDA, which excludes the charges I outlined earlier, specifically the non-cash stock compensation and the impact of the assets held for sale and merger related costs was $12.4 million compared with $27.4 million during the prior year period.

We continue to expect to meet or exceed 2007 adjusted EBITDA goal and the goal of adjusted EBITDA of $74.8 million, which meets or exceeds last year's number. This expectation is based on the following assumptions. Continued growth in the equity raises of our non-traded REIT and TICK programs. We expect to raise significantly more equity in these programs during the second half of the year as compared to the first, largely due to our increased broker dealer platform that Gary outlined.

In addition, we expect a 15% to 25% increase in Transaction Services revenue compared with the first half of 2008. And we will also realize cost synergies from the actions completed during the first half of '08. Grubb & Ellis is leveraging is expanded platform and strategic initiatives including an expanded broker dealer network and a strong brand, and we will position the company for growth and expansion both in the second half of 2008 and beyond.

At the same time, we continue to keep a close hand on expenses. We continue to identify synergies and maximize operating efficiencies as a result of the merger. To date, we have identified more than $17.5 million in annual cost savings. Some of these savings are being reinvested in key talent to ensure that we are positioned optimally for when the market recovers. But at the same time, in response to the current economic environment, we are keeping a tight reign on expenses; we have imposed hiring fees for nonessential positions throughout the organization, and have implemented other cost saving measures to ensure there are expenses in line with our revenue expectations.

Majority of our expenses are related to compensation and reimbursable costs directly related to revenue production. G&A represented 13% of the revenue for the quarter. More importantly, G&A costs are lower compared to the second quarter of '07 on a combined basis.

As I mentioned earlier, our bottom line was adversely impacted by the overall expense burden of five properties recently reclassified as held for investments. Just a reminder, these five properties were sourced; two of them came from pre-merger with NNN Realty of the strategic office fund strategy of value added properties and three assets that were brought to the merger from Grubb & Ellis through a special acquisition corporation strategy of value added assets.

These assets are performing at or above expected levels on an operating basis and we have added their operating income back into our EBITDA calculation. However, as we said repeatedly, these assets are not core to our long-term strategy. We are continuing to examine ways to maximize value from our investment and are considering all options in a very timely manner. As most of you know, our credit facility contain provisions requiring us to sell the three assets purchased for Grubb & Ellis Realty Advisors by September 30th, 2008.

In cooperation with our bank partners, we are pleased to announce that we have amended our credit facility to allow us to hold these specific assets until March 31, 2009. We finished the quarter with $29.7 million of cash and cash equivalents, up from the $24.8 million at March 31. During the quarter, we drew down $25 million on our credit facility and as of June 30th, we have $63 million outstanding on our facility; $14 million of that drawdown was used to retire mezzanine debt and one of the assets held for investment and $6.5 million was used to fund the first quarter '08 cash dividend.

Other sources and uses of cash during the quarter were essentially breakeven. On a year to date basis, the company reported revenue of $327.5 million compared with $331.2 million in the first six months of '07. For the first half of 2008, the company reported a net loss to common stockholders of $11 million compared with net income of $11.8 million in the year ago period.

For the first six months of '08, EBITDA was $8 million compared with $30.1 million during the same period of '07. Adjusted EBITDA for the first six months of '08 was $20.1 million versus $34.1 million for the first six months of '07. The primary drivers for the year over year decline in adjusted EBITDA are a decline in Transaction Services revenue of $29.9 million and a $7 million decline in disposition fee revenue. We expect this trend to continue as rising cap rates and differing expectations between buyer and sellers result in a longer holding periods for some of our investment products.

These decreases that I outlined were partially offset by the recurring revenue from the increases in square feet and assets under management, and the beginning effects of receiving synergies resulting from the merger. Since Gary detailed the factors driving the services business and predominantly all of the adjusted EBITDA generated in the first half of '08 came from our Investment Management business, I will focus my segment comments on the investment business.

Second quarter Investment Management revenue totaled $35.4 million compared with $41 million in the same period a year ago. The growth in acquisition and management fees were more than offset by a decrease in disposition fees due to lower transaction volume year-over-year. During the quarter, our public non-traded REITs and our wealth management platforms continued to perform extremely well.

As a result, our investment programs raised an aggregate of $252 million of equity during the second quarter. This compares favorably to a total equity raised of $221 million a year ago. For the year, the company's investment programs raised approximately $516 million compared with $365 million in 2007. Our public non-traded REITs raised approximately $138.7 million during the second quarter, up 38% from the equity raised in the quarter '07. And the equity raised continues to accelerate as our new broker dealers begin to ramp up the marketing of our products.

For the first half of the year, non-traded REIT products have raised approximately $212.9 million of equity, up from $140.8 million raised a year earlier. The equity raise reflects both the strong investment appeal of our REIT products under the Grubb & Ellis brand and the strength of our proprietary REITs in the alternative investment sector. The continued success of our REITs and the relationships that we are building within the broker dealer network will be instrumental in reaching our goals for '08 and beyond.

Since the beginning of the year, our wealth management program, our newest investment platform, has placed approximately $188 million in a variety of high quality real estate assets on behalf of high net worth individuals and corporations. Our traditional tenant-in-common 1031 exchange programs raised approximately $106.7 million during the first half of 2008 compared with $224.4 million a year ago. We expect the equity raised in this investment product to pick up in the second half of the year despite a significantly lower total market.

Our financial position as a sponsor should bring continued opportunity to gain market share in an environment where many competitors are not as strongly capitalized. During the second quarter of '08, Grubb & Ellis Realty Investors completed 21 acquisitions valued in excess of $497 million. As of June 30th, approximately 25.8 million square feet of properties from Grubb & Ellis Realty Investors captive management portfolio has been successfully transitioned to our Management Services subsidiary, Grubb & Ellis Management Services. At June 30th, 2008, Grubb & Ellis managed approximately 218 million square feet of property.

Before I close my remarks, I would like to briefly address our decision to institute a share repurchases program, allowing us to repurchase up to 25 million of the company's common stock and the suspension of our quarterly dividend payment. By utilizing a portion of our liquidity to repurchase shares to current levels, we will have greater financial flexibility to invest in growth opportunities as well as create shareholder value for our stockholders. The plan is in place and will commence in the third quarter.

Overall, we believe the company is in a sound financial position. We will remain diligent with regard to cost cutting and growth opportunities, and will stay focused on delivering the best possible results for our shareholders. At this point, I would like to ask Jack Van Berkel to update you on our merger integration.

Jack Van Berkel

As you know, one of our priorities since the closing of the merger has been to integrate NNN Realty Advisors in Grubb & Ellis company. This process is integral of the success of the merger not only from a client service standpoint but also from a cost and revenue perspective.

Since we last spoke to you in May, we are pleased to say that we have identified an additional $1 million in expense synergies. This brings the total to more than $17.5 million in identified annualized cost savings. To put our accomplishments in perspective, it is important to reiterate the rationale behind the merger of Grubb & Ellis and NNN Realty Advisors. While the industry continues to consolidate our merger with NNN Realty Advisors was unique and there was little overlap of products and services.

Instead it has provided an opportunity to combine Grubb & Ellis' brand strength, broader footprint and real estate services with the earnings power in investment expertise of one of the leading sponsors of alternative real estate products, ultimately creating a new company, the company that has all the elements necessary to become one of the leading providers of real estate services and investment products.

As we integrate the two companies, we are focused on creating a more streamlined organization that allows us to recognize the benefits associated with the merger. All of our actions have been designed to support the goals of; one, cross-selling our real estate services and investment products and capitalizing on the synergies of our businesses; two, leveraging the strength of the Grubb & Ellis' brand to expand the broker dealer network of our 1031 tenant-in-common exchange and public non-traded REIT products; and three, building a global platform that offers real estate services and investment products that anyone from the largest corporate users and institutional investors to individuals who believe real estate is an important part of their investment portfolio.

With regard to cross-selling, our new go-to-market strategy which was launched on July 1st more closely integrates our service delivery platform. We believe this new structure will allow us to more effectively service our clients as they increasingly expect holistic solutions of service providers as well as better insulate Grubb & Ellis from the types of market conditions we are seeing today.

Our new structure is designed to seamlessly integrate our Transaction Management Services and investment platforms. Local Managing Directors are responsible for the profitability of the respective regions, and we will be supported by senior management and corporate service directors to ensure that our clients are best served. This structure will be further supported by an operations infrastructure focused on reporting metrics and data.

Just last week, Jim Jones who has spent the last three years as Executive Vice President of Operations, CB Richard Ellis joins us. Jim will have the same title at Grubb & Ellis and is charged with building an infrastructure that fosters operational excellence. Jim is just one of several new hires made over the past several months and is representative of our focus on attracting top talent and strengthening our platform.

Within the past several weeks, we announced that Chuck Hunt, a 20-year veteran of the Southern Californian real estate market was returning to Grubb & Ellis to run our LA County brokerage operations. On the investment side, we announced that John Caley, an 18-year veteran of the commercial real estate investment market has joined the firm from Meridian Value Partners to oversee the acquisition and disposition process for investment programs.

Since the beginning of the year, we have added seven key individuals and senior operational business development positions. We also continue to attract high quality talent in our local offices. As both Gary and Rich have mentioned, our goal is about the need to manage our business for current market conditions with our goal building a diversified global platform of product and service offerings.

As we all know, the market will recover, and when it does, Grubb & Ellis will be more prepared than ever to service the needs of corporate and institutional clients and individual investors. Despite market conditions and the pace of change within our organization morale remains extremely high. As witnessed by our recent personnel announcement, the opportunity to be a part of an organization and to provide additional opportunities to its professionals, and a unique product set attracts top talent.

Although we continue to actively replace our lower performing brokerage professionals with high quality producers, we have seen almost no turnover among our top producers which is extremely encouraging. The strength of the Grubb & Ellis brand has quickly become a competitive advantage for our investment products. Probably one of our biggest successes today has been our ability to expand our broker dealer network primarily as a result of the Grubb & Ellis brand.

As Gary mentioned, since the close of the merger, we have entered into selling agreements for the Grubb & Ellis Healthcare REIT with LPL, NPH, and AIG, three of the five largest independent broker dealers in the country. These agreements more than doubled the number of registered reps eligible to market the healthcare REIT and has resulted in our ability to attract equity at a greater pace and it had increased the name recognition for Grubb & Ellis and all of our products and services.

With each new broker dealer that comes aboard, we also expand the Grubb & Ellis brand. We have more than 1,800 real estate brokerage and tens of thousands of financial reps in the field each day discussing our company and its products with our clients. Before I turn the call over to Gary for concluding remarks, I want to reiterate how pleased I am with the progress we have made, particularly in the face of a challenging market environment and I believe the company is better positioned for both current conditions as well as the eventual rebounding market.

Our integration is on track and we continue to add the talent and resources that will allow Grubb & Ellis to deliver best in class service, ability to its employees, and long-term value to its stockholders.

Gary Hunt

To summarize the quarter, we continue to integrate our organization and execute our growth strategy, while keeping a tight reign on costs. Our expanded platform and the resulting cross-selling opportunities as well as our ability to leverage the Grubb & Ellis brand, to expand the distribution channel for our investment products is helping to mitigate the impact of the current market conditions.

We are focused on continuing to position Grubb & Ellis for the future, both through organic growth and strategic acquisitions; so that we are poised to maximize our earnings potential as the market recovers. As we move forward with our growth strategy, Grubb & Ellis has and will continue to keep its focus and attention squarely where it belongs, and that is on its clients, the true arbiters of our success, and focused on our shareholders, our investors.

Before taking your questions, I would like to make a couple of comments related to the composition of our Board. Last month we announced that Devin Murphy joined our Board of Directors. I would like to take this opportunity to welcome Devin and say how pleased we are to have someone of his caliber as a member of the Board of Grubb & Ellis.

Devin brings more than 22 years of financial and real estate investment banking expertise and has worked at some of the largest financial institutions in the world, including Deutsche Bank and Morgan Stanley. We conducted an extensive search prior to Devin's appointment, and could not be more pleased with his outcome. And I would like to just iterate as a former member of NNN Board and a member of the Board of Grubb & Ellis and now the interim CEO that the same rationale for merging Grubb & Ellis and NNN Realty Advisors in December 2007 still exists today.

We are very pleased with the progress of our company to date. We are very pleased with the expansion of our platforms and we are very pleased with the foundation it is laying for the future. And we continue to execute on the objectives outlined in our growth strategy.

At this point, I would like to open up the call to your questions. Sitting here, as I indicated, we have Rich, Jack, and Jeff, and myself, and we will be glad to answer any questions that you may have.

Question-and-Answer Session


(Operator Instructions) Our first question will come from Will Marks of JMP Securities.

William Marks - JMP Securities

One is on the TICK business, can you discuss, in the beginning of the call you had some comments, but on your market share in that area of your business.

Rich Pehlke

We currently hold about a 15% share in the TICK business.

William Marks - JMP Securities

And would you say that has changed. I know some tenders have gone out of business to tough environment.

Rich Pehlke

I think it has been relatively flat. We have seen soft conditions in the overall market as some competitors have suffered because of their capital structure or the weaker conditions. We actually think it will be an opportunity for us to gain share as the year progresses. And as we indicated in my comments, we're confident we'll raise more equity in the second half of the year.

William Marks - JMP Securities

And then on the brokerage side, what was your broker headcount at quarter's end, you added brokerage?

Rich Pehlke

Our total headcount was 867, which is down probably about 30 or 28 brokers from March 31st.

William Marks - JMP Securities

And is that something that you had strived for, meaning are you cutting back or have you lost brokers to other firms?

Rich Pehlke

We continue to look it has cuts and adds and takeaways, if you will, there is insurance some by our desires, some by others, it is a tough market. As you know, most of the broker environment is such that they do not get paid if they do not do transactions. And so some people use this as an opportunity to find their different career path.

We have not been as aggressive in hiring as we have in years past. I think we have said many times, we are focusing much more in productivity rather than just numbers of brokers and some of the changes that I think Jack outlined in his comments, the go-to-market strategy are directly related to driving growth and productivity in the brokerage trends.

Jack Van Berkel

And we are definitely in the market though. We have got a lot of recruiting going on in specific markets. We have outlined the critical needs that we have going forward, and we have got some specific objectives here in the next six months. All along, we have been telling our brokerage community that is all around productivity, not around headcount.

So, obviously the number one metric we are focused on is continuing to drive that overall growth for productivity, but we are definitely in the market and we are definitely making some critical hires in individual markets.

William Marks - JMP Securities

And when you are recruiting, what are, I realize you have a very strong national name, the draw to Grubb & Ellis you explained, in addition to that, is it splits? Are you splits? I assume they are not that different from any other national players, maybe you can comment there?

Jack Van Berkel

Our splits are a little bit higher than national players. Obviously, we have a bit of compensation in management. But obviously we are looking to take other pieces of the platform to our advantage. Right so obviously we have an investment platform that we are leveraging. Culturally, we are trying to differentiate ourselves a little bit from the big players. And as we continue to expand the services platform, Dylan Taylor's world, that is obviously a big advantage to us. I mean we do not want to be CB or JLL. We want to create a unique space for ourselves in the marketplace and culturally as well.

Rich Pehlke

I think one of the, this is a good question I think to underline one of the reasons for the merger. Basically it brings multiple platforms to the transactional services side of the brokerage business that does not exists with a lot of our competitors. And that I think is boding well as we are talking with the brokerage community, as we are recruiting these top-notch brokers that Jack has referenced earlier in his comments.

And the comments we are getting back from the brokers that are joining us that are leaving very good positions with very good companies are that they are very excited about the combination of platforms that have been created at the new Grubb & Ellis.

William Marks - JMP Securities

Then a couple of questions on the remainder of the year, and then I will give up the floor. But you gave some guidance of 15% to 25% transaction revenue growth in the second half, and that applies to the brokerage platform. Is that correct?

Rich Pehlke

That is correct.

William Marks - JMP Securities

And then how can we get there in this environment that seems to be a lot of growth?

Rich Pehlke

Well, and I think again it has to be in context where I said it is 15% to 25% higher than the first half of this year. You remember, Will, that seasonally we are much weaker in the first quarter of the year. Our strongest quarter is expected to be the fourth quarter of this year. We have a larger mix of leasing revenue versus transaction sales revenue. So, when you really kind of look at that expectation against probably the prior year, you are still talking a pretty significant decrease year over year, pretty reflective of market conditions.

So, really it is not that high of a bar relative to what we see in our mix of business and what is in our pipelines and expectations. Again, at the end of the day we cannot make transactions happen, but we think it as a very achievable number at this point.

Jack Van Berkel

Will, we have done obviously an extensive look into each individual market. We have forecasted based upon each of those individual markets, we have taken that current situation into account and we are feeling very confident about that effort in the second half of the year.

William Marks - JMP Securities

And that actually leads me to my final question on the second half, and that is that if you do expect the brokerage to be down, at least on the revenue side, I know that is not a huge part of the business anymore but the simple numbers are, you guys would need to in order to hit last year's number. It appears you did to earn about $55 million of EBITDA in the second half versus about $40 million, $41 million in the second half of '08. Maybe there are some synergies, but even if there were $15 million of synergies, you will be assuming a flat EBITDA second half after EBITDA being down 41% in the first half of the year. So, how do you make that up? It just seems almost impossible.

Rich Pehlke

Well, it is a challenge. I would not use the work impossible because we believe we can do it, but I think there are a couple of things that drive that. Number one, our cost structure is such that any kind of uplift we get on the transaction side pretty well falls through with the margin like we have talked about it. We've held our G&A costs almost constant now for six quarters.

So, the combination of synergies across our expanded base and any uplift in the revenue on the transaction side will fall through on the margin. On the investment platform side, it is all driven by the growth in the equity raise and additional assets under management as well as the fact that we will be doing more acquisitions with the higher equity raise. It is a fee driven business, very high margin, and so we are successful in getting the equity in the door and putting it to work, and we believe we can, that certainly from our history and from our capabilities it is a very doable number in terms of what we can crank through. In six months, we should be able to generate high margin fee based business in the second half of the year.


Our next question will come from Analyst for Brandt Sakakeeny of Deutsche Bank.

Analyst for Brandt Sakakeeny - Deutsche Bank Securities

Just wondering the fee year over year corporate headcount number. Just obviously noted that you have been pretty aggressive in adding to your senior leadership ranks, as you mentioned during your prepared remarks. So, just wondering if the synergies not coming on the headcount number. Might that be coming from?

Gary Hunt

Well, I do not have the exact number in front of me of corporate headcount because we are in the process of still merging the organizations and kind of whether we call a person a corporate or a support operation to the operations, we can get almost too definitive. I think overall it is relatively flat. Some of the hires we have made have been in areas that would drive operational business not necessarily corporate overhead.

We are still looking to take corporate overhead out of the business on a going forward basis in becoming more streamlined organization. So, from that standpoint, we are trying to put investment dollars in reinvesting synergy savings in areas where we can drive revenue. And Jack, you can speak to that.

Jack Van Berkel

I mean obviously we are service and service based company, so when you taking that millions and millions of dollars with synergy costs, that is coming typically from one area, that is headcount. So obviously what we have done is we have streamlined the organization significantly.

Even thought you have seen a lot of announcements from us specific to individual hires, the vast majority of the costs is the cost cutting has come out of the headcount ranks. So, it is a mix issue and I would say that there have been a lot more coming out than there has been going in., even though the ones coming it we are incredibly pleased with.

Gary Hunt

In addition, I would just add to that that a lot of the overhead that has come out has been in the operational lines, in particular some of the legacy Grubb business, from the standpoint that we were much more, we were not synergistic about our go to market strategy that Jack outlined. And through the efforts that Jack and Dylan Taylor have done in terms of bringing the businesses together, we have got a lot more efficiency in the senior ranks now of the services side of the business.

Analyst for Brandt Sakakeeny - Deutsche Bank Securities

. I guess and then as a follow-up, just given Scott's decision to step down and continue to run the non-traded REITs, I guess what safeguards are in place to assure that the non-traded REITs remain in house given that they are independently governed. Can you talk about the dynamics there, of independent leadership?

Rich Pehlke

Well, first of all, the success of what we have experienced in Healthcare REIT probably is the best safeguard that we have. From the standpoint that going back to the comment Gary made earlier about the rationale for the merger, one of the rationale from the investment product side was melting the operations with the Grubb & Ellis platform and Grubb & Ellis brand, and I think the numbers speak for themselves, a significant increase in participation in the broker dealer networks has really been driven by the fact that this is now our branded product that has real presence in the real estate market. And a lot of people understand the sense behind what we are trying to do.

So, I think the Board, the independent Board of the REIT, there is a very constructive relationship with us as a sponsor. They understand the value of growing the REIT. Scott has indicated at every turn that he is totally dedicated to helping make that successful, and so far that has been the case. And so, we think that is the best safeguard we can have.

Gary Hunt

And Chris, I would just add, I have had numerous conversations with Scott and he is very committed to making the Healthcare REIT successful, very committed to continuing the relationship with Grubb & Ellis as are the members of the Healthcare REIT Board. So, I think the partnership that has been created with the dual entities is as secure as one could imagine and we are moving forward in a very positive way.

Analyst for Brandt Sakakeeny - Deutsche Bank Securities

I guess finally back to sort of the second half expectations and clearly maybe the biggest reason for the upside there, related to the first half, is your expectations on the Investment Management has the highest margin business that you have run. I guess how confident are you that these new relationships that you cited in your prepared remarks with the broker dealers that epidemically do increase the selling exposure in the market.

How confident are you that it will really make an immediate impact? I mean is there not going to be some sort of ramp time education process that these new brokers need to undertake before they can really get the ground running with these products? Could you just help us understand that?

Jeff Hanson

I would cite LPL as an example. In the first, call it 90 to 120 days of them signing a selling agreement. If memory serves correctly, they placed over $40 million in equity into the Healthcare REIT. Again, that was for the first three months. So, there is we expect a tremendous amount of upside not only on LPL as they continue to ramp up process but we also have a focused strategy to get AIG and NPH ramped in equally as quickly of a manner.


Our next question will come from Robert Riggs of William Blair & Company.

Robert Riggs - William Blair & Co.

Going back to the Investment Management business for a second, have you included any additional equity raised for the wealth management business in terms of your assumptions for the rest of the year?

Rich Pehlke

Well, incorporated in our thoughts and we have not articulated is some impact in the wealth management. That is a much more opportunistic strategy and we are constantly working to market that platform, both through our marketing efforts, our website, etc. But again, a lot of that can be driven off of the results of transaction businesses and transaction volume in the market. So we have not built too heavy of a reliance, so there is probably more upside than downside in our forecast on wealth management.

Gary Hunt

It is lower margins, so less impact.

Robert Riggs - William Blair & Co.

And then looking at given the balance between seen opportunities and a difficult market environment in terms of adding new producers and then also new businesses, new geographic areas, how are you balancing that against the efforts to contain costs?

Rich Pehlke

Well, I think Jack and I both can speak to that. I mean the bottom line, and Jack said it well earlier, this still is a services business, and it is a human capital based services business in many aspects. So, on the services side especially if we see good talent, we would not hesitate for the right opportunity to either take a run at hiring new talent or adding into our talent mix.

But we always balance that every time regardless of market conditions against perceived expectations what the return on that investment will be. That is really what we are investing in this business. So, when opportunity arises, the beauty of it is, is that now with the merged companies and this had an impact in terms of making this more attractive place to be.

Jack Van Berkel

And then, we have a whole set of metrics internally we go through it, anytime we hire someone and we look at obviously the whole cost model associated with that individual. But I will tell you Robert based upon the consolidation we are seeing in the overall market, there is a lot of talent out there right now. And we know that the market will turn and we are going to need that talent to expand our business. So, we are looking very closely the talent that is available to us right now. And there is significant talent that has attracted to us right now.

Gary Hunt

I would just add that not only are we watching the cost side to bring the new talent on but what is exciting to me as I am watching this process is that there are very, very, very good people out there that are in very good positions in their companies that are very excited about the what the model that Grubb & Ellis has created, and they are willing to come over here.

And that I think speaks a lot to what has happened here at this company post merger. So on one hand, we are watching the costs, we are watching the overhead, but on the other hand we are going to make sure that we get the very best people out there to move our platforms over.

Robert Riggs - William Blair & Co.

And then just finally you talked about some success with the corporate services group given the difficult environment those companies coming to you to provide those services. So, can you just discuss some of those kinds of recent wins? Are you seeing better margin in those businesses and really how are you winning those relationships?

Rich Pehlke

I think overall the margin in that business tends to remain relatively flat. I do not think the dynamics of the pricing metric change all that much year over year. I think it really comes down to the quality of service, and to give credit to our people, Dylan Taylor and his team have done an outstanding job in terms of bringing the entire platform to bear as we have talked to our clients and prospective customers in terms of what we can offer as a service organization and that we are the wherewithal to actually deliver everything from the recognition that we have talked about many times last year being Microsoft's Vendor of the Year has carried forward into the level of quality that we have delivered as a service based business. And so I think at the end of the day, it comes down to reputation in delivery. And that is a direct result of having quality people run the organization.


Our next question will come from Klaus Von Stutterheim of Deutsche Bank.

Klaus Von Stutterheim - Deutsche Bank

I have got a question on the repurchase program. You are planning to buy back 25 million shares, you've guided if I got it right $23 million in cash. So, assuming that we can buy that four that would be $100 million, is that a project that will take years and come out of cash from operating activities or are there other sources of cash that I did not catch on to?

Rich Pehlke

Just to be clear, the authorization for our share repurchase program is that we may purchase up to 25 million shares between now and 2009, 25 million shares through the end of the next calendar year. We will implement that repurchase program on a time to time basis; we have got a structured program ready to be put in place as I indicated in my remarks. Speaking about the cash flow of the business, it is important to understand that our cash flow is seasonal in nature along with our business. We are cash use business in the first half of the year and primarily a cash generation in the last half of the year.

Much of that relates to how we manage our working capital, particularly in services side of the business or there are many things that get deferred at the end of the year and then paid down in the beginning of the year. With the expectations we have outlined for revenue and profitability, we are a cash flow positive business, the combination of that, and we do have expectations that we will be returning capital from the five assets that I have outlined in my remarks, we should be have more than enough liquidity to meet our investment needs as well as from our share repurchase program. And again, to be clear, it is $25 million of our shares over the course of through 2009.

Klaus Von Stutterheim - Deutsche Bank

So, maybe I misunderstood. It is $25 million worth of stock.

Rich Pehlke


Klaus Von Stutterheim - Deutsche Bank

Not 25 million shares?

Rich Pehlke



Our next question will come from [Rod Hans] of [Keypoint Capital].

[Rod Hans] - Keypoint Capital

Can you detail the cost saving synergies the increase on the overall synergies that you have announced?

Rich Pehlke

Well, I think we have been fairly clear about this. This is primarily headcount driven. It is through full of duplicate overhead and of combining the services side of the business, particularly on the Transaction Services and Management Services side. And the number that we have outlined is an annual rate of savings. Some of that money has been reinvested back in the business for some of our new hires, and we will also realize cost savings as the year continues to progress and into '09 and on a year over year basis.

[Rod Hans] - Keypoint Capital

And then have you given estimates for your overall equity raise for '08?

Rich Pehlke

We have not given estimates. As I indicated, we have raised just over $500 million in the first half of the year and if you take, it will raise significantly more than that expect in the second half, so that will put us fall over $1 billion.

Rod Hans - Keypoint Capital

And then have you seen any gains in the non-traded REIT market share?

Jack Van Berkel

Significantly, we moved from 11th, I believe at the end of the first quarter to seventh or eighth at the end of the second quarter. If memory serves correctly, on the Healthcare REIT, we expect that trajectory with the addition of new selling agreements by significant broker dealers to hopefully put us in the top five by the end of the third quarter.


There are no further questions or comments at this time.

Gary Hunt

Well, ladies and gentlemen, thank you very much for taking our call. We certainly look forward to any questions you might have. Do not hesitate to call anyone of us during today or at anytime we are happy to respond and we certainly appreciate our relationship and your trusted confidence in us. Have a great day. Thank you.

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